UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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 June 30, 2006

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

INFORMATICA CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		77-0333710 (I.R.S. Employer Identification No.)

100 Cardinal Way
Redwood City, California 94063
(Address of principal executive offices) (Zip Code)

(650) 385-5000
(Registrant’s telephone number, including area code)

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 (the “Exchange Act”) 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:

þ Yes      o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes      þ No

As of July 31, 2006, there were approximately 86,517,000 shares of the registrant’s common stock outstanding.

 

 

INFORMATICA CORPORATION

Table of Contents

						Page No.
PART I. FINANCIAL INFORMATION
		Item 1.		Condensed Consolidated Financial Statements:
				Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005			2
				Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005			3
				Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005			4
				Notes to Condensed Consolidated Financial Statements			5
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			38
		Item 4.		Controls and Procedures			39
PART II. OTHER INFORMATION
		Item 1.		Legal Proceedings			39
		Item 1A.		Risk Factors			40
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			54
		Item 4.		Submission of Matters to a Vote of Security Holders			54
		Item 6.		Exhibits			55
				Signatures			56
				Exhibit Index			57
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INFORMATICA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

		June 30,				December 31,
		2006				2005
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	189,455			$	76,545
Short-term investments			229,527				185,649
Accounts receivable, net			48,042				50,533
Prepaid expenses and other current assets			11,730				9,342
Total current assets			478,754				322,069
Restricted cash			12,016				12,166
Property and equipment, net			17,207				21,026
Goodwill			127,555				81,066
Intangible assets, net			9,320				4,163
Other assets			6,812				532
Total assets		$	651,664			$	441,022
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	1,988			$	3,404
Accrued liabilities			19,730				17,424
Accrued compensation and related expenses			21,201				20,450
Income taxes payable			5,510				4,566
Accrued facilities restructuring charges			19,075				18,718
Deferred revenues			72,241				69,748
Total current liabilities			139,745				134,310
Convertible senior notes			230,000				—
Accrued facilities restructuring charges, less current portion			71,177				75,815
Deferred revenues, less current portion			8,793				8,167
Total liabilities			449,715				218,292
Commitments and contingencies
Stockholders’ equity:
Common stock			86				87
Additional paid-in capital			349,825				384,653
Deferred stock-based compensation			—				(187	)
Accumulated other comprehensive income (loss)			425				(539	)
Accumulated deficit			(148,387	)			(161,284	)
Total stockholders’ equity			201,949				222,730
Total liabilities and stockholders’ equity		$	651,664			$	441,022

See accompanying notes to condensed consolidated financial statements.

INFORMATICA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Revenues:
License		$	36,851			$	28,103			$	69,655			$	53,059
Service			43,959				36,102				84,212				69,537
Total revenues			80,810				64,205				153,867				122,596
Cost of revenues:
License			1,389				1,135				2,916				1,845
Service			15,003				11,387				28,184				21,868
Amortization of acquired technology			544				233				996				469
Total cost of revenues (1)			16,936				12,755				32,096				24,182
Gross profit			63,874				51,450				121,771				98,414
Operating expenses:
Research and development			14,185				10,460				27,243				20,707
Sales and marketing			35,442				29,028				66,965				54,386
General and administrative			6,935				4,994				13,578				10,100
Amortization of intangible assets			162				47				292				94
Facilities restructuring charges			1,129				70				2,278				1,628
Purchased in-process research and development			—				—				1,340				—
Total operating expenses (2)			57,853				44,599				111,696				86,915
Income from operations			6,021				6,851				10,075				11,499
Interest income			4,843				1,699				7,515				3,063
Interest expense			(1,804	)			—				(2,166	)			—
Other income (expense), net			(11	)			(128	)			47				(459	)
Income before provision for income taxes			9,049				8,422				15,471				14,103
Provision for income taxes			1,420				781				2,574				2,153
Net income		$	7,629			$	7,641			$	12,897			$	11,950
Basic net income per common share		$	0.09			$	0.09			$	0.15			$	0.14
Diluted net income per common share		$	0.08			$	0.09			$	0.14			$	0.13
Shares used in computing basic net income per common share			85,860				86,876				86,682				86,881
Shares used in computing diluted net income per common share			93,062				89,760				93,832				89,502
Includes share-based payment compensation expense as follows:
(1) Cost of service revenues		$	346			$	12			$	676			$	24
(2) Research and development			746				168				1,429				344
(2) Sales and marketing			1,204				44				2,271				93
(2) General and administrative			1,124				—				2,044				1
		$	3,420			$	224			$	6,420			$	462

See accompanying notes to condensed consolidated financial statements.

INFORMATICA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

		Six Months Ended
		June 30,
		2006				2005
Operating activities
Net income		$	12,897			$	11,950
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			4,968				4,467
Allowance for doubtful accounts and sales returns allowances			(33	)			(203	)
Share-based payment compensation expense and amortization of stock-based compensation			6,420				462
Amortization of intangible assets and acquired technology			1,705				563
Impairment of property and equipment, net			1,035				—
Non-cash facilities restructuring charges			2,278				1,628
Purchased in-process research and development			1,340				—
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable			5,139				12,068
Prepaid expenses and other assets			(1,823	)			(4,677	)
Accounts payable and accrued liabilities			(4,101	)			(5,266	)
Accrued compensation and related expenses			636				(999	)
Income taxes payable			944				1,715
Accrued facilities restructuring charges			(6,477	)			(9,239	)
Deferred revenues			2,505				5,817
Net cash provided by operating activities			27,433				18,286
Investing activities
Purchases of property and equipment			(1,879	)			(6,892	)
Purchases of investments			(200,205	)			(117,842	)
Maturities of investments			103,663				32,535
Sales of investments			52,702				61,100
Acquisition, net of cash acquired			(46,720	)			—
Net cash used in investing activities			(92,439	)			(31,099	)
Financing activities
Net proceeds from issuance of common stock			14,941				11,762
Repurchases and retirement of common stock			(61,559	)			(12,217	)
Issuance of convertible senior notes			230,000				—
Payment of issuance costs on convertible senior notes			(6,241	)			—
Net cash provided by (used in) financing activities			177,141				(455	)
Effect of foreign exchange rate changes on cash and cash equivalents			775				(1,506	)
Net increase (decrease) in cash and cash equivalents			112,910				(14,774	)
Cash and cash equivalents at beginning of period			76,545				88,941
Cash and cash equivalents at end of period		$	189,455			$	74,167
Supplemental disclosures:
Interest paid		$	—			$	122
Income taxes paid		$	1,548			$	649
Supplemental disclosures of non-cash investing and financing activities:
Common stock issued for acquisitions		$	1,583			$	—
Unrealized gain (loss) on short-term investments		$	38			$	(20	)

See accompanying notes to condensed consolidated financial statements.

INFORMATICA CORPORATION

Note 1. Summary of Significant Accounting Policies

     Basis of Presentation

     The accompanying condensed consolidated financial statements of Informatica Corporation (“Informatica,” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). However, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the financial statements include all adjustments necessary (which are of a normal and recurring nature (see Note 2. Acquisition and Note 6. Facilities Restructuring Charges) for the adjustments other than normal recurring adjustments) for the fair presentation of the results of the interim periods presented. All of the amounts included in this report related to the condensed consolidated financial statements and notes thereto as of and for the three and six months ended June 30, 2006 and 2005 are unaudited. The interim results presented are not necessarily indicative of results for any subsequent interim period, the year ending December 31, 2006, or any future period.

     As discussed later in Note 3. Share-Based Payment Compensation Expense, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, on January 1, 2006 using the modified prospective transition method. Accordingly, the Company’s income from operations for the three and six months ended June 30, 2006 includes approximately $3.4 million and $6.4 million, respectively, in share-based employee compensation expense for stock options and its Employee Stock Purchase Plan (“ESPP”). Because the Company elected to use the modified prospective transition method, results for prior periods have not been restated.

     Certain reclassifications have been made to the prior period’s condensed consolidated financial statements to conform to the current period’s presentation.

     The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments, and assumptions. The Company believes that the estimates, judgments, and assumptions upon which it relies are reasonable based upon information available to it at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates and actual results, Informatica’s financial statements would have been affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

     These unaudited, condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2005 included in the Company’s Annual Report on Form 10-K filed with the SEC. The condensed consolidated balance sheet as of December 31, 2005 has been derived from the audited consolidated financial statements of the Company.

     Revenue Recognition

     The Company derives revenues from software license fees, maintenance fees, and professional services, which consist of consulting and education services. The Company recognizes revenue in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended and modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, SOP 81-1, Accounting for Performance of Construction-type and Certain Production-type Contracts, the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 101, Revenue Recognition in Financial Statements, SAB 104, Revenue Recognition, and other authoritative accounting literature.

     Under SOP 97-2, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable.

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Persuasive evidence of an arrangement exists. The Company determines that persuasive evidence of an arrangement exists when it has a written contract, signed by both the customer and the Company, and written purchase authorization.

     Delivery has occurred. Software is considered delivered when title to the physical software media passes to the customer or, in the case of electronic delivery, when the customer has been provided the access codes to download and operate the software.

     The fee is fixed or determinable. The Company considers arrangements with extended payment terms not to be fixed or determinable. If the license fee in an arrangement is not fixed or determinable, revenue is recognized as payments become due. Revenue arrangements with resellers and distributors require evidence of sell-through, that is, persuasive evidence that the products have been sold to an identified end user. The Company’s standard agreements do not contain product return rights.

     Collection is probable. Credit worthiness and collectibility are first assessed at a country level based on the country’s overall economic climate and general business risk. For customers in countries deemed credit worthy, credit and collectibility are then assessed based on payment history and credit profile. When a customer is not deemed credit worthy, revenue is recognized when payment is received.

     The Company also enters into OEM arrangements that provide for license fees based on inclusion of its technology and/or products in the OEM’s products. These arrangements provide for fixed, irrevocable royalty payments. Royalty payments are recognized as revenue based on the activity in the royalty report the Company receives from the OEM or, in the case of OEMs with fixed royalty payments, revenue is recognized upon execution of the agreement, delivery of the software, and when all other criteria for revenue recognition are met.

     The Company’s software license arrangements include multiple elements: software license fees, maintenance fees, consulting, and/or education services. The Company uses the residual method to recognize license revenue when the license arrangement includes elements to be delivered at a future date and vendor-specific objective evidence (“VSOE”) of fair value exists to allocate the fee to the undelivered elements of the arrangement. VSOE is based on the price charged when an element is sold separately. If VSOE does not exist for undelivered elements, all revenue is deferred and recognized when delivery occurs or VSOE is established. Consulting services, if included as part of the software arrangement, generally do not involve significant modification or customization of the software. If the software arrangement includes significant modification or customization of the software, software license revenue is recognized as the consulting services revenue is recognized.

     The Company recognizes maintenance revenues, which consist of fees for ongoing support and product updates, ratably over the term of the contract, typically one year.

     Consulting revenues are primarily related to implementation services and product configurations performed on a time-and-materials basis and, occasionally, on a fixed fee basis. Education services revenues are generated from classes offered at both Company and customer locations. Revenues from consulting and education services are recognized as the services are performed.

     Deferred revenue includes deferred license, maintenance, consulting and education services revenue. For customers not deemed credit worthy, the Company’s practice is to net unpaid deferred revenue for that customer against the related receivable balance.

     Net Income Per Common Share

     Under the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 128, Earnings per Share, basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution of securities by adding other common stock equivalents, primarily stock options and common shares potentially issuable under the terms of the convertible senior notes, to the weighted-average number of common shares outstanding during the period, if dilutive. Potentially dilutive securities have been excluded from the computation of diluted net income per share if their inclusion is antidilutive.

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The calculation of basic and diluted net income per common share is as follows (in thousands, except per share amounts):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Net income		$	7,629			$	7,641			$	12,897			$	11,950
Weighted average shares outstanding			85,994				86,900				86,823				86,913
Weighted average unvested shares of common stock subject to repurchase			(134	)			(24	)			(141	)			(32	)
Shares used in computing basic net income per common share			85,860				86,876				86,682				86,881
Dilutive effect of employee stock options*			7,202				2,884				7,150				2,621
Shares used in computing dilutive net income per common share			93,062				89,760				93,832				89,502
Basic net income per common share		$	0.09			$	0.09			$	0.15			$	0.14
Diluted net income per common share		$	0.08			$	0.09			$	0.14			$	0.13

     The 11.5 million shares of common stock attributable to the assumed conversion of outstanding convertible senior notes were not included in the calculation of dilutive net income per share for the three and six months ended June 30, 2006 as the effect would be antidilutive.

     Share-Based Payment Compensation Expense

     Effective January 1, 2006, the Company adopted the Financial Accounting Standards Board’s (“FASB”) SFAS No. 123(R), Share-Based Payment (Revised 2004), on a modified prospective basis. As a result, the Company includes share-based payments in its results of operations for the three and six months ended June 30, 2006. See Note 3. Share-Based Payment Compensation Expense.

Note 2. Acquisition

     On January 26, 2006, the Company acquired Similarity Systems Limited (“Similarity”), a private company incorporated in Ireland, providing data quality and data profiling software. The acquisition extends Informatica’s data integration software to include Similarity’s data quality technology. Management believes that it is the investment value of this synergy related to future product offerings that principally contributed to a purchase price that resulted in the recognition of goodwill. The Company paid $54.9 million, consisting of $48.3 million of cash, 122,045 shares of Informatica common stock (which were fully vested but subject to escrow) with a fair value of $1.6 million, and 392,333 of Informatica stock options with a fair value of $5.0 million, to acquire all of the outstanding common stock, preferred stock, and stock options of Similarity. In connection with the acquisition, the Company also incurred estimated transaction costs of $2.3 million.

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The acquisition was accounted for using the purchase method of accounting, and a summary of the purchase price of the acquisition is as follows (in thousands):

Cash paid		$	48,329
Common stock issued			1,583
Fair value of options assumed			4,984
Total considerations paid to Similarity			54,896
Transaction costs			2,266
Fair value of unvested options assumed (share-based payment)			(1,011	)
Total purchase price		$	56,151

     The allocation of the purchase price for this acquisition, as of the date of the acquisition, is as follows (in thousands):

Net tangible assets acquired		$	1,456
Developed technology			5,050
Customer relationships			1,830
Purchased in-process research and development			1,340
Goodwill			46,475
Total purchase price		$	56,151

     The amount of the total purchase price allocated to the net tangible assets acquired of $1.5 million was assigned based on the fair values as of the date of acquisition. The identified intangible assets acquired were assigned fair values in accordance with the guidelines established in SFAS No. 141, Business Combinations, Financial Accounting Standards Board Interpretations (“FIN”) No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, and other relevant guidance. The Company believes that these identified intangible assets have no residual value. The purchase price allocated to purchased in-process research and development (“IPR&D”) and to identifiable intangible assets was determined by a third-party appraisal. The fair value assigned to IPR&D represented projects that had not reached technological feasibility and had no alternative uses. These were classified as IPR&D and expensed in the quarter ended March 31, 2006, which was the quarter of the acquisition, in accordance with FIN No. 4. The amortization periods of identifiable intangible assets were determined using the estimated economic useful life of the asset. The developed technology and customer relationships are being amortized on a straight-line basis over four years. Of the developed technology, the Company recorded amortization of acquired technology expense of $0.5 million in the six months ended June 30, 2006, and expects to record approximately $0.6 million, $1.3 million, $1.3 million, $1.3 million, and $0.1 million in the remainder of 2006, 2007, 2008, 2009, and 2010, respectively. Of the customer relationships, the Company recorded amortization of intangible assets expense of $0.2 million in the six months period ended June 30, 2006, and expects to record approximately $0.2 million, $0.5 million, $0.4 million, $0.4 million, and $0.1 million in the remainder of 2006, 2007, 2008, 2009, and 2010, respectively.

     The excess of the purchase price over the identified tangible and intangible assets was recorded as goodwill. The Company anticipates that none of the goodwill and intangible assets recorded in connection with the Similarity acquisition will be deductible for income tax purposes.

     The Company assumed all of the outstanding stock options issued pursuant to Similarity’s stock option plan, which became options to purchase 392,333 shares of Informatica common stock with a weighted average fair value of $12.70 per share at the closing date. The total fair value of the options assumed was $5.0 million, of which 311,961 fully vested options with $4.0 million fair value was included in the purchase price. The remaining 80,372 unvested options with $1.0 million fair value will be expensed over the remaining vesting period of the underlying awards. The Company expects to recognize share-based payment expense in connection with these assumed options of approximately $0.2 million, $0.3 million, $0.2 million, and $0.1 million in the remainder of 2006, 2007, 2008, and 2009, respectively.

     The purchase method of accounting requires the Company to reduce Similarity’s reported deferred revenue to an amount equal to the fair value of the legal liability, resulting in lower revenue in periods following the merger than Similarity would have achieved as a separate company.

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The results of Similarity’s operations have been included in the condensed consolidated financial statements since the acquisition date. The following unaudited pro forma adjusted summary reflects the Company’s condensed results of operations for the six months ended June 30, 2006, assuming Similarity had been acquired on January 1, 2006., and includes the acquired in-process research and development charge of $1.3 million. The unaudited pro forma adjusted summary for the six months ended June 30, 2005 combines the historical results for the Company for that period with the historical results for Similarity for the same period. The following unaudited pro forma adjusted summary is not intended to be indicative of future results (in thousands, except per share amounts):

		Six Months				Six Months
		Ended June 30,				Ended June 30,
		2006				2005
Pro forma adjusted total revenue		$	154,163			$	124,289
Pro forma adjusted net income		$	11,994			$	10,808
Pro forma adjusted net income per share — basic		$	0.14			$	0.12
Pro forma adjusted net income per share — diluted		$	0.13			$	0.12
Pro forma weighted-average basic shares			86,818				87,010
Pro forma weighted-average diluted shares			93,966				89,894

Note 3. Share-Based Payment Compensation Expense

     Changes in Accounting Principle

     On January 1, 2006, the Company adopted the FASB SFAS No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative to financial statement recognition. The Company elected to use the modified prospective transition method as permitted by SFAS No. 123(R) and therefore has not restated its financial results for prior periods. Under this transition method, the post adoption share-based payment includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123. The fair value of all share-based payment transactions granted subsequent to January 1, 2006 will be based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). The Company recognizes compensation expense for post adoption share-based awards on a straight-line basis over the requisite service period of the award.

     Prior to January 1, 2006, the Company accounted for stock issued to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and complied with the disclosure provisions of Statement of Financial Accounting Standard (“SFAS”) No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. Under APB No. 25, compensation expense of fixed stock options was based on the difference, if any, on the date of the grant between the fair value of the Company’s stock and the exercise price of the option. The Company amortized its stock-based compensation under APB No. 25 using a straight-line basis over the remaining vesting term of the related options.

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     As a result of adopting SFAS No. 123(R) on January 1, 2006, the Company’s income from operations and net income for the three and six months ended June 30, 2006 are $3.2 million and $6.1 million lower, respectively, than if it had continued to account for share-based compensation under APB No. 25. Basic and diluted earnings per share were both $0.04 lower for the three months ended June 30, 2006, and $0.07 and $0.06 lower for the six months ended June 30, 2006, respectively, than if the Company had continued to account for share-based compensation under APB No. 25.

     Summary of Assumptions

     The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. The Company has been using a blend of average historical and market-based implied volatilities for calculating the expected volatilities for employee stock options and market-based implied volatilities for its ESPP since the third quarter of 2005. Prior to the third quarter of 2005, expected volatilities were based on historical volatility. The expected term of employee stock options granted is derived from historical exercise patterns of the options while the expected term of ESPP is based on the contractual terms. The risk-free interest rate for the expected term of the option and ESPP is based on the U.S. Treasury yield curve in effect at the time of grant. SFAS No. 123(R) also requires the Company to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company used historical employee turnover experience to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. For purposes of calculating pro forma information under SFAS No. 123 for periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

     The fair value of the Company’s stock-based awards was estimated assuming no expected dividends with the following assumptions:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Option Grants:
Expected volatility			47- 48	%			61	%			43 -48	%			63	%
Weighted-average volatility			47	%			61	%			45	%			63	%
Expected dividends			—				—				—				—
Expected term of options (in years)			3.9				3.0				3.9				3.0
Risk-free interest rate			4.9 - 5.0	%			3.7	%			4.4 -5.0	%			3.8	%
ESPP:
Expected volatility			44	%			45	%			44	%			45	%
Weighted-average volatility			44	%			45	%			44	%			45	%
Expected dividends			—				—				—				—
Expected term of ESPP (in years)			0.5				1.25				0.5				1.25
Risk-free interest rate — ESPP			4.7	%			3.1	%			4.7	%			3.1	%

     Stock Option Plan Activity

     A summary of option activity through June 30, 2006 is presented below (in thousands, except per share amounts):

										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
						Exercise				Contractual-				Intrinsic
Options		Shares				Price				Term				Value
Outstanding at January 1, 2006			17,113			$	7.56
Granted			1,224				10.30
Exercised			(1,374	)			6.37
Forfeited or expired			(133	)			8.90
Outstanding at March 31, 2006			16,830			$	7.84				5.51			$	131,184
Granted			1,985				15.05
Exercised			(396	)			6.70
Forfeited or expired			(255	)			13.62
Outstanding at June 30, 2006			18,164			$	8.58				5.45			$	89,794
Exercisable at June 30, 2006			9,573			$	7.33				4.73			$	57,443

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The weighted-average grant date fair value of options granted during the three months ended June 30, 2006 was $6.32 per option. The total intrinsic value of options exercised during the three months ended June 30, 2006 was $3.3 million. The weighted-average grant date fair value of employee stock purchase shares granted under the ESPP during the quarter ended June 30, 2006 was $4.19 per share. The total intrinsic value of stock purchase shares granted under the ESPP exercised during the six months ended June 30, 2006 was $5.4 million. Upon the exercise of options and stock purchase shares granted under the ESPP, the Company issues new common stock from its authorized shares. As of June 30, 2006, there was $20.6 million in compensation cost related to unvested awards not yet recognized , which the Company expects to recognize over a weighted-average period of 2.8 years.

     Pro Forma Disclosure for Three and Six Months Ended June 30, 2005

     Pro forma information regarding net income (loss) and net income (loss) per share was required by SFAS No. 148. The fair value of the Company’s stock-based awards to employees was estimated using the multiple option approach of the Black-Scholes option-pricing model. The related expense was amortized using an accelerated method over the vesting terms of the option. Had compensation cost for the Company’s stock-based compensation plans and Employee Stock Purchase Plan (“ESPP”) been determined using the fair value at the grant dates for awards under those plans calculated using the Black-Scholes method of SFAS No. 123, the Company’s net income (loss) and basic and diluted net income (loss) per share would have been changed to the pro forma amounts for the three months and six months ended June 30, 2005 indicated below (in thousands, except per share amounts):

		Three Months				Six Months
		Ended				Ended
		June 30,				June 30,
		2005				2005
Net income, as reported		$	7,641			$	11,950
Stock-based employee compensation included in net income as reported, net of related tax effects *			224				462
Stock-based employee compensation using the fair value method, net of related tax effects *			(4,254	)			(8,956	)
Net income, pro forma		$	3,611			$	3,456
Basic net income per common share:
As reported		$	0.09			$	0.14
Pro forma		$	0.04			$	0.04
Diluted net income per common share:
As reported		$	0.09			$	0.13
Pro forma		$	0.04			$	0.04

Summary of Plans

     1999 Stock Incentive Plan

     The Company’s stockholders approved the 1999 Stock Incentive Plan (the “1999 Incentive Plan”) in April 1999 under which 2,600,000 shares have been reserved for issuance. In addition, any shares not issued under the 1996 Stock Plan are also available for grant. The number of shares reserved under the 1999 Incentive Plan automatically

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

increases annually beginning on January 1, 2000 by the lesser of 16,000,000 shares or 5% of the total amount of fully diluted shares of common stock outstanding as of such date. Under the 1999 Incentive Plan, eligible employees, officers, and directors may purchase stock options, stock appreciation rights, restricted shares, and stock units. The exercise price for incentive stock options and non-qualified options may not be less than 100% and 85%, respectively, of the fair value of the Company’s common stock at the option grant date. Options granted are exercisable over a maximum term of 7 to 10 years from the date of the grant and generally vest ratably over a period of 4 years, with options for new employees generally including a 1-year cliff period. It is the current practice of the Board to limit option grants under this plan to 7-year terms and to issue only non-qualified stock options. As of June 30, 2006, the Company had approximately 12,580,000 authorized options available for grant and 16,476,000 options outstanding under the 1999 Incentive Plan.

     1999 Non-Employee Director Stock Incentive Plan

     The Company’s stockholders adopted the 1999 Non-Employee Director Stock Option Incentive Plan (the “Directors Plan”) in April 1999 under which 1,000,000 shares have been reserved for issuance. Each non-employee joining the Board of Directors following the completion of the initial public offering would automatically receive options to purchase 100,000 shares of common stock at an exercise price per share equal to the fair market value of the common stock. In April 2003, the Board of Directors amended the Directors Plan such that each non-employee joining the Board of Directors will automatically receive options to purchase 60,000 shares of common stock. These options were exercisable over a maximum term of five years and would vest in four equal annual installments on each yearly anniversary from the date of the grant. The Directors Plan was amended in April 2003 such that one-third of the options vest one year from the grant date and the remainder shall vest ratably over 24 months. In May 2004, the Directors Plan was amended such that each non-employee director who has been a member of the Board for at least six months prior to each annual stockholders meeting will automatically receive options to purchase 25,000 shares of common stock at each such meeting. Each option will have an exercise price equal to the fair value of the common stock on the automatic grant date and will vest on the first anniversary of the grant date. There was an initial grant for a new Board member totaling 60,000 shares of common stock and five automatic annual options granted for a total of 125,000 shares of the Company’s common stock in 2004 under the Directors Plan. As of June 30, 2006, the Company had approximately 55,000 authorized options available for grant and 925,000 options outstanding under the Directors Plan.

     2000 Employee Stock Incentive Plan

     In January 2000, the Board of Directors approved the 2000 Employee Stock Incentive Plan (the “2000 Incentive Plan”) under which 1,600,000 shares have been reserved for issuance. Under the 2000 Incentive Plan, eligible employees and consultants may purchase stock options, stock appreciation rights, restricted shares, and stock units. The exercise price for non-qualified options may not be less than 85% of the fair value of common stock at the option grant date. Options granted are exercisable over a maximum term of 10 years from the date of the grant and generally vest over a period of 4 years from the date of the grant. As of June 30, 2006, the Company had approximately 764,000 authorized options available for grant and 413,000 options outstanding under the 2000 Incentive Plan.

     Assumed Option Plans

     In connection with certain acquisitions made by the Company, Informatica assumed options in the Influence 1996 Incentive Stock Option Plan, the Zimba 1999 Stock Option Plan, the Striva 2000 Stock Plan, and the Similarity 2002 Option Plan (the “Assumed Plans”). No further options will be granted under the Assumed Plans. As of June 30, 2006, the Company had approximately 350,000 options outstanding under the assumed option plans.

     Employee Stock Purchase Plan

     The stockholders adopted the 1999 Employee Stock Purchase Plan (“ESPP”) in April 1999 under which 1,600,000 shares have been reserved for issuance. The number of shares reserved under the ESPP automatically increases beginning on January 1 of each year by the lesser of 6,400,000 shares or 2% of the total amount of fully diluted common stock shares outstanding on such date. Under the ESPP, eligible employees may purchase common

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

stock in an amount not to exceed 10% of the employees’ cash compensation. Historically, the purchase price per share has been 85% of the lesser of the common stock fair market value either at the beginning of a rolling two-year offering period or at the end of each six-month purchase period within the two-year offering period. As of June 30, 2006, the Company had approximately 7,672,000 authorized shares available for grant under the ESPP.

     During the fourth quarter of 2005, the Board of Directors approved an amendment to the ESPP. Effective 2006, under the amended ESPP, the new participants will be entitled to purchase shares at 85% of the lesser of the common stock fair market value either at the beginning or at the end of the 6-month offering period, which was shortened from a 24-month offering period. The purchase price will then be reset at the start of the next offering period. The existing 2005 participants will be able to apply their subscription prices within their remaining two-year offering periods, which will expire at various purchase dates through July 31, 2007. Furthermore, the existing 2005 participants’ offering periods would also expire if, on the first day of one of the remaining purchase periods, the purchase price is lower than the purchase price that was set at the commencement of their two-year offering period.

     Disclosures Pertaining to All Share-Based Award Plans

     Cash received from option exercises and ESPP contributions under all share-based payment arrangements for the six months ended 2006 and 2005 were $14.9 million and $11.8 million, respectively. The Company has been in full valuation allowance since inception and has not been recognizing excess tax benefits from share-based awards. The Company does not anticipate recognizing excess tax benefits from share-based payments for the foreseeable future, and the Company believes it would be reasonable to exclude such benefits from deferred tax assets and net income per common share calculations. The Company did not realize any tax benefits from tax deductions related to share-based payment awards during the six months ended June 30, 2006 and 2005.

Note 4. Comprehensive Income

     Other comprehensive income (loss) refers to gains and losses that, under GAAP, are recorded as an element of stockholders’ equity and are excluded from net income. Comprehensive income consisted of the following items (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Net income, as reported		$	7,629			$	7,641			$	12,897			$	11,950
Other comprehensive income (loss):
Unrealized gain (loss) on investments			(41	)			244				38				(20	)
Foreign currency translation adjustment			692				(1,138	)			926				(1,766	)
Comprehensive income		$	8,280			$	6,747			$	13,861			$	10,164

     Accumulated other comprehensive income (loss) as of June 30, 2006 and December 31, 2005 consisted of the following (in thousands):

		June 30,				December 31,
		2006				2005
Unrealized loss on investments		$	(664	)		$	(702	)
Cumulative foreign currency translation adjustment			1,089				163
		$	425			$	(539	)

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 5. Goodwill and Intangible Assets

     The carrying amount of intangible assets other than goodwill as of June 30, 2006 and December 31, 2005 is as follows (in thousands):

		June 30, 2006												December 31, 2005
		Gross Carrying				Accumulated				Net				Gross Carrying				Accumulated				Net
		Amount				Amortization				Amount				Amount				Amortization				Amount
Developed and core technology		$	11,388			$	(6,175	)		$	5,213			$	6,357			$	(5,178	)		$	1,179
Purchased technology			2,500				(451	)			2,049				2,500				(35	)			2,465
Customer relationships			2,775				(717	)			2,058				945				(426	)			519
Total intangible assets		$	16,663			$	(7,343	)		$	9,320			$	9,802			$	(5,639	)		$	4,163

     Amortization expense of intangible assets was approximately $0.9 million and $0.3 million for the three months ended June 30, 2006 and 2005, respectively, and $1.7 million and $0.6 million for the six months ended June 30, 2006 and 2005, respectively. The weighted-average amortization periods of the Company’s core and developed technology, purchased technology, and customer relationships are 3.6 years, 3.0 years, and 4.3 years, respectively. In the first quarter of 2005, the Company purchased a source code license with a value of $2.5 million. The amortization expense related to identifiable intangible assets as of June 30, 2006 is expected to be $1.8 million for the remainder of 2006, and $3.0 million, $2.7 million, $1.7 million, and $0.1 million in 2007, 2008, 2009, and 2010, respectively.

     Core technology at June 30, 2006 and December 31, 2005 totaling $0.2 million and $0.4 million, net, related to the 2003 acquisition, was recorded in a European local currency; therefore, the gross carrying amount and accumulated amortization are subject to periodic translation adjustments.

     The Company adopted SFAS No. 142 effective January 1, 2002 and, as a result, ceased to amortize goodwill at that time. The changes in the carrying amount of goodwill for the six months ended June 30, 2006 is as follows (in thousands):

		June 30,
		2006
Beginning balance, as of December 31, 2005		$	81,066
Goodwill recorded in acquisition			46,489
Ending balance, as of June 30, 2006		$	127,555

Note 6. Facilities Restructuring Charges

     2004 Restructuring Plan

     In October 2004, the Company announced a restructuring plan (“2004 Restructuring Plan”) related to the December 2004 relocation of the Company’s corporate headquarters within Redwood City, California. In 2005, the Company subleased the available space at the Pacific Shores Center under the 2004 Restructuring Plan with two subleases expiring in 2008 and 2009 with rights to extend for a period of one and four years, respectively. The Company recorded restructuring charges of approximately $103.6 million, consisting of $21.6 million in leasehold improvement and asset write-offs and $82.0 million related to estimated facility lease losses, which consist of the present value of lease payment obligations for the remaining nine-year lease term of the previous corporate headquarters, net of actual and estimated sublease income. The Company has assumed actual and estimated sublease income, including the reimbursement of certain property costs such as common area maintenance, insurance and property tax, net of estimated broker commissions, of $4.3 million in 2006, $4.5 million in 2007, $4.4 million in 2008, $2.4 million in 2009, $0.9 million in 2010, $3.3 million in 2011, $3.9 million in 2012, and $2.1 million in 2013. If the subtenants do not extend their subleases and the Company is unable to sublease any of the related Pacific Shores facilities during the remaining lease terms through 2013, restructuring charges could increase by approximately $10.2 million.

     The Company records accretion charges on the cash obligations related to the 2004 Restructuring Plan. The accretion charges represent imputed interest and is the difference between our non-discounted future cash obligations and the discounted present value of these cash obligations. At June 30, 2006, the Company will recognize approximately $17.9 million of accretion as a restructuring charge over the remaining term of the lease, or approximately seven years, as follows: $2.1 million for the remainder of 2006, $4.0 million in 2007, $3.6 million in 2008, $3.1 million in 2009, $2.4 million in 2010, $1.6 million in 2011, $0.9 million in 2012, and $0.2 million in 2013.

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     2001 Restructuring Plan

     During 2001, the Company announced a restructuring plan (“2001 Restructuring Plan”) and recorded restructuring charges of approximately $12.1 million, consisting of $1.5 million in leasehold improvement and asset write-offs and $10.6 million related to the consolidation of excess leased facilities in the San Francisco Bay Area and Texas.

     During 2002, the Company recorded additional restructuring charges of approximately $17.0 million, consisting of $15.1 million related to estimated facility lease losses and $1.9 million in leasehold improvement and asset write-offs. The timing of the restructuring accrual adjustment was a result of negotiated and executed subleases for the Company’s excess facilities in Dallas, Texas and Palo Alto, California during the third quarter of 2002. These subleases included terms that provided a lower level of sublease rates than the initial assumptions. The terms of these new subleases were consistent with the continued deterioration of the commercial real estate market in these areas. In addition, cost containment measures initiated in the same quarter, such as delayed hiring and salary reductions, resulted in an adjustment to management’s estimate of occupancy of available vacant facilities. These charges represent adjustments to the original assumptions, including the time period that the buildings will be vacant, expected sublease rates, expected sublease terms, and the estimated time to sublease. The Company calculated the estimated costs for the additional restructuring charges based on current market information and trend analysis of the real estate market in the respective area.

     In December 2004, the Company recorded additional restructuring charges of $9.0 million related to estimated facility lease losses. The restructuring accrual adjustments recorded in the third and fourth quarters of 2004 were the result of the relocation of its corporate headquarters within Redwood City, California in December 2004, an executed sublease for the Company’s excess facilities in Palo Alto, California during the third quarter of 2004, and an adjustment to management’s estimate of occupancy of available vacant facilities. These charges represent adjustments to the original assumptions in the 2001 Restructuring Plan charges, including the time period that the buildings will be vacant, expected sublease rates, expected sublease terms, and the estimated time to sublease. The Company calculated the estimated costs for the additional restructuring charges based on current market information and trend analysis of the real estate market in the respective area. In 2005, the Company subleased the available space at the Pacific Shores Center under the 2001 Restructuring Plan through May 2013.

     A summary of the activity of the accrued restructuring charges for the six months ended June 30, 2006 and 2005 follows (in thousands):

		Accrued																Accrued
		Restructuring																Restructuring
		Charges at								Net								Charges at
		December 31,				Restructuring				Cash				Non-cash				June 30,
		2005				Charges				Payment				Reclass				2006
2004 Restructuring Plan
Excess lease facilities		$	78,129			$	2,278			$	(4,391	)		$	(82	)		$	75,934
2001 Restructuring Plan
Excess lease facilities			16,404				—				(2,086	)			—				14,318
		$	94,533			$	2,278			$	(6,477	)		$	(82	)		$	90,252

     In the six months ended June 30, 2006, the Company recorded $2.3 million of restructuring charges, which includes $2.2 million from accretion charges related to the 2004 Restructuring Plan.

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		Accrued																				Accrued
		Restructuring																				Restructuring
		Charges at												Net								Charges at
		December 31,				Restructuring								Cash				Non-cash				June 30,
		2004				Charges				Adjustments				Payment				Reclass				2005
2004 Restructuring Plan
Excess lease facilities		$	88,521			$	2,465			$	(823	)		$	(7,082	)		$	(21	)		$	83,060
2001 Restructuring Plan
Excess lease facilities			20,730				—				(14	)			(2,157	)			—				18,559
		$	109,251			$	2,465			$	(837	)		$	(9,239	)		$	(21	)		$	101,619

     Net cash payments for the six months ended June 30, 2006 and 2005 for facilities included in the 2001 Restructuring Plan amounted to $2.1 million and $2.2 million, respectively. Actual future cash requirements may differ from the restructuring liability balances as of June 30, 2006 if the Company is unable to sublease the excess leased facilities after the expiration of the subleases, there are changes to the time period that facilities are vacant, or the actual sublease income is different from current estimates.

     Inherent in the estimation of the costs related to the restructuring efforts are assessments related to the most likely expected outcome of the significant actions to accomplish the restructuring. The estimates of sublease income may vary significantly depending, in part, on factors that may be beyond the Company’s control, such as the time periods required to locate and contract suitable subleases should the Company’s existing sublessees elect to terminate their sublease agreements in 2008 and 2009 and the market rates at the time of entering into new sublease agreements.

     Because the related facilities associated with the restructured properties are no longer being used in the Company’s operations, the Company reclassified the deferred rent liability to accrued restructuring charges in 2004. As of June 30, 2006, $19.1 million of the $90.3 million accrued restructuring charges was classified as current liabilities and the remaining $71.2 million was classified as non-current liabilities.

Note 7. Convertible Senior Notes

     On March 8, 2006, the Company issued and sold convertible senior notes with an aggregate principal amount of $230 million due 2026 (“Notes”). The Company pays interest at 3.0% per annum to holders of the Notes, payable semi-annually on March 15 and September 15 of each year, commencing September 15, 2006. Each $1,000 principal amount of Notes is initially convertible, at the option of the holders, into 50 shares of our common stock prior to the earlier of the maturity date (March 15, 2026) or the redemption or repurchase of the Notes. The initial conversion price represents a premium of approximately 29.28% relative to the last reported sale price of common stock of the Company on the Nasdaq National Market of $15.47 on March 7, 2006. The conversion rate is subject to certain adjustments. The conversion rate initially represents a conversion price of $20.00 per share. After March 15, 2011, the Company may from time to time redeem the Notes, in whole or in part, for cash, at a redemption price equal to the full principal amount of the notes, plus any accrued and unpaid interest. Holders of the Notes may require the Company to repurchase all or a portion of their Notes at a purchase price in cash equal to the full principal amount of the Notes plus any accrued and unpaid interest on March 15, 2011, March 15, 2016, and March 15, 2021, or upon the occurrence of certain events including a change in control. The Company has the right to redeem some or all of the Notes after March 15, 2011. Future minimum payments related to the Notes in total which represent interest as of June 30, 2006 are as follows: remaining 2006—$3.5 million; 2007—$6.9 million; 2008—$6.9 million; 2009—$6.9 million; 2010—$6.9 million. Future minimum payments related to the Notes as of June 30, 2006 for 2011 and thereafter—$107 million represents interest and $230 million represents principal for a total of $337 million.

     Pursuant to a Purchase Agreement (the “Purchase Agreement”), the Notes were sold for cash consideration in a private placement to an initial purchaser, UBS Securities LLC, an “accredited investor,” within the meaning of Rule 501 under the Securities Act of 1933, as amended (“the Securities Act”), in reliance upon the private placement exemption afforded by Section 4(2) of the Securities Act. The initial purchaser reoffered and resold the Notes to “qualified institutional buyers” under Rule 144A of the Securities Act without being registered under the Securities Act, in reliance on applicable exemptions from the registration requirements of the Securities Act. In connection with the issuance of the Notes, the Company filed a shelf registration statement with the SEC for the resale of the Notes and the common stock issuable upon conversion of the Notes, which became effective on June 21, 2006. The Company also agreed to periodically update the shelf registration and to keep it effective until the earlier of the date

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the Notes or the common stock issuable upon conversion of the Notes is eligible to be sold to the public pursuant to Rule 144(k) of the Securities Act or the date on which there are no outstanding registrable securities. The Company has evaluated the terms of the call feature, redemption feature, and the conversion feature under applicable accounting literature, including SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, and concluded that none of these features should be separately accounted for as derivatives.

     The Company used approximately $50 million of the net proceeds from the offering to fund the purchase of shares of its common stock concurrently with the offering of the Notes and intends to use the balance of the net proceeds for working capital and general corporate purposes, which may include the acquisition of businesses, products, product rights or technologies, strategic investments, or additional purchases of common stock.

     In connection with the issuance of the Notes, the Company incurred $6.2 million of issuance costs, which primarily consisted of investment banker fees and legal and other professional fees. These costs are classified within Other Assets and are being amortized as a component of interest expense using the effective interest method over the life of the Notes from issuance through March 15, 2026. If the holders require repurchase of some or all of the Notes on the first repurchase date, which is March 15, 2011, the Company would accelerate amortization of the pro rata share of the unamortized balance of the issuance costs on such date. If the holders require conversion of some or all of the Notes when the conversion requirements are met, the Company would accelerate amortization of the pro rata share of the unamortized balance of the issuance cost to additional paid-in capital on such date. Amortization expense related to the issuance costs was $78,000 and $93,000 for the three and six months ended June 30, 2006, respectively. Interest expense on the Notes was $1.7 million and $2.1 million for the three and six months ended June 30, 2006, respectively. No payments of interest were made in the six months ended June 30, 2006.

Note 8. Commitments and Contingencies

     Lease Obligations

     In December 2004, the Company relocated its corporate headquarters within Redwood City, California and entered into a new lease agreement. The lease term is from December 15, 2004 to December 31, 2007 (with a three-year renewal option). Minimum contractual lease payments are $1.9 million and $2.1 million for the years ended December 31, 2006 and 2007, respectively.

     The Company entered into two lease agreements in February 2000 for two office buildings at the Pacific Shores Center in Redwood City, California, which was used as its former corporate headquarters from August 2001 through December 2004. The leases expire in July 2013. As part of these agreements, the Company purchased certificates of deposit totaling approximately $12 million as a security deposit for lease payments. These certificates of deposit are classified as long-term restricted cash on the Company’s consolidated balance sheet.

     The Company leases certain office facilities under various non-cancelable operating leases, including those described above, which expire at various dates through 2013 and require the Company to pay operating costs, including property taxes, insurance, and maintenance. Operating lease payments in the table below include approximately $116.1 million for operating lease commitments for facilities that are included in restructuring charges. See Note 6. Facilities Restructuring Charges, above, for a further discussion.

     Future minimum lease payments as of June 30, 2006 under non-cancelable operating leases with original terms in excess of one year are summarized as follows (in thousands):

		Operating				Sublease
		Leases				Income				Net
Remaining 2006		$	11,526			$	(1,589	)		$	9,937
2007			21,475				(2,731	)			18,744
2008			17,644				(2,752	)			14,892
2009			17,773				(1,623	)			16,150
2010			17,809				(424	)			17,385
Thereafter			48,052				(1,114	)			46,938
		$	134,279			$	(10,233	)		$	124,046

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Of these future minimum lease payments, the Company has accrued $90.3 million in the facilities restructuring accrual at June 30, 2006. This accrual, in addition to minimum lease payments of $116.1 million, includes estimated operating expenses of $21.6 million and sublease commencement costs associated with excess facilities and is net of estimated sublease income of $29.5 million and a present value discount of $17.9 million recorded in accordance with SFAS No. 146.

     In December 2005, the Company subleased 35,000 square feet of office space at the Pacific Shores Center, its former corporate headquarters, in Redwood City, California through May 2013. In June 2005, the Company subleased 51,000 square feet of office space at the Pacific Shores Center, its previous corporate headquarters, in Redwood City, California through August 2008 with an option to renew through July 2013. In February 2005, the Company subleased 187,000 square feet of office space at the Pacific Shores Center for the remainder of the lease term through July 2013 with a right of termination by the subtenant that is exercisable in July 2009. In 2004, the Company signed sublease agreements for leased office space in Palo Alto and Scotts Valley, California. In 2003, the Company signed sublease agreements for leased office space in San Francisco, Palo Alto, and Redwood City, California. During 2002, the Company signed a sublease agreement for leased office space in Palo Alto, California.

     Warranties

     The Company generally provides a warranty for its software products and services to its customers for a period of three to six months and accounts for its warranties under the SFAS No. 5, Accounting for Contingencies. The Company’s software products’ media are generally warranted to be free from defects in materials and workmanship under normal use, and the products are also generally warranted to substantially perform as described in certain Company documentation and the product specifications. The Company’s services are generally warranted to be performed in a professional manner and to materially conform to the specifications set forth in a customer’s signed contract. In the event there is a failure of such warranties, the Company generally will correct or provide a reasonable work-around or replacement product. The Company has provided a warranty accrual of $0.2 million as of June 30, 2006 and December 31, 2005. To date, the Company’s product warranty expense has not been significant.

     Indemnification

     The Company sells software licenses and services to its customers under contracts, which the Company refers to as the License to Use Informatica Software (“License Agreement”). Each License Agreement contains the relevant terms of the contractual arrangement with the customer and generally includes certain provisions for indemnifying the customer against losses, expenses, liabilities, and damages that may be awarded against the customer in the event the Company’s software is found to infringe upon a patent, copyright, trademark, or other proprietary right of a third party. The License Agreement generally limits the scope of and remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to certain time and scope limitations and a right to replace an infringing product with a non-infringing product.

     The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the License Agreement. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights to its employees’ development work to the Company. To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions, and no material claims against the Company are outstanding as of June 30, 2006. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the License Agreement, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     In addition, we indemnify our officers and directors under the terms of indemnity agreements entered into with them, as well as pursuant to our certificate of incorporation, bylaws, and applicable Delaware law. To date, we have not incurred any costs related to these indemnifications.

     The Company accrues for loss contingencies when available information indicates that it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated, in accordance with SFAS No. 5, Accounting for Contingencies.

     Litigation

     On November 8, 2001, a purported securities class action complaint was filed in the U.S. District Court for the Southern District of New York. The case is entitled In re Informatica Corporation Initial Public Offering Securities Litigation, Civ. No. 01-9922 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.). Plaintiffs’ amended complaint was brought purportedly on behalf of all persons who purchased the Company’s common stock from April 29, 1999 through December 6, 2000. It names as defendants Informatica Corporation, two of the Company’s former officers (the “Informatica defendants”), and several investment banking firms that served as underwriters of the Company’s April 29, 1999 initial public offering and September 28, 2000 follow-on public offering. The complaint alleges liability as to all defendants under Sections 11 and/or 15 of the Securities Act of 1933 and Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statements for the offerings did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The complaint also alleges that false analyst reports were issued. No specific damages are claimed.

     Similar allegations were made in other lawsuits challenging over 300 other initial public offerings and follow-on offerings conducted in 1999 and 2000. The cases were consolidated for pretrial purposes. On February 19, 2003, the Court ruled on all defendants’ motions to dismiss. The Court denied the motions to dismiss the claims under the Securities Act of 1933. The Court denied the motion to dismiss the Section 10(b) claim against Informatica and 184 other issuer defendants. The Court denied the motion to dismiss the Section 10(b) and 20(a) claims against the Informatica defendants and 62 other individual defendants.

     The Company accepted a settlement proposal presented to all issuer defendants. In this settlement, plaintiffs will dismiss and release all claims against the Informatica defendants, in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the IPO cases, and for the assignment or surrender of control of certain claims the Company may have against the underwriters. The Informatica defendants will not be required to make any cash payments in the settlement, unless the pro rata amount paid by the insurers in the settlement exceeds the amount of the insurance coverage, a circumstance which the Company does not believe will occur. The settlement will require approval of the Court, which cannot be assured, after class members are given the opportunity to object to the settlement or opt out of the settlement. At the hearing on April 24, 2006, the judge took the approval of the settlement under submission. The ruling is expected later this year.

     On July 15, 2002, the Company filed a patent infringement action in U.S. District Court in Northern California against Acta Technology, Inc. (“Acta”), now known as Business Objects Data Integration, Inc. (“BODI”), asserting that certain Acta products infringe on three Company patents: U.S. Patent No. 6,014,670, entitled “Apparatus and Method for Performing Data Transformations in Data Warehousing”; U.S. Patent No. 6,339,775, entitled “Apparatus and Method for Performing Data Transformations in Data Warehousing” (this patent is a continuation-in-part of and claims the benefit of U.S. Patent No. 6,014,670); and U.S. Patent No. 6,208,990, entitled “Method and Architecture for Automated Optimization of ETL Throughput in Data Warehousing Applications.” On July 17, 2002, the Company filed an amended complaint alleging that Acta products also infringe on one additional patent: U.S. Patent No. 6,044,374, entitled “Object References for Sharing Metadata in Data Marts.” In the suit, the Company is seeking an injunction against future sales of the infringing Acta/BODI products, as well as damages for past sales of the infringing products. The Company has asserted that BODI’s infringement of the Informatica patents was willful and deliberate. On September 5, 2002, BODI answered the complaint and filed counterclaims against us seeking a declaration that each patent asserted is not infringed and is invalid and unenforceable. BODI has not made any claims for monetary relief against the Company and has not filed any counterclaims alleging that the Company has infringed any of BODI’s patents. The parties presented their respective claim constructions to the Court on September 24, 2003, and on August 1, 2005, the Court issued its claims construction order. The Company believes

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

that the issued claims construction order is favorable to the Company’s position on the infringement action. The matter is currently at the end of the discovery phase. Informatica is preparing to argue motions for summary judgment on both patent infringement and validity in the third quarter of 2006.

     The Company is also a party to various legal proceedings and claims arising from the normal course of business activities.

     Based on current available information, the Company does not expect that the ultimate outcome of these unresolved matters, individually or in the aggregate, will have a material adverse effect on its results of operations, cash flows, or financial position.

Note 9. Income Taxes

     The Company recorded an income tax provision of $1.4 million and $2.6 million for the three and six months ended June 30, 2006, respectively, which primarily represents income and withholding taxes attributable to foreign operations, and federal and state minimum taxes. The Company recorded an income tax provision of $0.8 million and $2.2 million for the three months and six months ended June 30, 2005, respectively, which primarily represents income and withholding taxes attributable to foreign operations, and federal and state minimum taxes. The expected tax provision derived from applying the federal statutory rate to the Company’s income before income taxes for the six months period ended June 30, 2006 differed from the recorded income tax provision primarily due to the reversal of a portion of the Company’s valuation allowance to reflect the utilization of approximately $4.7 million of tax attributes, partially offset by foreign income and withholding taxes of $1.1 million and state taxes of $0.7 million.

Note 10. Stock Repurchases

     On March 8, 2006, the Company used a portion of the proceeds from the issuance of convertible senior notes to repurchase $50 million of common stock (3,232,062 shares at $15.47 per share). These shares were repurchased and retired to the status of authorized and unissued shares immediately.

     In April 2006, Informatica’s Board of Directors authorized a stock repurchase program for a one-year period for up to $30 million of the Company’s common stock. Purchases can be made from time to time in the open market and privately negotiated transactions and will be funded from available working capital. The purpose of the Company’s stock repurchase program is, among other things, to help offset the dilution caused by the issuance of stock under the Company’s employee stock option plans. The number of shares acquired and the timing of the repurchases are based on several factors, including general market conditions and the trading price of its common stock. These repurchased shares will be retired and reclassified as authorized and unissued shares of common stock. As of July 31, 2006, the Company purchased 915,000 shares at cost of $13.1 million under this program.

Note 11. Recent Accounting Pronouncements

     In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, (“SFAS No. 154”), which replaces APB No. 20, Accounting Changes, and FAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. APB No. 20 previously required that most voluntary changes in accounting principles be recognized by including the cumulative effect of changing to the new accounting principle in net income in the period of the change. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle, unless it is impracticable. SFAS No. 154 enhances the consistency of financial information between periods. The Company adopted SFAS No. 154 in the first quarter of 2006. The adoption of SFAS No. 154 did not materially affect the company’s Condensed Consolidated Financial Statements in the period of adoption. See Changes in Accounting Principle under Note 3. Share-Based Payment Compensation Expense. The effect on future periods will depend on the nature and significance of any future accounting changes.

INFORMATICA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. The Company will adopt SFAS No. 155 in the first quarter of 2007. The Company does not expect the adoption of SFAS No. 155 to have a material impact on its consolidated financial position, results of operations or cash flows.

     In June 2006, the FASB ratified the Emerging Issues Task Force (EITF) consensus on EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation), (“EITF 06-3”). EITF 06-3 provides guidance for income statement presentation and disclosure of any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, including but not limited to, sales, use, value added, and some excise taxes. Presentation of taxes within the scope of this EITF may be made on either a gross basis (included in revenues and costs) or a net basis (excluded from revenues), with appropriate accounting policy disclosure. EITF 06-3 is effective for reporting periods beginning after December 15, 2006. The Company will adopt this consensus as required, and adoption is not expected to have an impact on the consolidated financial statements.

     In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109 (“FIN 48”)”, which is effective in fiscal years beginning after December 15, 2006. FIN 48 prescribes a comprehensive model for recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken on the Company’s tax return. The cumulative effect of applying the provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings for that fiscal year, presented separately. The Company is currently evaluating the accounting and disclosure requirements of FIN 48 and expects to adopt it as required in the beginning of the first quarter of 2007.

Note 12. Significant Customer Information and Segment Reporting

     SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The method for determining the information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.

     The Company is organized and operates in a single segment: the design, development, marketing, and sales of software solutions. The Company’s chief operating decision-maker is considered to be the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance.

     The following table presents geographic information (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Revenues:
North America		$	58,644			$	45,737			$	109,886			$	83,905
Europe			18,625				15,913				36,178				34,601
Other			3,541				2,555				7,803				4,090
		$	80,810			$	64,205			$	153,867			$	122,596

		June 30,				December 31,
		2006				2005
Long-lived assets (excluding goodwill):
North America		$	23,240			$	21,708
Europe			2,511				2,571
Other			776				910
		$	26,527			$	25,189

     No customer accounted for more than 10% of the Company’s total revenues in the three and six months ended June 30, 2006 and 2005. At June 30, 2006 and 2005, no single customer accounted for more than 10% of the accounts receivable balance.

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

     This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the federal securities laws, particularly statements referencing our expectations relating to revenues, cost of revenues as a percentage of revenues, and operating expenses as a percentage of total revenues; the recording of amortization of acquired technology, the dilutive impact of the Similarity Systems Limited (“Similarity”) acquisition; the neutral to slightly accretive impact to earnings of our Notes through 2006; continuing impacts on our results of operations from our 2004 and 2001 Restructuring Plans; the sufficiency of our cash balances and cash flows for the next 12 months investment and potential investments of cash or stock to acquire or invest in complementary businesses, products, or technologies; the impact of recent changes in accounting standards; and assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “intends,” “plans,” “anticipates,” “estimates,” “potential,” or “continue,” or the negative thereof, or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to risks and uncertainties, including but not limited to the factors set forth under Part II, Item 1A. Risk Factors. All forward-looking statements and reasons why results may differ included in this Report are made as of the date hereof, and we assume no obligation to update any such forward-looking statements or reasons why actual results may differ.

     The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this Report.

Overview

     We are a leading provider of enterprise data integration software. We generate revenues from sales of software licenses for our enterprise data integration software products and from sales of services, which consist of maintenance, consulting, and education services.

     We receive revenues from licensing our products under perpetual licenses directly to end users and indirectly through resellers, distributors, and OEMs in the United States and internationally. Most of our international sales have been in Europe, and revenue outside of Europe and North America has comprised 6% or less of total consolidated revenues during the last three years. We receive service revenues from maintenance contracts, consulting services, and education services that we perform for customers that license our products either directly or indirectly.

     We license our software and provide services to many industry sectors, including, but not limited to, energy and utilities, financial services, insurance, government & public sector, healthcare, high-technology, manufacturing, retail, services, telecommunications, and transportation.

     In the second quarter of 2006, our total revenues grew 26% to $80.8 million compared to the second quarter of 2005. The increase in license revenues was a result of year-over-year increases in the volume and the average size of our transactions. The increase in service revenues was due primarily to increased maintenance revenues driven by strong renewals from our expanding customer base and contributions from the new releases of existing products and an increase in customer projects for broader data integration that drove additional consulting and education revenues.

     On January 26, 2006, we acquired Similarity, a private company incorporated in Ireland.’ Similarity’s software product suite includes data profiling, data standardization, data cleansing, data matching, and data quality monitoring. We are extending our enterprise data integration platform by working to incorporate certain components of Similarity’s product suite including its patented data quality technology. In connection with the acquisition, we have incurred additional expenses, including amortization of intangible assets and acquired technology, purchased in-process research and development costs, stock-based compensation, and other charges. As a result of these charges, we expect the acquisition to be dilutive to earnings in 2006. See Note 2. Acquisition of Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this report.

     On March 8, 2006, we issued and sold convertible senior notes with an aggregate principal amount of $230 million due 2026 (“Notes”). We used approximately $50 million of the net proceeds from the offering to fund the purchase of shares of our common stock concurrently with the offering of the Notes, and we intend to use the balance of the net proceeds for working capital and general corporate purposes, which may include the acquisition of businesses, products, product rights or technologies, strategic investments or additional purchases of common stock. We expect the Notes to be neutral to slightly accretive to earnings through 2006. See Note 7. Convertible Senior Notes of Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Report.

     Because our market is a dynamic one, we face both significant opportunities and challenges. As such, we focus on several key factors:

	§		Competition: Inherent in our industry are risks arising from competition with existing software solutions, technological advances from other vendors, and the perception of cost-savings by solving data integration challenges through internal development. Our prospective customers may view these alternative solutions as more attractive than our offerings. Additionally, the consolidation activity in our industry (including IBM’s acquisition of Ascential Software and Business Objects’ recent acquisition of FirstLogic) could pose challenges as competitors could potentially offer our prospective customers a broader suite of software products or solutions.
	§		New Product Introductions: To address the expanding data integration and data integrity needs of our customers and prospective customers, we continue to introduce new products and technology enhancements on a regular basis. After our acquisition of Similarity, we commenced integration of Similarity’s data quality technology into the PowerCenter product suite. Accordingly, in May 2006, we released the “general availability” version of PowerCenter 8.0 which included new products, Informatica Data Quality and Informatica Data Explorer, that deliver advanced data quality capabilities. We also announced in May the strategic roadmap for Informatica On-Demand, a Software-as-a-Service (“SaaS”) offering, to enable cross-enterprise data integration. As part of Phase One (offering connectivity to leading SaaS vendors), we concurrently introduced Informatica PowerCenter Connect for salesforce.com which allows customers to integrate data managed by salesforce.com with data managed by on-premise applications. New product introductions and/or enhancements have inherent risks including, but not limited to, product availability, product quality and interoperability, and customer adoption or the delay in customer purchases. Given the risks and new nature of the products, we cannot predict their impact on overall sales and revenues.
	§		Quarterly and Seasonal Fluctuations: Historically, purchasing patterns in the software industry have followed quarterly and seasonal trends and they are likely to do so in the future. We typically recognize a substantial portion of our new license orders in the last month of each quarter and sometimes in the last few weeks of each quarter, although such fluctuations are mitigated by backlog orders entering into a quarter. Seasonally, in recent years, the fourth quarter has had the highest level of license revenue and order backlog, and we have generally had weaker demand for our software products and services in the first and third quarters. Additionally, our consulting and education services have sometimes been negatively impacted in the fourth quarter and first quarter due to the holiday season and internal meetings, which result in fewer billable hours for our consultants and fewer education classes.

     To address these potential risks, we have focused on a number of key initiatives, including the strengthening of our partnerships, the broadening of our distribution capability worldwide, and the focusing of our sales force and distribution channel on new products.

     We are concentrating on maintaining and strengthening our relationships with our existing strategic partners and building relationships with additional strategic partners. These partners include systems integrators, resellers and distributors, and strategic technology partners, including enterprise application providers, database vendors, and enterprise information integration vendors, in the United States and internationally. Recently, we have become a global OEM partner with Hyperion Solutions and have partnered with salesforce.com. Our alliance managers are focused on developing new and enhancing existing strategic partnerships and, in the past year, we have added employees in Europe to drive deeper relationships with partners based in that geography. We have increased joint marketing initiatives and have experienced more lead sharing from our partners.

     We continued to broaden our distribution efforts in the first six months of 2006 by selling data warehouse products to the enterprise level and selling more strategic data integration solutions beyond data warehousing to our customers’ enterprise architects and chief information officers. We also continued our international expansion efforts, begun in 2005,by opening new offices in Sydney, Australia and Singapore. As the result of this international expansion, as well as the increase in our direct sales headcount in the U.S. during 2005, our sales and marketing expenses have increased accordingly during 2005 and the first half of 2006. We expect these investments to result in increased revenue, increased sales productivity, and increased profitability. However, if we experience an increase in sales personnel turnover, do not achieve expected increases in our sales pipeline, experience a decline in our sales pipeline conversion ratio, or do not achieve increases in productivity and efficiencies from our new sales personnel as they gain more experience, then we may not achieve our expected increases in revenue, productivity or profitability.

     To address the risks of introducing new products, we have continued to invest in programs to help train our internal sales force and our external distribution channel on new product functionalities, key differentiations, and key business values. These programs include our annual sales kickoff conference for all sales and key marketing personnel in January of this year, “Webinars” for our direct sales force and indirect distribution channel, in-person technical seminars for our pre-sales consultants, the building of product demonstrations, and creation and distribution of targeted marketing collateral. We have also invested in partner enablement programs, including product-specific briefings to partners and the inclusion of several partners in our beta programs.

Critical Accounting Policies and Estimates

     In preparing our condensed consolidated financial statements, we make assumptions, judgments, and estimates that can have a significant impact on amounts reported in our condensed consolidated financial statements. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments, and estimates and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of the Board of Directors. We believe that the assumptions, judgments, and estimates involved in the accounting for revenue recognition, facilities restructuring charges, income taxes, accounting for impairment of goodwill, acquisitions, and share-based payment compensation expense have the greatest potential impact on our condensed consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. Historically, our assumptions, judgments, and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on our significant accounting policies, see the discussion in Note 1. Summary of Significant Accounting Policies and Note 11. Recent Accounting Pronouncements of Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Report.

     Revenue Recognition

     We follow detailed revenue recognition guidelines, which are discussed below. We recognize revenue in accordance with generally accepted accounting principles in the United States of America (“GAAP”) that have been prescribed for the software industry. The accounting rules related to revenue recognition are complex and are affected by interpretations of the rules, which are subject to change. Consequently, the revenue recognition accounting rules require management to make significant judgments, such as determining if collectibility is probable.

     We derive revenues from software license fees, maintenance fees (which entitle the customer to receive product support and unspecified software updates), and professional services, consisting of consulting and education services. We follow the appropriate revenue recognition rules for each type of revenue. The basis for recognizing software license revenue is determined by American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2 Software Revenue Recognition, together with other authoritative literature. For other authoritative literature, see the subsection Revenue Recognition in Note 1. Summary of Significant Accounting

Policies of Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. Substantially all of our software licenses are perpetual licenses under which the customer acquires the perpetual right to use the software as provided and subject to the conditions of the license agreement. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable. In applying these criteria to revenue transactions, we must exercise judgment and use estimates to determine the amount of software, maintenance and professional services revenue to be recognized each period.

     Our judgment in determining the collectibility of amounts due from our customers impacts the timing of revenue recognition. We assess credit worthiness and collectibility and when a customer is not deemed credit worthy, revenue is recognized when payment is received.

     We assess whether fees are fixed or determinable prior to recognizing revenue. We must make interpretations of our customer contracts and exercise judgments in determining if the fees associated with a license arrangement are fixed or determinable. We consider factors including extended payment terms, financing arrangements, the category of customer (end-user customer or reseller), rights of return or refund, and our history of enforcing the terms and conditions of customer contracts. If the fee due from a customer is not fixed or determinable due to extended payment terms, revenue is recognized when payment becomes due or upon cash receipt, whichever is earlier. If we determine that a fee due from a reseller is not fixed or determinable upon shipment to the reseller, we defer the revenue until the reseller provides us with evidence of sell through to an end-user customer or upon cash receipt.

     Our software license arrangements include multiple elements: software license fees, maintenance fees, consulting, and/or education services. We use the residual method to recognize license revenue upon delivery when the arrangement includes elements to be delivered at a future date and vendor-specific objective evidence (“VSOE”) of fair value exists to allocate the fee to the undelivered elements of the arrangement. VSOE is based on the price charged when an element is sold separately. If VSOE does not exist for any undelivered element of the arrangement, all revenue is deferred until all elements have been delivered, or VSOE is established. We are required to exercise judgment in determining if VSOE exists for each undelivered element.

     Consulting services, if included as part of the software arrangement, generally do not require significant modification or customization of the software. If, in our judgment, the software arrangement includes significant modification or customization of the software, software license revenue is recognized as the consulting services revenue is recognized.

     Consulting revenues are primarily related to implementation services and product configurations performed on a time-and-materials basis and, occasionally, on a fixed fee basis. Revenue is generally recognized as these services are performed. If uncertainty exists about our ability to complete the project, our ability to collect the amounts due, or in the case of fixed fee consulting arrangements, our ability to estimate the remaining costs to be incurred to complete the project, revenue is deferred until the uncertainty is resolved.

     Facilities Restructuring Charges

     During the fourth quarter of 2004, we recorded significant charges (2004 Restructuring Plan) related to the relocation of our corporate headquarters to take advantage of more favorable lease terms and reduced operating expenses. In addition, we significantly increased the 2001 restructuring charges (2001 Restructuring Plan) in the third and fourth quarters of 2004 due to changes in our assumptions used to calculate the original charges as a result of our decision to relocate our corporate headquarters. The accrued restructuring charges represent gross lease obligations and estimated commissions and other costs (principally leasehold improvements and asset write-offs), offset by actual and estimated gross sublease income, which is net of estimated broker commissions and tenant improvement allowances, expected to be received over the remaining lease terms.

     These liabilities include management’s estimates pertaining to sublease activities. Inherent in the assessment of the costs related to our restructuring efforts are estimates related to the most likely expected outcome of the significant actions to accomplish the restructuring. We will continue to evaluate the commercial real estate market conditions periodically to determine if our estimates of the amount and timing of future sublease income are reasonable based on current and expected commercial real estate market conditions. Our estimates of sublease

income may vary significantly depending, in part, on factors that may be beyond our control, such as the time periods required to locate and contract suitable subleases and the market rates at the time of such subleases. Currently, we have subleased our excess facilities in connection with our 2004 and 2001 facilities restructuring, but for durations that are generally less than the remaining lease terms.

     If we determine that there is a change in the estimated sublease rates or in the expected time it will take us to sublease our vacant space, we may incur additional restructuring charges in the future and our cash position could be adversely affected. For example, we increased our 2001 Restructuring Plan charges in 2002 and 2004 based on the continued deterioration in the San Francisco Bay Area and Dallas, Texas real estate markets. See Note 6. Facilities Restructuring Charges of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. Future adjustments to the charges could result from a change in the time period that the buildings will be vacant, expected sublease rates, expected sublease terms, and the expected time it will take to sublease. We will periodically assess the need to update the original restructuring charges based on current real estate market information and trend analysis and executed sublease agreements.

     Accounting for Income Taxes

     We use the asset and liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 109, Accounting for Income Taxes. Under this method, income tax expenses or benefits are recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. We also account for any income tax contingencies in accordance with SFAS No. 5, Accounting for Contingencies. The measurement of current and deferred tax assets and liabilities are based on provisions of currently enacted tax laws. The effects of future changes in tax laws or rates are not contemplated.

     As part of the process of preparing consolidated financial statements, we are required to estimate our income taxes and tax contingencies in each of the tax jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. 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 net deferred tax assets and liabilities. We must then assess the likelihood that the deferred tax assets will be realizable and to the extent we believe that realizability is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or adjust such allowance in a period, we must include a tax expense or benefit within the tax provision in the statement of operations. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust our valuation allowance, which could impact our results of operations in the quarter in which such determination is made.

     Accounting for Impairment of Goodwill

     We assess goodwill for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, which requires that goodwill be tested for impairment at the “reporting unit level” (“Reporting Unit”) at least annually and more frequently upon the occurrence of certain events, as defined by SFAS No. 142. Consistent with our determination that we have only one reporting segment, we have determined that there is only one Reporting Unit, specifically the license, implementation, and support of our software products. Goodwill was tested for impairment in our annual impairment tests on October 31 in each of the years in 2005, 2004, and 2003 using the two-step process required by SFAS No. 142. First, we reviewed the carrying amount of the Reporting Unit compared to the “fair value” of the Reporting Unit based on quoted market prices of our common stock. If such comparison reflected potential impairment, we would then prepare the discounted cash flow analyses. Such analyses are based on cash flow assumptions that are consistent with the plans and estimates being used to manage the business. An excess carrying value compared to fair value would indicate that goodwill may be impaired. Finally, if we determined that goodwill may be impaired, then we would compare the “implied fair value” of the goodwill, as defined by SFAS No. 142, to its carrying amount to determine the impairment loss, if any.

     Based on these estimates, we determined in our annual impairment tests as of October 31 of each year that the fair value of the Reporting Unit exceeded the carrying amount and, accordingly, goodwill was not impaired. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including such external factors as industry and economic trends and such internal factors as changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. Accordingly, future changes in market capitalization or estimates used in discounted cash flows analyses could result in significantly different fair values of the Reporting Unit, which may impair goodwill.

     Acquisitions

     We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as purchased in-process research and development (“IPR&D”) based on their estimated fair values. We engage independent third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. This valuation requires management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets.

     Critical estimates in valuing certain of the intangible assets include but are not limited to future expected cash flows from customer contracts, customer lists, distribution agreements, and acquired developed technologies and patents; expected costs to develop the IPR&D into commercially viable products and estimating cash flows from the projects when completed; the acquired company’s brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.

     Share-Based Payment Compensation Expense

     We account for share-based compensation related to share-based transactions in accordance with the provisions of SFAS No. 123(R). Under the fair value recognition provisions of SFAS 123(R), share-based payment expense is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of stock-based awards requires judgment, including estimating stock price volatility, forfeiture rates and expected life.

     We have estimated the expected volatility as an input into the Black-Scholes valuation formula when assessing the fair value of options granted. Our current estimate of volatility was based upon a blend of average historical and market-based implied volatilities of our stock price. To the extent volatility of our stock price increases in the future, our estimates of the fair value of options granted in the future could increase, thereby increasing share-based payment expense in future periods. For instance, an estimate in volatility 10 percentage points higher would have resulted in a $2.6 million increase in the fair value of options granted during the six months ended June 30, 2006. In addition, we apply an expected forfeiture rate when amortizing share-based payment expense. Our estimate of the forfeiture rate was based primarily upon historical experience of employee turnover. To the extent we revise this estimate in the future, our share-based payment expense could be materially impacted in the quarter of revision, as well as in following quarters. An estimated forfeiture rate of 10 percentage points lower would have resulted in an increase of $1.0 million in share-based payment expense for the six months ended June 30, 2006. Our expected term of options granted was derived from the historical option exercises, post-vesting cancellations, and estimates concerning future exercises/cancellations of vested/unvested options that remain outstanding. In the future, as empirical evidence regarding these input estimates are able to provide more directionally predictive results, we may change or refine our approach of deriving these input estimates. These changes could impact our fair value of options granted in the future.

Recent Accounting Pronouncements

     For recent accounting pronouncements see Note 11. Recent Accounting Pronouncements to the Condensed Consolidated Financial Statements under Part I, Item. 1 of this Report.

Results of Operations

     The following table presents certain financial data for the three and six months ended June 30, 2006 and 2005 as a percentage of total revenues:

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
Revenues:
License			46	%			44	%			45	%			43	%
Service			54				56				55				57
Total revenues			100				100				100				100
Cost of revenues:
License			2				2				2				2
Service			19				18				18				18
Amortization of acquired technology			—				—				1				—
Total cost of revenues			21				20				21				20
Gross margin			79				80				79				80
Operating expenses:
Research and development			18				16				18				17
Sales and marketing			44				45				44				44
General and administrative			9				8				9				8
Amortization of intangible assets			—				—				—				—
Facilities restructuring charges			1				—				1				1
Purchased in-process research and development			—				—				—				—
Total operating expenses			72				69				72				70
Income from operations			7				11				7				10
Interest income			6				2				5				2
Interest expense			(2	)			—				(2	)			—
Other, net			—				—				—				—
Income before provision for income taxes			11				13				10				12
Provision for income taxes			2				1				2				2
Net income			9	%			12	%			8	%			10	%

Revenues

     Our total revenues increased to $80.8 million for the three months ended June 30, 2006 from $64.2 million for the three months ended June 30, 2005 representing an increase of $16.6 million or 26%. Total revenues increased to $153.9 million for the six months ended June 30, 2006 from $122.6 million for the six months ended June 30, 2005 representing an increase of $31.3 million or 26%.

     The following sets forth, for the periods indicated, our revenues (in thousands, except percentages):

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2006				2005				Change				2006				2005				Change
License revenues		$	36,851			$	28,103				31	%		$	69,655			$	53,059				31	%
Service revenues:
Maintenance			30,613				25,385				21	%			59,406				49,122				21	%
Consulting and education			13,346				10,717				25	%			24,806				20,415				22	%
Total service revenues			43,959				36,102				22	%			84,212				69,537				21	%
		$	80,810			$	64,205				26	%		$	153,867			$	122,596				26	%

     License Revenues

     Our license revenues increased to $36.9 million and $69.7 million for the three and six months ended June 30, 2006, respectively, from $28.1 million and $53.1 million for the three and six months ended June 30, 2005, respectively. The $8.8 million or 31% increase for the three months ended June 30, 2006 and the $16.6 million or 31% increase for the six months ended June 30, 2006 compared to the same periods in 2005 were primarily due to an increase in both the volume and the average transaction amount in the second quarter of 2006. The average transaction amount for orders greater than $100,000 in the second quarter of 2006 increased to $326,000 from $307,000 in the second quarter of 2005. We believe that the increase in average transaction amount is primarily the result of larger deployments by customers and continued growth in the broader data integration market.

     Service Revenues

     Maintenance Revenues

     Maintenance revenues increased to $30.6 million for the three months ended June 30, 2006 from $25.4 million for the three months ended June 30, 2005 and increased to $59.4 million for the six months ended June 30, 2006 from $49.1 million for the six months ended June 30, 2005. The $5.2 million or 21% increase and $10.3 million or 21% increase for the three and six months ended June 30, 2006, respectively, compared to the same periods in 2005, were primarily due to consistently strong renewals of maintenance contracts in 2006 coupled with the increasing size of our customer base. For the remainder of 2006, we expect maintenance revenues to increase from the second quarter of 2006 as we continue to increase our customer base.

     Consulting and Education Services Revenues

     Consulting and education services revenues increased to $13.3 million for the three months ended June 30, 2006 from $10.7 million for the three months ended June 30, 2005 and increased to $24.8 million for the six months ended June 30, 2006 from $20.4 million for the six months ended June 30, 2005. The $2.6 million or 25% increase and $4.4 million or 22% increase for the three and six months ended June 30, 2006, respectively, compared to the same periods in 2005 were primarily due to an increase in demand for consulting in both our North America and Europe regions. North America represented approximately 50% of the increase for both the three and six months ended June 30, 2006, respectively. Europe represented 27% and 30% of the increase for the three and six months ended June 30, 2006, respectively. For the remainder of 2006, we expect revenues from consulting and education services to remain relatively consistent with, or increase slightly from the second quarter of 2006.

     International Revenues

     Our international revenues increased to $22.2 million for the three months ended June 30, 2006 from $18.5 million for the three months ended June 30, 2005 and increased to $44.0 million for the six months ended June 30, 2006 from $38.7 million for the six months ended June 30, 2005. The $3.7 million or 20% increase for the three months ended June 30, 2006 compared to the same period in 2005 is primarily due to an 11% increase in license revenues, an 18% increase in maintenance revenues, and a 71% increase in education services revenues. The $5.3 million or 14% increase for the six months ended June 30, 2006, compared to the same period in 2005 was primarily due to a 21% increase in maintenance revenues and a 58% increase in consulting and education services revenues. International revenues as a percentage of total revenues were 27% and 29% for the three and six months ended June 30, 2006 and 29% and 32% for the three and six months ended June 30, 2005, respectively.

     Future Revenues (New Orders, Backlog and Deferred Revenues)

     Our future revenues are dependent upon (1) new orders received, shipped, and recognized in a given quarter and (2) our backlog and deferred revenues entering a given quarter. Our backlog consists primarily of product license orders that have not shipped as of the end of a given quarter and orders to certain distributors, resellers, and OEMs where revenue is recognized upon cash receipt. Our deferred revenues are primarily comprised of (1) maintenance revenues that we recognize over the term of the contract, typically one year, (2) license product orders that have shipped but where the terms of the license agreement contain acceptance language or other terms that require that the license revenues be deferred until all revenue recognition criteria are met or recognized ratably over an extended period, and (3) consulting and education services revenues that have been prepaid but for which services have not yet been performed. We typically ship products shortly after the receipt of an order, which is common in the software industry, and historically our backlog of license orders awaiting shipment at the end of any given quarter has varied. Aggregate backlog and deferred revenues at June 30, 2006 was approximately $97.9 million compared to $83.6 million at June 30, 2005 and $96.5 million at March 31, 2006. The increases at June 30, 2006 are primarily due to an increase in deferred maintenance revenues, and to a lesser extent, deferred license revenues to be recognized on a ratable basis. Backlog and deferred revenues as of any particular date are not necessarily indicative of future results.

Cost of Revenues

     The following sets forth, for the periods indicated, our cost of revenues (in thousands, except percentages):

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2006				2005				Change				2006				2005				Change
Cost of license revenues		$	1,389			$	1,135				22	%		$	2,916			$	1,845				58	%
Cost of service revenues			15,003				11,387				32	%			28,184				21,868				29	%
Amortization of acquired technology			544				233				133	%			996				469				112	%
		$	16,936			$	12,755				33	%		$	32,096			$	24,182				33	%
Cost of license revenues, as a percentage of license revenues			4	%			4	%							4	%			3	%
Cost of service revenues, as a percentage of service revenues			34	%			32	%							33	%			31	%

     Cost of License Revenues

     Our cost of license revenues consists primarily of software royalties, product packaging, documentation, and production costs. Cost of license revenues increased to $1.4 million for the three months ended June 30, 2006 from $1.1 million for the three months ended June 30, 2005 due to increased license revenues, representing 4% of license revenues for both periods. Cost of license revenues increased to $2.9 million for the six months ended June 30, 2006 from $1.8 million for the six months ended June 30, 2005, representing 4% and 3% of license revenues for those periods, respectively. For the remainder of 2006, we expect the cost of license revenues as a percentage of license revenues to be relatively consistent with, or increase slightly from the second quarter of 2006.

     Cost of Service Revenues

     Our cost of service revenues is a combination of costs of maintenance, consulting, and education services revenues. Our cost of maintenance revenues consists primarily of costs associated with customer service personnel expenses and royalty fees for maintenance related to third-party software providers. Cost of consulting revenues consists primarily of personnel costs and expenses incurred in providing consulting services at customers’ facilities. Cost of education services revenues consists primarily of the costs of providing training classes and materials at our headquarters, sales and training offices, and customer locations. Cost of service revenues increased to $15.0 million for the three months ended June 30, 2006 from $11.4 million for the three months ended June 30, 2005, representing 34% and 32% of service revenues for those periods, respectively, and increased to $28.2 million for the six months ended June 30, 2006 from $21.9 million for the six months ended June 30, 2005, representing 33% and 31% of

service revenues for those periods, respectively. The $3.6 million or 32% increase and $6.3 million or 29% increase for the three and six months ended June 30, 2006 compared to the same periods in 2005, respectively, were primarily due to headcount growth in the customer support, consulting, and education service groups, and higher share-based payment compensation expense. Cost of service revenues as a percentage of service revenues increased in both the three and six month periods in 2006 compared to 2005 as a result of increased headcount growth in the consulting and educational services organizations outpacing overall service revenues growth. For the remainder of 2006, we expect our cost of service revenues as a percentage of service revenues to be relatively consistent with the second quarter of 2006, or increase slightly from the current levels if the growth in our consulting services business, if any, is greater than that experienced by our maintenance and education services business.

     Amortization of Acquired Technology

     The following sets forth, for the periods indicated, our amortization of acquired technology (in thousands, except percentages):

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2006				2005				Change				2006				2005				Change
Amortization of acquired technology		$	544			$	233				133	%		$	996			$	469				112	%

     Amortization of acquired technology is the amortization of technologies acquired through business combinations. Amortization of acquired technology increased to $0.5 million for the three months ended June 30, 2006 from $0.2 million for the three months ended June 30, 2005 and increased to $1.0 million for the six months ended June 30, 2006 from $0.5 million for the six months ended June 30, 2005. The $0.3 million or 133% increase and $0.5 million or 112% increase for the three and six months ended June 30, 2006, respectively, compared to the same periods in 2005 was a result of certain technologies we acquired in connection with the acquisition of Similarity in January 2006. We expect amortization of other acquired technology to be approximately $1.0 million for the remainder of 2006.

Operating Expenses

     Research and Development

     The following sets forth, for the periods indicated, our research and development expenses (in thousands, except percentages):

		Three Months Ended												Six Months Ended
		June 30,												June 30,
		2006				2005				Change				2006				2005				Change
Research and development		$	14,185			$	10,460				36	%		$	27,243			$	20,707				32	%
Percent of total revenues			18	%			16	%			2	%			18	%			17	%			1	%