LIBERATE TECHNOLOGIES - 10-K Annual Report

FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED MAY 31, 2002

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .

LIBERATE TECHNOLOGIES
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE (State or Other Jurisdiction of Incorporation or Organization)		94-3245315 (I.R.S. Employer Identification No.)
2 Circle Star Way, San Carlos, California (Address of Principal Executive Offices)		94070-6200 (Zip Code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Indicate by check mark whether the Company (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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

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

As of June 30, 2002, the aggregate market value of the voting stock held by non-affiliates of the Company was $195,380,000 based on the last reported sale price of the Company's common stock on the Nasdaq National Market System, and there were 107,618,302 shares of common stock outstanding (including shares held by affiliates).

Portions of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on October 29, 2002 are incorporated by reference in Items 10, 11, 12, and 13 of Part III of this Report.

LIBERATE TECHNOLOGIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MAY 31, 2002

The discussion in this Annual Report on Form 10-K ("Form 10-K") filed on behalf of Liberate Technologies and its wholly owned subsidiaries ("Liberate," "we," "us," or "our") contains statements that involve expectations or intentions (such as those relating to future business or financial results, new products or features, anticipated deployments, or management strategies). These are forward-looking statements that are subject to risks and uncertainties. We assume no obligation to update any forward-looking statements. Actual results may vary materially due to the risks listed below, risks listed in our other filings with the Securities and Exchange Commission, and unforeseen other factors. You should consider our forward-looking statements in conjunction with those risks discussed below, as well as with our financial statements, related notes, and the other financial information appearing elsewhere in this Form 10-K.

Liberate Technologies is the premier provider of standards-based software platforms for delivering enhanced digital content and services to television viewers around the world. Network operators (such as cable and satellite television operators and telecommunications companies), broadcasters, content providers, and manufacturers of information-oriented consumer devices such as television set-top boxes and game consoles ("consumer devices") use our software to deliver enhanced digital content and services. Our software also facilitates network management and interoperability of third-party applications.

We began our operations in late 1995 as a division of Oracle, developing client and server software for the consumer, enterprise, and educational markets. We incorporated in Delaware in April 1996 when Oracle spun off our division as Network Computer, Inc. ("NCI"). NCI's initial focus was selling software to original equipment manufacturers of network computer products for enterprise customers. In August 1997, NCI merged with a Netscape Communications subsidiary, Navio Communications, Inc. ("Navio"), which was developing Internet application and server software for the consumer market. NCI was the surviving entity in the merger. After the merger, we changed our strategic direction and restructured our operations to focus our development and marketing efforts on products targeted primarily at the consumer device market, targeting sales to a limited number of large network operators and consumer device manufacturers. In May 1999, we changed our name from NCI to Liberate Technologies.

Since our incorporation, we have raised a significant amount of capital by selling small equity positions to a number of investors, including some major network operators. This has provided us with the financial resources we needed to continue our growth, given us resources to pursue investments and acquisitions, and reinforced our relationships with participating network operators. In order to continue to fund our growth, we decided to offer our stock to the public and became a publicly traded company on July 28, 1999. In January 2000, we effected a two-for-one split of our stock. We raised additional capital in February 2000 through a secondary public offering, and again in July 2000 when Cisco Systems ("Cisco") invested $100.0 million through a private placement.

We have made two acquisitions since becoming a publicly traded company. In March 2000, we acquired the VirtualModem assets of SourceSuite LLC ("SourceSuite"), a company based in Canada. In June 2000, we acquired MoreCom, Inc. ("MoreCom"), based in Horsham, Pennsylvania.

In July 2002, we entered into an agreement to acquire Sigma Systems Group (Canada) ("Sigma"), which develops and licenses operations support systems software to cable operators to permit them to create, deploy, monitor, and maintain subscriber services. See Note 17 of Notes to Consolidated Financial Statements.

We operate solely in one segment and generate revenues by licensing our client and server products, applications, and tools, and providing related services. Our fiscal year runs from June 1 to May 31, with each fiscal year ending on May 31 of the corresponding calendar year. Our stock is traded on the Nasdaq National Market under the symbol "LBRT."

We have offices in the United States, Canada, Europe, Asia, and Australia. Our headquarters and primary development offices are located in San Carlos, California. We have a development office in London, Ontario, Canada. We also have sales offices in London, England; Tokyo, Japan; Sydney, Australia; and Beijing, China.

Our software platform includes a full range of client and server products, tools, and applications. These solutions enable network operators, broadcasters, content and applications developers, and consumer device manufacturers to deliver enhanced content and applications to TV viewers. Deploying these solutions requires a depth of knowledge in a broad range of technical fields. Over the past six years, we have acquired expertise in technologies such as the following:

Digital television. Much of the technology we offer is specifically engineered to deliver enhanced TV applications for digital television. For example, we have developed the software technology to manage the triggers that are used to signal the presence of interactive content in a digital broadcast stream. Each aspect of deploying an application—creating it, delivering it over a network, and running it on a set-top box—requires specialized knowledge of how digital TV systems work. We routinely use this digital TV know-how in the development of our products and the delivery of our services.

Standards-based technology. From our inception, we recognized the important role that standards have played in the major advances in television and other consumer electronics markets. Consequently, we became an early proponent of standards in this industry and built our products around them. For example, Liberate® TV Navigator™ software was the first certified Java-compliant software client in the industry. Our products use many existing broadcast and Internet standards, and where standards do not exist, we help to create them. We have contributed to industry standards activities such as Advanced Television Enhancement Forum ("ATVEF"), Digital Video Broadcast-Multimedia Home Platform ("DVB-MHP"), OpenCable Application Platform ("OCAP"), and the TV Linux Alliance.

Since our products are based on the same technologies that form the basis of DVB-MHP and OCAP (notably, Java), Liberate is well positioned to provide solutions where these standards are adopted. By offering standards-based solutions, we further ensure that application developers can use widely available and highly refined tools designed for other purposes (for example, Java or HTML development) to develop for TV. This promotes a broader array of content and applications, and thus creates a better experience for the consumer.

Efficient client technology. We have engineered our client software to support a range of digital devices. With products that run in less than 400 kilobytes of memory, we offer some of the smallest,

most efficient client engines available. Even on resource-constrained hardware platforms, these client engines can support such advanced features as a Java applications environment, video-on-demand, and electronic program guides. We also offer small and efficient implementations of our higher-end products that offer substantial feature sets.

Portable client architecture. We have developed porting technology and tools that streamline the process of making our software run across a variety of digital hardware platforms and operating systems. This approach maximizes the number of devices that can run our software.

Reliable software architecture. Our software typically operates in always-on environments, where reliability, security, and privacy are of utmost importance. Accordingly, we design our software to function under extended use and extreme loads. For example, we use deployment-proven technologies (such as load balancers) and established standards (such as SSL).

Integration technologies. Recognizing that digital network operators, broadcasters, and application developers have their own specific needs (and unique existing infrastructures), we have developed a modular architecture that uses interchangeable components and industry-standard interconnections. Further, we have pre-integrated our server technology with related software solutions to facilitate integration with the systems used by our network operators.

Cable, satellite, terrestrial broadcast, and telephony-based digital television network infrastructures are quite varied. In response to this diversity, we have created a modular suite of products that we can adapt to meet the specific needs of each operator.

Our client software products and their accompanying servers form the core of our offerings. The client components, collectively called Liberate TV Navigator, run on digital set-top boxes of various types, such as cable, satellite, digital terrestrial broadcast, and DSL (Digital Subscriber Lines), and create an application environment. Since our client software needs to run on a variety of set-top boxes, we offer Liberate® TV Porter™ software, which is used to create porting layers typically implemented by the set-top box manufacturers. In aggregate, the set-top box's operating system, the porting layer, and Liberate TV Navigator software control the function of the set-top box, turning a conventional digital device into one capable of providing interactive and enhanced services. We offer Liberate TV Navigator software in three basic configurations, depending on the capability of the consumer device:

We provided a variety of server software to support Liberate TV Navigator software and other set-top box clients. Liberate® Transcoder™ server software lets many set-top boxes that are limited in functionality provide a richer user experience by offloading some processing to a remote server. Liberate® Datapoint™ server software manages subscribers and set-top boxes, while continually sending data that a user can access from different set-top boxes. Liberate® Mediacast™ server software efficiently transfers data to set-top boxes using a minimum of network resources. Liberate® Command™ server software lets operators manage their server infrastructure and data. Collectively, these products comprise a software suite called Liberate® Connect™.

Without an array of compelling applications, digital set-top boxes and broadband networks are neither interesting to consumers nor profitable to their developers. We have developed products that provide common functionality needed by various types of applications. In some cases, these products also give the operator control over how services are delivered and who can access them.

Several of our products are aimed at person-to-person communications or communications between an application service provider and a consumer. Liberate® Message™ software is a general messaging system used to deliver data between various points on a network, either between set-top boxes or between servers and set-top boxes. Liberate® TV Ticker™ software captures live data and manages its broadcast to set-top boxes for applications such as an information ticker (in which data runs across the screen) or other applications that use near-real-time broadcast data (such as a games leader-board). Liberate® TV Info™ software also collects television-programming-related data and delivers it to the set-top box. Liberate® TV Chat™ software, when used in conjunction with other software, lets users exchange messages nearly instantly. Liberate® TV Mail™ provides the infrastructure to deliver messages that need to be retained for a period of time, and is used as the foundation for building mail applications. Liberate® Imprint™ software incorporates both client and server elements that let network operators collect data about subscriber usage patterns. Such information lets network operators target and personalize their offerings for subscribers.

We continue to develop infrastructure to assist in the deployment of TV-based applications and services.

We also provide tools to developers that let them develop applications on our platform. Key products that support developers include Liberate® TV Producer Studio™ tools and Liberate® TV Emulator™ tools. Liberate TV Producer Studio tools includes the documentation and sample code to instruct developers how to write applications for our platform. We provide Liberate TV Emulator tools for Liberate TV Navigator client software to application developers as a PC-based emulation environment for testing their applications to see how they will perform on real set-top boxes running our software. Liberate TV Emulator tools, typically used in conjunction with Liberate's server offerings, provide a complete client-server environment.

Liberate®, the Liberate logo, and the various Liberate products and programs described above are registered trademarks and trademarks of Liberate Technologies. All other trademarks are the property of their respective owners.

Our consulting service group provides project management support, which includes implementation guidance, product customization, and product configuration. This group also provides project management, engineering assistance, and assistance with custom applications. To help ensure seamless product deployments, consulting teams may work closely with network operators and consumer device manufacturers to integrate and install our software at their facilities. We intend to devote substantial resources to helping our customers integrate our products into their infrastructure.

Our customer service, support, and training organizations provide worldwide support and services. We run a technical training program for our worldwide customers and developers. Curriculum and training classes are available for most of our products.

We have development offices in San Carlos, California and London, Ontario, Canada. Our total research and development expenses were $32.3 million, $51.2 million, and $44.8 million for fiscal 2000, 2001, and 2002, respectively. These amounts exclude acquisition-related charges for purchased in-process research and development of $1.9 million and $22.4 million in fiscal 2000 and 2001, respectively. We believe our success will depend in part upon our ability to continue to effectively invest in research and development.

We typically license our server software directly to network operators and license our client software to both consumer device manufacturers and network operators. Consumer devices containing our software platform are distributed by the manufacturer to the end user primarily through network operators.

We license our software primarily through our direct sales force. We use indirect resellers in certain developing markets and may increase the number of indirect distribution partners in the future. Our sales force is organized into teams of sales representatives and systems engineers. We have direct sales professionals located in North America, Europe, Asia, and Australia.

Our customers are typically large network operators who introduce, market, and promote products and services based on our technology. For fiscal 2000, NTL, Wind River Systems, and AOL accounted for 30%, 19%, and 12%, respectively, of total revenues. For fiscal 2001, NTL, Telewest, and AOL accounted for 28%, 25%, and 11%, respectively, of total revenues. For fiscal 2002, Telewest and NTL accounted for 17% and 16%, respectively, of total revenues. In May 2000, NTL acquired the consumer cable and certain other operations of Cable and Wireless and the percentages for NTL for fiscal 2000 include amounts previously reported for Cable and Wireless. We expect that we will continue to depend upon a limited number of customers for a significant portion of our revenues in future periods, although the specific customers may vary from period to period.

We face intense competition in licensing software for networks and consumer devices. Our principal competitors in the client software market include Microsoft, OpenTV (including Liberty Broadband Interactive Technologies, its controlling shareholder), and Canal+ Technologies. In the server market, our primary competitor is Microsoft. We also expect additional competition from other established and emerging companies in the television, computer, software, and telecommunications sectors. The principal competitive factors in our industry include:

We believe that we presently compete favorably with our competitors in many of these areas. However, the market for consumer device software is evolving, and we cannot be certain that we will compete successfully in the future. See "Risk Factors—Competition from bigger, better capitalized competitors could result in price reductions, reduced gross margins, and loss of market share."

We have a portfolio of technologies and intellectual property that addresses various features of interactive networks and devices. We see significant value in the intellectual property we have developed, acquired, and incorporated into our technologies and systems. We also seek to protect and grow our intellectual property portfolio by developing and acquiring strategically important technologies and patents. We safeguard our proprietary information and our other intellectual property through a combination of domestic and international copyrights, trademarks, patents, and trade secret protection, as well as through contractual protections such as proprietary information agreements and nondisclosure agreements. However, we cannot guarantee that these steps will prevent misappropriation of our proprietary information, and we may not be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. See "Risk Factors—Our limited ability to protect our intellectual property and proprietary rights may harm our competitiveness."

We currently have 27 issued U.S. patents in the general area of interactive networking technologies (consisting of more than 700 claims) and 22 foreign patents and pending patent applications. We continue to develop new technologies and file a range of additional patent applications as part of a worldwide intellectual property program. We currently have 32 U.S. patent applications pending (including more than 850 claims.)

We have registered "Liberate" and the Liberate logo in the United States and extensively throughout the world, and use our many other product trademarks in association with these marks.

As of May 31, 2002, we had 512 employees. None of our employees is represented by a collective bargaining agreement and we have never experienced a work stoppage. We consider our relations with our employees to be good.

We launched the Liberate Corporate Venture Fund (the "Venture Fund") in November 2000 to promote the development of interactive television and growth of innovative companies that we expect to be our strategic partners. The Venture Fund operates as a business group within Liberate. As of May 31, 2002, we had invested $17.1 million in our portfolio of companies. In fiscal 2001 and 2002, we wrote down $5.3 million and $1.4 million, respectively, of equity investments that had been permanently impaired, reducing our net equity investments to $10.4 million as of May 31, 2002. See "Risk Factors—We may not be successful in making strategic investments, which may increase our basic net loss." and Notes 1 and 8 of Notes to Consolidated Financial Statements.

Any of the following risks could seriously harm our business, financial condition, and results of operations, causing the trading price of our common stock to decline.

Demand for information-oriented consumer devices and interactive television may not develop.

Because the market for interactive television and information-oriented consumer devices (such as set-top boxes) is newly emerging, the potential size of the market opportunity and the timing of its development are uncertain. As a result, our profit potential is unknown. Although historically our revenues have increased every fiscal year, we do not anticipate that we will be able to sustain our historical revenue growth rates. Our ability to achieve our revenue and profitability goals will depend in large part upon increased license and royalty revenues from deployments in North America, which are largely beyond our control.

Sales of our technology and services depend upon the commercialization and broad acceptance by consumers and businesses of interactive television and information-oriented devices, primarily cable and satellite set-top boxes. This will depend in turn on many factors, including the development of content and applications of interest to significant numbers of consumers, and the emergence of industry standards that facilitate the distribution of such content.

If the market for interactive television consumer devices, and set-top boxes in particular, does not develop, develops more slowly, or develops in a different direction than we anticipate, our revenues will not grow quickly, if at all. For example, a consumer device manufacturer or its customers could choose to use only applications and content developed to operate directly with a particular consumer device, thereby eliminating the need for our software platform. As another example, many industry analysts have predicted that North American cable operators will focus on rolling out to their subscribers various forms of video-on-demand services, which could operate directly with a set-top box. Moreover, although we have focused on developing software that operates with set-top boxes, consumers may in the future receive interactive television through multi-purpose home entertainment devices or advanced game consoles, using software platforms other than ours.

Our success depends on a limited number of network operators introducing and promoting products and services incorporating our technology.

Our success depends on large network operators introducing and promoting products and services based on our technology. There are, however, only a limited number of large network operators worldwide, some of whom may not elect to adopt our products. Mergers or other business combinations among these network operators would reduce this number, possibly disrupting our business relationships, and adversely affecting demand for our products and services. Moreover, some of our largest customers are restructuring and have reduced their use of our products and services.

Currently, a number of network operators are not deploying products and services incorporating our technology and services for consumer devices. In addition, none of our network operator customers is contractually obligated to introduce or promote products and services incorporating our technology, nor to achieve any specific introduction schedule. Accordingly, even if a network operator initiates a customer trial of products incorporating our technology, that operator is under no obligation to continue its relationship with us or to launch a full-scale deployment of these products. Further, our agreements with network operators are generally not exclusive, so network operators with whom we have agreements may enter into similar license agreements with one or more of our competitors.

Because the large-scale deployment of products and services incorporating our technology is complex, time-consuming, and expensive, network operators are cautious about proceeding with such deployments. While we believe that products and services based on our technology will have significant value to network operators (in the form of opportunities to generate additional revenues per subscriber from interactive applications, such as video-on-demand, and the loss of fewer subscribers to competing services), there is only limited data available to demonstrate to network operators that they will receive attractive returns on their investments. Moreover, the customization process for new customers requires a lengthy and significant commitment of resources by our customers and us. These and other factors,

including our customers' needs to involve multiple departments in the purchasing decision and get approval at a number of levels of management within their organizations, may slow deployment, which could, in turn, delay market acceptance of these products and services.

Furthermore, some of our current and historical revenues consist of one-time revenues derived from the termination of certain major customers' unused rights to use prepayments for products and services. In the future, we will need to substantially increase our sources of sustainable revenues to maintain our historical rates of revenue growth and to meet our revenue and profitability goals.

Unless network operators introduce and promote products and services incorporating our technology in a successful and timely manner, our software platform will not achieve widespread acceptance and our revenues will not grow quickly, if at all.

Deployment and availability of interactive television and consumer device networks may be limited by the lack of content and infrastructure.

Interactive television networks and other consumer-device networks are complex systems, requiring the successful interaction of many elements in order to be technologically and financially attractive to deploy. Many network operators seek to deploy a complete interactive television system, including features such as video-on-demand and guide services, rich content, and robust infrastructure support. Our success thus depends on the emergence of content, applications, and infrastructure for interactive television that do not now exist. Moreover, these elements must interact successfully with our software in order for our platform to gain widespread acceptance.

In different regions of the world, certain elements of interactive television systems may be controlled by a single company or a few large companies. Development of the interactive television market may be slowed if these companies delay or do not participate in the deployment of interactive television, charge excessive fees, or use proprietary technologies rather than industry standards that permit interconnection and a uniform environment for developing applications and content.

Moreover, some companies have obtained patent protection on technology relating to important parts of a complete interactive television system. If patent licenses were required to assemble a complete interactive television system and could not be obtained on reasonable terms, the development of the interactive television industry could be slowed and revenues available to us could be reduced.

Our lower-margin service revenues will likely continue to constitute a significant percentage of total revenues.

In our work, we find that our customers need substantial professional services to integrate our products into their networks. To achieve our revenue and profitability goals, we will need to increase all forms of revenues, including service revenues, which typically have a lower gross margin than do license and royalty revenues. Moreover, we may find it difficult to increase our service revenues because of the difficulty in obtaining new service contracts and recruiting additional qualified service personnel. Our service margins are likely to remain volatile as we attempt to expand our service business.

Our success depends on consumer device manufacturers introducing and promoting products that incorporate or operate with our technology.

We do not typically manufacture hardware components that incorporate our technology. Rather, we license software technology to consumer device manufacturers and work with them to ensure that our products operate together. Accordingly, our success will depend, in part, upon our ability to convince a number of consumer device manufacturers to manufacture products that incorporate or operate with our technology, and upon the successful introduction and commercial acceptance of these products.

None of these consumer device manufacturers is obligated to introduce or promote consumer devices incorporating our technology, achieve any specific production schedule, or license from us exclusively. Our failure to convince consumer device manufacturers to incorporate our software platform into their products or modify their products to operate with our software, or the failure of these products to achieve broad acceptance with retailers and consumers, will result in our revenues not growing quickly, if at all.

A continued downturn in macroeconomic conditions could reduce sales of our products and services or result in collection difficulties.

Economic growth in the United States and internationally has slowed significantly and the prospects for near-term economic growth worldwide are uncertain at best. The economic slowdown and uncertainty may harm our business. Many of our customers rely on debt-based financing and subscriber revenues to fund their deployments, so economic conditions that reduce either of these sources of financing may slow or stop their deployments, or make it more difficult to collect receivables. Some of our largest customers are restructuring their debt and have reduced their use of our products and services. Moreover, some of our smaller customers may not be able to continue their operations or afford to pay for our products. As a result, we may experience substantial fluctuations from period to period as a consequence of general economic conditions affecting the timing of orders from major customers and other factors affecting the capital spending or financial condition of our customers. Our business, financial condition, and operating results could be harmed if we were to face volatility or reductions in customer orders or payments.

If we do not meet our announced pro forma revenue or profitability goals, our stock price could decline.

We have in the past provided, and may in the future provide, public guidance regarding quarterly revenues, earnings, assets, and cash flows. We have also announced that we expect to achieve profitability on a pro forma basis in the second half of fiscal 2003. Our pro forma financial information excludes special charges, including those identified in Item 7. We have in the past failed to meet our guidance. If we again fail to meet this guidance in any given quarter or on the timeline we have announced, our stock price could decline.

Our quarterly revenues are likely to vary from quarter to quarter and may be difficult to forecast. We expect our quarterly revenues to continue to depend significantly on a small number of relatively large orders for our products and services. We have found it difficult to forecast the timing and amount of specific sales because our sales process is complex and our sales cycle is long. Our quarterly operating results may be lower than our public guidance if we are unable to complete one or more substantial sales on the schedule we anticipated. If we license our products on a site or enterprise basis (as some of our customers have requested), we will not receive the more predictable royalty revenues on a per-subscriber basis, but rather one-time license revenues, which will continue to be difficult for us to forecast. In some cases, we recognize revenues from services on a percentage-of-completion basis. Our ability to recognize these revenues may be delayed if we are unable to meet service milestones on a timely basis. Delays in network operators' deployment schedules (which would delay royalty revenue for us) or our receipt of royalty reports could adversely affect our revenues for any given quarter. Because our expenses are relatively fixed in the near term, any shortfall from anticipated revenues could result in greater short-term losses.

To meet our pro forma profitability goal, we will have to increase revenues while keeping expenses relatively flat. Since our inception, we have not had a profitable quarter, on a pro forma basis or otherwise, and may never achieve or sustain profitability. For fiscal 2000, 2001, and 2002, we incurred a net loss of $80.8 million, $306.4 million, and $325.0 million, respectively. We could continue to incur

significant losses and negative cash flows in the near future, which would adversely affect our stock price, business, and financial condition.

Our future license and royalty revenues and margins may be lower than we currently anticipate if our customers license only certain features of our products and do not deploy them widely.

We have developed our software platform to enable a broad array of interactive television features and we typically license our entire software platform to our network operator customers. Some network operators are choosing to roll out only certain features of interactive television, such as video-on-demand services, and want to license only certain individual capabilities of our software platform. If we increasingly license only some components of our software platform and our network operator customers do not deploy our technology widely enough to make up for the resulting lower per-unit license and royalty fees, our license and royalty revenues and margins will be lower than we currently anticipate and our business, financial condition, and results of operations could be seriously harmed.

We have relied and expect to continue to rely on a limited number of customers for a significant portion of our revenues.

We currently derive, and expect to continue to derive, a significant portion of our revenues from a limited number of customers. For fiscal 2000, NTL, Wind River Systems, and AOL accounted for 30%, 19%, and 12%, respectively, of total revenues. For fiscal 2001, NTL, Telewest, and AOL accounted for 28%, 25%, and 11%, respectively, of total revenues. For fiscal 2002, Telewest and NTL accounted for 17% and 16%, respectively, of total revenues.

We expect that we will continue to depend upon a limited number of customers for a significant portion of our revenues in future periods, although the specific customers may vary from period to period. As a result, if we fail to successfully sell our products and services to one or more customers in any particular period, or a large customer purchases fewer of our products or services, defers or cancels orders, fails to meet its payment obligations, or terminates its relationship with us, our revenues could decline significantly.

Several of our largest customers have significant debt burdens and are restructuring. These customers have decreased their use of our products and services. While these customers continue to pay us, there can be no assurance that corporate changes will not create risk to future business or payments.

International revenues account for a significant portion of our revenues and are subject to operational risks and currency fluctuations.

International revenues consist of sales to customers outside of the United States and are assigned to specific countries based on the location of the customer. International and domestic revenues as a percentage of total revenues for the periods reported were as follows:

		Years ended May 31,
		2000		2001		2002
International revenues		39	%	67	%	67	%
Domestic (U.S.-based) revenues		61	%	33	%	33	%

	Total revenues	100	%	100	%	100	%

Revenues from countries providing material amounts of our revenues were as follows (in thousands):

	Years ended May 31,
	2000		2001		2002
U.K.-based revenues	$	7,644	$	21,591	$	28,332

Domestic (U.S.-based) revenues	$	13,275	$	13,022	$	26,411

We expect to derive a significant portion of our revenues for the foreseeable future from sources outside the United States, especially as we increase our international sales and marketing activities. Accordingly, our success will depend, in part, upon international economic, political, legal, and regulatory conditions; our ability to manage international sales and marketing operations; and our ability to improve collections of international accounts receivable. To successfully expand international sales, we must establish additional foreign operations, hire additional personnel, and increase our foreign direct and indirect sales forces. This expansion will require significant management attention and resources, which could divert attention from other aspects of our business. Failing to expand our international operations in a timely manner would limit the growth of our international revenues. See Note 13 of Notes to Consolidated Financial Statements.

To date, the majority of our revenues and costs have been denominated in U.S. dollars. The effect of changes in foreign currency exchange rates on revenues and operating expenses are reflected in our Consolidated Statements of Operations and Comprehensive Loss. See Note 1 of Notes to Consolidated Financial Statements. Expanded international operations are likely to result in increased foreign currency receivables and payables. Although we may from time to time undertake foreign exchange hedging transactions to cover a portion of our foreign currency transaction exposure, we do not currently do so. Accordingly, fluctuations in the value of foreign currency could significantly reduce our international revenues or increase our international expenses.

In order to remain competitive in our market, we are making an acquisition, and may make additional acquisitions, that could be difficult to integrate, disrupt our business, and dilute stockholder value.

We entered into an agreement in July 2002 to acquire Sigma Systems Group (Canada), which develops and licenses operations support systems software to cable operators to permit them to create, deploy, monitor, and maintain subscriber services. We may acquire other businesses in the future in order to remain competitive or to acquire new technologies. With our acquisition of Sigma Systems and with any future acquisitions, we will need to integrate product lines, technologies, personnel, customers, widely dispersed operations, and distinct corporate cultures. These integration efforts may not succeed or may distract our management from operating our existing business. Our failure to successfully manage current and future acquisitions could seriously harm our operating results. In addition, our stockholders would be diluted if we were to finance acquisitions by incurring convertible debt or issuing equity securities.

As the market for interactive television develops, we face increased pressure to reduce the prices for our products, which could harm our results of operations and financial condition.

The market for interactive television is newly emerging and the relative value of system components (such as infrastructure, operating systems, middleware, applications, and content) has yet to be widely tested commercially. We have focused on developing and marketing our software platform and extending it to enable our network operator customers to handle more of the subscriber management services associated with delivering interactive television. One of our competitors has re-oriented its business focus toward developing and marketing content and applications because it believes that the margins on those products will increase, while platforms to enable interactive

television will become more of a commodity, with much lower margins. If the market for interactive television develops in this way, our business, financial condition, and results of operations would be seriously harmed.

We have been sued for patent infringement by one of our competitors and may be subject to other third-party intellectual property infringement claims that could be costly and time-consuming to defend. We do not have insurance to protect against these claims.

On February 7, 2002, OpenTV filed a lawsuit against Liberate in the United States District Court for Northern California, alleging that Liberate is infringing two of OpenTV's patents and seeking monetary damages and injunctive relief. We have retained O'Melveny & Myers as our legal counsel and filed an answer denying OpenTV's allegations and counter-claiming that OpenTV infringes our patents for interactive networking software. We are seeking to have OpenTV's patents invalidated, requesting a finding that our technology does not infringe OpenTV's patents, and seeking monetary damages and injunctive relief against OpenTV. While litigation is by its nature uncertain, we do not believe that we are likely to face any material exposure arising from this case and have not reserved funds for a potential settlement or adverse decision.

We expect that, like other software product developers, we will increasingly be subject to infringement claims as the number of products and competitors developing consumer device software grows, software and business-method patents become more common, and the functionality of products in different industry segments overlaps. From time to time, we hire or retain employees or external consultants who have worked for independent software vendors or other companies developing products similar to ours. These prior employers may claim that our products are based on their products and that we have misappropriated their intellectual property.

Several other companies involved in the interactive television market have large patent portfolios that they have aggressively sought to enforce. While we do not believe we currently infringe such patents, and believe that we have valuable patents that we are seeking to enforce in the context of litigation, claims of infringement are always possible, and success in litigation or other successful resolution of claims is by no means assured.

We currently do not have liability insurance to protect against the risk that our own technology or licensed third-party technology infringes the intellectual property of others. Claims relating to our intellectual property, regardless of their merit, may seriously harm our ability to develop and market our products and manage our day-to-day operations because they are time-consuming and costly to defend, and may divert management's attention and resources, cause product shipment delays, require us to redesign our products, or require us to enter into royalty or licensing agreements.

We believe that our success will depend on the continued employment of our senior management team and key technical personnel. Recently, we have had significant turnover among key members of senior management. If our new organization of senior management does not work well or we have difficulty replacing other key personnel who leave their employment with Liberate, our ability to manage day-to-day operations, develop and deliver new technologies, attract and retain customers, attract and retain other employees, and generate revenues could be harmed.

Competition from bigger, better capitalized competitors could result in price reductions, reduced gross margins, and loss of market share.

primary competitor in the server market is Microsoft. Additionally, certain interactive television applications developers, such as Gemstar-TV Guide or NDS Group (a partially owned subsidiary of News Corporation), may expand into the interactive television platform market where we compete. We expect additional competition from other established and emerging companies in the television, computing, software, and telecommunications sectors and from stronger competitors created by the current consolidation in our industry. Increased competition could result in price reductions, fewer customer orders, reduced gross margins, longer sales cycles, reduced revenues, and loss of market share.

Several of our existing and potential competitors have one or more of the following advantages: longer operating histories, larger customer bases, greater name recognition, more patents relating to important technologies, and significantly greater financial, technical, sales and marketing, and other resources. This may place us at a disadvantage in responding to their pricing strategies, technological advances, advertising campaigns, strategic partnerships, and other initiatives. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer or governmental requirements, or to devote greater resources to the development, marketing, promotion, and sale of their technologies than we can. In addition, many of our competitors have well-established relationships with our current and potential customers. Some of our competitors, particularly Microsoft, have made and may continue to make large strategic investments in our current and potential customers. Such investments may allow our competitors to strengthen existing relationships or quickly establish new relationships with our current or potential customers.

Our products may contain errors or be unable to support and manage a potentially unlimited number of users.

Software development is an inherently complex and subjective process, which frequently results in products that contain errors, as well as defective or non-competitive features or functions. Moreover, our technology is integrated into the products and services of our network operator customers. Accordingly, a defect, error, or performance problem with our technology could cause our customers' cable and satellite television or other telecommunications systems to fail for a period of time. Any such failure could cause severe customer service and public relations problems for our customers and could result in delayed or lost revenues or increased expenses due to adverse customer reaction, negative publicity, and damage claims.

Despite frequent testing of our software's scalability in a laboratory environment and in customer deployments, the ability of our software platform to support and manage a potentially unlimited number of users is uncertain. If our software platform does not efficiently scale while maintaining a high level of performance, demand for our products and services and our ability to sell additional products to our existing customers will be significantly reduced.

Our success depends on our ability to keep pace with the latest changes in technology and industry and governmental standards, and any delays or failure in developing and introducing new software products in a cost-effective way could result in a loss of market share, render our technology obsolete, or make it difficult for us to reach our pro forma profitability goal.

The market for consumer device and network operations software is characterized by evolving industry and governmental standards, rapid technological change, and frequent new product introductions and enhancements. Accordingly, our success will depend in large part upon our ability to adhere to and adapt our products to evolving communications protocols and standards. Therefore, we will need to develop and introduce new products that meet changing customer requirements and emerging industry and governmental standards on a timely and cost-effective basis. We have encountered, in the past, and may encounter in the future, delays in completing the development and introduction of new software products. The different products that we have developed for different

markets may be costly for us to maintain and improve if we permit the product lines to branch farther apart from each other. Any delays or failure in developing or introducing new products that meet consumer requirements, technological requirements, or industry or governmental standards could result in a loss of customers and render our products and services obsolete or non-competitive. We hope to increase our potential revenues by creating more extensions to our software platform and extending into complementary lines of software. However, we may not be successful in developing or selling those extensions, and may incur significant development costs not offset by new revenues. If we fail to develop or improve products in a cost-effective way, our expenses may be higher than we have forecasted and we may be unable to reach our pro forma profitability goal.

As we exhaust sales opportunities in our existing markets, we may be unable to identify and take advantage of new business opportunities.

We hope to increase our potential revenues by expanding our sales efforts to reach customers we have not traditionally targeted and licensing a wider variety of software to our current customers. In the future, we may expand our sales efforts to reach a wider variety of customers, including producers, vendors, and aggregators of content; service providers; and manufacturers of other types of consumer devices. We may not succeed in customizing our software to meet the unique needs of those classes of customers or in expanding our sales efforts to new channels.

We may not be successful in making strategic investments, which may increase our basic net loss.

In fiscal 2001, we established the Liberate Corporate Venture Fund to make strategic investments in other companies. In most instances, we make investments in return for equity securities of private companies, for which there is no public market. These companies may be expected to incur substantial losses and may never become profitable, publicly traded companies. If no active trading market develops for these securities, or these securities are not attractive to other investors, we may never realize any return on these investments. During fiscal 2001 and 2002, we wrote-down these investments by $5.3 million and $1.4 million, respectively, as their fair market value had been permanently impaired. If these companies are not successful, we could incur additional future charges related to write-downs or write-offs of these types of assets. Losses or charges resulting from these and other investments could increase our basic net loss. See Notes 1 and 8 of Notes to Consolidated Financial Statements.

We have been named in securities class-action litigation and may be named in additional litigation, which may result in substantial costs and divert management's attention and resources.

Beginning May 16, 2001, a number of class-action lawsuits seeking monetary damages were filed in the United States District Court for the Southern District of New York against several of the firms that underwrote our initial public offering ("IPO"), naming Liberate and certain of our officers and directors as co-defendants. The plaintiffs subsequently added allegations regarding our secondary offering, and named additional officers and directors as co-defendants. A suit making similar allegations based on the same facts has also been filed in California state court. The plaintiffs allege that the underwriters received excessive and improper commissions that were not disclosed in our prospectuses. The federal cases have now been consolidated with several hundred other cases against underwriters and other issuers. We have retained Wilson Sonsini Goodrich & Rosati as our lead counsel, and tendered notice to our insurance carriers and underwriters pursuant to the terms of our insurance policies and underwriting agreements. We are seeking to have the claims dismissed and, while litigation is by its nature uncertain, we do not believe that we are likely to face any material exposure arising from these cases and have not reserved funds for a potential settlement or adverse decision.

More generally, securities class-action litigation has often been brought against a company following declines in the market price of its securities. This risk is especially acute for us because technology companies have experienced greater-than-average stock price declines in recent years and, as a result, have been subject to, on average, a greater number of securities class action claims than companies in other industries. Due to the volatility of our stock price, we may in the future be the target of this kind of litigation. Securities litigation could result in substantial costs and divert management's attention and resources.

We may have to cease or delay product shipments if we are unable to obtain key technology from third parties.

We rely on technology licensed from third parties, including applications that are integrated with internally developed software and used in our products. Most notably, we license certain technologies from BitStream, Macromedia, RealNetworks, RSA, and Sun Microsystems. These third-party technology licenses may not continue to be available to us on commercially reasonable terms, or at all, and we may not be able to obtain licenses for other existing or future technologies that we desire to integrate into our products. If we cannot maintain existing third-party technology licenses or enter into licenses for other existing or future technologies needed for our products, we may be required to cease or delay product shipments while we seek to develop or license alternative technologies.

Our limited ability to protect our intellectual property and proprietary rights may harm our competitiveness.

Our ability to compete and continue to provide technological innovation depends substantially upon internally developed technology. We rely primarily on a combination of patents, trademark laws, copyright laws, trade secrets, confidentiality procedures, and contractual provisions to protect our proprietary technology. While we have a number of patent applications pending, patents may not issue from these or any future applications. In addition, our existing and future patents may not survive a legal challenge to their validity or provide significant protection for us.

The steps we have taken to protect our proprietary rights may not be adequate to prevent misappropriation of our proprietary information. Further, we may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Our competitors may also independently develop similar technology. In addition, the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. If we fail to protect our intellectual property, our competitors could offer products that incorporate our most technologically advanced features, reducing demand for our products and services.

Oracle holds a substantial portion of our stock and could cause our stock price to decline with large sales of our stock.

As of June 30, 2002, Oracle beneficially owned 33,399,843 shares, or 31% of our outstanding common stock, based on 107,618,302 shares outstanding. These shares are held by two co-trustees for the benefit of Delphi Asset Management, a wholly owned subsidiary of Oracle, subject to the terms of a trust agreement that is intended to be irrevocable and will be effective for as long as any shares of our stock are held by Delphi Asset Management (or by the co-trustees for its benefit). The trust agreement specifies that these shares will be voted in proportion to all other voted shares of Liberate. Under a standstill agreement, Delphi Asset Management has agreed not to acquire any more shares of our common stock; not to sell, transfer, or encumber the shares of our common stock beneficially owned by it, except in certain limited ways; and not to seek to control or influence the management or business of Liberate. If Oracle were to sell large amounts of its holdings, our stock price could decline and we could find it difficult to raise capital through the sale of additional equity securities. In addition, this concentration of ownership could delay or prevent a third party from acquiring control over us at a premium over the then-current market price of our common stock.

The reduction in our revenues from our adoption of EITF 00-25 and 01-09 could result in a decline of our stock price.

Recently issued accounting standards have affected how we account for the warrants we have issued to network operators. Effective December 1, 2001, we adopted EITF No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products" and EITF No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor's Products" ("EITF 00-25 and 01-09"). EITF 00-25 and 01-09 generally require that consideration, including warrants, issued to a customer should be classified in a vendor's financial statements not as an expense, but as an offset to revenues up to the amount of cumulative revenues recognized or to be recognized from that customer. In accordance with the transition guidance in EITF 00-25 and 01-09, adoption required the reclassification of financial statements for prior periods presented for comparative purposes. See Note 1 of Notes to Consolidated Financial Statements.

While these accounting changes do not affect our basic net loss per share, the reclassification will reduce our present and future revenues. To the extent that analysts or investors value us on the basis of our revenues, our stock price could decline. See "Risk Factors—We may incur net losses or increased net losses if we are required to record a significant accounting expense related to the issuance or impairment of warrants."

We may incur net losses or increased net losses if we are required to record a significant accounting expense related to the issuance or impairment of warrants.

In fiscal 1999, we entered into agreements to issue several network operators warrants to purchase up to approximately 4.6 million shares of Liberate common stock. Those warrants can be earned and exercised if the network operators satisfy certain milestones within specific time frames. Pursuant to the requirements of EITF No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF 96-18"), we will revalue the warrants if appropriate. The fair market value of the warrants is estimated using the Black-Scholes pricing model. Additionally, the value of the warrants is subject to classification as an offset to revenues up to the amount of cumulative revenues recognized or to be recognized, in accordance with EITF 00-25 and 01-09. See Notes 1 and 10 of Notes to Consolidated Financial Statements.

We have in the past accelerated and made other modifications to these warrants to motivate network operators to deploy our software and we may do so again. If the remaining warrants are earned, accelerated, modified, or impaired, we may be required to record additional significant non-cash expenses or offsets to revenues. As a result, we could incur net losses or increased net losses for a given period and this could seriously harm our operating results.

We may incur net losses or increased net losses if we are required to record additional significant accounting charges related to excess facilities that we are unable to sublease.

We have existing commitments to lease office space at our headquarters in San Carlos, California in excess of our needs for the foreseeable future. The commercial real estate market in the San Francisco Bay Area has developed such a large excess inventory of office space that we now believe we will be unable to sublease a substantial portion of our excess office space in the near future. Accordingly, for fiscal 2002, we recorded excess facilities charges and related asset impairment of $9.9 million, of which $9.3 million represented the remaining lease commitments for vacant facilities, net of expected sublease income, and $601,000 related to the impairment of certain assets. If current market conditions for the commercial real estate market remain the same or worsen, or we conclude that we are not likely to use additional space, we may be required to record additional charges of up to $28.9 million in future periods. See Note 4 of Notes to Consolidated Financial Statements.

We may incur net losses or increased net losses if we are required to record expenses related to grants of options to our employees.

Current proposed legislation in Congress, if adopted, would require us to record the stock options granted to all or certain of our employees as an expense. If we are required to record non-cash expenses related to the issuance of stock options, we may incur increased net losses.

New or changed government regulation could significantly reduce demand for our products and services.

We are subject not only to regulations applicable to businesses generally, but also to laws and regulations directly applicable to the Internet, cable and satellite television networks, and other telecommunications content and services. State, federal, and foreign governments may adopt laws and regulations that adversely affect us or our markets in any of the following areas: user privacy, copyrights, consumer protection, taxation of e-commerce, the online distribution of content, standards for transmission of interactive and enhanced television, and the characteristics and quality of online products and services. In particular, government laws or regulations restricting or burdening the exchange of personally identifiable information could delay the implementation of interactive services or create liability for us or other manufacturers of software that facilitates information exchange. Also, if we have to re-design our products to comply with new or changed government laws or regulations, we could face additional expense and delay in delivering our products to our customers. See "Risk Factors—Our success depends on our ability to keep pace with the latest changes in technology and industry and governmental standards, and any delays or failure in developing and introducing new software products in a cost-effective way could result in a loss of market share, render our technology obsolete, or make it difficult for us to reach our pro forma profitability goal."

Moreover, the market for television, and particularly cable and satellite television, is extensively regulated by a large number of national, state, and local government agencies. New or altered laws or regulations regarding interactive television that change its competitive landscape, limit its market, or affect its pricing could seriously harm our business prospects.

We expect our operations to continue to produce negative cash flow in the near term; consequently, if we should need additional capital and could not raise it, we may not be able to fund our continued operations.

Since our inception, cash used in our operations has substantially exceeded cash received from our operations and we expect this trend to continue for the near future. We believe that our existing cash balances will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months and beyond. At some point in the future, we may need to raise additional funds and we cannot be certain that we will be able to obtain additional financing on favorable terms, or at all. If we need additional capital and cannot raise it on acceptable terms, we may not be able to develop our products and services, acquire complementary technologies or businesses, open new offices, hire and retain employees, or respond to competitive pressures or new business requirements.

Provisions of our corporate documents and Delaware law could deter takeovers and prevent stockholders from receiving a premium for their shares.

Certain provisions of our certificate of incorporation and bylaws may discourage, delay, or prevent a change in control of our company that a stockholder may consider favorable. These include provisions that:

In addition, Section 203 of the Delaware General Corporation Law and provisions in our stock incentive plans may discourage, delay, or prevent a change in control of our company.

We currently lease approximately 237,000 square feet of office space in various locations throughout the United States, Canada, Europe, Asia, and Australia.

We lease approximately 181,000 square feet of office space for our headquarters and development offices in San Carlos, California. Approximately 53,000 square feet of our headquarters office space is available for sublease to third parties. In December 2001, we subleased approximately 25,000 square feet of our headquarter space for a 36-month term at an average rate over the sublease term that is less than our cost. We have engaged a commercial real estate broker to market the remaining space.

We lease approximately 25,000 square feet for a development facility in London, Ontario, Canada. We are currently negotiating to renew this facility lease for an additional five-year term, which would extend our lease through December 2007.

We leased approximately 16,000 square feet in Horsham, Pennsylvania and approximately 10,000 square feet in Murray City, Utah for development facilities. As part of our February 2002 restructuring, we did not renew the Horsham lease upon its expiration in June 2002, and we negotiated an early buyout of the Murray City lease, which ended our obligation as of May 31, 2002.

We also lease sales offices in London, England; Tokyo, Japan; Beijing, China; and Sydney, Australia.

Beginning May 16, 2001, a number of class-action lawsuits seeking monetary damages were filed in the United States District Court for the Southern District of New York against several of the firms that underwrote our IPO, naming Liberate and certain of our officers and directors as co-defendants. The plaintiffs subsequently added allegations regarding our secondary offering, and named additional officers and directors as co-defendants. A suit making similar allegations based on the same facts has also been filed in California state court. The plaintiffs allege that the underwriters received excessive and improper commissions that were not disclosed in our prospectuses. The federal cases have now been consolidated with several hundred other cases against underwriters and other issuers. We have retained Wilson Sonsini Goodrich & Rosati as our lead counsel, and tendered notice to our insurance carriers and underwriters pursuant to the terms of our insurance policies and underwriting agreements. We are seeking to have the claims dismissed and, while litigation is by its nature uncertain, we do not believe that we are likely to face any material exposure arising from these cases and have not reserved funds for a potential settlement or adverse decision.

On February 7, 2002, OpenTV filed a lawsuit against Liberate in the United States District Court for Northern California, alleging that Liberate is infringing two of OpenTV's patents and seeking

monetary damages and injunctive relief. We have retained O'Melveny & Myers as our legal counsel and filed an answer denying OpenTV's allegations and counter-claiming that OpenTV infringes our patents for interactive networking software. We are seeking to have OpenTV's patents invalidated, requesting a finding that our technology does not infringe OpenTV's patents, and seeking monetary damages and injunctive relief against OpenTV. While litigation is by its nature uncertain, we do not believe that we are likely to face any material exposure arising from this case and have not reserved funds for a potential settlement or adverse decision.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Our common stock has been traded on the Nasdaq National Market under the symbol "LBRT" since July 28, 1999. The following table sets forth, for the periods indicated, the high and low closing sale prices per share of our common stock as reported on the Nasdaq National Market:

Fiscal 2001	High		Low
First Quarter	$	34.13		$	16.38
Second Quarter	$	32.94		$	10.63
Third Quarter	$	20.56		$	9.00
Fourth Quarter	$	10.80		$	7.09
Fiscal 2002	High		Low
First Quarter	$	15.35		$	7.75
Second Quarter	$	13.95		$	7.12
Third Quarter	$	12.27		$	6.47
Fourth Quarter	$	7.60		$	4.05

As of June 30, 2002, the last reported sales price of our common stock was $2.64 per share, and there were 373 holders of record of our common stock. This does not include the number of persons whose stock is held in "street name" accounts through brokers.

The following table summarizes our current equity compensation plans as of May 31, 2002:

During our fiscal year ended May 31, 2002, we did not issue or sell unregistered securities.

We have not paid any cash dividends since our incorporation and do not intend to pay any cash dividends in the foreseeable future.

On July 27, 1999, the Securities and Exchange Commission declared effective our Registration Statement on Form S-1 (File No. 333-78781) for our IPO. In the IPO, we sold an aggregate of 13,402,100 shares of our common stock (including 902,100 shares in connection with the exercise of the underwriters' overallotment), at $8.00 per share (all share numbers and share price are split-adjusted). The IPO generated gross proceeds of $107.2 million. Our net proceeds were $97.8 million, after deducting $9.4 million in underwriters' discounts and other related costs of the IPO.

On February 17, 2000 (following our stock split), we commenced a secondary stock offering pursuant to a Registration Statement on Form S-1 (File No. 333-95139). In the secondary offering, we sold 2,890,000 shares of our common stock at $108.00 per share, for gross proceeds of $312.1 million. Net proceeds from this transaction, after underwriters' discounts and other related costs of $14.9 million, were $297.2 million.

Our IPO concluded on August 2, 1999 and our secondary offering concluded on February 24, 2000. In each case, all securities registered were sold.

We intend to continue to use the net proceeds of our IPO and secondary offering for general corporate purposes, such as funding our operating losses, working capital needs, expenditures for research and development, and sales and marketing efforts. In addition, we may use a portion of the net proceeds to fund acquisitions or investments in complementary businesses, technologies, or products. Pending any of these uses, we will continue to hold the net proceeds in cash, cash equivalents, or short-term investments.

Please read the following selected consolidated financial data (in thousands, except per share data) in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations," Consolidated Financial Statements, and Notes thereto, and with other financial data included elsewhere in this Form 10-K. The Consolidated Statements of Operations data for the years ended May 31, 2000, 2001, and 2002 and the Consolidated Balance Sheet data as of May 31, 2001 and 2002, are derived from audited consolidated financial statements included elsewhere in this Form 10-K. The Consolidated Statements of Operations data for the years ended May 31, 1998 and 1999, and the Consolidated Balance Sheet data as of May 31, 1998, 1999, and 2000 are derived from audited consolidated financial statements not included in this Form 10-K. These historical results do not necessarily indicate the results to be expected in any future period.

			Page
PART I
	Item 1.	Business	1
	Item 2.	Properties	18
	Item 3.	Legal Proceedings	18
	Item 4.	Submission of Matters to a Vote of Security Holders	19
PART II
	Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	20
	Item 6.	Selected Financial Data	22
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	50
	Item 8.	Financial Statements and Supplementary Data	51
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	91
PART III
	Item 10.	Directors and Executive Officers of the Registrant	92
	Item 11.	Executive Compensation	93
	Item 12.	Security Ownership of Certain Beneficial Owners and Management	93
	Item 13.	Certain Relationships and Related Transactions	93
PART IV
	Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	94
Signatures			99

		Equity Compensation Plan Information
Plan category		Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a)	Weighted average exercise price of outstanding options, warrants, and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders(1)(2)(3)		14,936,951	$	9.74	4,965,414
Equity compensation plan not approved by security holders(4)		5,245,548	$	4.99	1,983,332

	Total	20,182,499	$	8.50	6,948,746

		Years ended May 31,
		1998		1999		2000		2001		2002
Consolidated Statements of Operations Data:
Revenues:
	License and royalty(1)	$	4,162	$	5,281	$	2,970	$	14,694	$	37,801
	Service(2)		6,131		12,304