UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2005

OR

o 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 000-26934

Hyperion Solutions Corporation

5450 Great America Parkway, Santa Clara, California 95054

(408) 744-9500

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 þ    No o

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

As of April 29, 2005, there were 40,387,508 shares of the registrant’s common stock outstanding.

Hyperion Solutions Corporation

Form 10-Q

“Hyperion,” the Hyperion “H” logo and Hyperion’s product names are trademarks of Hyperion. References to other companies and their products use trademarks are owned by the respective companies and are for reference purposes only.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HYPERION SOLUTIONS CORPORATION

See accompanying notes to condensed consolidated financial statements.

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HYPERION SOLUTIONS CORPORATION

See accompanying notes to condensed consolidated financial statements.

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HYPERION SOLUTIONS CORPORATION

See accompanying notes to condensed consolidated financial statements.

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HYPERION SOLUTIONS CORPORATION

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to these rules and regulations. However, management believes that the disclosures are adequate to ensure the information presented is not misleading. The balance sheet at June 30, 2004 has been derived from the audited financial statements, but it does not include all disclosures required by generally accepted accounting principles. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended June 30, 2004.

We have reclassified auction rate securities from cash and cash equivalents to short-term investments. This resulted in a reclassification from cash and cash equivalents to short-term investments of $192.9 million on the June 30, 2004 condensed consolidated balance sheet. We also made corresponding adjustments to the statement of cash flows for the nine months ended March 31, 2004 to reflect the gross purchases and sales and maturities of these securities as investing activities rather than as a component of cash and cash equivalents. For the nine months ended March 31, 2004, before this reclassification, net cash provided by investing activities related to these investments of $52.4 million was included in cash and cash equivalents in the condensed consolidated statement of cash flows. These reclassifications had no impact on the previously reported net income or cash flow from operations. Short-term investments at March 31, 2005 consisted primarily of balances in interest-bearing demand deposit accounts, variable rate demand notes, state and municipal bonds, U.S. government and agency obligations and other highly-liquid securities.

In the opinion of management, all adjustments, consisting only of normal recurring items, considered necessary for a fair statement have been included in the accompanying unaudited financial statements. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year ending June 30, 2005.

2. Significant Accounting Policies

Revenue Recognition

We derive revenues from licensing our software products and providing maintenance, consulting and training services. Our standard software license agreement is a perpetual license to use our products on an end user, concurrent user or central processing unit basis.

We record revenue from licensing our software products to end users provided there is persuasive evidence of an arrangement, the fee is fixed or determinable, collection is reasonably assured and delivery of the product has occurred, as prescribed by Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition.” For arrangements with multiple elements, and for which vendor specific objective evidence (“VSOE”) of fair value exists for the undelivered elements, revenue is recognized for the delivered elements based upon the residual method in accordance with SOP 98-9, “Modifications of SOP 97-2 with Respect to Certain Transactions.” Amounts billed or payments received in advance of revenue recognition are recorded as deferred revenue.

Maintenance agreements are generally twelve-month prepaid contracts that are recognized ratably over the service period. VSOE of fair value for maintenance is measured by the stated renewal rates included in the agreements.

Customers may also enter into arrangements that are typically on a time and materials basis for consulting and training services. VSOE of fair value for consulting and training services is based upon the standard hourly rate we charge for such services when sold separately. Training services are generally prepaid prior to rendering the service. Consulting and training revenues are typically recognized as earned proportional to performance. Consulting revenues are generated primarily from implementation services related to the installation of our products. These arrangements are generally accounted for separately from the license revenue because the arrangements qualify as “service transactions” as defined in SOP 97-2. Our services are generally not essential to the functionality of the software. Our products are fully functional upon delivery of the product and implementation does not require significant modification or alteration. Factors considered in determining whether the revenue should be accounted for separately include, but are not limited to: degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee. Payments related to the software product to which the services relate are typically billed independently from the services and, therefore, are not

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coincident with performance of such services. License agreements generally do not include acceptance provisions. In the infrequent circumstance where an arrangement does not qualify for separate accounting of the license and service elements, license revenue is recognized together with the consulting services using the percentage-of-completion method of contract accounting in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Product-Type Contracts” and Accounting Research Bulletin No. 45, “Long-Term Construction-Type Contracts.”

If the fair value of any undelivered element included in a multiple-element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered, services have been performed or until fair value can be objectively determined for all undelivered elements. License revenue from resellers or distributors is recognized upon sell-through to the end customer. If we determine that collection of a license fee is not reasonably assured, the fee is deferred and revenue is recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash.

Accounts Receivable Allowances

We make judgments as to our ability to collect outstanding receivables and provide allowances for a portion of receivables when collection becomes doubtful. Allowances are based upon a review of all significant outstanding invoices. For those invoices not specifically reviewed, allowances are made at differing rates, based upon the age of the receivable. In determining these allowances, we analyze several factors, including: our historical collection experience, customer concentrations, customer credit-worthiness and current economic trends. If the historical data used to calculate the allowances for accounts receivable does not reflect our future ability to collect outstanding receivables, we may record additional allowances for accounts receivable. We record the provision for accounts receivable allowances either in general and administrative expense or as a reduction of revenue based on the underlying cause of the provision to the appropriate classification in our condensed consolidated statements of income and comprehensive income.

Our accounts receivable allowances totaled $10.0 million at March 31, 2005 and $8.8 million at June 30, 2004. The total provision for accounts receivable allowances was $2.2 million and $3.4 million for the three months ended March 31, 2005 and 2004 respectively. Of these amounts, $0.2 million and $0.4 million were recorded in general and administrative expense for the three months ended March 31, 2005 and 2004, respectively, and $2.0 million and $3.0 million were recorded as a reduction of revenues for the three months ended March 31, 2005 and 2004, respectively. The total provision for accounts receivable allowances was $4.3 million and $7.6 million for the nine months ended March 31, 2005 and 2004, respectively. Of these provisions, approximately $0.2 million and $1.3 million were recorded in general and administrative expense for the nine months ended March 31, 2005 and 2004, respectively, and $4.1 million and $6.3 million were recorded as a reduction of revenues for the nine months ended March 31, 2005 and 2004, respectively.

Net Income Per Share

Net income per share, which is also referred to as earnings per share (“EPS”), is computed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.” Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding and potentially dilutive securities outstanding during the period. Potentially dilutive securities include stock options, unvested restricted shares and shares issuable upon conversion of Hyperion’s convertible subordinated notes. Potentially dilutive securities are excluded from the computations of diluted net income per share if their effect would be antidilutive.

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The following table sets forth the computations of basic and diluted net income per share (in thousands, except per share data):

For the quarter ended March 31, 2005, stock option rights totaling 0.4 million shares of common stock have been excluded from the diluted EPS calculations because their effect would have been antidilutive. For the nine months ended March 31, 2005, stock option rights totaling 0.6 million shares of common stock have been excluded from the diluted EPS calculations because their effect would have been antidilutive. For the three and nine months ended March 31, 2004, stock option rights totaling 0.7 million shares and 0.9 million shares, respectively, have been excluded from the diluted EPS calculations because their effect would have been antidilutive.

For the nine months ended March 31, 2004, 0.5 million shares of common stock issuable upon conversion of the convertible subordinated notes have been excluded from the diluted EPS calculations because their effect would have been antidilutive. In the second quarter of fiscal 2004, all remaining outstanding convertible subordinated notes were redeemed.

Stock-Based Compensation

Hyperion accounts for employee stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” as permitted by SFAS 123, “Accounting for Stock-Based Compensation,” and SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.” Had Hyperion accounted for employee stock-based compensation based on the estimated grant date fair values, as defined by SFAS 123, Hyperion’s net income and net income per share would have been adjusted to the following pro forma amounts (in thousands, except per share data):

These pro forma amounts may not be representative of the effects for future periods as options vest over several years and additional awards are generally granted each year.

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Comprehensive Income

Comprehensive income includes net income, foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. The components of comprehensive income are as follows (in thousands):

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued a Statement, “Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95” (“SFAS 123R”) that addresses the accounting for share-based payment transactions in which a Company receives employee services in exchange for either equity instruments of the Company or liabilities that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for share-based compensation transactions using the intrinsic method that Hyperion currently uses and generally requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the condensed consolidated statements of income and comprehensive income. The effective date of the new standard is for fiscal years beginning after June 15, 2005, which for Hyperion will be the first quarter of fiscal 2006. The amounts disclosed within our footnotes are not necessarily indicative of the amounts that will be expensed upon the adoption of SFAS 123R. Compensation expense calculated under SFAS 123R may differ from amounts currently disclosed within our footnotes based on changes in the fair value of our common stock, changes in the number of options granted or the terms of such options, the treatment of tax benefits and changes in interest rates or other factors. In addition, upon adoption of SFAS 123R, we may choose to use a different valuation model to value the compensation expense associated with employee stock options and stock purchases under our employee stock purchase plan. We are currently evaluating the potential impact of this standard on our financial position and results of operations and alternative adoption methods. We expect this standard to have a significant impact on the condensed consolidated statements of income and comprehensive income.

In October 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 04-8 “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,” that the dilutive effect of contingent convertible debt instruments (“CoCo’s”) must be included in diluted earnings per share regardless of whether the triggering contingency has been satisfied, if dilutive. Adoption of Issue No. 04-8 would be on a retroactive basis and would require restatement of prior period diluted earnings per share, subject to certain transition provisions. It is effective for all periods ending after December 15, 2004. The adoption of EITF 04-08 did not have a material impact on our financial position or results of operations.

In March 2004, the FASB issued Emerging Issues Task Force Issue (“EITF”) No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which provides new guidance for assessing impairment losses on investments. In addition, EITF 03-01 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-01; however, the disclosure requirements remain effective for annual periods ending after June 15, 2004. Although we are currently evaluating the impact of adopting EITF 03-01, we do not expect the adoption of this new standard to have a material impact on our financial position or results of operations.

Income Taxes

Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. The measurement of current and deferred tax assets and liabilities are based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not anticipated.

During the preparation of our consolidated financial statements, we estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax expense 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 sheet. We then assess the likelihood that our

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deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, a valuation allowance is established. To the extent we establish a valuation allowance or increase this allowance in a period, an expense is recorded within the tax provision in the statements of operations.

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. We have recorded a valuation allowance due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily relating to foreign net operating losses carried forward, before they expire. The valuation allowance is based on estimates of taxable income by jurisdiction in which we operate and the period over which the deferred tax assets will be recoverable. In the event that actual results differ from these estimates, or these estimates are adjusted in future periods, additional valuation allowances may need to be recorded, which could materially impact our financial position and results of operations.

Valuation of Goodwill, Intangibles, and Long-Lived Assets

We account for goodwill under SFAS 142, “Goodwill and Other Intangible Assets,” which requires us to review goodwill for impairment on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. This impairment review involves a two-step process and is performed annually in the fourth quarter of the fiscal year. We have determined that we have only a single reporting unit, and we are required to make estimates regarding the fair value of that reporting unit when testing for potential impairment. We estimate the fair value of our reporting unit using the market approach. Under the market approach, we estimate the fair value based on our market capitalization. Our determination that we have only a single reporting unit and the method used to estimate the fair value of that reporting unit requires significant judgment.

The changes in the carrying amount of goodwill for the nine months ended March 31, 2005 are as follows (in thousands):

Intangible assets consists of the following (in thousands):

Amortization expense related to intangible assets was $3.4 million and $9.3 million for the three and nine months ended March 31, 2005, respectively, and $2.8 million and $6.4 million for the three and nine months ended March 31, 2004, respectively. Product development costs and acquired technologies are generally amortized over three years, and other intangibles are amortized over periods between one and six years. The total expected future annual amortization expense for these intangible assets is as follows (in thousands):

We account for finite-lived intangibles and long-lived assets under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires us to review long-lived assets for impairment whenever events or changes in circumstances

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indicate that the carrying amount of an asset may not be recoverable. Factors considered important which could trigger an impairment review include (i) significant underperformance relative to historical or projected future operating results, (ii) significant changes in the manner of use of the assets or the strategy for our overall business, (iii) significant decrease in the market value of the assets and (iv) significant negative industry or economic trends.

Based upon the existence of one or more indicators of impairment, we measure any impairment of intangibles or long-lived assets based on the estimated future discounted cash flows using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Our estimates of cash flows require significant judgment based on our historical results and anticipated results and are subject to many factors that may change in the near term.

3. Commitments and Contingencies

Guarantees and Indemnifications

Financial Accounting Standards Board Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”), requires that Hyperion recognize the fair value for guarantee and indemnification arrangements issued or modified by Hyperion after March 31, 2002 if these arrangements are within the scope of FIN 45. In addition, we must continue to monitor the conditions that are subject to the guarantees and indemnifications, as required under previously existing generally accepted accounting principles, in order to identify if a loss has occurred. If we determine it is probable that a loss has occurred then any such estimable loss would be recognized under those guarantees and indemnifications. We have entered into agreements with some of our customers that contain indemnification provisions relating to potential situations where claims could be alleged that our products infringe the intellectual property rights of a third party. We also have indemnification arrangements with our Board of Directors and officers. We have not recorded a liability related to these indemnification and guarantee provisions, and we believe that the estimated fair value of these arrangements is minimal.

Contingencies

In December 2004, Hyperion filed an action against OutlookSoft Corporation (“OutlookSoft”) in Federal District Court for the Eastern District of Texas, charging that OutlookSoft is infringing two Hyperion patents relating to our financial consolidation, reporting and analysis applications, Hyperion Financial Management and Hyperion Enterprise. Hyperion is asking for damages for past infringement, including treble damages for willful infringement, and an injunction against further infringement. In January 2005, OutlookSoft answered the complaint by denying infringement and challenging the validity and enforceability of the Hyperion patents. OutlookSoft also filed counterclaims alleging that Hyperion infringes two of its patents, asked for damages for past infringement, including treble damages for willful infringement, and an injunction against further infringement. Hyperion intends to vigorously pursue the protection of our intellectual property, and will vigorously defend the charges of patent infringement made against us. As we are unable to predict the outcome of the litigation and we cannot estimate any possible gain or loss at this time, we have not accrued for any estimated loss in our condensed consolidated financial statements. Hyperion does not believe the outcome of the litigation will have a material effect on our financial position, results of operations or cash flows.

In November 2004, Hyperion filed a declaratory judgment action in Federal District Court for the Northern District of California against HyperRoll, Inc. (“HyperRoll”) to establish that Hyperion did not infringe any of HyperRoll’s patents. Additionally, Hyperion filed a request for re-examination on one of HyperRoll’s patents with the United States Patent and Trademark Office, citing a prior art reference not considered in the original examination of the HyperRoll patent. In January 2005, HyperRoll Israel Ltd., a HyperRoll subsidiary, filed an action in Federal District Court for the Eastern District of Texas against Hyperion claiming that Hyperion infringed two HyperRoll patents relating to our multidimensional database product, Essbase, and claiming violations of the Latham Act regarding claims made about its products, and a claim for patent mis-marking. HyperRoll also filed a motion in the declaratory judgment action in Federal District Court for the Northern District of California to dismiss the case because Hyperion had filed the action against HyperRoll, claiming that the patents in issue were in-fact assigned to HyperRoll Israel. Also in January 2005, the United States Patent and Trademark Office notified Hyperion that it will re-examine the HyperRoll patent in light of the new prior art reference provided by Hyperion. In January 2005, the court in Federal District Court for the Northern District of California dismissed the declaratory judgment action, but allowed Hyperion to amend the action to add HyperRoll Israel, which we have done. On May 4, 2005, the Federal District Court for the Eastern District of Texas granted Hyperion’s Motion of Transfer Action to the Federal District Court for the Northern District of California. Hyperion will vigorously defend the claims made against us. As we are unable to predict the outcome of the litigation and we cannot estimate any possible loss at this time, we have not accrued for any estimated loss in our condensed consolidated financial statements. Hyperion does not believe the outcome of the litigation will have a material effect on our financial position, results of operations and cash flows.

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4. Business Combination

Brio Software, Inc.

In October 2003, Hyperion completed its acquisition of Brio Software, Inc., a business intelligence software provider based in Santa Clara, California. Under the terms of the acquisition, Brio stockholders received a combination of 0.109 of a share of Hyperion common stock and $0.363 in cash in exchange for each share of Brio common stock, which resulted in the issuance of 4.2 million shares of Hyperion common stock and $14.0 million in cash to the Brio stockholders. Additionally, Hyperion reserved 1.1 million shares of its common stock for issuance in connection with the Brio stock options assumed in the transaction. Brio’s results of operations have been included in Hyperion’s results since the date of acquisition.

Brio provides business intelligence software with advanced query, reporting and analysis capabilities. Brio’s business intelligence tools supplement the Hyperion platform and complement our Business Performance Management offering. Hyperion expects the acquisition will result in greater integration of business intelligence into the Business Performance Management process.

The aggregate purchase price was approximately $150.1 million, which consisted of approximately $14.0 million in cash, $133.0 million in Hyperion common stock and options, and $3.1 million in acquisition costs, which primarily consist of fees paid for financial advisory, legal, and accounting services. The value of the stock issued to Brio stockholders was based upon the average of the closing prices of one share of Hyperion’s common stock during the five trading days ending July 25, 2003, which was $27.68. The fair value of Hyperion’s stock-based awards issued to employees was estimated using a Black-Scholes option pricing model. The fair value of the stock-based awards was estimated assuming no expected dividends, an expected stock price volatility of 54%, a risk free interest rate of 2.51% and an expected term of 3.56 years.

The intrinsic value allocated to unvested stock-based awards issued to employees was approximately $7.1 million and has been recorded as deferred stock-based compensation. Deferred stock-based compensation is being amortized over the remaining vesting periods of the awards.

In accordance with SFAS 141, “Business Combinations,” Hyperion allocated the purchase price to tangible assets, intangible assets, in-process research and development, deferred compensation, and liabilities based on their estimated fair values. The excess purchase price over the fair values was recorded as goodwill. The fair value assigned to intangible assets acquired was based on estimates and assumptions determined by management. In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” goodwill and purchased intangibles with indefinite lives acquired after June 30, 2001 are not amortized but will be reviewed periodically for impairment. Purchased intangibles with finite lives are amortized on a straight-line basis over their respective useful lives. The total purchase price has been allocated as follows (in thousands):

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In performing the purchase price allocation, Hyperion considered, among other factors, its intention for future use of the acquired assets, analyses of historical financial performance and estimates of future performance of Brio’s products. The fair values of intangible assets were estimated using the income approach for capitalized software and maintenance agreements, the royalty savings approach for patents and core technology, and the cost approach for customer contracts and related relationships and value added reseller relationships. The rates utilized to discount the net cash flows to their present values were based upon Hyperion’s weighted average cost of capital and range from 14% to 16%. These discount rates were determined after consideration of Hyperion’s rate of return on debt capital and equity, the weighted average return on invested capital and the risk associated with achieving forecasted sales related to the technology and assets acquired from Brio. Identifiable intangible assets purchased in the Brio acquisition consist of the following (in thousands, except for useful life):

In-process research and development (“IPR&D”) of $2.3 million was expensed in the second quarter of fiscal 2004 because the purchased research and development had no alternative uses and had not reached technological feasibility. The IPR&D relates to the Brio 8 product line. The value assigned to IPR&D was determined utilizing the income approach. The stage of completion for the project was estimated to determine the discount rate to be applied to the valuation of the in-process technology. Based upon the level of completion and the risk associated with the in-process technology, a discount rate of 20% was deemed appropriate for valuing IPR&D. As of March 31, 2005, the Brio 8 product line is continuing to be developed.

The unaudited financial information in the table below summarizes the combined results of operations of Hyperion and Brio, on a pro forma basis, as though the companies had been combined as of the beginning of each period presented. This pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition taken place at the beginning of the period presented. The unaudited condensed consolidated statements of income and comprehensive income data for the three months ended March 31, 2004 includes the post-acquisition results of Brio for the full quarter. The unaudited pro forma combined condensed consolidated statements of income and comprehensive income data for the nine months ended March 31, 2004 combines (i) the results of Hyperion for the nine months ended March 31, 2004, which include the post-acquisition results of Brio for the period of October 16, 2003 to March 31, 2004 and (ii) the pre-acquisition results of Brio for the period of July 1, 2003 to October 15, 2003. The pro forma amounts are as follows (in thousands, except per share amounts):

Acquisitions in Fiscal Year 2005

From time to time, we will acquire other companies or assets to enhance our product offerings or expand our distribution network. In July 2004, we acquired certain assets and assumed certain liabilities of QiQ Solutions Pty Limited, an Australian based developer of management and reporting tools for the enterprise Business Intelligence market. In January 2005, we acquired substantially all of the assets of Razza Solutions, an Austin, Texas based private software company offering a solution for synchronizing master data management across BPM including Business Intelligence platforms, financial and analytical applications, and transaction systems. Both of these acquisitions will enhance our offering of Business Intelligence products, a market in which we have experienced solid growth.

These acquisitions were accounted for using the purchase method of accounting in accordance with SFAS 141, “Business Combinations.” Hyperion’s condensed consolidated statements of operations include the results of both QiQ and Razza from the date of acquisition. In aggregate, we paid $8.2 million for these two companies during the nine months ended March 31, 2005. There was no IPR&D expense incurred as a result of these acquisitions.

5. Restructuring Accruals

In the fourth quarter of fiscal 2004, we signed a lease agreement for a new corporate headquarters facility located in Santa Clara, California that accommodates all employees in the San Francisco Bay area. In December 2004, we vacated facilities in Sunnyvale and Santa Clara, which resulted in a restructuring charge in the second quarter of fiscal year 2005 of approximately $4.5 million and $1.1 million, respectively. In July 2004, we vacated our San Francisco facility and recorded a restructuring charge in the first quarter of fiscal 2005 of approximately $2.0 million. In the third quarter of fiscal 2005, we reduced the restructuring accrual by $1.8 million. This adjustment resulted from our buyout agreement to terminate the lease on our Sunnyvale facility and the sublease of our Santa Clara facility for the remaining term of the lease, both of which were completed during the third quarter of

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fiscal 2005. These restructuring costs, net of adjustments, were accounted for under SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” and are included as a charge or credit to Hyperion’s results of operations.

In the fourth quarter of fiscal 2004, we signed an engineering consulting agreement with a consulting firm based in Bangalore, India in an effort to increase our multi-shore development capacity and capability. The expansion of our multi-shore initiative will be gradual over fiscal 2005 and has resulted so far in about 140 additional developers contributing to our development efforts in India. Because of this initiative, in July 2004 we reduced our U.S.-based development staff by approximately 50 employees, or approximately 10% of our development headcount, and recorded a restructuring charge in the first quarter of fiscal 2005 of approximately $1.1 million. This restructuring charge consists of severance and related benefits costs. These costs were accounted for under SFAS 146 and have been included as a charge to Hyperion’s results of operations.

In connection with the acquisition of Brio in October 2003, management approved and initiated plans to restructure the operations of Hyperion to eliminate certain duplicative activities and reduce the combined company’s cost structure. Consequently, Hyperion recorded restructuring charges totaling $3.6 million in fiscal 2004, including $3.4 million of employee severance costs and $0.2 million of facility closure costs. These costs were accounted for under SFAS 146 and have been included as a charge to Hyperion’s results of operations.

As a result of the acquisition of Brio, Hyperion recorded $36.1 million of restructuring costs in connection with exiting certain pre-acquisition activities of Brio, including $4.8 million of employee severance costs, $26.6 million of facility closure costs, and $4.7 million of asset impairments related to the facility closures. These costs have been recognized as liabilities assumed in the purchase business combination in accordance with EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.”

In June 2001, Hyperion announced a corporate restructuring plan designed to bring costs more in line with revenues and strengthen the financial performance of the company, which resulted in a reduction of the workforce by approximately 300, or 12% of worldwide headcount. Employee groups impacted by the restructuring included personnel involved in corporate services, product business units, sales and customer support. In addition, Hyperion consolidated some of its facilities and exited other facilities. The total restructuring and other charges recorded in June 2001 were $42.8 million and were accounted for under EITF 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” which was subsequently superseded by SFAS 146. In second quarter of fiscal year 2005, Hyperion reduced the restructuring charges recorded in fiscal 2001 by $0.6 million. This adjustment resulted primarily from a change to the estimate of sublease income related to our facility exit costs and did not represent new restructuring activities.

The following table sets forth the activity in Hyperion’s restructuring accruals accounted for under SFAS 146 and EITF 94-3, which are included in “Restructuring liabilities” and “Long-term restructuring liabilities and other” in the accompanying condensed consolidated balance sheets (in thousands):

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The following table sets forth the activity in Hyperion’s restructuring accruals accounted for under EITF 95-3 which are included in “Restructuring liabilities” and “Long-term restructuring liabilities and other” in the accompanying condensed consolidated balance sheets (in thousands):

Of the total $30.3 million of restructuring accruals, $9.2 million is accounted for in “Restructuring liabilities” and $21.1 million is included in “Long-term restructuring liabilities and other” in the accompanying condensed consolidated balance sheet as of March 31, 2005.

The restructuring costs recorded during the three and nine months ended March 31, 2005 are based on Hyperion’s restructuring plans that have been committed to by management and are subject to refinement.

6. Stockholders’ Equity

In May 2004, Hyperion’s board of directors authorized the company to repurchase up to $75.0 million of its common stock. During the three months ended March 31, 2005, Hyperion repurchased and retired 316,000 shares of its common stock for a total cost of $15.1 million. Of this amount, $3.8 million was recorded as a reduction of additional paid-in capital and the remaining $11.3 million was recorded as a reduction of retained earnings. During the nine months ended March 31, 2005, Hyperion repurchased and retired 1,309,300 shares of its common stock for a total cost of $52.5 million. Of this amount, $14.8 million was recorded as a reduction of additional paid-in capital and the remaining $37.7 million was recorded as a reduction of retained earnings.

7. Segment and Geographic Information

SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” established standards for reporting information about operating segments in a company’s financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Hyperion has identified one industry segment: the development and marketing of business performance management software and related services. This segment operates in three geographic regions: the Americas (United States, Canada and Latin America), EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific). Hyperion’s products are marketed internationally through Hyperion’s direct sales force, independent distributors and application resellers.

Enterprise-wide information is provided in accordance with SFAS 131. Geographic revenue information is primarily based on the ordering location of the customer, and long-lived asset information is based on the physical location of the assets. The following table presents revenues by geographic region (in thousands):

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The Americas region includes non-U.S. revenues of $6.2 million and $5.5 million for the quarter ended March 31, 2005 and March 31, 2004, respectively. The Americas region includes non-U.S. revenues of $18.0 million and $15.8 million for the nine months ended March 31, 2005 and March 31, 2004, respectively.

The following table presents long-lived assets, which consist of tangible assets, by geographic region (in thousands):

The Americas region includes non-U.S. long-lived assets of $0.4 million as of March 31, 2005 and June 30, 2004.

The following table presents revenues for software licenses and maintenance and services (in thousands):

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain information contained in this report on Form 10-Q is forward-looking in nature. All statements included in this report on Form 10-Q or made by management of Hyperion Solutions Corporation and its subsidiaries, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Hyperion’s future financial results, operating results, business strategies, projected costs, products, competitive positions and plans and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “project,” “continue,” or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section entitled “Factors That May Affect Future Results.” These and many other factors could affect Hyperion’s future financial and operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Hyperion or on its behalf. Hyperion does not undertake an obligation to update its forward-looking statements to reflect future events or circumstances.

OVERVIEW

Hyperion provides business performance management software that enables companies to translate strategies into plans, monitor execution and provide insight to improve financial and operational performance. We combine a complete set of interoperable applications with a business intelligence platform to support and create business performance management solutions. In addition, we offer support and services from offices in 20 countries and are represented by distributors in an additional 25 countries. We work with over 600 partners to provide specialized solutions to more than 10,000 customer organizations worldwide. Hyperion is headquartered in Santa Clara, California and employs approximately 2,600 people globally.

RESULTS OF OPERATIONS

We acquired Brio Software, Inc. on October 16, 2003. Brio’s results of operations have been included in Hyperion’s results beginning on the date of acquisition. In addition to the incremental revenue streams associated with Brio products and services, our headcount increased by approximately 15% as a result of the acquisition.

REVENUES

Total revenues increased 7% in the third quarter of fiscal 2005 compared to the third quarter of fiscal 2004 and increased 15% in the first nine months of fiscal 2005 compared to the first nine months of fiscal 2004.

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The change in foreign currency exchange rates favorably impacted total revenues in the third quarter of fiscal 2005 compared to the third quarter of fiscal 2004 by approximately $3.0 million and favorably impacted total revenues in the first nine months of fiscal 2005 compared to the first nine months of fiscal 2004 by approximately $11.2 million, in both cases primarily due to the strength of the Euro against the U.S. dollar. Excluding the impact of foreign currency exchange rate changes, total revenues would have increased 5% in the third quarter of fiscal 2005 and would have increased 13% in the first nine months of fiscal 2005, compared to the same periods in fiscal 2004.

Software licenses. Software license revenues increased 5% in the third quarter of fiscal 2005 compared to the third quarter of fiscal 2004 and increased 16% in the first nine months of fiscal 2005 compared to the first nine months of fiscal 2004. The increase in license revenue in the third quarter of fiscal 2005 compared to the third quarter of fiscal 2004 was primarily due to the increase in licensing revenue from Hyperion Performance Suite, which was offset by a decrease in licensing revenue from Essbase and Hyperion Financial Management. The increase in license revenue in the first nine months of fiscal 2005 compared to the first nine months of fiscal 2004 was primarily attributable to increases in revenues from licensing of Hyperion Performance Suite, Hyperion Planning, Hyperion Strategic Finance and Hyperion Financial Management. These increases were partially offset by decreases in licensing revenue from Essbase and related platform products.

We market our products through our direct sales force and through channel partners. To date, we have generated the majority of our license revenue through our direct sales force, but we continue to focus on complementing our direct sales force with channel partners, which include original equipment manufacturers, value added resellers, system integrators and independent distributors. License revenue from channel partners comprised 33% of total license revenue in the third quarter of fiscal 2005 compared to 29% in the third quarter of fiscal 2004 and comprised 28% of total license revenue in the first nine months of fiscal 2005 compared to 25% for the first nine months of fiscal 2004. The percentage of license revenue derived from our channel partners can fluctuate between periods, as it is sensitive to individual large transactions that are neither predictable nor consistent in size or timing. No single channel partner represented more than 10% of total revenue during the periods presented.

Maintenance and services. Maintenance and services revenue increased 7% in the third quarter of fiscal 2005 compared to the third quarter of fiscal 2004, which was comprised of a 6% increase in maintenance revenue and a 10% increase in consulting and training services revenue. Maintenance and services revenue increased 15% in the first nine months of fiscal 2005 compared to the first nine months of fiscal 2004, which was comprised of a 14% increase in maintenance revenue and a 16% increase in consulting and training services revenue.

The increases in maintenance revenue in the third quarter and first nine months of fiscal 2005 compared to the same periods in fiscal 2004 were primarily attributable to additional license revenue during the fiscal year. The increases in consulting and training services revenue in the third quarter and first nine months of fiscal 2005 were principally due to our acquisition of Brio in October 2003 and to increased sales of services resulting from an increase in licensing contracts acquired during those periods.

COST OF REVENUES

Cost of software license revenue. Cost of software license revenue consists primarily of royalty expenses, amortization of capitalized software development costs, amortization of acquired technologies, and the cost of product packaging and documentation materials. Total cost of software license revenues, as a percentage of revenues, remained consistent in the three and nine months of fiscal year 2005 as compared to the same periods in fiscal year 2004. While there has been an overall increase in the level of amortization expense primarily due to the acquisitions of The Alcar Group in April 2003, Brio in October 2003, QiQ Solutions in July 2004, and Razza Solutions in January 2005, these increases have been offset by decreases in royalty expenses due to different mixes of product sales.

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Gross margins on software license revenue were 94% for the third quarter and first nine months of fiscal year 2005. Gross margins on software license revenue were 95% for the third quarter of fiscal year 2004 and 94% for the first nine months of fiscal year 2004.

In the first nine months of fiscal 2005 and 2004, we capitalized $4.3 million and $1.2 million of software product development costs, respectively, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” The amounts capitalized relate to localization costs for our software products. Capitalized software product development costs are amortized over the estimated economic life of the products, which is generally three years. The amortization of capitalized product development costs begins upon the general release of the software to customers. The significant increase in software product development costs in the first nine months of fiscal 2005 compared to the first nine months of fiscal year 2004 was principally due to increased activity during this period to localize Hyperion’s products for international markets in conjunction with our synchronized product release schedule.

Cost of maintenance and services revenue. Cost of maintenance and services revenue consists largely of compensation and benefits for support, consulting and training personnel. Cost of maintenance and services revenue increased 2% in the third quarter of fiscal 2005 compared to the third quarter of fiscal 2004 and increased 10% in the first nine months of fiscal 2005 compared to the first nine months of fiscal 2004. The increase in cost of maintenance and services revenue in the third quarter of fiscal year 2005 compared to the third quarter of fiscal year 2004 was principally due to a $1.9 million increase in employee expenses, which was partially offset by a $0.8 million decrease in information technology expenses and $0.3 million decrease in occupancy and equipment expenses. The increase in cost of maintenance and services revenue in the first nine months of fiscal year 2005 compared to the first nine months of fiscal year 2004 was principally due to a $5.3 million increase in employee expenses, which, in turn, resulted mostly from increased revenue year over year. In addition, subcontractor and external personnel costs increased by $2.9 million, and occupancy and equipment expenses increased by $0.8 million. Maintenance and services headcount decreased from 773 employees at March 31, 2004 to 768 employees at March 31, 2005.

Gross margins on maintenance and services revenue were 63% for the third quarter and first nine months of fiscal 2005 up from 61% for the third quarter and first nine months of fiscal 2004.

OPERATING EXPENSES

Sales and marketing. Sales and marketing expense increased 3% to $62.2 million in the third quarter of fiscal 2005 from $60.6 million in the third quarter of fiscal 2004. This increase was mainly due to a $1.3 million increase in employee expenses and $0.3 million increase in subcontractors and external personnel costs. Sales and marketing headcount grew to 906 employees at March 31, 2005 from 831 employees at March 31, 2004.

Sales and marketing expense increased 15% to $185.5 million in the first nine months of fiscal 2005 from $161.3 million in the first nine months of fiscal 2004. This increase was mainly due to a $14.1 million increase in employee expenses and $2.8 million increase in subcontractor and external personnel costs.

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Research and development. Research and development expense increased 2% to $26.9 million in the third quarter of fiscal 2005 from $26.3 million in the third quarter of fiscal 2004. The increase was primarily due to a $0.7 million increase in employee expenses. Overall, research and development headcount decreased from 528 employees at March 31, 2004 to 512 employees at March 31, 2005. Within our cost structure for research and development, we have engineering offshoring contracts in India and Belarus that employ approximately 170 engineering consultants. These individuals are not included in our headcount figure of 512 employees as of March 31, 2005.

Research and development expense increased by 12% to $78.2 million in the first nine months of fiscal 2005 from $69.7 million in the first nine months of fiscal 2004. This increase was primarily attributable to a $3.8 million increase in employee expenses and $3.5 million increase in subcontractor and external personnel costs.

General and administrative. General and administrative expense increased 10% to $18.4 million in the third quarter of fiscal 2005 from $16.8 million in the third quarter of fiscal 2004. This increase was principally due to a $1.8 million increase in professional services related to various legal matters and our compliance efforts associated with Section 404 of the Sarbanes-Oxley Act of 2002. General and administrative headcount decreased from 395 employees at March 31, 2004 to 368 employees at March 31, 2005.

General and administrative expense increased 7% to $48.8 million in the first nine months of fiscal 2005 compared to $45.6 million in the first nine months of fiscal 2004. This increase was principally due to a $1.6 million increase in employee expenses and a $2.6 million increase in professional services related to legal matters and our compliance efforts associated with Sarbanes-Oxley.

RESTRUCTURING CHARGES

In the fourth quarter of fiscal 2004, we signed a lease agreement for a new corporate headquarters facility located in Santa Clara, California that accommodates all employees in the San Francisco Bay area, which resulted in a restructuring charge in the second quarter of fiscal year 2005 of approximately $5.6 million. In the third quarter of fiscal 2005, we reduced the restructuring accrual by $1.8 million. This adjustment resulted from our buyout agreement to terminate the lease on our Sunnyvale facility and the sublease of our Santa Clara facility for the remaining term of the lease, both of which were completed during the third quarter of fiscal 2005. In July 2004, we vacated our San Francisco facility and recorded additional restructuring charges in the first quarter of fiscal 2005 of approximately $2.0 million. During the second quarter of fiscal 2005, we also made an adjustment to the restructuring charges recorded in fiscal 2001 by reducing the estimated charges by $0.6 million. This adjustment resulted primarily from a change to the estimate of sublease income related to our facility exit costs and did not represent new restructuring activities.

In the fourth quarter of fiscal 2004, we signed an engineering consulting agreement with a consulting firm based in Bangalore, India in an effort to increase our multi-shore development capacity and capability. The expansion of our multi-shore initiative will be gradual over fiscal 2005 and has resulted so far in about 140 additional developers contributing to our development efforts in India. Because of this initiative, in July 2004 we reduced our U.S.-based development staff by approximately 50 employees, or approximately 10% of our development headcount, and recorded a restructuring charge in the first quarter of fiscal 2005 of approximately $1.1 million. This restructuring charge consists of severance and related benefits costs.

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The following table sets forth the activity in Hyperion’s restructuring accruals accounted for under SFAS 146 and EITF 94-3, which are included in “Restructuring liabilities” and “Long-term restructuring liabilities and other” in the accompanying condensed consolidated balance sheets (in thousands):

The following table sets forth the activity in Hyperion’s restructuring accruals accounted for under EITF 95-3 which are included in “Restructuring liabilities,” and “Long-term restructuring liabilities and other” in the accompanying condensed consolidated balance sheets (in thousands):

Of the total $30.3 million of restructuring accruals, $9.2 million is accounted for in “Restructuring liabilities” and $21.1 million is included in “Long-term restructuring liabilities and other” in the accompanying condensed consolidated balance sheet as of March 31, 2005.

IN-PROCESS RESEARCH AND DEVELOPMENT

During the second quarter of fiscal 2004, in connection with our acquisition of Brio, we recorded a charge of $2.3 million related to the write-off of in-process research and development costs.

INTEREST AND OTHER INCOME

Interest and other income consists primarily of interest earned on cash, cash equivalent and short-term investment balances. Interest and other income increased 133% in the third quarter of fiscal 2005 compared to the third quarter of fiscal 2004 and increased 63% in the first nine months of fiscal 2005 compared to the first nine months of fiscal 2004 primarily due to increases in interest rates and increases in balances of cash, cash equivalents and short-term investments.

INTEREST AND OTHER EXPENSE

Interest and other expense consists primarily of interest paid and amortization of deferred issuance costs related to our convertible subordinated notes. Interest and other expense increased 35% in the third quarter of fiscal 2005 compared to the third quarter of fiscal 2004 due to interest owed on foreign tax liabilities from previous years. Interest and other expense decreased 95% in the first nine months of fiscal 2005 compared to the first nine months of fiscal 2004 due to the redemption of all of our remaining convertible notes in the second quarter of fiscal 2004.

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LOSS ON REDEMPTION OF DEBT

During the second quarter of fiscal 2004, we redeemed all of our outstanding convertible subordinated notes, which had face values totaling $50.0 million. This redemption resulted in the recognition of a loss of $0.9 million in the second quarter of fiscal 2004, which comprised the 1.286% redemption premium paid as well as the write-off of associated deferred issuance costs.

INCOME TAX PROVISION

Our effective income tax rate was 35% for the third quarter of fiscal 2005 compared to 37% for the third quarter of fiscal 2004 and was 35% for the first nine months of fiscal 2005 compared to 39% for the first nine months of fiscal 2004. Excluding the impact of the charge for in-process research and development of $2.3 million, which is not deductible for tax purposes, our effective income tax rate would have been 37% for the first nine months of fiscal 2004. We anticipate an income tax rate of 35% for all of fiscal 2005.

NET INCOME

We generated net income of $18.8 million, or $0.45 per diluted share, in the third quarter of fiscal 2005 compared to net income of $12.7 million, or $0.32 per diluted share, in the third quarter of fiscal 2004. For the first nine months of fiscal 2005, our net income was $46.0 million or $1.12 per diluted share, compared to net income of $29.0 million or $0.74 per diluted share, for the first nine months of fiscal 2004.

We project total revenues in the fourth quarter of fiscal 2005 to be in the range of $183 million to $188 million. We expect operating expenses in the fourth quarter of fiscal 2005 to increase primarily due to higher variable compensation expenses associated with higher revenue as well as continued increases in professional service costs associated with legal matters. Based upon the cumulative factors noted above, we expect net income for the fourth quarter of fiscal 2005 to be in the range of $17.7 million to $19.8 million, or $0.42 to $0.47 per diluted share, assuming an effective tax rate of 35% and projected diluted shares outstanding of approximately 42.0 million.

LIQUIDITY AND CAPITAL RESOURCES