~~By:~~ ~~/s/MARK B. TEMPLETON~~
CITRIX SYSTEMS, INC
By:
/S/    MARK B. TEMPLETON

Mark B. Templeton

President and Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES

We, the undersigned officers and directors of Citrix Systems, Inc., hereby severally constitute and appoint Mark B. Templeton and David ~~D. Urbani,~~J. Henshall, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below, all amendments to this report, and generally to do all things in our names and on our behalf in such capacities to enable Citrix Systems, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below on the ~~24th~~11th day of March, ~~2003.~~
2005.
Signature
Title(s)
/~~s/ MARK~~S/    MARK B. ~~TEMPLETON~~
TEMPLETON
Mark B. Templeton
   President, Chief Executive Officer and Director (Principal Executive Officer)
/~~s/ DAVID D. URBANI~~
S/    DAVID J. HENSHALL
David ~~D. Urbani~~J. Henshall
   ~~Acting~~ Chief Financial Officer ~~(Principal Financial Officer)~~ and Vice President, Finance (Principal Financial and Accounting Officer)
/~~s/ STEPHEN~~S/    STEPHEN M. ~~DOW~~
DOW
Stephen M. Dow
   Chairman of the Board of Directors
/~~s/ KEVIN R. COMPTON~~
S/    THOMAS F. BOGAN
~~Kevin R. Compton~~
Thomas F. Bogan
   Director
/~~s/ TYRONE F. PIKE~~
S/    MURRAY J. DEMO
~~Tyrone F. Pike~~
Murray J. Demo
   Director
/~~s/ JOHN~~S/    GARY E. MORIN
Gary E. Morin
Director
/S/    GODFREY R. SULLIVAN
Godfrey R. Sullivan
Director
/S/    JOHN W. ~~WHITE~~
WHITE
John W. White
   Director
47
~~CERTIFICATIONS~~
~~I, Mark B. Templeton, certify that:~~
1. ~~I have reviewed this annual report on Form 10-K of Citrix Systems, Inc.;~~
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. ~~Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and~~
c. ~~Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;~~
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b. ~~Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and~~
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
~~By:~~ ~~/s/ MARK B. TEMPLETON~~
~~Mark B. Templeton~~
~~Chief Executive Officer~~
~~(Principal Executive Officer)~~
~~Date: March 24, 2003~~
48
~~CERTIFICATIONS~~
~~I, David D. Urbani, certify that:~~
1. ~~I have reviewed this annual report on Form 10-K of Citrix Systems, Inc.;~~
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. ~~Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and~~
c. ~~Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;~~
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b. ~~Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and~~
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
~~By:~~ ~~/s/ DAVID D. URBANI~~
~~David D. Urbani~~
~~Acting Chief Financial Officer~~
~~(Principal Financial Officer)~~
~~Date: March 24, 2003~~
49
CITRIX SYSTEMS, INC.

List of Financial Statements and Financial Statement Schedule

The following consolidated financial statements of Citrix Systems, Inc. are included in Item 8:


Report of Independent ~~Certified~~Registered Public ~~Accountants~~	Accounting Firm	F-2
Consolidated Balance Sheets — December 31, ~~2002~~2004 and ~~2001.~~	2003	F-3
Consolidated Statements of Income — Years ended December 31, ~~2002, 2001~~2004, 2003 and ~~2000~~	2002	F-4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income — Years ended December 31, ~~2002, 2001~~2004, 2003 and ~~2000~~	2002	F-5
Consolidated Statements of Cash Flows — Years ended December 31, ~~2002, 2001~~2004, 2003 and ~~2000~~	2002	F-6
Notes to Consolidated Financial Statements		F-7

The following consolidated financial statement schedule of Citrix Systems, Inc. is included in Item 15(a):


	~~The following consolidated financial statement schedule of Citrix Systems, Inc. is included in Item 15(a):~~
Schedule II Valuation and Qualifying Accounts		~~F-37~~	F-34

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

~~F-1~~

REPORT OF INDEPENDENT ~~CERTIFIED~~REGISTERED PUBLIC ~~ACCOUNTANTS~~ACCOUNTING FIRM

Board of Directors and Stockholders

Citrix Systems, Inc.

We have audited the accompanying consolidated balance sheets of Citrix Systems, Inc. as of December 31, ~~2002~~2004 and ~~2001,~~2003, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, ~~2002.~~2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with ~~auditing~~the standards ~~generally accepted in~~of the ~~United States.~~Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Citrix Systems, Inc. at December 31, ~~2002~~2004 and ~~2001,~~2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2002,~~2004, in conformity with ~~accounting principles~~U.S. generally accepted ~~in the United States.~~accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

~~As discussed~~

We also have audited, in ~~Note 2 to~~accordance with the ~~consolidated~~standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Citrix Systems, Inc.’s internal control over financial ~~statements, effective January 1, 2002,~~reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the ~~Company changed its method~~Committee of ~~accounting for goodwill~~Sponsoring Organizations of the Treadway Commission and ~~certain intangible assets as a result of adopting Statement of Financial Accounting Standard No. 142,~~~~Goodwill and Other Intangible Assets~~.our report dated March 10, 2005 expressed an unqualified opinion thereon.

~~/s/ ERNST & YOUNG LLP~~

/s/Ernst & Young LLP

Certified Public Accountants

West Palm Beach, Florida

~~January 14, 2003~~

~~F-2~~March 10, 2005

CITRIX SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

December 31,
2002 2001
(In thousands, except
par value)
Assets
Current assets:
Cash and cash equivalents $ 142,700 $ 139,693
Short-term investments 77,213 77,078
Accounts receivable, net of allowances of $16,538 and $12,069 at 2002 and 2001, respectively 69,471 65,032
Inventories 1,774 3,568
Prepaid taxes 2,128 6,069
Other prepaids and current assets 32,498 21,444
Current portion of deferred tax assets 49,515 33,171

Total current assets 375,299 346,055
Long-term investments 499,491 529,894
Property and equipment, net 76,534 90,110
Goodwill, net 152,364 152,364
Other intangible assets, net 30,849 36,613
Long-term portion of deferred tax assets, net 5,587 25,071
Other assets, net 21,407 28,123

$ 1,161,531 $ 1,208,230

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses $ 92,926 $ 111,928
Current portion of deferred revenues 95,963 80,573

Total current liabilities 188,889 192,501
Long-term portion of deferred revenues 8,028 5,631
Convertible subordinated debentures 333,549 346,214
Commitments and contingencies
Put warrants 7,340 16,554
Common stock subject to repurchase 9,135 —
Stockholders’ equity:
Preferred stock at $.01 par value: 5,000 shares authorized, none issued and outstanding — —
Common stock at $.001 par value: 1,000,000 shares authorized; 197,426 and 196,627 issued at 2002 and 2001, respectively 197 197
Additional paid-in capital 595,959 507,857
Retained earnings 519,797 425,877
Accumulated other comprehensive income (loss) 3,833 (84 )

1,119,786 933,847
Less — common stock in treasury, at cost (29,290 and 11,450 shares in 2002 and 2001, respectively) (505,196 ) (286,517 )

Total stockholders’ equity 614,590 647,330

$ 1,161,531 $ 1,208,230


	December 31,
	2004			2003
	(In thousands, except par value)
Assets
Current assets:
Cash and cash equivalents	$	73,485		$	182,969
Short-term investments		159,656			385,431
Accounts receivable, net of allowances of $4,916 and $6,365 in 2004 and 2003, respectively		108,399			87,464
Prepaid expenses and other current assets		41,159			58,167
Current portion of deferred tax assets, net		43,881			51,540

Total current assets		426,580			765,571
Restricted cash equivalents and investments		149,051			146,460
Long-term investments		183,974			183,411
Property and equipment, net		69,281			65,837
Goodwill, net		361,452			152,364
Other intangible assets, net		87,172			21,300
Long-term portion of deferred tax assets, net		—			3,168
Other assets		8,574			6,828

	$	1,286,084		$	1,344,939

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	131,287		$	114,456
Current portion of deferred revenues		210,872			152,938
Convertible subordinated debentures		—			351,423

Total current liabilities		342,159			618,817
Long-term portion of deferred revenues		14,271			12,137
Other liabilities		4,749			7,187

Commitments and contingencies (Note 10)

Stockholders’ equity:
Preferred stock at $.01 par value: 5,000 shares authorized, none issued and outstanding		—			—
Common stock at $.001 par value: 1,000,000 shares authorized; 212,991 and 202,622 shares issued at 2004 and 2003, respectively		213			203
Additional paid-in capital		872,659			700,111
Deferred compensation		(1,063	)		—
Retained earnings		778,286			646,740
Accumulated other comprehensive income		7,489			7,810

		1,657,584			1,354,864
Less — common stock in treasury, at cost (42,608 and 38,150 shares in 2004 and 2003, respectively)		(732,679	)		(648,066	)

Total stockholders’ equity		924,905			706,798

	$	1,286,084		$	1,344,939

See accompanying notes.

~~F-3~~

CITRIX SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,
2002 2001 2000
(In thousands, except per share
information)
Revenues:
Revenues $ 513,365 $ 551,799 $ 430,548
Other revenues 14,083 39,830 39,898

Total net revenues 527,448 591,629 470,446

Cost of revenues:
Cost of revenues (excluding amortization, presented separately below) 19,030 29,848 28,483
Cost of other revenues — — 571

Total cost of revenues 19,030 29,848 29,054

Gross margin 508,418 561,781 441,392
Operating expenses:
Research and development 68,923 67,699 50,622
Sales, marketing and support 235,393 224,108 180,384
General and administrative 88,946 85,212 58,685
Amortization of intangible assets 11,296 48,831 30,395
In-process research and development — 2,580 —
Write-down of technology — — 9,081

Total operating expenses 404,558 428,430 329,167

Income from operations 103,860 133,351 112,225
Interest income 30,943 42,006 41,313
Interest expense (18,163 ) (20,553 ) (17,099 )
Other expense, net (3,483 ) (2,253 ) (1,422 )

Income before income taxes 113,157 152,551 135,017
Income taxes 19,237 47,291 40,505

Net income $ 93,920 $ 105,260 $ 94,512

Earnings per common share:
Basic earnings per share $ 0.53 $ 0.57 $ 0.51

Weighted average shares outstanding 177,428 185,460 184,804

Earnings per common share — assuming dilution:
Diluted earnings per share $ 0.52 $ 0.54 $ 0.47

Weighted average shares outstanding 179,359 194,498 199,731


	Year Ended December 31,
	2004			2003			2002
	(In thousands, except per share information)
Revenues:
Software licenses	$	369,826		$	374,403		$	363,145
Software license updates		271,547			168,793			105,682
Services		99,784			45,429			44,539
Other		—			—			14,082

Total net revenues		741,157			588,625			527,448

Cost of revenues:
Cost of software license revenues		3,824			13,555			12,444
Cost of services revenues		16,472			6,481			6,586
Amortization of core and product technology		6,127			11,036			10,811

Total cost of revenues		26,423			31,072			29,841

Gross margin		714,734			557,553			497,607
Operating expenses:
Research and development		86,357			64,443			68,923
Sales, marketing and support		337,566			252,749			235,393
General and administrative		106,516			85,672			88,946
Amortization of other intangible assets		6,204			300			485
In-process research and development		19,100			—			—

Total operating expenses		555,743			403,164			393,747

Income from operations		158,991			154,389			103,860
Interest income		14,274			21,120			30,943
Interest expense		(4,367	)		(18,280	)		(18,163	)
Write-off of deferred debt issuance costs		(7,219	)		—			—
Other income (expense), net		2,754			3,458			(3,483	)

Income before income taxes		164,433			160,687			113,157
Income taxes		32,887			33,744			19,237

Net income	$	131,546		$	126,943		$	93,920

Earnings per share:
Basic	$	0.78		$	0.77		$	0.53

Diluted	$	0.75		$	0.74		$	0.52

Weighted average shares outstanding:
Basic		168,868			165,323			177,428

Diluted		174,734			171,447			179,359

See accompanying notes.

~~F-4~~

CITRIX SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

Accumulated
Common Stock Additional Other Treasury Stock Total Total
Paid-In Retained Comprehensive
Stockholders’ Comprehensive
Shares Amount Capital Earnings Income (loss) Shares Amount Equity Income
Balance at December 31, 1999 181,093 $ 181 $ 309,321 $ 226,105 $ (2,537 ) — $ — $ 533,070
Exercise of stock options 6,698 7 69,146 — — — — 69,153
Common stock issued under employee stock purchase plan 78 — 1,262 — — — — 1,262
Common stock issued upon debt conversion 3 — 73 — — — — 73
Tax benefit from employer stock plans — — 63,923 — — — — 63,923
Proceeds from sale of put warrants — — 4,870 — — — — 4,870
Put warrant obligations — — (15,732 ) — — — — (15,732 )
Repurchase of common stock — — — — — (3,817 ) (76,040 ) (76,040 )
Cash paid in advance for share repurchase contract, net of shares received — — (81,810 ) — — — — (81,810 )
Unrealized loss on available-for-sale securities, net of taxes — — — — (406 ) — — (406 ) $ (406 )
Net income — — — 94,512 — — — 94,512 94,512

Total comprehensive income $ 94,106

Balance at December 31, 2000 187,872 188 351,053 320,617 (2,943 ) (3,817 ) (76,040 ) 592,875
Exercise of stock options 8,541 9 113,331 — — — — 113,340
Common stock issued under employee stock purchase plan 214 — 4,008 — — — — 4,008
Common stock issued upon debt conversion — — 2 — — — — 2
Tax benefit from employer stock plans — — 28,011 — — — — 28,011
Proceeds from sale of put warrants — — 12,019 — — — — 12,019
Put warrant obligations, net of expired put warrants — — (822 ) — — — — (822 )
Repurchase of common stock — — — — — (7,633 ) (210,477 ) (210,477 )
Cash paid in advance for share repurchase contract, net of shares received — — 255 — — — — 255
Unrealized gain on forward contracts and interest rate swap, net of reclassification adjustments and net of tax — — — — 84 — — 84 $ 84
Unrealized gain on available-for-sale securities, net of tax — — — — 2,775 — — 2,775 2,775
Net income — — — 105,260 — — — 105,260 105,260

Total comprehensive income $ 108,119

Balance at December 31, 2001 196,627 197 507,857 425,877 (84 ) (11,450 ) (286,517 ) 647,330
Exercise of stock options 551 1 3,369 — — — — 3,370
Common stock issued under employee stock purchase plan 248 — 1,301 — — — — 1,301
Tax benefit from employer stock plans — — 25,735 — — — — 25,735
Proceeds from sale of put warrants — — 3,310 — — — — 3,310
Put warrant obligations, net of expired put warrants — — 9,215 — — — — 9,215
Repurchase of common stock — — — — — (17,840 ) (218,679 ) (218,679 )
Common stock subject to repurchase — — (9,135 ) — — — — (9,135 )
Cash paid in advance for share repurchase contracts, net of shares received and maturities — — 54,307 — — — — 54,307
Unrealized gain on forward contracts and interest rate swaps, net of reclassification adjustments and net of tax — — — — 3,428 — — 3,428 $ 3,428
Unrealized gain on available-for-sale securities, net of tax — — — — 489 — — 489 489
Net income — — — 93,920 — — — 93,920 93,920

Total comprehensive income $ 97,837

Balance at December 31, 2002 197,426 $ 197 * $ 595,959 $ 519,797 $ 3,833 (29,290 ) $ (505,196 ) $ 614,590 *

(In thousands)


	Common Stock				Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income(Loss)			Deferred Compensation			Common Stock in Treasury					Total Stockholders’ Equity			Total Comprehensive Income
	Shares	Amount			Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income(Loss)			Deferred Compensation			Shares		Amount			Total Stockholders’ Equity			Total Comprehensive Income
Balance at December 31, 2001	196,627	$	197		$	507,857		$	425,877	$	(84	)		—		(11,450	)	$	(286,517	)	$	647,330
Exercise of stock options	551		1			3,369			—		—			—		—			—			3,370
Common stock issued under employee stock purchase plan	248		—			1,301			—		—			—		—			—			1,301
Tax benefit from employer stock plans	—		—			25,735			—		—			—		—			—			25,735
Proceeds from sale of put warrants	—		—			3,310			—		—			—		—			—			3,310
Put warrant obligations, net of expired put warrants	—		—			9,215			—		—			—		—			—			9,215
Repurchase of common stock	—		—			85,811			—		—			—		(17,840	)		(218,679	)		(132,868	)
Common stock subject to repurchase	—		—			(9,135	)		—		—			—		—			—			(9,135	)
Cash paid in advance for share repurchase contract	—		—			(31,504	)		—		—			—		—			—			(31,504	)
Unrealized gain on forward contracts and interest rate swap, net of reclassification adjustments and net of tax	—		—			—			—		3,428			—		—			—			3,428		$	3,428
Unrealized gain on available-for-sale securities, net of tax	—		—			—			—		489			—		—			—			489			489
Net income	—		—			—			93,920		—			—		—			—			93,920			93,920

Total comprehensive income																								$	97,837

Balance at December 31, 2002	197,426		197	*		595,959			519,797		3,833			—		(29,290	)		(505,196	)		614,590	*
Exercise of stock options	4,723		5			54,984			—		—			—		—			—			54,989
Common stock issued under employee stock purchase plan	473		—			3,434			—		—			—		—			—			3,434
Tax benefit from employer stock plans	—		—			10,289			—		—			—		—			—			10,289
Proceeds from sale of put warrants	—		—			655			—		—			—		—			—			655
Put warrant obligations, net of expired put warrants	—		—			7,340			—		—			—		(200	)		(2,517	)		4,823
Repurchase of common stock	—		—			33,195			—		—			—		(8,659	)		(140,354	)		(107,159	)
Common stock subject to repurchase	—		—			9,135			—		—			—		—			—			9,135
Cash paid in advance for share repurchase contracts	—		—			(14,878	)		—		—			—		—			—			(14,878	)
Unrealized gain on forward contracts and interest rate swaps, net of reclassification adjustments and net of tax	—		—			—			—		3,672			—		—			—			3,672		$	3,672
Unrealized gain on available-for-sale securities, net of tax	—		—			—			—		305			—		—			—			305			305
Net income	—		—			—			126,943		—			—		—			—			126,943			126,943

Total comprehensive income																								$	130,920

Balance at December 31, 2003	202,622		203	*		700,111	*		646,740		7,810			—		(38,150	)*	$	(648,066	)*		706,798
Exercise of stock options	4,492		4			58,673			—		—			—		—			—			58,677
Common stock issued under employee stock purchase plan	299		—			4,786			—		—			—		—			—			4,786
Common stock issued for acquisition	5,578		6			124,416			—		—			—								124,422
Tax benefit from employer stock plans	—		—			20,875			—		—			—		—			—			20,875
Deferred compensation			—			1,088								(1,063	)							25
Repurchase of common stock	—		—			15,782			—		—			—		(4,458	)		(84,613	)		(68,831	)
Cash paid in advance for share repurchase contracts	—		—			(53,072	)		—		—			—		—			—			(53,072	)
Unrealized loss on forward contracts and interest rate swaps, net of reclassification adjustments and net of taxes	—		—			—			—		(164	)		—		—			—			(164	)	$	(164	)
Unrealized loss on available-for-sale securities, net of tax	—		—			—			—		(156	)		—		—			—			(156	)		(156	)
Net income	—		—			—			131,546		—			—		—			—			131,546			131,546

Total comprehensive income
Balance at December 31, 2004	212,991	$	213		$	872,659		$	778,286	$	7,489	*	$	(1,063	)	(42,608	)	$	(732,679	)	$	924,905	*	$	131,226


*	Amounts do not add due to rounding

See accompanying notes.

~~F-5~~

CITRIX SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
2002 2001 2000
(In thousands)
Operating activities

Net income $ 93,920 $ 105,260 $ 94,512
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets 11,296 48,831 30,395
Depreciation and amortization of property and equipment 30,142 30,757 19,853
Realized (gain) loss on the repurchase of convertible subordinated debentures (1,547 ) 360 —
Realized gain on the termination of interest rate swap (3,356 ) — —
Loss on abandonment of fixed assets 2,006 247 —
Realized losses and other-than-temporary decline in fair value of investments 2,095 7,689 —
In-process research and development — 2,580 —
Write-down of technology — — 9,081
Provision for doubtful accounts 3,486 2,784 377
Provision for product returns 25,282 22,533 27,883
Provision for inventory reserves 1,407 2,292 6,932
Deferred income taxes (4,218 ) (1,063 ) 6,240
Tax benefit related to the exercise of non-statutory stock options and disqualified dispositions of incentive stock options 25,735 28,011 63,923
Accretion of original issue discount and amortization of financing cost 17,711 17,853 16,911

Total adjustments to reconcile net income to net cash provided by operating activities 110,039 162,874 181,595
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (33,205 ) (50,665 ) (8,625 )
Inventories 387 (1,238 ) (3,762 )
Prepaid expenses and other current assets (1,387 ) 12,648 4,614
Other assets 5,661 (12,034 ) (2 )
Deferred tax assets 6,480 3,534 (8,440 )
Accounts payable and accrued expenses (65 ) 5,523 18,799
Deferred revenues 17,787 (8,630 ) (26,987 )
Income taxes payable (12,514 ) 12,571 (8,467 )

Total changes in operating assets and liabilities, net of effects of acquisitions (16,856 ) (38,291 ) (32,870 )

Net cash provided by operating activities 187,103 229,843 243,237
Investing activities

Purchases of investments (364,482 ) (553,490 ) (569,795 )
Proceeds from sales and maturities of investments 393,454 415,633 642,986
Purchases of property and equipment (19,104 ) (60,557 ) (43,532 )
Proceeds from termination of interest rate swap 3,902 — —
Cash paid for acquisitions, net of cash acquired (10,680 ) (183,754 ) (30,102 )
Cash paid for licensing agreement (3,000 ) — (1,333 )

Net cash provided by (used in) investing activities 90 (382,168 ) (1,776 )
Financing activities

Proceeds from issuance of common stock 4,671 117,350 70,488
Cash paid to repurchase convertible subordinated debentures (27,773 ) (2,141 ) —
Cash paid under stock repurchase programs (164,372 ) (210,222 ) (157,850 )
Proceeds from sale of put warrants 3,310 12,019 4,870
Other (22 ) (13 ) (60 )

Net cash used in financing activities (184,186 ) (83,007 ) (82,552 )

Change in cash and cash equivalents 3,007 (235,332 ) 158,909
Cash and cash equivalents at beginning of year 139,693 375,025 216,116

Cash and cash equivalents at end of year $ 142,700 $ 139,693 $ 375,025

~~Supplemental Cash Flow Information~~

The Company paid income taxes of approximately $14,222, $7,991 and $9,277 in 2002, 2001 and 2000, respectively. Additionally, the Company paid interest of approximately $4,155, $1,221 and $23 during the years ended December 31, 2002, 2001 and 2000, respectively.


	Year Ended December 31,
	2004			2003			2002
	(In thousands)
Operating activities
Net income	$	131,546		$	126,943		$	93,920
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets		12,331			11,336			11,296
Depreciation and amortization of property and equipment		21,247			23,000			30,142
Write-off of deferred debt issuance costs		7,219			—			—
Realized gain on the repurchase of convertible subordinated debentures		—			—			(1,547	)
Realized loss (gain) on the termination of interest rate swap		(328	)		736			(3,356	)
Realized (gains) losses on investments		—			(1,978	)		2,095
In-process research and development		19,100			—			—
Provision for doubtful accounts		1,108			522			3,486
Provision for product returns		6,663			3,825			25,282
Provision for (recovery of) inventory reserves		428			(4	)		1,407
Deferred income tax provision (benefit)		(2,360	)		1,343			(4,218	)
Tax benefit related to the exercise of non-statutory stock options and disqualified dispositions of incentive stock options		20,875			10,289			25,735
Accretion of original issue discount and amortization of financing cost		4,318			18,237			17,711
Other non-cash items		677			273			2,006

Total adjustments to reconcile net income to net cash provided by operating activities		91,278			67,579			110,039
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(25,312	)		(22,340	)		(33,205	)
Prepaid expenses and other current assets		9,172			(4,413	)		(1,000	)
Other assets		(456	)		6,119			5,661
Deferred tax assets, net		12,249			(731	)		6,480
Accounts payable and accrued expenses		1,763			20,455			(18,496	)
Deferred revenues		54,118			61,084			17,787
Other liabilities		(9,077	)		735			5,917

Total changes in operating assets and liabilities, net of effects of acquisitions		42,457			60,909			(16,856	)

Net cash provided by operating activities		265,281			255,431			187,103
Investing activities
Purchases of available for-sale investments		(192,745	)		(381,107	)		(423,207	)
Proceeds from sales of available-for-sale investments		161,846			196,524			349,600
Proceeds from maturities of available-for-sale investments		56,867			109,252			88,229
Proceeds from maturities of held-to-maturity investments		195,350			—			—
Purchases of property and equipment		(24,412	)		(11,063	)		(19,104	)
(Payment for) proceeds from termination of interest rate swaps		—			(1,572	)		3,902
Cash paid for acquisitions, net of cash acquired		(140,788	)		—			(10,680	)
Cash paid for licensing agreements and core technology		(16,784	)		(1,358	)		(3,000	)

Net cash provided by (used in) investing activities		39,334			(89,324	)		(14,260	)
Financing activities
Proceeds from issuance of common stock		63,463			58,423			4,671
Cash paid to repurchase convertible subordinated debentures		(355,659	)		—			(27,773	)
Cash paid under stock repurchase programs		(121,903	)		(124,554	)		(164,372	)
Proceeds from sale of put warrants		—			655			3,310
Other		—			(12	)		(22	)

Net cash used in financing activities		(414,099	)		(65,488	)		(184,186	)

Change in cash and cash equivalents		(109,484	)		100,619			(11,343	)
Cash and cash equivalents at beginning of year		182,969			82,350			93,693

Cash and cash equivalents at end of year	$	73,485		$	182,969		$	82,350

(continued)

Supplemental Cash Flow Information (In thousands)

Non-cash investing activity—Increase (decrease) in restricted cash equivalents and investments
   $ 2,591    $ (25,646 ) $ 172,106



Cash paid for income taxes
   $ 2,623    $ 10,331 $ 14,222



Cash paid for interest
   $ 559    $ 2,976 $ 4,155

See accompanying ~~notes.~~notes

~~F-6~~

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Citrix Systems, Inc. (“Citrix” or the “Company”), is a Delaware corporation founded on April 17, ~~1989, is a leading supplier of corporate application~~1989. The Company designs, develops and ~~information~~markets access infrastructure software, services and services that enable the effective and efficient enterprise-wide deployment and management of applications and information, including those designed for Microsoft® Windows® operating systems, for UNIX® operating systems, such as Sun Solaris^TM, HP-UX, or IBM®-AIX® (collectively, “UNIX operating systems”) and for Web-based information systems. The Company’s MetaFrame® products permit organizations to provide secure access to Windows based, Web-based and UNIX applications without regard to location, network connection or type of client hardware platforms.appliances. The Company markets and licenses its products through multiple channels such as value-added resellers, channel distributors, system integrators, ~~and~~ independent software vendors and its websites, managed by the ~~Company’s worldwide sales force.~~Company’s. The Company also promotes its products through relationships with a wide variety of industry participants, including Microsoft Corporation (“Microsoft”).

2. SIGNIFICANT ACCOUNTING POLICIES


	~~Consolidation Policy~~

Consolidation Policy

The consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries in the Americas, Europe, the Middle East and Africa (“EMEA”) and Asia-Pacific. All significant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.


	~~Cash and Cash Equivalents~~

Cash and Cash Equivalents

Cash and cash equivalents at December 31, ~~2002~~2004 and 2003 include marketable securities, which are primarily municipal securities, money market funds, corporate securities, ~~and~~ commercial paper and government securities with initial or remaining contractual maturities when purchased of three months or less. The Company minimizes its credit risk associated with cash and cash equivalents by investing primarily in investment grade, highly liquid instruments and periodically evaluating the credit quality of its primary financial institutions.


	~~Investments~~

Restricted Cash Equivalents and Investments

Restricted cash equivalents and investments at December 31, 2004 and 2003 include approximately $62.8 million in investment securities and cash equivalents were pledged as collateral for specified obligations under the Company’s synthetic lease arrangement. In addition, at December 31, 2004 and 2003 approximately $86.3 million and $83.6 million, respectively, in investment securities were pledged as collateral for certain of the Company’s credit default contracts and interest rate swaps. The Company maintains the ability to manage the composition of the restricted cash equivalents and investments within certain limits and to withdraw and use excess investment earnings from the restricted collateral for operating purposes. For further information, see Notes 10 and 13.

Investments

Short and long-term investments at December 31, ~~2002~~2004 and 2003 primarily consist of corporate securities, government securities, commercial paper and municipal securities. Investments classified as available-for-sale are stated at fair value with unrealized gains and losses, net of taxes, reported in accumulated other comprehensive ~~income (loss).~~income. Investments classified as held-to-maturity are stated at amortized cost. The Company does not recognize changes in the fair value of ~~certain~~held-to-maturity investments in income unless a decline in value is considered other-than-temporary.

From time to time, the Company makes equity investments that are accounted for under the cost method due to the limited extent of the Company’s ownership interest and the lack of the Company’s ability to exert significant influence over the investees. As of December 31, 2002 and 2001, such investments were recorded at the lower of cost or estimated net realizable value. The Company periodically evaluates the carrying value of its investments to determine if there has been any impairment of value that is other-than-temporary. During 2002 and 2001, the Company recorded $2.1 million and $7.7 million, respectively, of losses resulting from sales of available-for-sale securities and other-than-temporary declines in fair value of certain of the Company’s investments. Amounts included in accumulated other comprehensive income (loss) in prior periods are reclassified to earnings using the specific identification method. At December 31, 2002, the Company’s remaining equity investments were approximately $0.2 million.

The Company minimizes its credit risk associated with investments by investing primarily in investment grade, highly liquid securities. The Company maintains investments with various financial institutions and the Company’s policy is designed to limit exposure to any one ~~institution~~issuer depending on credit quality. Periodic

~~F-7~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

evaluations of the relative credit standing of those ~~financial institutions~~issuers are considered in the Company’s investment strategy.

At December 31, 2002, approximately $63 million in investment securities were pledged as collateral for specified obligations under the Company’s synthetic lease. In addition, at December 31, 2002, approximately $109 million in investment securities were pledged as collateral for the Company’s credit default contracts. The Company maintains the ability to manage the composition of the pledged investments. Accordingly, these securities are not reflected as restricted investments in the accompanying consolidated balance sheets. For furtheruses information ~~see Notes 10 and 13.~~

~~The Company relies on~~provided by third ~~party valuations~~parties to adjust the carrying value of certain of its investments and derivative instruments to fair value at the end of each period. Fair values are based on valuation models that use market quotes and, for certain investments, assumptions as to the creditworthiness of the entities issuing those underlying investments.

CITRIX SYSTEMS, INC.


	~~Accounts Receivable~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accounts Receivable

Substantially all of the Company’s accounts receivable are due from value-added resellers and distributors of computer software. Collateral is not required. Credit losses and expected product returns are provided for in the consolidated financial statements and have historically been within management’s expectations. If the financial condition of a significant distributor or customer were to deteriorate, the Company’s operating results could be adversely affected. ~~One distributor accounted for approximately 7% and 14% of gross accounts receivable at December 31, 2002 and 2001, respectively.~~ No ~~other~~ distributor or customer accounted for more than 10% of gross accounts ~~receivable.~~


	~~Inventories~~

receivable at December 31, 2004 or 2003.

Inventories, consisting primarily of raw materials, are stated at the lower of cost (determined by the first-in, first-out method) or market. When necessary, a provision has been made to reduce obsolete or excess inventories to market.Property and Equipment


	~~Property and Equipment~~

Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is generally three years for computer equipment, software, office equipment and furniture, the lesser of the lease term or five years for leasehold improvements, seven years for the Company’s enterprise resource planning system and 40 years for buildings. ~~Assets under capital leases are amortized over~~Depreciation expense was $21.2 million, $23.0 million and $30.1 million for 2004, 2003 and 2002, respectively.

During 2003, the ~~shorter~~Company retired $15.4 million in property and equipment that were no longer in use. At the time of ~~the~~retirement, these assets had no remaining net book value and no asset life or the remaining lease term. Amortization of assets under capital leases is included in depreciation expense. Accumulated amortization of equipment under capital leases approximated $0.4 million at December 31, 2002 and 2001, respectively.

~~F-8~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~retirement obligations associated with them. In 2004 retirements were not material.

Property and equipment consist of the following:

December 31,
2002 2001
(In thousands)
Buildings $ 17,781 $ 17,583
Computer equipment 53,109 50,561
Software 40,312 38,028
Equipment and furniture 17,062 13,250
Leasehold improvements 29,277 25,930
Land 9,062 9,062
Equipment under capital leases 411 451

167,014 154,865
Less accumulated depreciation and amortization (90,480 ) (64,755 )

$ 76,534 $ 90,110


	~~Long-Lived Assets~~


	December 31,
	2004			2003
	(In thousands)
Buildings	$	17,781		$	17,781
Computer equipment		57,628			48,452
Software		47,799			40,548
Equipment and furniture		18,143			16,297
Leasehold improvements		35,759			30,922
Land		9,062			9,062

		186,172			163,062
Less accumulated depreciation and amortization		(116,891	)		(97,225	)

	$	69,281		$	65,837

Long-Lived Assets

The Company reviews for impairment of long-lived assets and certain identifiable intangible assets to be held and used whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss ~~for long-lived assets and certain identifiable intangible assets that management expects to hold and use~~ is based on the fair value of the ~~asset.~~asset compared to its carrying value. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. During 2004 and 2003, the Company did not recognize any impairment charges associated with its long-lived or intangible assets. During 2002, the Company recognized $2.0 million in asset impairment charges primarily due to the consolidation of certain of its offices resulting in the abandonment of certain leasehold improvements. These charges are reflected in operating expenses in the accompanying consolidated ~~statements~~statement of income for the year ended December 31, 2002 and primarily related to the Americas geographic segment. ~~As of December 31, 2002, we have determined that there were no other triggering events requiring additional impairment analysis.~~


	~~Software Developed or Obtained for Internal Use~~

Software Developed or Obtained for Internal Use

The Company accounts for internal use software pursuant to the American Institute of Certified Public Accountants Statement of Position ~~No.~~ (“SOP”) No. 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Pursuant to ~~the~~ SOP 98-1, the Company capitalizes external direct costs of materials and services used in the project and internal costs such as payroll and benefits of those employees directly associated with the development of the software. The amount of costs capitalized in ~~2002~~2004 and ~~2001~~2003 relating to internal use software were ~~$3.4~~$6.6 million and ~~$16.7~~$3.8 million, respectively, consisting ~~principally~~ of purchased software and services provided by external vendors. These costs are being

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

amortized over the estimated useful life of the software developed, which is generally three to seven years and are included in property and equipment in the accompanying consolidated balance sheets.


	~~Software Development Costs~~

Goodwill

The Company accounts for goodwill in accordance with Statement of Financial Accounting ~~Standard~~Standards (“SFAS”) ~~No. 86,~~~~Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,~~ requires certain software development costs to be capitalized upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs requires considerable judgment by manage-

~~F-9~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

ment with respect to certain external factors such as anticipated future revenue, estimated economic life, and changes in software and hardware technologies. Software development costs incurred beyond the establishment of technological feasibility have not been significant.


	~~Goodwill and other intangible assets~~

~~Effective January 1, 2002, the Company adopted SFAS~~ No. 142,Goodwill and Other Intangible Assets. ~~As a result of adopting~~ SFAS No. 142, ~~the Company’s~~requires that goodwill and certain intangible assets are ~~no longer~~not amortized, but are subject to an annual impairment test. ~~In accordance with SFAS No. 142,~~At December 31, 2004 and 2003, the Company ~~ceased amortizing goodwill with a net book value at January 1, 2002 of~~had $361.5 million and $152.4 million ~~including $10.1 million~~ of ~~acquired workforce previously classified as purchased intangible assets.~~goodwill, respectively. There was no impairment of goodwill ~~or other intangible assets~~ as a result of ~~adopting SFAS No. 142 or~~ the annual impairment tests completed during the fourth ~~quarter~~quarters of ~~2002.~~2004 and 2003. Excluding goodwill, the Company has no intangible assets deemed to have indefinite lives. Substantially all of the Company’s goodwill at December 31, ~~2002~~2004 was associated with the Americas and Citrix Online reportable segments and at December 31, 2003 substantially all of the Company’s goodwill was associated with the Americas reportable segment. See Note 3 for acquisitions and Note 12 for segment information.

Intangible Assets

The following table provides a reconciliation of reported net income for the years ended December 31, 2001 and 2000 to net income adjusted as if SFAS No. 142 had been applied as of the beginning of 2000. Some amounts may not add due to rounding.

Year Ended December 31,
2001 2000
(In thousands, except per
share amounts)
Net income as reported $ 105,260 $ 94,512
Goodwill amortization, net of taxes 33,659 15,661

Adjusted net income $ 138,919 $ 110,173

BASIC EARNINGS PER SHARE:
Earnings per share as reported $ 0.57 $ 0.51
Goodwill amortization, net of taxes 0.18 0.08

Adjusted earnings per share $ 0.75 $ 0.60

DILUTED EARNINGS PER SHARE:
Earnings per share as reported $ 0.54 $ 0.47
Goodwill amortization, net of taxes 0.17 0.08

Adjusted earnings per share $ 0.71 $ 0.55


	~~Intangible Assets~~

~~Intangible~~Company has intangible assets with definite lives that are recorded at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally three to ~~five~~seven years, except for patents, which are amortized over 10 years. In accordance with SFAS No. 86,Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,the Company ~~carries~~records acquired core and product technology at net realizable value and reviews this technology for impairment on a periodic basis by comparing the estimated net realizable value to the unamortized cost of the technology. There has been no impairment of these assets ~~to date.~~

~~F-10~~

~~CITRIX SYSTEMS, INC.~~for any of the periods presented.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Intangible assets consist of the following (in thousands):

December 31, 2002 December 31, 2001
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
Amortized intangible assets:
Core and product technologies $ 81,686 $ 52,056 $ 76,686 $ 41,245
Other 8,460 7,241 7,928 6,756

Total $ 90,146 $ 59,297 $ 84,614 $ 48,001

Estimated future annual amortization expense is as follows (in thousands):
Year ending December 31,
2003 $ 11,685
2004 8,894
2005 7,600
2006 2,074
2007 124


	~~Revenue Recognition~~


	December 31, 2004				December 31, 2003
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Core and product technologies	$	125,248	$	67,488	$	82,486	$	63,092
Other		43,432		14,020		9,447		7,541

Total	$	168,680	$	81,508	$	91,933	$	70,633

Amortization of core and product technology was $6.1 million, $11.0 million and $10.8 million for 2004, 2003 and 2002, respectively, and is classified as a component of cost of revenues on the accompanying consolidated statements of income. Amortization of other intangible assets was $6.2 million, $0.3 million and $0.5 million for 2004, 2003 and 2002, respectively. Estimated future annual amortization expense is as follows (in thousands):


Year ending December 31,
2005	$	23,254
2006		19,205
2007		14,149
2008		11,684
2009		8,098

During 2004, the Company reclassified certain acquired intangible assets to goodwill to adjust the purchase price allocation resulting from a 2001 acquisition. The adjustment resulted in a $4.4 million reduction of amortization expense, net of related tax effect of $2.8 million in 2004.

Software Development Costs

SFAS No. 86 requires certain software development costs to be capitalized upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs requires considerable judgment by management with respect to certain external factors such as anticipated future revenue, estimated economic life, and changes in software and hardware technologies. Software development costs incurred beyond the establishment of technological feasibility have not been significant.

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue Recognition

The Company markets and licenses software products primarily through value-added resellers, channel distributors, system integrators and independent software ~~vendors, managed by the Company’s worldwide sales force.~~vendors. The Company’s software licenses are generally ~~perpetual,~~perpetual. The Company also separately sells software license updates and ~~are delivered by means of traditional packaged products~~services, which include product training, technical support and ~~electronically, typically under volume-based licensing programs.~~ consulting services, as well as Web-based desktop access services.

The Company’s packaged products are typically purchased by medium and small-sized businesses with ~~fewer locations and~~a minimal number of locations. In these cases, the software license is delivered with the packaged product.

~~Volume-based~~ Electronic license arrangements are used with more complex ~~multi-server~~multiserver environments typically found in larger business enterprises that deploy the Company’s products on a department or enterprise-wide basis, which could require differences in product features and functionality at various customer locations. ~~The end-customer license agreement with enterprise customers is typically customized based on these factors.~~ Once the Company receives a software license agreement and purchase order, ~~from~~ the ~~channel distributor, the volume-based~~enterprise customer licenses are electronically ~~delivered to the customer with “software~~delivered. “Software activation keys” that enable the feature configuration ordered by the ~~end-customer. Depending on~~end-user are delivered separate from the ~~size of the enterprise, software~~software. Software may be delivered indirectly by ~~the~~a channel distributor, via download from the Company’s website or directly to the end-user by the ~~Company pursuant to a purchase order from the channel distributor.~~Company.

Revenue is recognized when it is earned. The Company’s revenue recognition policies are in compliance with ~~the American Institute of Certified Public Accountants~~ Statement of Position (“SOP”) 97-2 (as amended by SOP 98-4 and SOP 98-9) and related interpretations,Software Revenue ~~Recognition~~Recognition.. In addition, for the Company’s Web-based desktop access services revenue is recognized in accordance with Emerging Issues Task Force (“EITF”) No. 00-3,Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware. The Company recognizes revenue when all of the following criteria are met: persuasive evidence of the arrangement exists; delivery has occurred and the Company has no remaining obligations; the fee is fixed or determinable; and collectibility is probable. The Company defines these four criteria as follows:

• Persuasive evidence of the arrangement exists. The Company recognizes revenue on packaged product upon shipment to distributors and resellers. For packaged product sales, it is the Company’s customary practice to require a purchase order from distributors who have previously negotiated a master packaged product distribution or resale agreement. For volume-based licensing, the Company typically requires a purchase order from the distributor or reseller and an executed standard software license agreement from the end-customer. The Company requires a purchase order for training and services.

Persuasive evidence of the arrangement exists. The Company recognizes revenue on packaged product upon shipment to distributors and resellers. For packaged product sales, it is the Company’s customary practice to require a purchase order from distributors and resellers who have previously negotiated a master packaged product distribution or resale agreement. For electronic and paper license arrangements, the Company typically requires a purchase order from the distributor, reseller or end-user (depending on the arrangement) and an executed software license agreement from the end-user. For technical support, product training and consulting services, the Company requires a purchase order and an executed agreement. For Web-based desktop access services, the Company requires the customer or the reseller to electronically accept the terms of an online services agreement or execute a contract and generally submit a purchase order.

Delivery has occurred and the Company has no remaining obligations. For software license sales, the Company’s standard delivery method is free-on-board shipping point. Consequently, it considers delivery of packaged product to have occurred when the products are shipped pursuant to an agreement and purchase order. The Company considers delivery of licenses under electronic licensing agreements to have occurred when the related products are shipped and the end-user has been electronically provided with the licenses and software activation keys that allow the end-user to take immediate possession of the software. For product training and consulting services, the Company fulfills its obligation when the services are performed. For software license updates, technical support and Web-based desktop access services, the Company assumes that its obligation is satisfied ratably over the respective terms of the agreements, which are typically 12 to 24 months.

The fee is fixed or determinable. In the normal course of business, the Company does not provide customers the right to a refund of any portion of their license fees or extended payment terms. The Company sells software license updates and services, which includes technical support, product training and consulting services, and Web-based desktop access services separately and it determines vendor specific objective evidence (“VSOE”) of fair value by the price charged for each product when sold separately or applicable renewal rates.

Collectibility is probable. The Company determines collectibility on a customer-by-customer basis and generally does not require collateral. The Company typically sells software licenses and updates to distributors or resellers for whom there are histories of successful collection. New customers are subject to a credit review process that

~~F-11~~

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	•	Delivery has occurred and the Company has no remaining obligations. The Company’s standard delivery method is free-on-board shipping point. Consequently, it considers delivery of packaged product to have occurred when the products are shipped to distributors pursuant to an agreement and purchase order. The Company considers delivery of licenses under electronic licensing agreements to have occurred when the related products are shipped and the end-customer has been electronically provided with the licenses that include the activation keys that allow the end-customer to take immediate possession of the software. For training and service revenue recognition, the Company fulfills its obligation when the services are performed.

	•	The fee is fixed or determinable. In the normal course of business, the Company does not provide end-customers the right to a refund of any portion of their license fees or extended payment terms. When the Company sells its software products separately, vendor specific objective evidence (“VSOE”) is determined by the price charged for each product. In software arrangements that include the rights to multiple software products, post-contract customer support (“PCS”) and/or other services, the Company allocates the total arrangement fee among each deliverable based on the relative fair value of each of the deliverables based on VSOE. If management cannot objectively determine the fair value of each undelivered element based on VSOE, revenue recognition is deferred until all elements are delivered, all services have been performed, or until fair value can be objectively determined.

	•	Collectibility is probable. The Company determines collectibility on a customer-by-customer basis. The Company typically sells to distributors or resellers for whom there are histories of successful collection. New customers are subject to a credit review process that evaluates the ~~customers’~~their financial position and ultimately their ability to pay. Customers are also subject to an ongoing credit review process. If the Company determines from the outset of an arrangement that collectibility is not probable, revenue recognition is deferred until customer payment is received and the other parameters of revenue recognition described above have been achieved. Management’s judgment is required in assessing the probability of collection, which is generally based on evaluation of customer specific information, historical experience and economic market conditions. If market conditions decline, or, if the financial condition of distributors or end-customers deteriorates, the Company may be unable to determine that collectibility is probable, and it could be required to defer the recognition of revenues until the Company receives customer payment.

~~For certain software products that are only sold bundled with PCS,~~Net revenues include the ~~Company allocates revenue~~following categories: Software Licenses, Software License Updates and Services. Software Licenses primarily represent fees related to the ~~delivered software product using the residual method. Under the residual method, the Company does not sell the software products separately~~licensing of our MetaFrame products. These revenues are reflected net of sales allowances and ~~thus is generally unable~~provisions for stock balancing return rights. Software License Updates consists of fees related to determine VSOE of fair value for the product. Therefore, the Company allocates discounts inherent in the arrangement entirely to the software product and the portion of the fee initially allocated to PCS and deferred is generally higher than in arrangements with established VSOE for the software product. Depending on future product releases or changes in customer demand, the Company may offer additional products that are only sold bundled with PCS. If the Company does this, the use of the residual method will become more prevalent, which could impact the timing of revenue recognition since more of the sales proceeds would be allocated to the PCS portion of the arrangement and recognized over the PCS period. The Company also sells PCS separately through the Subscription Advantage ~~renewal~~ program ~~and it determines VSOE by the renewal price charged. The Company bases technical service and PCS revenues from customer maintenance fees~~(the Company’s terminology for ~~ongoing customer support and product updates and upgrades on the price charged or derived value of the undelivered elements and~~post contract support) that are recognized ratably over the term of the contract, which is typically 1212-24 months. Subscription Advantage is a renewable program that provides subscribers with automatic delivery of software upgrades, enhancements and maintenance releases when and if they become available during the term of subscription. Services consist primarily of technical support services and Web-based desktop access services revenue recognized ratably over the contract term, revenue from product training and certification, and consulting services revenue related to ~~24 months.~~ implementation of the Company’s software products, which is recognized as the services are provided.

The Company ~~includes~~licenses most of its software products bundled with an initial subscription for software license updates that provide the end-user with free enhancements and upgrades to the licensed product on a when and if available basis. Customers may also elect to purchase technical ~~service revenues in~~support, product training or consulting services. The Company allocates revenue to software license updates and any other undelivered elements of the arrangement based on VSOE of fair value of each element and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria described above have been met. The balance of the revenue, net ~~revenues~~of any discounts inherent in the ~~consolidated statements~~arrangement, is allocated to the delivered software product using the residual method and recognized at the outset of ~~income.~~the arrangement as the software licenses are delivered. If management cannot objectively determine the fair value of each undelivered element based on VSOE, revenue recognition is deferred until all elements are delivered, all services have been performed, or until fair value can be objectively determined.

In the normal course of business, the Company does not permit product returns, but it does provide most of its distributors and value added resellers with stock balancing and price protection rights. Stock balancing rights permit distributors to return products to the Company by the forty-fifth day of the fiscal quarter, subject to ordering an equal dollar amount of ~~products.~~

~~F-12~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

the Company’s other products prior to the last day of the same fiscal quarter. Price protection rights require that the Company grant retroactive price adjustments for inventories of ~~its~~ products held by distributors or resellers if it lowers prices for such products. The Company establishes provisions for estimated returns for stock balancing and price protection rights, as well as other sales allowances, concurrently with the recognition of revenue. The provisions are established based upon consideration of a variety of factors, including, among other things, recent and historical return rates for both specific products and distributors, estimated distributor inventory levels by product, the impact of any new product releases and projected economic conditions. Actual product returns for stock balancing and price protection provisions incurred are, however, dependent upon future events, including the amount of stock balancing activity by distributors and the level of distributor inventories at the time of any price adjustments. The Company continually monitors the factors that influence the pricing of its products and distributor inventory levels and makes adjustments to these provisions when it believes actual returns and other allowances could differ from established reserves. The Company’s ability to recognize ~~revenues~~revenue upon shipment to distributors is predicated on its ability to reliably estimate future ~~product returns and rotation.~~stock balancing returns. If actual ~~return~~ experience or changes in market condition impairs the Company’s ability to estimate returns, ~~and rotation,~~ it would be required to defer the recognition of revenue until the delivery of the product to the ~~end-user customer.~~end-user. Allowances for estimated product returns amounted to approximately ~~$10.5~~$2.3 million at December 31, ~~2002~~2004 and ~~$8.3~~$3.0 million at December 31, ~~2001.~~2003. The Company has not reduced and has no current plans to reduce its prices for inventory currently held by distributors or resellers. Accordingly, there were no reserves required for price protection at December 31, ~~2002~~2004 or ~~2001.~~December 31, 2003. The Company also records estimated reductions to revenue for customer programs and incentive offerings including volume-based incentives. If market conditions were to decline, the Company could take actions to increase its customer incentive offerings, ~~and possibly~~which could result in an incremental reduction to ~~its~~ revenue at the time the incentive is offered.

The Company provides consulting services to certain license customers. The services consist of network configuration and optimization and are typically performed prior to the customers’ purchase and implementation of the Company’s software products. Services are not essential to the functionality of the Company’s software and do not constitute modifications to the Company’s software. Revenue from services, support arrangements and training programs and materials, which totaled $44.5 million, $40.7 million and $30.4 million for the years ended December 31, 2002, 2001 and 2000, respectively, is recognized when the services are provided and the other criteria of revenue recognition have been met. Such items are included in net revenues. The costs for providing consulting services are included in cost of sales. The costs of providing training and services are included in sales, marketing and support expenses.

CITRIX SYSTEMS, INC.

In May 1997, the Company entered into a five year joint license, development and marketing agreement with Microsoft Corporation (“Microsoft”) (as amended, the “Microsoft Development Agreement”), pursuant to which the Company licensed its multi-user Windows NT extensions to Microsoft for inclusion in certain versions of Windows NT server software. Revenue from the Microsoft Development Agreement was recognized ratably over the five-year term of the contract, which expired in May 2002. Revenues recognized pursuant to the Microsoft Development Agreement are included in other revenues in the accompanying consolidated statements of income.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	~~Product Concentration~~

Product Concentration

The Company derives a substantial portion of its revenues from one software product and anticipates that this product and future derivative products and product lines based upon this technology, if any, will constitute a majority of its revenue for the foreseeable future. The Company could experience declines in demand for products, whether as a result of general economic conditions, new competitive product releases, price competition, lack of success of its strategic partners, technological change or other factors.

~~F-13~~

~~CITRIX SYSTEMS, INC.~~Cost of Revenues

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


	~~Cost of Revenues~~

Cost of revenues ~~consist~~consists primarily of compensation and other personnel-related costs of providing ~~consulting~~ services and amortization of core and product technology, as well as, ~~the cost~~costs of ~~royalties,~~ product media and duplication, manuals, packaging materials, shipping expense, service capacity costs and ~~shipping expense.~~royalties. The Company is a party to licensing agreements with various entities, which give the Company the right to use certain software code in its products or in the development of future products in exchange for the payment of a fixed fee or certain amounts based upon the sales of the related product. The licensing agreements generally have terms ranging from one to five years, and generally include renewal options. However, some agreements may be perpetual unless expressly terminated. Royalties and other costs related to these agreements are included in cost of revenues. All development costs incurred in connection with the Microsoft Development Agreement, were expensed as incurred as cost of other revenues. The Company’s cost of revenues excludes amortization of acquired core and product technologies, which is included in amortization of intangible assets in the accompanying consolidated statements of income.


	~~Foreign Currency~~

Foreign Currency

The functional currency of each of the Company’s wholly-owned foreign subsidiaries is the U.S. dollar. ~~Assets~~Monetary assets and liabilities of the subsidiaries are remeasured into U.S. dollars at year-end exchange rates, and revenues and expenses are remeasured at average rates prevailing during the year. Remeasurement and foreign currency transaction ~~losses~~gains (losses) of approximately ~~$1.1~~$1.7 million, $2.4 million and ~~$0.1~~$(1.1) million for the years ended December 31, ~~2002, 2001,~~2004, 2003, and ~~2000,~~2002, respectively, are included in other ~~expense,~~income (expense), net in the accompanying consolidated statements of income.


	~~Derivatives and Hedging Activities~~

Derivatives and Hedging Activities

In accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities,and its related interpretations and amendments, the Company records derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value. ~~Derivatives not designated as hedging instruments, if any, are adjusted to fair value through earnings as other income (expense) in the current period.~~ For derivatives that are designated as and qualify as effective cash flow hedges, the portion of gain or loss on the derivative instrument effective at offsetting changes in the hedged item is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings as operating income (expense) when the hedged transaction affects earnings. For derivative instruments that are designated as and qualify as effective fair value hedges, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk is recognized in current earnings as interest income (expense) during the period of the change in fair values. Derivatives not designated as hedging instruments are adjusted to fair value through earnings as other income (expense) in the period the changes in fair value occur. The application of the provisions of SFAS No. 133 could impact the volatility of earnings.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes attributing all derivatives that are designated as cash flow hedges to floating rate assets or liabilities or forecasted transactions and attributing all derivatives that are designated as fair value hedges to fixed rate assets or liabilities. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in cash flows or fair value of the hedged item. Fluctuations in the value of the derivative instruments are generally offset by changes in the hedged item; however, if it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively for the affected derivative.

~~F-14~~

~~CITRIX SYSTEMS, INC.~~Advertising Expense

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


	~~Advertising Expense~~

The Company expenses ~~advertising~~ costs as incurred. The Company has cooperative advertising agreements with certain distributors and resellers whereby the Company will reimburse distributors and resellers for qualified advertising of Citrix

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

products. The Company also has advertising agreements with, and purchases advertising from, online media providers to advertise its Web-based desktop access products. Reimbursement is made once the distributor, reseller or ~~reseller~~provider provides substantiation of qualified expenditures. The Company estimates the impact of ~~this program~~these expenses and recognizes itthem at the time of product ~~sale~~sales as a component of sales, marketing and support expenses in the accompanying consolidated statements of income. The Company recognized advertising expenses of approximately ~~$10.0~~$35.2 million, ~~$11.1~~$13.5 million and ~~$10.7~~$10.0 million, during the years ended December 31, 2004, 2003 and 2002, ~~2001 and 2000,~~ respectively.


	~~Income Taxes~~

Income Taxes

The Company ~~is required to estimate~~estimates income taxes based on rates in effect in each of the jurisdictions in which it ~~operates as part of the process of preparing the consolidated financial statements.~~operates. Deferred income tax assets and liabilities are determined based upon differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. Valuation allowances are recorded related to deferred tax assets ~~if their realization does not meet~~based on the “not more likely than not” criteria of SFAS No. 109,Accounting for Income Taxes. ~~Except for amounts previously provided for in the consolidated financial statements, earnings~~

Use of ~~overseas subsidiaries are considered permanently reinvested.~~Estimates


	~~Use of Estimates~~

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates made by management include the provision for doubtful accounts ~~receivables,~~receivable, provision for estimated returns for stock balancing and price protection rights, as well as other sales ~~returns and stock rotation,~~allowances, the valuation of the Company’s goodwill, ~~and acquired workforce,~~ net realizable value of core and product technology, the provision for income taxes and the amortization and depreciation periods for intangible and long-lived assets. While the Company believes that such estimates are fair when considered in conjunction with the consolidated financial position and results of operations taken as a whole, the actual amounts of such estimates, when known, will vary from these estimates.


	~~Accounting for Stock-Based Compensation~~

Accounting for Stock-Based Compensation

SFAS No. 123,Accounting for Stock-Based Compensation,as amended by SFAS No. 148,Accounting for Stock Based Compensation- Transition and Disclosure, defines a fair value method of accounting for issuance of stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to SFAS No. 123, companies are not required to adopt the fair value method of accounting for employee stock-based transactions. Companies are permitted to account for such transactions under Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees,but are required to disclose in a note to the consolidated financial statements pro forma net income and per share amounts as if a company had applied the fair methods prescribed by SFAS No. 123.

The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans, stock options granted to employees and non-employee directors and has complied with the disclosure requirements of SFAS No. 123. Except for non-employee directors, the Company has not granted any options to non-employees. ~~See Note 6 for more information regarding the Company’s stock option plans.~~

~~F-15~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


	~~Earnings Per Share~~

Dilutive common share equivalents consist of shares issuable upon the exercise of certain stock options (calculated using the treasury stock method) and put warrants (calculated using the reverse treasury stock method). All common share and per share data, except par value per share, have been retroactively adjusted to reflect the two-for-one stock split of the Company’s Common Stock effective February 16, 2000, which is further discussed in Note 7.


	~~Reclassifications~~

~~Certain reclassifications of the prior years’ financial statements have been made to conform to the current year’s presentation.~~

~~3. ACQUISITIONS~~

In April 2001, the Company completed the acquisition of Sequoia Software Corporation (“Sequoia”) for approximately $182.6 million. A portion of the purchase price was allocated to in-process research and development (“IPR&D”), which the Company concluded had not reached technological feasibility and for which there was no alternative future use after taking into consideration the potential use of technologies in different products, the stage of development and life cycle of each project, resale of the software and internal use. The value of the respective purchased IPR&D was expensed at the time of the transaction and resulted in a pre-tax charge to the Company’s operations of approximately $2.6 million in 2001.

In February 2000, the Company acquired all of the operating assets of the Innovex Group, Inc. (“Innovex”) for approximately $47.8 million. At the date of acquisition, the Company paid approximately $28.7 million in consideration and $0.2 million in transaction costs, respectively. Pursuant to the acquisition agreement, the remaining purchase consideration, plus interest, was contingently payable based on future events. During 2001, these contingencies were met, resulting in approximately $16.2 million of additional purchase price and $2.9 million in compensation to the former owners. Pursuant to the acquisition agreement, payment of $10.5 million of the contingent amounts and associated interest was made in August 2001 and $10.7 million was paid in 2002. There are no remaining contingent obligations.

Each acquisition was accounted for under the purchase method of accounting. The consolidated financial statements reflect the operations of the acquired businesses for the periods after their respective dates of acquisition. The purchase consideration was allocated to the acquired assets and liabilities based on fair values as follows:

Innovex Sequoia
(In thousands)
Net assets acquired $ 2,259 $ 10,058
Purchased identifiable intangibles 9,908 46,775
Purchased in-process research and development — 2,580
Goodwill 32,944 123,157

Total purchase consideration $ 45,111 $ 182,570

During the fourth quarter of 2000, the Company did not believe that there were sufficient projected cash flows or alternative future uses to support the net book value of core technology associated with certain acquisitions made prior to 2000. As a result, the Company wrote off $9.1 million of certain core technology as of December 31, 2000.

~~F-16~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~4. CASH AND INVESTMENTS~~

~~The summary of the Company’s cash and cash equivalents and investments consists of the following:~~

December 31,
2002 2001
(In thousands)
Cash and cash equivalents:
Cash $ 35,377 $ 55,209
Municipal securities 60,953 16,855
Money market funds 35,573 20,515
Corporate securities 9,769 39,482
Commercial paper 1,028 3,682
Government securities — 3,950

Cash and cash equivalents $ 142,700 $ 139,693

Short-term investments:
Corporate securities $ 44,355 $ 68,912
Government securities 29,781 3,990
Municipal securities 3,077 4,176

Short-term investments $ 77,213 $ 77,078

Long-term investments:
�� Corporate securities $ 351,065 $ 503,138
Government securities 124,906 22,063
Municipal securities 23,294 3,132
Other 226 1,561

Long-term investments $ 499,491 $ 529,894

~~The unrealized gain (loss) associated with each individual category of cash and investments was not significant for either of the periods presented.~~

In December 2000, the Company invested $158.1 million in a trust managed by an investment advisor. The purpose of the trust is to maintain sufficient liquidity in the event that the Company’s debentures are redeemed in March 2004. The Company’s investment in the trust matures on March 22, 2004, and comprises all of the trust’s assets. The trust’s assets primarily consist of AAA-rated zero-coupon corporate securities. The trust entered into a credit risk swap agreement with the investment advisor, which effectively increased the yield on the trust’s assets and for which value the trust assumed the credit risk of ten investment-grade companies. The effective yield of the trust, including the credit risk swap agreement, is 6.72% and the principal balance will accrete to $195 million in March 2004. The Company records its investment in the trust and the underlying investments and swap as held-to-maturity zero-coupon corporate security in its consolidated financial statements. The Company does not recognize changes in the fair value of the held-to-maturity investment unless a decline in the fair value of the trust is other-than-temporary, in which case the Company would recognize a loss in earnings. The Company’s investment is at risk to the extent that one of the underlying corporate securities has a credit event resulting in non-payment to the counterparty that may include bankruptcy, dissolution, or insolvency of the issuers. There have been no losses associated with the trust’s underlying corporate securities to date. The amortized cost of the Company’s investment in the trust was approximately $180.4 million at December 31, 2002 and $169.0 million at December 31, 2001, which was

~~F-17~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~classified as long-term corporate investments in our consolidated balance sheets. At December 31, 2002, the fair value of the trust’s assets was $180.2 million.~~

Other than the Trust investments described above, the Company’s short and long-term investments are classified as available-for-sale and are recorded at fair value. Gross realized gains and gross realized losses on sales of securities and other-than-temporary write downs of investments classified as available-for-sale, using the specific identification method, were $0.7 million and $2.8 million, respectively, for the year ended December 31, 2002 and $8.1 million and $7.7 million respectively, for the year ended December 31, 2001. At December 31, 2002, the average original contractual maturity of the Company’s short-term available-for-sale investments was approximately 17 months. The Company’s long-term available-for-sale investments at December 31, 2002 include $297.2 million of investments with original contractual maturities ranging from one to five years, $20.5 million of investments with original contractual maturities ranging from five to 10 years and $1.1 million of investments with contractual maturities of 35 years. The average remaining maturities of the Company’s short and long-term available-for-sale investments at December 31, 2002 was four and 42 months, respectively. The Company also owns $0.2 million in equity investments not due at a single maturity date classified as long-term investments.

During 2002 the Company invested in two instruments with an aggregate amount of $38 million that include structured credit risk features whereby the Company’s investment is at risk to the extent that several of the underlying corporate securities, above specified threshold amounts, have credit events that result in a loss to the counterparty that may include bankruptcy, dissolution or insolvency of the issuers. The risk level of these instruments is equivalent to an “AA” single security. There have been no credit events associated with the underlying corporate securities to date. If, in the future, one of these instruments has credit events, which would accrue to the Company, the Company’s investment will be reduced to fund the loss, not to exceed the principal value of the investment.

The change in net unrealized securities gains (losses) recognized in other comprehensive income includes unrealized gains (losses) that arose from changes in market value of securities that were held during the period and gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales of available-for-sale securities. This reclassification has no effect on total comprehensive income or stockholders’ equity and was immaterial for all periods presented.

In connection with the Company’s efforts to manage the credit quality and maturities of its investment portfolio, during 2001 the Company sold corporate debt securities with an accreted value of $165.5 million that were previously designated as held-to-maturity and purchased higher credit quality corporate debt securities with interest rates that reset quarterly. Additionally, during 2001, the Company terminated a forward bond purchase agreement previously designated as a hedge of forecasted purchases of corporate security investments. The sale of securities and the termination of the forward bond purchase agreement resulted in a realized gain of approximately $8.0 million, which is included in other expense, net in the 2001 consolidated statement of income.

~~F-18~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES~~

~~Accounts payable and accrued expenses consist of the following:~~

December 31,
2002 2001
(In thousands)
Accounts payable $ 11,913 $ 10,635
Accrued compensation and employee benefits 19,200 17,510
Accrued cooperative advertising and marketing programs 11,872 20,368
Accrued taxes 20,543 35,885
Other 29,398 27,530

$ 92,926 $ 111,928

~~6. EMPLOYEE STOCK COMPENSATION AND BENEFIT PLANS~~


	~~Stock Compensation Plans~~

As of December 31, 2002, the Company has five stock-based compensation plans, which are described below. The Company grants stock options for a fixed number of shares to employees with an exercise price equal to or above the fair value of the shares at the date of grant. As mentioned in Note 2, the Company applies the intrinsic value method under APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock plans and its stock purchase plan. However, the impact on the Company’s financial statements from the use of options is reflected in the calculation of earnings per share in the form of dilution (see Note 14).

The Company has elected to follow APB Opinion No. 25 because the alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models, including the Black-Scholes model, that were developed for use with traded options which have no vesting restrictions and are fully transferable, as opposed to employee stock options, which are typically non-transferable and last up to ten years. Currently, management believes there is not one agreed upon option valuation method that is comparable among all reporting companies. Specifically, the Black-Scholes model requires the input of highly subjective assumptions, including assumptions related to the expected stock price volatility over the expected life of the option. Because the Company’s stock-based awards to employees have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing pricing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. Since the Black-Scholes model is based on statistical expectations, the calculation can result in substantial earnings volatility that may not agree, as to timing or amount, with the actual gain or loss accrued or realized by the option holder.

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

No stock-based employee compensation cost is reflected in net income except for amounts related to the 51,546 options assumed as part of the Net6 acquisition, which were accounted for in accordance with FASB Interpretation No. 44,Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25), and was not material. Substantially all options granted under the Company’s six stock-based compensation plans, including plans assumed from acquired entities, have an exercise price equal to or above market value of the underlying common stock on the date of grant. Had compensation cost for the grants issued at an exercise price equal to or above market value under the Company’s ~~five~~ stock-based compensation plans had been determined based on the fair value at the grant dates for grants under those plans consistent with the fair value method of SFAS No. 123,

~~F-19~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

the Company’s cash flows would have remained ~~unchanged,~~unchanged; however, net income and earnings per share would have been reduced to the pro forma amounts indicated below:

2002 2001 2000
(In thousands, except per share
information)
Net income (loss)
As reported $ 93,920 $ 105,260 $ 94,512

Pro forma $ (61,852 ) $ (41,188 ) $ (38,036 )

Basic earnings (loss) per share
As reported $ 0.53 $ 0.57 $ 0.51

Pro forma $ (0.35 ) $ (0.22 ) $ (0.21 )

Diluted earnings (loss) per share
As reported $ 0.52 $ 0.54 $ 0.47

Pro forma $ (0.35 ) $ (0.22 ) $ (0.21 )


	2004			2003			2002
	(In thousands, except per share information)
Net income (loss):
As reported	$	131,546		$	126,943		$	93,920
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(48,043	)		(87,645	)		(137,645	)

Pro forma	$	83,503		$	39,298		$	(43,725	)

Basic earnings (loss) per share:
As reported	$	0.78		$	0.77		$	0.53

Pro forma	$	0.49		$	0.24		$	(0.25	)

Diluted earnings (loss) per share:
As reported	$	0.75		$	0.74		$	0.52

Pro forma	$	0.48		$	0.23		$	(0.25	)

For purposes of the pro forma calculations, the fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model, assuming no expected dividends and the following assumptions:

2002 Grants 2001 Grants 2000 Grants
Expected volatility factor 0.69 0.60 0.80
Approximate risk free interest rate 4.0% 5.0% 6.0%
Expected lives 4.60 years 4.68 years 4.64 years

Volatility is a measure of the amount by which a stock price is expected to fluctuate during the expected life of the option. Much of the value of a stock option is derived from its potential for appreciation. This potential is reflected in the volatility of the underlying stock, which can be measured by periodic changes in the historical stock price. The higher the volatility, the higher the fair value of the option.


	2004 Grants	2003 Grants	2002 Grants
Expected volatility factors	0.38 – 0.49	0.57 – 0.68	0.69
Approximate risk free interest rate	3.0% – 3.5%	2.5% – 3.0%	4.0%
Expected lives	3.32 – 4.76 years	4.70 – 4.75 years	4.60 years

The risk-free interest rate represents the current rate associated with zero coupon U.S. Government securities with a remaining term equal to the expected life of the options being valued. The risk-free interest rate is used in determining the stock’s forward value, and only modestly impacts the fair value of the option. The higher the risk-free interest rate, the higher the fair value of the option.

The expected life of the option is a measure of the amount of time it is expected to take for an employee to exercise their option. Estimating expected lives involves consideration of several factors, including the characteristics of employees receiving the option awards, the vesting period of the awards, historical exercise patterns of employees, and the expected volatility of the underlying stock. The longer the expected life, the more time the option holder has available to allow the stock price to increase, and thus the higher the option’s fair value.

The determination of the fair value of all options is based on the ~~assumptions described in the preceding paragraphs, and because~~above assumptions. Because additional option grants are expected to be made each year and forfeitures will occur when employees leave the Company, the above pro forma disclosures are not representative of pro forma effects on reported net income (loss) for future years. See Note 6 for more information regarding the Company’s stock option plans.

~~F-20~~

Earnings Per Share

Basic earnings per share is calculated by dividing income available to shareholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise of certain stock options (calculated using the treasury stock method) and put warrants (calculated using the reverse treasury stock method). Certain shares under the Company’s stock-based compensation programs, and common stock potentially issuable upon conversion of the Company’s convertible subordinated debentures were excluded from the computation of diluted earnings per share due to their anti-dilutive effect for the respective periods in which they were outstanding. The reconciliation of the numerator and denominator of the earnings per share calculation is presented in Note 14.
Reclassifications
Certain reclassifications of the prior years’ financial statements have been made to conform to the current year’s presentation.

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3. ACQUISITIONS

On February 27, 2004, the Company acquired all of the issued and outstanding capital stock of Expertcity.com, Inc. (“Expertcity”), a market leader in Web-based desktop access, as well as a leader in Web-based training and customer assistance products. The consideration for this transaction was approximately $241.4 million, comprised of approximately $112.6 million in cash, approximately 5.9 million shares of the Company’s common stock valued at approximately $124.4 million and direct transactions costs of approximately $4.4 million. These amounts include additional common stock earned by Expertcity upon the achievement of certain revenue and other financial milestones during 2004 pursuant to the merger agreement, which will be issued during 2005. The fair value of the common stock earned as additional purchase price consideration was recorded as goodwill on the date earned. There is no further contingent consideration related to the transaction. The sources of funds for consideration paid in this transaction consisted of available cash and investments and our authorized common stock.

On December 8, 2004, the Company acquired all of the issued and outstanding capital stock of Net6, Inc. (“Net6”), a leader in secure access gateways. The acquisition extends the Company’s ability to provide easy and secure access to virtually any resource, both data and voice, on-demand. The consideration for this transaction was approximately $49.2 million and was paid in cash. In addition to the purchase price, direct transaction costs associated with the acquisition were approximately $1.7 million.

Under the purchase method of accounting, the purchase price for each of Expertcity and Net6 was allocated to Expertcity’s and Net6’s respective net tangible and intangible assets based on their estimated fair values as of the date of the completion of the respective acquisitions. Independent valuation specialists conducted separate valuations to assist us in determining the fair values of a significant portion of Expertcity’s and Net6’s net assets.

The allocation of the purchase price is summarized below (in thousands):


	Expertcity			Net6
	Purchase Price Allocation		Asset Life	Purchase Price Allocation		Asset Life
Current assets	$	26,085		$	2,107
Property and equipment		1,998	Various		204	Various
In-process research and development		18,700			400
Intangible assets		50,800	3-7 years		20,300	3-7 years
Goodwill		165,758	Indefinite		33,506	Indefinite

Assets acquired		263,341			56,517
Current liabilities		13,617			2,836
Deferred tax liability		8,292			2,812

Total liabilities assumed		21,909			5,648

Net assets acquired, including direct transaction costs	$	241,432		$	50,869

The goodwill recorded in relation to these acquisitions is not deductible for tax purposes. Identifiable intangible assets purchased in the Expertcity and Net6 acquisitions and their weighted average lives are as follows:


	Expertcity		Asset Life	Net6		Asset Life
Trade name	$	4,500	5 years	$	—	N/A
Covenants not to compete		8,000	4 years		300	3 years
Customer relationships		13,000	3 years		6,600	6 years
Core and product technologies		25,300	6.7 years		13,400	7 years

Total	$	50,800		$	20,300

The fair values used in determining the purchase price allocation for certain intangible assets for Expertcity and Net6 were based on estimated discounted future cash flows, royalty rates and historical data, among other information. Purchased in-process research and development (“IPR&D”) of approximately $19.1 million was expensed immediately upon closing of the respective mergers in accordance with Financial Accounting Standards Board Interpretation No. 4,Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, due to the fact that it pertains to

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

technology that was not currently technologically feasible, meaning it had not reached the working model stage, did not contain all of the major functions planned for the product, was not ready for initial customer testing and had no alternative future use. The fair value assigned to in-process research and development was determined using the income approach, which includes estimating the revenue and expenses associated with a project’s sales cycle and by estimating the amount of after-tax cash flows attributable to the projects. The future cash flows were discounted to present value utilizing an appropriate risk-adjusted rate of return, which ranged from 17% to 25%. The rate of return included a factor that takes into account the uncertainty surrounding the successful development of the IPR&D.

The $165.8 million of goodwill related to the Expertcity acquisition was assigned to the Citrix Online division segment and the $33.5 million of goodwill related to the Net6 acquisition was assigned to the Americas segment. See Note 12 for segment information.

The results of operations of Expertcity and Net6 are included in the Company’s results of operations beginning after their respective acquisition dates. Expertcity is the Company’s new segment, the Citrix Online division and Net6 is part of the Company’s Americas reportable segment. The following unaudited pro forma information combines the consolidated results of operations of the Company and Expertcity and Net6 as if the acquisitions had occurred at the beginning of fiscal year 2003 (in thousands, except per share data):


	December 31,
	2004		2003
Revenues	$	750,861	$	625,435
Income from operations		143,724		132,868
Net income		118,224		108,897
Per share – basic		0.68		0.64
Per share – diluted		0.66		0.62

4. CASH AND INVESTMENTS

Cash and cash equivalents and investments consist of the following:


	December 31,
	2004		2003
	(In thousands)
Cash and cash equivalents:
Cash	$	36,019	$	67,419
Municipal securities		4,896		8,705
Money market funds		34,902		50,289
Corporate securities		3,577		9,684
Government securities		6,837		57,006

Total	$	86,231	$	193,103

Reported as:
Cash and cash equivalents	$	73,485	$	182,969

Restricted cash equivalents and investments	$	12,746	$	10,134

Short-term investments:
Corporate securities	$	112,632	$	284,867
Government securities		25,828		14,666
Commercial paper		—		1,988
Municipal securities		69,485		117,690

Total	$	207,945	$	419,211

Reported as:
Short-term investments	$	159,656	$	385,431

Restricted cash equivalents and investments	$	48,289	$	33,780

Long-term investments:
Corporate securities	$	167,910	$	169,418
Government securities⁽¹⁾		103,699		116,251
Other		381		288

Total	$	271,990	$	285,957

Reported as:
Long-term investments	$	183,974	$	183,411

Restricted cash equivalents and investments	$	88,016	$	102,546

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(1)
	~~Fixed Stock Option Plans~~Includes investments in both United States and foreign government securities.

The Company had two AAA-rated zero coupon corporate securities classified as held-to-maturity investments that were carried at the combined accreted value of approximately $192.5 million at December 31, 2003. These securities matured on March 22, 2004 and the Company received $195.4 million, all of which was used to redeem a portion of the Company’s convertible subordinated debentures. At December 31, 2004, the Company held no investments classified as held-to-maturity.

The Company’s ~~amended~~other short and ~~restated~~long-term investments are classified as available-for-sale and are recorded at fair value. Gross realized gains and losses on sales of securities during 2004 and 2003 were not material. Gross realized gains and losses were $0.7 million and $2.8 million, respectively, for the year ended December 31, 2002. At December 31, 2004, the average original contractual maturity of the Company’s short-term available-for-sale investments was approximately 13 months. The Company’s long-term available-for-sale investments at December 31, 2004 include $253.6 million of investments, including restricted investments, with original contractual maturities ranging from one to five years and $18.0 million of investments with original contractual maturities ranging from five to 10 years. The average remaining maturities of the Company’s short and long-term available-for-sale investments, including restricted investments, at December 31, 2004 were five and 27 months, respectively. In addition, included in short-term available for sale investments are auction rate securities owned by the Company that generally reset every seven to 28 days. The Company also owns $0.4 million in equity investments not due at a single maturity date classified as long-term investments.

The Company has investments in two instruments with an aggregate amount of $50.0 million that include structured credit risk features related to certain referenced entities. Under the terms of these debt instruments, the Company assumes the default risk, above a certain threshold, of a portfolio of specific referenced issuers in exchange for a fixed yield that is added to the LIBOR-based yield on the underlying debt instrument. In the event of default by the underlying referenced issuers above specified amounts, the Company will pay the counterparty an amount equivalent to its loss, not to exceed the face value of the instrument. The primary risk associated with these investments is the default risk of the underlying issuers. The credit ratings of these instruments are equivalent to the likelihood of an event of default under “AAA” or “AA” rated individual securities. The purpose of these instruments is to provide additional yield on certain of the Company’s available-for-sale investments. These instruments mature in November 2007 and February 2008. To date there have been no credit events for the underlying referenced entities resulting in losses to the Company. The Company separately accounts for changes in the fair value of the structured credit features of the investments and as of December 31, 2004 and 2003, there was no material change in fair value.

The change in net unrealized securities gains (losses) recognized in other comprehensive income includes unrealized gains (losses) that arose from changes in market value of securities that were held during the period and gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales or maturities of available-for-sale securities. This reclassification has no effect on total comprehensive income or stockholders’ equity and was immaterial for all periods presented. The unrealized gain (loss) associated with each individual category of cash and investments was not significant for either of the periods presented.

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:


	December 31,
	2004		2003
	(In thousands)
Accounts payable	$	17,554	$	14,992
Accrued compensation and employee benefits		29,734		25,528
Accrued cooperative advertising and marketing programs		14,699		9,964
Accrued taxes		37,050		37,253
Other		32,250		26,719

	$	131,287	$	114,456

6. EMPLOYEE STOCK COMPENSATION AND BENEFIT PLANS

Stock Compensation Plans

As of December 31, 2004, the Company has six stock-based compensation plans including plans assumed in acquisitions, which are described below. The Company typically grants stock options for a fixed number of shares to employees with an exercise price equal to or above the market value of the shares at the date of grant. As mentioned in Note 2, the Company applies the intrinsic value method under APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock plans and its stock purchase plan except for 51,546 options assumed as part of the Net6 acquisition that had an exercise price below market value and were accounted for in accordance with FASB Interpretation No. 44,Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25). The impact on the Company’s financial statements from the use of options is reflected in the calculation of earnings per share in the form of dilution (see Note 14).

Fixed Stock Option Plans

The Company’s Amended and Restated 1995 Stock Plan (the “1995 Plan”) was originally adopted by the Board on September 28, 1995 and approved by the Company’s stockholders in October 1995. Under the terms of the 1995 Plan, the Company is authorized to grant incentive stock options (“ISOs”) and ~~nonqualified~~non-qualified stock options (“NSOs”), make stock awards and provide the opportunity to purchase stock to employees, directors and officers and consultants of the Company. The 1995 Plan, as amended, provides for the issuance of a maximum of 69,945,623 ~~(as adjusted for stock splits)~~ shares of ~~Common Stock,~~common stock, plus, effective January 1, 2001 and each year thereafter, a number of shares of ~~Common Stock~~common stock equal to 5% of the total number of shares of ~~Common Stock~~common stock issued and outstanding as of December 31 of the preceding year. Under the 1995 Plan, a maximum of 60,000,000 ISOs may be granted and ISOs must be granted at exercise prices no less than fair market value at the date of grant, except for ISOs granted to employees who own more than 10% of the Company’s combined voting power, for which the exercise prices will be no less than 110% of the market value at the date of grant. NSOs, stock awards or stock purchases may be granted or authorized, as applicable, at prices no less than the minimum legal consideration required. Under the 1995 Plan, as amended, ~~ISOs~~stock options must be granted at exercise prices no less than market value at the date of ~~grant,~~grant; provided, however, that if an NSO is expressly granted in lieu of a reasonable amount of salary or cash bonus, the exercise price may be equal to or greater than 85% of the fair market value at the date of such grant. ISOs and NSOs expire five or ten years from the date of ~~grant.~~grant depending on the applicable option agreement. All options are exercisable upon vesting. ~~The~~Ten year options typically vest over four years at a rate of 25% of the shares underlying the option one year from the date of grant and at a rate of 2.08% monthly thereafter and five year options typically vest over three years at a rate of 33.3% of the shares underlying the option one year from date of grant and at a rate of 2.78% monthly thereafter.

The Company’s ~~amended~~Second Amended and ~~restated~~Restated 2000 Director and Officer Stock Option and Incentive Plan (the “2000 Plan”) was originally adopted by the Board of Directors and approved by the Company’s stockholders on May 18, 2000. Under the terms of the 2000 Plan, the Company is authorized to make stock awards, provide eligible individuals with the opportunity to purchase stock, grant ISOs and grant NSOs to officers and directors of the Company. The 2000 Plan provides for the issuance of up to 4,000,000 shares, plus, effective on January 1, 2001, on January 1 of each year, a number of shares of ~~Common Stock~~common stock equal to one-half of one percent (0.5%) of the total number of shares of ~~Common Stock~~common stock issued and

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

outstanding as of December 31 of the preceding year. Notwithstanding the foregoing, the maximum number of stock options that may be issued pursuant to the 2000 Plan shall be equal to the maximum number of stock options issuable under the 2000 Plan at any time less 500,000 stock options, and no more than 3,000,000 shares of ~~Common Stock~~common stock may be issued pursuant to the exercise of incentive stock options granted under the 2000 Plan. Under the 2000 Plan, ~~ISOs~~stock options must be granted at exercise prices no less than market value at the date of grant, provided however, that if an NSO is expressly granted in lieu of a reasonable amount of salary or cash bonus, the exercise price may be equal to or greater than 85% of the fair market value at the date of such grant. ISOs and NSOs expire ten or five years from date of ~~grant.~~grant depending on the applicable option agreement. All options are exercisable upon vesting. ~~The~~Ten year options typically vest over four years at a rate of 25% of the shares underlying the option one year from the date of grant and at a rate of 2.08% monthly thereafter and five year options typically vest over three years at a rate of 33.3% of the shares underlying the option one year from date of grant and at a rate of 2.78% monthly thereafter.

The ~~amended~~Second Amended and ~~restated~~Restated 1995 Non-Employee Director Stock Option Plan (the “Director Option Plan”) was originally adopted by the Board of Directors on September 28, 1995 and approved by the Company’s stockholders in October 1995. The Director Option Plan provides for the grant of options to purchase a maximum of 3,600,000 ~~(as adjusted for stock splits)~~ shares of ~~Common Stock~~common stock of the Company to non-employee directors of the Company.

~~Under the current terms of~~

Pursuant to the Director Option Plan, each non-employee director ~~who~~ is ~~not also~~eligible to receive an ~~employee~~initial grant of ~~the Company and who is first elected as a director will receive, upon the date of his or her initial election,~~ an option to purchase 60,000 shares of ~~Common Stock. Such options will vest at a rate~~common stock and an annual grant of ~~33.33% per year from the date~~an option to purchase 20,000 shares of ~~the grant for the first year and vest at a rate of 2.78% monthly thereafter. In addition, in the calendar year following a director’s first election to the Board of Directors,~~common stock on the first business day of the month following the Annual ~~Stockholders’ meeting,~~Meeting of Stockholders, provided that no annual grant shall be granted to any non-employee director in the same calendar year that such ~~director would receive an additional option to purchase 20,000 shares~~person received his or her initial grant. The initial grant vests 33.3% after the conclusion of ~~Common Stock, which shall vest at a rate of 8.33%~~the first year and 2.78% per month ~~provided such~~

~~F-21~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~director continues to serve on~~over the ~~Board~~remaining two years. The annual grant vests in equal monthly increments over a period of ~~Directors at the time of grant.~~one year. All options granted under the Director Option Plan have an exercise price equal to the fair market value of the ~~Common Stock~~common stock on the date of grant and a term of ~~ten~~five years from the date of grant. Options are exercisable to the extent vested only while the optionee is serving as a director of the Company or within 90 days after the optionee ceases to serve as a director of the Company.

The Company’s ~~1989~~Amended and Restated 2000 Stock ~~Option~~Incentive Plan of Net6, Inc. (the “2000 Net6 Plan”) was originally adopted and approved by the Board of Directors and stockholders of Net6 on January 19, 2001. The 2000 Net6 Plan and the outstanding unvested stock options under the 2000 Net6 Plan (the ~~“1989 Plan”~~“2000 Assumed Options”) ~~as amended, permitted~~were assumed by the Company on December 8, 2004 in connection with the Company’s acquisition of Net6. Under the terms of the 2000 Net6 Plan, Net6 was authorized to grant ISOs and NSOs and to ~~purchase up~~make stock awards to ~~25,256,544~~employees, directors, officers and consultants of Net6. The 2000 Net6 Plan, as amended and restated, provides for the issuance of a maximum of 167,850 (as adjusted for stock splits) shares of common stock. As of December 8, 2004, however, the Company’s ~~Common Stock. Under~~Board of Directors resolved to cap the ~~1989~~2000 Net6 Plan ~~options may be~~with 7,861 shares of the 2000 Assumed Options outstanding and to make no further option grants or stock awards under the 2000 Net6 Plan. ISOs were granted at exercise prices no less than the fair market value at the date of grant, except for ISOs granted to employees who owned more than 10% of Net6’s combined voting power, for which the exercise prices were no less than 110% of the market value at the date of grant. NSOs were granted at exercise prices no less than 85% of the fair market value at the date of grant. Stock awards were authorized at prices established by the Board of Directors of Net6. ISOs and NSOs expire five or ten years from the original grant date depending on the applicable option agreement. All options are ~~fully~~ exercisable ~~from the date of grant and are subject to a repurchase option in favor of the Company which lapses as to 25.00%~~upon vesting. The 2000 Assumed Options generally vest over four years with 25% of the shares underlying the option vesting one year from the original grant date ~~of grant~~ and ~~as to~~at a rate of 2.08% monthly thereafter. If

The Company’s Amended and Restated 2003 Stock Incentive Plan of Net6, Inc. (the “2003 Net6 Plan”) was originally adopted and approved by the ~~purchaser~~Board of Directors and stockholders of Net6 on May 15, 2003. The 2003 Net6 Plan and the outstanding unvested stock ~~pursuant to~~options under the ~~1989~~2003 Net6 Plan ~~is terminated from employment~~(the “2003 Assumed Options”) were assumed by the Company on December 8, 2004 in connection with the ~~Company,~~Company’s acquisition of Net6. Under the ~~Company has~~terms of the ~~right~~2003 Net6 Plan, Net6 was authorized to grant ISOs and ~~option~~NSOs and to ~~purchase from the employee, at the price paid~~make stock awards to employees, directors, officers and consultants of Net6. The 2003 Net6 Plan, as amended and restated, provides for the issuance of a maximum of 102,575 (as adjusted for stock splits) shares byof common stock. As of December 8, 2004, however, the ~~employee,~~Company’s Board of Directors resolved to cap the ~~number~~2003 Net6 Plan with 43,685 shares of ~~unvested shares~~the 2003 Assumed Options outstanding and to make no further option grants or stock awards under the 2003 Net6 Plan. ISOs were granted at exercise prices no less than the fair market value at the date of ~~termination. No~~grant, except for ISOs granted to employees who owned more than 10% of Net6’s combined voting power, for which the exercise prices were no less than 110% of the market value at the date of grant. NSOs were granted at

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

exercise prices established by the Board of Directors of Net6, provided that NSOs granted to certain Net6 officers were granted at no less than fair market value at the date of grant. Stock awards were authorized at prices established by the Board of Directors of Net6, provided that stock awards made to certain Net6 officers were made at no less than fair market value at the date of award. ISOs and NSOs expire five or ten years from the original grant date depending on the applicable option agreement. All options are exercisable upon vesting. The 2003 Assumed Options generally vest over four years with 25% of the shares ~~have been repurchased under this Plan. Effective November 1999 no further options may be granted under this Plan.~~underlying the option vesting one year from the original grant date and at a rate of 2.08% monthly thereafter.

A summary of the status and activity of the Company’s fixed stock option plans is as follows:

Year Ended December 31,
2002 2001 2000
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 39,596,278 $ 28.92 43,288,840 $ 25.67 42,358,350 $ 18.28
Granted at market value 9,274,497 9.98 8,351,092 30.68 12,671,582 42.38
Granted above market value 355,626 17.92 — — — —
Exercised (550,791 ) 6.12 (8,545,575 ) 13.27 (6,692,488 ) 10.32
Forfeited (7,455,093 ) 30.86 (3,498,079 ) 31.06 (5,048,604 ) 25.65

Outstanding at end of year 41,220,517 24.51 39,596,278 28.92 43,288,840 25.67

Options exercisable at end of year 24,101,550 27.01 18,140,094 26.02 14,364,325 16.49

Weighted-average fair value of options granted during the year at market value 5.80 $ 16.63 $ 28.07
Weighted-average fair value of options granted during the year above market value 8.57 — —

~~F-22~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


	Year Ended December 31,
	2004				2003				2002
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of year	38,221,590		$	24.56	41,220,517		$	24.51	39,596,278		$	28.92
Granted at market value	5,637,687			20.97	5,574,808			16.19	9,274,497			9.98
Granted above market value	—			—	348,500			12.00	355,626			17.92
Granted below market value	51,546			3.86	—			—	—			—
Exercised	(4,491,795	)		13.06	(4,722,911	)		11.64	(550,791	)		6.12
Forfeited	(2,490,866	)		25.14	(4,199,324	)		28.14	(7,455,093	)		30.86

Outstanding at end of year	36,928,162			25.20	38,221,590			24.56	41,220,517			24.51

Options exercisable at end of year	25,525,048			28.62	25,044,225			28.76	24,101,550			27.01

Weighted-average fair value of options granted during the year at market value			$	7.26			$	8.68			$	5.80
Weighted-average fair value of options granted during the year above market value				—				6.71				8.57
Weighted-average fair value of options granted during the year below market value				21.55				—				—

Information about stock options outstanding as of December 31, ~~2002~~2004 is as follows:

Options Outstanding Options Exercisable
Weighted
Options Average Weighted Options Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices December 31, 2002 Contractual Life Exercise Price December 31, 2002 Exercise Price
$ 0.13 to $ 5.60 4,814,448 8.31 $ 4.87 914,872 $ 1.75
$ 5.84 to $ 13.31 4,750,650 6.97 $ 9.40 2,812,680 $ 9.68
$13.55 to $ 15.34 3,782,130 7.51 $ 15.09 1,746,230 $ 14.98
$15.34 to $ 16.94 4,629,666 7.18 $ 15.98 2,966,322 $ 16.03
$17.39 to $ 21.67 3,741,623 7.09 $ 19.47 2,536,552 $ 19.67
$22.19 to $ 24.38 4,125,217 7.13 $ 23.26 2,953,269 $ 23.31
$24.39 to $ 25.55 4,414,087 6.62 $ 25.41 3,540,743 $ 25.43
$25.69 to $ 35.01 3,414,456 7.52 $ 30.34 2,090,999 $ 30.11
$35.49 to $ 44.66 3,739,886 8.22 $ 37.44 1,827,503 $ 39.47
$48.44 to $104.00 3,808,354 7.13 $ 75.19 2,712,380 $ 75.41

41,220,517 7.36 $ 24.51 24,101,550 $ 27.01


	~~Stock Purchase Plan~~


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Options Outstanding at December 31, 2004	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Options Exercisable at December 31, 2004	Weighted Average Exercise Price
$ 2.49 to $ 9.38	3,804,701	6.13	$	6.38	2,148,454	$	6.90
$ 10.06 to $ 15.25	4,673,325	6.97	$	13.25	2,518,514	$	13.54
$ 15.34 to $ 17.55	4,323,986	4.92	$	16.39	3,084,235	$	16.01
$ 17.66 to $ 19.69	3,755,861	6.39	$	18.68	2,199,702	$	18.92
$ 19.81 to $ 22.19	3,894,204	5.04	$	21.29	1,300,644	$	21.62
$ 22.47 to $ 24.98	4,116,042	5.23	$	23.73	2,448,525	$	23.56
$ 25.44 to $ 26.13	3,702,820	4.75	$	25.51	3,631,192	$	25.50
$ 27.81 to $ 35.49	4,698,025	5.95	$	33.17	4,236,203	$	32.99
$ 36.25 to $ 48.44	976,470	4.96	$	44.90	974,904	$	44.92
$ 53.38 to $104.00	2,982,728	5.14	$	76.64	2,982,675	$	76.64

	36,928,162	5.63	$	25.20	25,525,048	$	28.62

Stock Purchase Plan

The ~~amended~~Third Amended and ~~restated~~Restated 1995 Employee Stock Purchase Plan (the “1995 Purchase Plan”) was originally adopted by the Board of Directors on September 28, 1995 and approved by the Company’s stockholders in October 1995. The 1995 Purchase Plan provides for the issuance of a maximum of 9,000,000 shares of ~~Common Stock~~common stock upon the exercise of ~~nontransferable~~non-transferable options granted to participating employees. All U.S.-based employees of the Company whose customary employment is 20 hours or more per week and more than five months in any calendar year, and employees of certain international subsidiaries, are eligible to participate in the 1995 Purchase Plan. Employees who would immediately after the grant own 5% or more of the Company’s ~~Common Stock,~~common stock and directors who are not employees of the Company, may not participate in the 1995 Purchase Plan. To participate in the 1995 Purchase Plan, an employee must authorize the Company to deduct an amount (not less than 1% nor more than 10% of a participant’s total cash compensation, up to a maximum of $25,000) from his or her pay during six-month periods (each a ~~Plan Period)~~“Plan Period”).

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The maximum number of shares of Common Stock an employee may purchase in any Plan Period is ~~6,000~~12,000 shares subject to certain other limitations. The exercise price for the option for each Plan Period is 85% of the lesser of the market price of the Common Stock on the first or last business day of the Plan Period. If an employee is not a participant on the last day of the Plan Period, such employee is not entitled to exercise his or her option, and the amount of his or her accumulated payroll deductions are refunded. An employee’s rights under the 1995 Purchase Plan terminate upon his or her voluntary withdrawal from the 1995 Purchase Plan at any time or upon termination of employment. In January 2002, the 1995 Purchase Plan was amended to change the Plan Periods to avoid automatic purchases of shares of Common Stock from being made during the Company’s regular black-out periods. Under the 1995 Purchase Plan, the Company issued 299,498 shares, 473,002 shares and 248,027 shares ~~213,907 shares~~in 2004, 2003, and ~~77,781 shares in~~ 2002, ~~2001, and 2000,~~ respectively.


	~~Benefit Plan~~

Benefit Plan

The Company maintains a 401(k) benefit plan (the “Plan”) allowing eligible U.S.-based employees to contribute up to ~~15%~~60% of their annual compensation, limited to an annual maximum amount as set periodically by the Internal Revenue Service. The Company, at its discretion, may contribute up to $0.50 onof each dollar of employee contribution, limited to a maximum of 6% of the employee’s annual ~~contribution.~~compensation. The Company’s matching contributions for 2004, 2003 and 2002 ~~2001~~were $2.3 million and ~~2000 were~~ $2.0 million ~~$1.8 million~~for both 2003 and ~~$1.2 million,~~2002, respectively. The Company’s contributions vest over a four-year period at 25% per year.

~~F-23~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

7. CAPITAL STOCK


	~~Common Stock~~

Common Stock

The Company has reserved for future issuance ~~71,221,641~~79,800,352 shares of ~~Common Stock~~common stock for the exercise of stock options outstanding or available for ~~grant and 10,880,486 shares for the conversion of the zero coupon convertible debentures into Common Stock.~~grant.

~~On May 18, 2000, the stockholders approved an increase of authorized Common~~ Stock ~~from 400,000,000 shares, $0.001 par value per share to 1,000,000,000 shares, $0.001 par value per share.~~Repurchase Programs


	~~Stock Repurchase Programs~~

The Company’s Board of Directors has authorized ~~$600 million of~~an ongoing stock repurchase program with a total repurchase authority ~~under~~granted to the ~~Company’s stock repurchase program,~~Company of $1.0 billion, of which $200 million was authorized in February 2005, the objective of which is to manage actual and anticipated ~~dilution.~~dilution and improve shareholders’ return. At December 31, 2004, approximately $42.0 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock.

The Company is authorized to make open market purchases ~~paid out~~ of its common stock using general corporate funds. During the years ended December 31, 2002 and 2001, the Company purchased 9,300,000 and 3,135,500 shares, respectively of outstanding Common Stock on the open market for approximately $75.7 million and $90.7 million (at an average per share price of $8.14 and $28.92), respectively.

~~From~~Additionally, from time to time, the Company ~~enters~~has entered into structured stock repurchase arrangements with large financial institutions using general corporate funds as part of ~~the~~its share repurchase program in order to lower the ~~Company’s~~ average cost to acquire shares. These ~~arrangements are described below.~~

~~The~~programs include terms that require the Company ~~was a party~~ to ~~two agreements, executed during 2001 and 2000, with a large~~make up front payments to the counterparty financial institution ~~to purchase approximately 7.3 million shares~~and result in the receipt of stock during or at the end of the ~~Company’s Common Stock at various times in private transactions. Pursuant to the terms~~period of the ~~agreements, an aggregate~~agreement or the receipt of ~~$150 million was paid to this institution, with~~either stock or cash at the ~~ultimate number~~maturity of ~~shares repurchased dependent~~the agreement, depending on market conditions. ~~In May 2002, the agreements were terminated and, upon termination,~~Prior to June 2003, the Company received 3.0 million of the remaining shares. The Company received a total of 7,209,286 shares pursuant to these agreements. During 2002, the Company entered into a new agreement, as amended, with this financial institution in a private transaction to purchase up to 3.8 million shares of the Company’s Common Stock at various times through February 2003. Pursuant to the terms of the agreement, $25 million was paid to this institution during the third quarter of 2002. During 2002, the Company received 2,655,469 shares under this agreement with a total value of $18.5 million. The agreement matured in February 2003 and the Company received 390,830 of the remaining shares with a total value of $6.5 million.

During 2002, the Company entered into two private structured stock repurchase transactions with a large financial institution. Under the terms of the first agreement and in exchange for an up front payment of $25 million, the Company was entitled to receive shares of its Common Stock or a predetermined cash amount at the expiration of the agreement dependent upon the closing price of the Company’s Common Stock at maturity. Upon expiration of the agreement in December 2002, the Company received approximately $29.3 million in cash. Under the terms of the second agreement and in exchange for an up front payment of $25 million, the Company is entitled to receive approximately 2.2 million shares of its Common Stock or a predetermined cash amount at expiration of the agreement in March 2003. The form of settlement at maturity of the second transaction will be dependent upon the closing market price of the Company’s Common Stock.

~~The Company sells~~sold put warrants that ~~entitle~~entitled the holder of each warrant to sell to the Company, generally by physical delivery, one share of ~~the Company’s Common Stock~~its common stock at a specified price. At December 31, 2004 and 2003 there were no put warrants outstanding.

The Company expended an aggregate of $121.0 million, $123.9 million and $161.1 million during 2004, 2003 and 2002, respectively, net of premiums received, under all stock repurchase transactions. During ~~2002,~~2004, the Company ~~sold 2,300,000 put warrants at~~took delivery of a total of 4,458,740 shares of outstanding common stock with an average ~~strike~~per share price of ~~$11.10~~$18.77; and during 2003, the Company took delivery of a total of 8,859,381 shares of outstanding common stock with an average per share price of $15.86. Some of these shares were received ~~premium~~pursuant to prepaid programs. Since the inception of the stock repurchase programs, the average cost of shares acquired was $16.55 per share compared to an average close price during open trading windows of $19.83 per share. In addition, a significant portion of the funds used to repurchase stock was funded by proceeds from employee stock option exercises and the related tax benefit. As of December 31, 2004, the Company has remaining prepaid notional amounts of approximately ~~$3.3 million. During 2002,~~$53.1 million under structured stock repurchase agreements. Due to the ~~Company paid $42.9 million~~fact that the total shares to be received for the ~~purchase of 2,050,000~~open repurchase agreements at December 31, 2004 is not determinable until the contracts mature in 2005, the above price per share amounts exclude the remaining shares ~~upon~~to be received subject to the ~~exercise of outstanding put warrants, while 600,000 put warrants expired unexercised. As of~~agreements.

~~F-24~~

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

December 31, 2002, 950,000 put warrants were outstanding, with exercise prices ranging from $7.18 to $12.58, and expired on various dates between January and March 2003. As of December 31, 2002, the Company has a total potential repurchase obligation of approximately $9.9 million associated with outstanding put warrants, of which $7.3 million is classified as a put warrant obligation in the accompanying consolidated balance sheet. The remaining $2.6 million of outstanding put warrants permit a net-share settlement at the Company’s option and are not recorded as a put warrant obligation in the consolidated balance sheet. The outstanding put warrants classified as a put warrant obligation on the consolidated balance sheet will be reclassified to stockholders’ equity when each warrant is exercised or when it expires. Under the terms of certain put warrant agreements, the Company must maintain certain levels of cash and investment balances. As of December 31, 2002, the Company was in compliance with the required levels.

~~In December 2002, the Company entered into an agreement with a large financial institution requiring that this institution sell to the Company up to 1,560,000 million shares of the Company’s Common~~Preferred Stock at fixed prices if the Company’s common stock trades at designated levels between December 16, 2002 and January 23, 2003. As of December 31, 2002, the Company had a potential remaining repurchase obligation associated with this agreement of approximately $9.1 million, which is classified as common stock subject to repurchase in the accompanying consolidated balance sheet. During January 2003, this agreement expired and no shares were repurchased.


	~~Stock Splits~~

~~On January 19, 2000, the Company announced a two-for-one stock split in the form of a stock dividend paid on February 16, 2000, to stockholders of record as of January 31, 2000.~~

The number of options issuable and previously granted and their respective exercise prices under the Company’s stock option plans have been proportionately adjusted to reflect stock splits. The accompanying consolidated financial statements have been retroactively restated to reflect stock splits.


	~~Preferred Stock~~

The Company is authorized to issue 5,000,000 shares of preferred stock, $0.01 par value per share. The Company has no present plans to issue such shares.

8. CONVERTIBLE SUBORDINATED DEBENTURES

In March 1999, the Company sold $850 million principal amount at maturity of its zero coupon convertible subordinated debentures (the “Debentures”) due March 22, 2019, in a private placement. The Debentures were priced with a yield to maturity of 5.25% and resulted in net proceeds to the Company of approximately $291.9 million, net of original issue discount and net of debt issuance costs of approximately $9.6 million. Except under limited circumstances, no interest will be paid on the Debentures prior to maturity. The Debentures are convertible at the option of the security holder at any time on or before the maturity date at a conversion rate of 14.0612 shares of the Company’s Common Stock for each $1,000 principal amount at maturity of Debentures, subject to adjustment in certain events. The Company could redeem the Debentures on or after March 22, 2004. Holders could require the Company to repurchase the Debentures, on fixed dates and at set redemption prices (equal to the issue price plus accrued original issue discount), beginning on March 22, 2004. In October 2000, the Board of Directors approved a program authorizing the Company to repurchase up to $25 million of the Debentures in open market purchases. Additionally, in April 2002, the Board of Directors granted additional authority of $100 million to the Company to repurchase Debentures through private transactions, bringing the total repurchase authority to $125 million. The Board of Directors’ authorization to repurchase the Debentures ~~allows~~allowed the Company to repurchase Debentures when market conditions ~~are~~were favorable. ~~As of~~Through December 31, ~~2002,~~2003, 76,000 units of the Company’s Debentures representing $76.0 million in principal amount at maturity, ~~have~~had been repurchased under these programs for $29.9 million.

~~F-25~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~During 2002,~~ On March 22, 2004, the Company ~~early adopted~~redeemed all of the ~~provisions of SFAS No. 145,~~~~Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,~~~~and accordingly, the Company recorded~~outstanding Debentures for an ~~operating gain~~aggregate redemption price of approximately ~~$1.6 million during 2002 as a result of Debenture repurchases since~~$355.7 million. The Company used the proceeds from its held-to-maturity investments that matured on March 22, 2004 and cash on hand to fund the redemption. At the date of ~~adoption.~~redemption, the Company incurred a charge for the write-off of the associated deferred debt issuance costs of approximately $7.2 million.

9. FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of these items. The Company’s investments classified as available-for-sale securities, including restricted investments, are carried at fair value on the accompanying consolidated balance sheets based primarily on quoted market prices for such financial instruments. The aggregate fair value of the Company’s available-for-sale investments was ~~$396.3~~$479.6 million and ~~$437.9~~$512.4 million at December 31, ~~2002~~2004 and ~~2001,~~2003, respectively. The Company’s held-to-maturity investments had a carrying value of ~~$180.4 million and $169.0~~$192.5 million at December 31, ~~2002 and 2001, respectively,~~2003, and an aggregate fair value of ~~$180.2 million and $170.7~~$194.5 million at December 31, ~~2002 and 2001, respectively,~~2003 based on dealer quotation. The carrying amount of the Company’s Debentures at December 31, ~~2002 and 2001 were approximately $333.5~~2003 was $351.4 million and ~~$346.2 million, respectively. The~~the fair value of the Debentures, based on the quoted market price as of December 31, ~~2002 and 2001 were~~2003 was approximately ~~$334.0 million and $388.0 million, respectively.~~$355.9 million.

10. COMMITMENTS AND CONTINGENCIES

The Company leases certain office space and equipment under various operating leases. In addition to rent, the leases require the Company to pay for taxes, insurance, maintenance and other operating expenses. Certain of these leases contain stated escalation clauses while others contain renewal options. The Company recognizes rent expense on a straight-line basis over the term of the lease, excluding renewal periods, unless renewal of the lease is reasonably assured.

Rental expense for the years ended December 31, ~~2002, 2001~~2004, 2003 and ~~2000~~2002 totaled approximately ~~$24.4~~$18.0 million, ~~$17.1~~$16.4 million and ~~$8.7~~$24.4 million, respectively. Rental expense for 2002 includes lease losses associated with the vacancy of certain of the Company’s leased properties, as discussed below. Sublease income for the ~~year~~years ended December 31, 2004, 2003 and 2002 was approximately $1.6 million, $2.0 million and $1.7 million, ~~and there was no sublease income during 2001.~~respectively. Lease commitments under non-cancelable operating leases with initial or remaining terms in excess of one year and sublease income associated with non-cancelable subleases, including estimated future payments under the Company’s synthetic lease arrangement, are as follows:

CITRIX SYSTEMS, INC.

Operating Sublease
Leases Income
(In thousands)
Years ending December 31,
2003 $ 18,170 $ 2,708
2004 15,693 1,596
2005 15,162 506
2006 14,283 363
2007 11,604 268
Thereafter 41,190 250

$ 116,102 $ 5,691

~~In April~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Operating Leases		Sublease Income
	(In thousands)
Years ending December 31, 2005	$	23,065	$	894
2006		19,857		1,203
2007		14,957		1,324
2008		11,871		1,316
2009		9,557		747
Thereafter		38,499		317

	$	117,806	$	5,801

During 2002, the Company ~~entered into~~became a party to a synthetic lease ~~with a substantive lessor~~arrangement totaling approximately $61.0 million for its corporate headquarters office space in Fort Lauderdale, Florida. The synthetic lease represents a form of off-balance sheet financing under which an unrelated third party lessor funded 100% of the costs of acquiring the property and leases the asset to the Company. The synthetic lease qualifies as an operating lease for accounting purposes and as a financing lease for tax purposes. The Company does not include the property or the related lease debt as an asset or a liability onin its consolidated balance ~~sheet.~~sheets. Consequently,

~~F-26~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

payments ~~are~~ made pursuant to the lease are recorded as operating expenses in the Company’s consolidated statements of income. The Company entered into the synthetic lease in order to lease its headquarters properties under more favorable terms than under its previous lease arrangements.

The initial term of the synthetic lease is seven years. Upon approval by the lessor, the Company can renew the lease twice for additional two-year periods. The lease payments vary based on ~~the London Interbank Offered Rate, or~~ LIBOR plus a margin. At any time during the lease term, the Company has the option to sublease the property and upon thirty-days’ written notice, the Company has the option to purchase the property for an amount representing the original property cost and transaction fees of approximately $61.0 million plus any lease breakage costs and outstanding amounts owed. Upon at least 180 days notice prior to the termination of the initial lease term, the Company has the option to remarket the property for sale to a third party. If the Company chooses not to purchase the property at the end of the lease term, it has guaranteed a residual value to the lessor of approximately $51.9 million and possession of the buildings will be returned to the lessor. On a periodic basis, the Company evaluates the property for indicators of impairment. If ~~the~~an evaluation were to indicate that fair value of the building were to decline below $51.9 million, the Company would ~~have to make up~~be responsible for the difference under its residual value guarantee, which could have a material adverse effect on the Company’s results of operations and financial condition.

The synthetic lease includes certain financial covenants including a requirement for the Company to maintain a pledged balance of approximately ~~$63.0~~$62.8 million in cash and/or investment securities as collateral. This amount is included in restricted cash equivalents and investments in the accompanying consolidated balance sheets. The Company ~~manages~~maintains the ability to manage the composition of the ~~pledged~~restricted investments within certain limits and to withdraw and use excess investment earnings ~~are available~~from the restricted collateral for operating purposes. Additionally, the Company must maintain a minimum cash and investment balance of $100.0 million, excluding the Company’s ~~Debentures,~~ collateralized investments and equity investments as of the end of each fiscal quarter. As of December 31, ~~2002,~~2004, the Company had approximately ~~$113.5~~$316.7 million in cash and investments in excess of ~~those~~this required ~~levels.~~level. The synthetic lease includes non-financial covenants, including the maintenance of the ~~properties~~property and adequate insurance, prompt delivery of financial statements to the lender of the lessor and prompt payment of taxes associated with the ~~properties.~~property. As of December 31, ~~2002,~~2004, the Company was in compliance with all material provisions of the arrangement.

In January 2003, the FASB issued FASB Interpretation (“FIN”) No. 46,Consolidation of Variable Interest Entities, which addresses the consolidation of variable interest entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. In December 2003, the FASB issued FIN No. 46 (revised). FIN No. 46 (revised) was effective immediately for certain disclosure requirements and variable interest entities referred to as special-purpose entities for periods ending after December 15, 2003 and for all types of entities for financial statements for periods ending after March 15, 2004. The Company determined that it was not required to consolidate the lessor, the leased facility or the related debt upon the adoption of FIN No. 46 (revised). Accordingly, there was no impact on its financial position, results of operations or cash flows from adoption. However, if the lessor were to change its ownership of the property or significantly change its ownership of other properties that it currently holds, the Company could be required to consolidate the entity, the leased facility and the debt in a future period.

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During 2002 and 2001, the Company took actions to consolidate certain of its offices, including the exit of certain leased office space and the abandonment of certain leasehold improvements. Lease obligations related to these existing operating leases continue to ~~2018~~2025 with a total remaining obligation at December 31, ~~2002~~2004 of approximately ~~$28.5~~$22.5 million, of which ~~$6.8~~$3.0 million ~~net of anticipated sublease income,~~ was accrued for as of December 31, ~~2002,~~2004, and is reflected in accrued expenses and other liabilities in the accompanying consolidated ~~financial statements.~~balance sheets. In calculating this accrual, the Company made estimates, based on market information, including the estimated vacancy periods and sublease rates and opportunities. IfThe Company periodically re-evaluates its estimates and if actual circumstances prove to be materially worse than management has estimated, the total charges for these vacant facilities could be significantly higher.

11. INCOME TAXES

The United States and foreign components of income before income taxes are as follows:

2002 2001 2000
(In thousands)
United States $ 33,865 $ 57,096 $ 80,465
Foreign 79,292 95,455 54,552

Total $ 113,157 $ 152,551 $ 135,017

~~F-27~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~


	2004		2003		2002
	(In thousands)
United States	$	29,017	$	45,820	$	33,865
Foreign		135,416		114,867		79,292

Total	$	164,433	$	160,687	$	113,157

The components of the provision for income taxes are as follows:

2002 2001 2000
(In thousands)
Current:
Federal $ 13,786 $ 38,469 $ 29,252
Foreign 5,389 6,319 3,428
State 4,280 3,566 1,585

Total current 23,455 48,354 34,265
Deferred (4,218 ) (1,063 ) 6,240

Total provision for income taxes $ 19,237 $ 47,291 $ 40,505


	2004			2003		2002
	(In thousands)
Current:
Federal	$	23,763		$	20,887	$	13,786
Foreign		8,974			5,435		5,389
State		2,510			6,079		4,280

Total current		35,247			32,401		23,455
Deferred		(2,360	)		1,343		(4,218	)

Total provision for income taxes	$	32,887		$	33,744	$	19,237

The significant components of the Company’s deferred tax assets and liabilities consisted of the following:

December 31,
2002 2001
(In thousands)
Deferred tax assets:
Acquired technology $ 16,463 $ 16,726
Deferred revenue — 5,833
Accounts receivable allowances 4,901 2,901
Depreciation and amortization 2,587 4,597
Tax credits 21,824 13,264
Net operating losses 8,896 17,346
Other 9,184 6,328

Total deferred tax assets 63,855 66,995
Deferred tax liabilities:
Foreign earnings (8,753 ) (8,753 )

Total deferred tax liabilities (8,753 ) (8,753 )

Total net deferred tax assets $ 55,102 $ 58,242


	December 31,
	2004			2003
	(In thousands)
Deferred tax assets:
Acquired technology	$	—		$	16,348
Accruals and reserves		6,422			4,826
Depreciation and amortization		2,663			413
Tax credits		25,547			24,612
Net operating losses		22,684			8,999
Other		4,265			10,408
Valuation allowance		(1,332	)		(2,145	)

Total deferred tax assets		60,249			63,461
Deferred tax liabilities:
Acquired technology		(10,712	)		—
Foreign earnings		(8,753	)		(8,753	)

Total deferred tax liabilities		(19,465	)		(8,753	)

Total net deferred tax assets	$	40,784		$	54,708

SFAS No. 109,Accounting for Income Taxes, requires a valuation allowance to reduce the deferred tax assets reported if it is not more likely than not that some portion or all of the deferred tax assets will be realized. At December 31, 2004, the Company has recorded a valuation allowance of approximately $1.3 million relating to deferred tax assets for foreign tax credit carryovers.

During the years ended December 31, ~~2002, 2001,~~2004, 2003, and ~~2000,~~2002, the Company recognized tax benefits related to the exercise of employee stock options in the amount of $20.9 million, $10.3 million, and $25.7 million, ~~$28.0 million and $63.9 million,~~ respectively. ~~This benefit was~~These

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

benefits were recorded to additional paid-in capital. At December 31, ~~2002,~~2004, the Company had approximately ~~$35.4~~$35.0 million of additional U.S. net operating loss carryforwards resulting from stock options, a substantial portion of which begins to expire in 2020. The Company will record the benefit of the net operating loss carryforwards generated from the exercise of employee stock options ~~through additional paid-in capital when~~in the period that the net operating loss carryforwards are utilized.

~~During 2001, the Company acquired an entity with approximately $37.9 million of net operating loss carryforwards. Additionally,~~

At December 31, 2004, the Company had ~~approximately $6.8~~$70.3 million of remaining net operating loss carryforwards from ~~prior~~ acquisitions. ~~These~~The utilization of these net operating loss carryforwards are limited in any one year pursuant to Internal Revenue Code Section 382 and begin to expire in ~~2010. The Company had approximately $22.9 million of remaining net operating losses at December 31, 2002 subject to Internal Revenue Code Section 382 limitations.~~2020.

At December 31, ~~2002,~~2004, the Company had research and development tax credit carryforwards of approximately ~~$9.0~~$10.8 million that expire beginning in ~~2018.~~2008. The Company had foreign tax credit carryforwards

~~F-28~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

of approximately ~~$10.7~~$12.6 million at December 31, ~~2002~~2004 that expire beginning in ~~2003.~~ 2009.

Additionally, the Company had alternative minimum tax credit carryforwards of approximately $2.1 million at December 31, ~~2002. These credits do not expire.~~2004 that have no expiration date.

~~The Company does not expect to remit earnings from its foreign subsidiaries. Accordingly, during 2002 and 2001 the Company did not provide for deferred taxes on foreign earnings.~~

A reconciliation of the Company’s effective tax rate to the statutory federal rate is as follows:

Year Ended December 31,
2002 2001 2000
(In thousands)
Federal statutory taxes 35.0 % 35.0 % 35.0 %
State income taxes, net of federal tax benefit 3.8 3.8 3.8
Foreign operations (17.9 ) (20.2 ) (14.6 )
Interest income — — (4.4 )
Intangible assets — 7.4 2.3
Other permanent differences 0.5 1.8 2.3
Tax credits (7.6 ) (0.8 ) 0.5
Other 3.2 4.0 5.1

17.0 % 31.0 % 30.0 %

   Year Ended December 31,

   2004
2003
2002

Federal statutory taxes
   35.0 % 35.0 % 35.0 %
State income taxes, net of federal tax benefit
   4.5 3.8 3.8
Foreign operations
   (27.0 ) (21.7 ) (17.9 )
Permanent differences
   5.0 1.7 0.5
Tax credits
   — (1.7 ) (7.6 )
Other
   3.0 2.6 3.2
Change in valuation allowance
   (0.5 ) 1.3 —


   20.0 % 21.0 % 17.0 %


The Company’s tax provision is based on expected income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. In the ordinary course of global business, there are transactions for which the ultimate tax outcome is uncertain, thus judgment is required in determining the worldwide provision for income taxes and the associated realizability of deferred tax assets and liabilities. The Company establishes reserves when it becomes probable that a tax return position may be challenged and that the Company may not succeed in completely defending that challenge. The Company adjusts these reserves in light of changing facts and circumstances, such as the settlement of a tax audit. The Company’s annual tax rate includes the impact of reserve provisions and changes to reserves. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its reserves reflect the probable outcome of known tax contingencies. Resolution of the tax contingencies would be recognized as an increase or decrease to the Company’s tax rate in the period of resolution.
On October 22, 2004, the American Jobs Creation Act (“the AJCA”) was signed into law. The AJCA includes a deduction for 85% of certain foreign earnings that are repatriated, as defined in the AJCA. The Company may elect to apply this provision to qualifying earnings repatriations in 2005. The Company has started an evaluation of the effects of the repatriation provision; however, the Company does not expect to be able to complete this evaluation until after Congress or the Treasury Department provides guidance concerning the key elements of the provision. The Company expects to complete its evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the anticipated guidance. Per the provisions of the AJCA, the range of possible amounts that the Company is eligible to repatriate under this provision is between zero and $500 million. The related potential range of income tax is between zero and $52 million.
Other than considering the one-time repatriation provision within the AJCA, the Company does not expect to remit earnings from its foreign subsidiaries. Accordingly, since 2000 the Company has not provided for deferred taxes on foreign earnings.

12. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS

The Company operates in a single market consisting of the design, development, marketing, sales and support of access infrastructure software and services for enterprise ~~applications.~~applications, as well as Web-based desktop access. The Company’s

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

revenues are derived from MetaFrame Access Suite sales and related services in the Americas, ~~Europe, the Middle East and Africa (“EMEA”)~~EMEA and Asia-Pacific ~~regions.~~regions and from Web-based desktop access services sold by its Citrix Online division. These three geographic regions and the Citrix Online division constitute the Company’s four reportable segments.

The Company does not engage in intercompany revenue transfers between segments. The Company’s management evaluates performance based primarily on revenues in the geographic locations in which the Company ~~operates.~~operates and separately evaluates revenues from the Citrix Online division. Segment profit for each segment includes certain sales, marketing, general and administrative expenses directly attributable to the segment and excludes certain expenses that are managed outside the reportable segments. Costs excluded from segment profit primarily consist of research and development costs associated with the MetaFrame Access Suite products, amortization of core and product technology, amortization of other intangible assets, interest, corporate expenses and income taxes, as well as, ~~non-recurring~~ charges for in-process research and ~~development and write-down of technology.~~development. Corporate expenses are comprised primarily of corporate marketing costs, operations and certain general and administrative expenses, which are separately managed. Accounting policies of the segments are the same as the Company’s consolidated accounting policies.

~~Previously, the Company formed wholly-owned subsidiaries in various locations within EMEA and Asia-Pacific. These subsidiaries are responsible for sales and distribution~~

International revenues (sales outside of the ~~Company’s products. Prior to the formation~~United States) accounted for approximately 53.2%, 54.6% and 53.7% of these subsidiaries, sales in these geographic segments were classified as export sales from the Americas segment. For purposes of the presentation of segment information, the sales previously reported as Americas export sales have been reclassified to the geographical segments where the sale was made for each of the periods presented.

In July 2001, the Company implemented a new enterprise resource planning system. The new system was designed to provide a structure that would meet the growing demands of the Company and to provide management improved focus on the results of operations and the Company’s financial resources. The features and functionality of the new system allowed the Company to summarize and classify information included in

~~F-29~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~the results of operations differently than that provided by the Company’s legacy information systems. The Company began planning~~our net revenues for the ~~new information system in 2000,~~year ended December 31, 2004, 2003, and as a result, detailed transaction information for 2001 and 2000, prior to the implementation of the new system, was retained and converted to the new system. Information for the years ended 2001 and 2000 has been reclassified to reflect these changes.

2002, respectively. Net revenues and segment profit for ~~2002, 2001~~2004, 2003 and ~~2000~~2002 classified by the ~~major geographic area in which the Company operates,~~Company’s reportable segments, are presented below.

2002 2001 2000
(In thousands)
Net revenues:
Americas $ 255,438 $ 289,017 $ 248,398
EMEA 209,520 216,766 158,645
Asia-Pacific 48,408 46,016 23,505
Other(1) 14,082 39,830 39,898

Consolidated $ 527,448 $ 591,629 $ 470,446

Segment profit:
Americas $ 122,553 $ 163,621 $ 149,856
EMEA 123,126 134,096 102,356
Asia-Pacific 18,839 22,880 2,610
Other(1) 14,082 39,830 39,898
Unallocated expenses(2):
Amortization of intangibles (11,296 ) (48,831 ) (30,395 )
In-process research and development — (2,580 ) —
Research and development (68,923 ) (67,699 ) (50,622 )
Write-down of technology — — (9,081 )
Net interest and other income 9,297 19,200 22,792
Other corporate expenses (94,521 ) (107,966 ) (92,397 )

Consolidated income before income taxes $ 113,157 $ 152,551 $ 135,017


	2004			2003			2002
	(In thousands)
Net revenues:
Americas(1)	$	335,436		$	291,470		$	255,438
EMEA(2)		293,690			243,890			209,520
Asia-Pacific		67,930			53,265			48,408
Citrix Online division		44,101			—			—
Other(3)		—			—			14,082

Consolidated	$	741,157		$	588,625		$	527,448

Segment profit (loss):
Americas	$	199,332		$	158,781		$	122,553
EMEA		174,277			151,557			123,126
Asia-Pacific		19,587			18,364			18,839
Other(3)		—			—			14,082
Citrix Online division		(1,124	)		—			—
Unallocated expenses(4):
Amortization of intangibles		(12,331	)		(11,336	)		(11,296	)
In-process research and development		(19,100	)		—			—
Research and development		(81,483	)		(64,443	)		(68,923	)
Net interest and other income		5,442			6,298			9,297
Other corporate expenses		(120,167	)		(98,534	)		(94,521	)

Consolidated income before income taxes	$	164,433		$	160,687		$	113,157

(1) The Americas segment is comprised of the United States, Canada and Latin America.

~~(1)~~ (2)

Defined as Europe, the Middle East and Africa.

(3)	Represents royalty fees in connection with the Microsoft Development Agreement, which expired in May 2002.


~~(2)~~ (4)	Represents expenses presented to management only on a consolidated basis and not allocated to the geographic operating segments.

~~F-30~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Identifiable assets classified by ~~major geographic area in which~~ the ~~Company operates~~Company’s reportable segments are shown below. Long-lived assets consist of property ~~plant~~ and equipment, net:

CITRIX SYSTEMS, INC.

December 31,
2002 2001
(In thousands)
Identifiable assets:
Americas $ 752,841 $ 945,299
EMEA 378,831 241,943
Asia-Pacific 29,859 20,988

Total identifiable assets $ 1,161,531 $ 1,208,230

Long-lived assets, net:
United States $ 38,089 $ 50,601
United Kingdom 33,663 33,029
Other foreign countries 4,782 6,480

Total long-lived assets, net $ 76,534 $ 90,110

~~To purchase certain investments during 2002, the Company initiated an inter-segment loan whereby the Americas transferred approximately $134 million to EMEA.~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	December 31,
	2004		2003
	(In thousands)
Identifiable assets:
Americas	$	537,199	$	975,054
EMEA		483,637		328,689
Asia-Pacific		43,240		41,196
Citrix Online division		222,008		—

Total identifiable assets	$	1,286,084	$	1,344,939

Long-lived assets, net:
United States	$	31,376	$	29,917
United Kingdom		30,165		31,821
Other foreign countries		7,740		4,099

Total long-lived assets, net	$	69,281	$	65,837

The decrease in ~~the~~ Americas ~~identifiable assets and increase in EMEA’s~~ identifiable assets is primarily due to a decrease in cash, cash equivalents and investments related to the ~~result~~redemption of ~~this agreement. This loan was repaid during early 2003.~~the Company’s convertible subordinated debentures and to expenditures related to the Net6 and Expertcity acquisitions.

Export revenue represents shipments of finished goods and services from the United States to international ~~customers. As of July 1, 2000, the Company was shipping finished goods to European~~customers, primarily in Latin America and ~~Asia-Pacific customers from its warehouse location in Europe.~~Canada. Shipments from the United States to international customers for 2004, 2003 and 2002 were ~~as follows:~~

Years Ended December 31,
2002 2001 2000
(In thousands)
Asia-Pacific $ — $ — $ 11,249
Other(1) 25,297 21,392 7,274

$ 25,297 $ 21,392 $ 18,523

~~(1)~~ ~~Represents Latin America and Canada geographic locations, which are included as part of the Americas geographic segment.~~
$32.9 million, $24.3 million and $25.3 million, respectively.

The Company had net revenue attributed to individual distributors in excess of 10% of total net sales as follows. There were no individual end-customers that represented greater than 10% of net sales for any of the years presented.

Year Ended December 31,
2002 2001 2000
Distributor A 13 % 13 % 13 %
Distributor B 10 % 10 % 12 %
Distributor C 8 % 9 % 10 %
The revenue contributed by the distributors below is primarily recorded in the Americas segment.

~~F-31~~


	Year Ended December 31,
	2004		2003		2002
Distributor A	11	%	13	%	13	%
Distributor B	8	%	9	%	10	%

13.	DERIVATIVE FINANCIAL INSTRUMENTS

As of December 31, 2004 and 2003, the Company had $12.6 million and $12.8 million of derivative assets, respectively, and $7.9 million and $9.4 million of derivative liabilities, respectively, representing the fair values of the Company’s outstanding derivative instruments, which are recorded in other current assets, other assets, accrued expenses and other liabilities in the accompanying consolidated balance sheets. The change in derivatives recognized in other comprehensive income includes unrealized gains (losses) that arose from changes in market value of derivatives that were held during the period, and gains (losses) that were previously unrealized, but have been recognized in current period net income due to termination or maturities of derivative contracts. This reclassification has no effect on total comprehensive income or stockholders’ equity. The following table presents these components of other comprehensive income, net of tax for the Company’s derivative instruments (in thousands):


	For the Year Ended December 31,
	2004			2003			2002
Unrealized gains on derivative instruments	$	6,258		$	11,200		$	9,091
Reclassification of realized gains		(6,422	)		(7,528	)		(5,663	)

Net change in other comprehensive income due to derivative instruments	$	(164	)	$	3,672		$	3,428

The total cumulative unrealized gain on derivative instruments was $7.0 million and $7.2 million at December 31, 2004 and 2003, respectively, and is included in accumulated other comprehensive income in the accompanying consolidated balance sheets.

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company also tracks revenue according to the following three categories: License Revenue, Technical Services Revenue and Royalty Revenue, but does not track expenses or identifiable assets by category. As a result, these revenue categories do not constitute segments in accordance with SFAS No. 131,~~Disclosures About Segments of an Enterprise and Related Information.~~ ~~Additional information regarding revenue by categories is as follows:~~

Year Ended December 31,
2002 2001 2000
(In thousands)
Revenues:
License Revenue $ 468,827 $ 511,147 $ 400,156
Technical Services Revenue 44,539 40,652 30,392
Royalty Revenue 14,082 39,830 39,898

Net Revenues $ 527,448 $ 591,629 $ 470,446

~~13. DERIVATIVE FINANCIAL INSTRUMENTS~~

Cash Flow Hedges.At December 31, 2004 and 2003, the Company had in place foreign currency forward sale contracts with a notional amount of $39.0 million and $37.2 million, respectively, and foreign currency forward purchase contracts with a notional amount of $165.0 million and $160.9 million, respectively. The fair value of these contracts at December 31, 2004 and 2003 were assets of $11.5 million and $12.8 million, respectively and liabilities of $3.5 million and $4.9 million, respectively. A substantial portion of the Company’s anticipated overseas expense ~~and capital purchasing activities are~~will be transacted in local currencies. To protect against ~~reductions~~fluctuations in ~~value~~operating expenses and the volatility of future cash flows caused by changes in currency exchange rates, the Company has established a ~~hedging program. The Company~~program that uses forward foreign exchange forward contracts to reduce ~~a portion of~~ its exposure to these potential changes. The terms of ~~such~~these instruments, and the ~~hedging~~hedged transactions to which they relate, generally do not exceed 12 months. ~~Principal currencies~~Currencies hedged are Euros, British pounds sterling, ~~Euros,~~ Swiss francs, Australian dollars, and Japanese ~~yen and Australian dollars. The Company could choose not to hedge certain foreign exchange transaction exposures due to immateriality, prohibitive economic cost~~yen. There was no material ineffectiveness of ~~hedging particular exposures, and availability of appropriate hedging instruments. At December 31, 2002 and 2001,~~ the ~~Company had in place~~Company’s foreign currency forward ~~sale~~ contracts with a notional amount of $48.9 million and $13.1 million, respectively, and foreign currency forward purchase contracts with a notional amount of $128.4 million and $60.9 million, respectively. The aggregate net fair value of these contracts at December 31, 2002 and 2001 were recorded as assets of $3.6 million and $0.2 million, respectively.for 2004, 2003 or 2002.

In order to manage its exposure to interest rate risk, in November 2001, the Company entered into an interest rate swap ~~agreement~~instrument with a notional amount of $174.6 million that was to expire in March 2004. The swap converted the floating rate return on certain of the Company’s available for sale investment securities to a fixed interest rate. In October 2002, the Company terminated this interest rate swap ~~agreement.~~instrument. Upon termination, the Company received a cash payment of $9.2 million as settlement under the swap ~~agreement, and there was approximately $2.4 million in accumulated other comprehensive income, net of taxes.~~instrument. The swap was previously accounted for as an effective cash flow hedge, and in accordance with the provisions of SFAS No. 133, the remaining ~~$2.4 million, net of taxes,~~amount in accumulated other comprehensive income of approximately $2.4 million was ~~to be~~ recognized in interest income ~~ratably along with the interest cash flows from the investments~~ through the ~~original termination date~~remaining holding period of the ~~swap~~underlying investments in March 2004. As a result of the sale of certain investments underlying this swap agreement in December 2002, the forecasted interest cash flows from the investments were no longer probable and interest income of approximately $3.4 million related to the terminated swap was recognized.2002.

In connection with the efforts to manage the credit quality and maturities of its available-for-sale investment portfolio, during 2001 the Company terminated a forward bond purchase agreement previously designated as a hedge of forecasted purchases of corporate security investments. As a result, the Company recorded a realized gain of $1.4 million, which is included in other expense, net on the 2001 consolidated statements of income. At the time of the sale, the Company realized approximately $0.5 million of amounts previously classified in accumulated other comprehensive loss.

~~F-32~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Fair Value Hedges.The Company uses ~~derivatives~~interest rate swap instruments to hedge against the ~~change~~changes in fair value of certain of its available-for-sale securities due to changes in interest rates. ~~During~~At December ~~2002,~~31, 2004, the ~~Company entered into 12 interest rate swap agreements with~~instruments have an aggregate notional amount of ~~$208.0~~$182.4 million related to 12 specific available-for-sale ~~securities. The swaps qualify for the short-cut method of accounting~~securities and expire on various dates through ~~November 2007. The~~September 2008. Each of the instruments swap the fixed rate interest on the underlying investments tofor a variable rate based on ~~LIBOR~~the London Interbank Offered Rate (“LIBOR”) plus a specified margin. During 2003, the Company sold $104.0 million of the underlying fixed rate available-for-sale securities and discontinued hedge accounting for the related $104.0 million of the interest rate swaps. Changes in the fair value of the ~~derivatives~~swap instruments are recorded in earnings along with related designated changes in the value of the underlying investments. The fair value of the instruments at December 31, 2004 were liabilities of approximately $4.4 million and assets of $1.1 million. At December 31, 2003, the fair value of the instruments were liabilities of approximately $4.2 million. Changes in the fair value of these derivatives are recorded in earnings. There was no material ineffectiveness of the Company’s interest rate swaps for the years ended December 31, 2004, 2003 or 2002.

Derivatives not Designated as Hedges.The Company utilizes credit ~~default contracts~~derivatives and other instruments for investment purposes that either do not qualify or are not designated for hedge accounting treatment under SFAS No. ~~133.~~133,Accounting for Derivative Instruments and Hedging Activities, and its related interpretations. Accordingly, changes in the fair value of these contracts, if any, are recorded in other ~~expense, net, if any.~~income (expense), net. Under the terms of ~~these~~the credit contracts, the Company assumes the default risk, above a certain threshold, of a portfolio of specified ~~high credit quality~~ referenced issuers in exchange for a fixed yield that is recorded in interest income. In the event of default by underlying referenced issuers above specified amounts, the Company will pay the counterparty an amount equivalent to its loss, not to exceed the notional value of the contract. The primary risk associated with these transactions is the default risk of the underlying issuers. The risk levels of these instruments are equivalent to ~~“AAA” and “Super AAA”~~“AAA,” or better single securities. The purpose of the credit default contracts is to ~~increase the effective~~provide additional yield on certain of the Company’s underlying available-for-sale investments.

~~During December 2002, the~~

The Company ~~entered into two~~is a party to three credit default contracts ~~with~~that have an aggregate notional amount of ~~$100.0~~$75.0 million ~~that~~and expire ~~during December 2007.~~on various dates through March 2008. The Company was also a party to a credit default contract that has ~~pledged $104~~an aggregate notional amount of $195.4 million and expired on March 22, 2004. At December 31, 2004, the Company has restricted approximately $86.3 million of investment securities as collateral for these ~~contracts.~~contracts and interest rate swaps, which is included in restricted cash equivalents and investments in the accompanying consolidated balance sheet. The Company maintains the ability to manage the composition of the ~~pledged investments. Accordingly, these securities are not reflected as~~ restricted investments inwithin certain limits and to withdraw and use excess investment earnings from the ~~accompanying consolidated balance sheets.~~restricted collateral for operating purposes. The fixed yield earned on these contracts ~~was not material at December 31, 2002,~~during 2004 and 2003 is included in interest income in the accompanying consolidated statements of income. ~~For~~To date there have been no credit events for the ~~year ended~~underlying referenced entities resulting in losses to the Company. As of December 31, ~~2002, there was no change in~~2004, the fair value of these ~~credit default~~ contracts ~~and there were no credit events related to the underlying reference issuers.~~

~~The ineffectiveness of hedges on existing derivative instruments for the year ended December 31, 2002,~~ was not material. As of December 31, 2002, the Company recorded $6.3 million of derivative assets and $6.2 million of derivative liabilities, representing the fair values of the Company’s outstanding derivative instruments in other current assets and accrued expenses in the accompanying consolidated balance sheets.

The change in net unrealized derivative gains (losses) recognized in other comprehensive income includes unrealized gains (losses) that arose from changes in market value of derivatives that were held during the period, and gains (losses) that were previously unrealized, but have been recognized in current period net income due to termination or maturities of derivative contracts. This reclassification has no effect on total comprehensive income or stockholders’ equity.

~~The following table presents these components of other comprehensive income, net of tax:~~

2002 2001
Unrealized gains (losses) $ 3,512 $ 84
Reclassification for realized gains (losses) (84 ) —

Increase (decrease) in net unrealized derivative gains recognized in other comprehensive gain (loss) $ 3,428 $ 84

~~F-33~~

CITRIX SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


~~14.~~	~~EARNINGS PER SHARE~~

14. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

Year Ended December 31,
2002 2001 2000
(In thousands, except per share
information)
Numerator:
Net income $ 93,920 $ 105,260 $ 94,512

Denominator:
Denominator for basic earnings per share — weighted average shares 177,428 185,460 184,804
Effect of dilutive securities:
Put warrants 3 — 41
Employee stock options 1,928 9,038 14,886

Denominator for diluted earnings per share — adjusted weighted-average shares 179,359 194,498 199,731

Basic earnings per share $ 0.53 $ 0.57 $ 0.51

Diluted earnings per share $ 0.52 $ 0.54 $ 0.47

Antidilutive weighted shares 50,919 45,454 41,943


	Year Ended December 31,
	2004		2003		2002
	(In thousands, except per share information)
Numerator:
Net income	$	131,546	$	126,943	$	93,920

Denominator:
Denominator for basic earnings per share — weighted average shares		168,868		165,323		177,428
Effect of dilutive securities:
Put warrants		—		—		3
Employee stock options		5,644		6,124		1,928
Contingent consideration related to acquisition		222		—		—

Denominator for diluted earnings per share — adjusted weighted-average shares		174,734		171,447		179,359

Basic earnings per share	$	0.78	$	0.77	$	0.53

Diluted earnings per share	$	0.75	$	0.74	$	0.52

Antidilutive weighted average shares		28,878		41,216		50,919

The above antidilutive weighted average shares to purchase shares of ~~Common Stock~~common stock includes certain shares under the Company’s stock option ~~program,~~programs, certain put warrants under the Company’s stock repurchase program and ~~Common Stock~~common stock potentially issuable on the conversion of the Debentures and were not included in computing diluted earnings per share because their effects were antidilutive for the respective ~~periods.~~


~~15.~~	~~RECENT ACCOUNTING PRONOUNCEMENTS~~

periods that they were outstanding. The decrease in anti-dilutive weighted shares for 2004 compared to 2003 is due to the redemption of the Company’s convertible subordinated debentures during March 2004.

15. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board issued SFAS No. ~~143,~~123R,~~Accounting for Asset Retirement Obligations,~~Share-Based Payment. establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS No. ~~143~~123R requires companies to expense the value of employee stock option and similar awards. SFAS No. 123R is effective ~~in fiscal years~~as of the beginning of the first interim or annual reporting period that begins after June 15, ~~2002,~~2005. As of the effective date, the Company will be required to expense all awards granted, modified, cancelled or repurchased as well as the portion of prior awards for which the requisite service has not been rendered, based on the grant-date fair value of those awards as calculated for pro forma disclosures under SFAS No.123. SFAS No.123R permits public companies to adopt its requirements using one of two methods: A “modified prospective” method in which compensation cost is recognized beginning with ~~early~~the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123R for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. A “prospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123R for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The adoption ~~permitted. The Company expects that~~of SFAS No. 123R’s fair value method will have an impact on the Company’s results of operations. Currently, the impact the adoption of SFAS No. ~~143~~123R will ~~not~~ have ~~a material impact~~ on ~~its consolidated financial position,~~the Company’s results of operations ~~or cash flows upon adoption. The Company plans to adopt SFAS No. 143 effective January 1, 2003.~~

~~In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145,~~~~Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”~~ ~~SFAS No. 145,~~cannot be estimated because among other things ~~requires gains and losses~~it will depend on ~~extinguishment~~the levels of debt to be classified as part of continuing operations rather than treated as extraordinary, as previously required in accordance with SFAS 4. SFAS No. 145 also modifies accounting for subleases where the original lessee remains the secondary obligor and requires certain modifications to capital leases to be treated as a sale-leaseback transaction. The Company early adopted the provisions of SFAS No. 145, during 2002 and recorded $1.6 million in gains from the repurchase of the Debentures as part of continuing operationsshare-based payments granted in the ~~accompanying consolidated statements of income.~~

~~In July 2002, the FASB issued SFAS No. 146,~~~~Accounting for Costs Associated with Exit or Disposal Activities~~~~. SFAS No. 146 nullifies the guidance previously provided under Emerging Issues Task Force Issue~~

~~F-34~~

~~CITRIX SYSTEMS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Among other things, SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to when there is commitment to a restructuring plan as set forth under the nullified guidance. The Company will adopt SFAS No. 146 on January 1, 2003 and expects no material impact from adoption on its financial position, results of operations or cash flows.

~~In December 2002, the FASB issued SFAS No. 148,~~~~Accounting for Stock-Based Compensation — Transition and Disclosure~~. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The Company expects no material impact on its financial position, results of operations or cash flows from adoption.

~~In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45,~~~~Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others~~. FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. FIN No. 45 also clarifies requirements for the recognition of guarantees at the onset of an arrangement. The initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN No. 45 are effective for interim or annual financial statements after December 15, 2002. The Company implemented the disclosure requirements of FIN No. 45 at December 31, 2002. The Company had no material impact on its financial position, results of operations or cash flows as a result of this implementation.

~~In January 2003, the FASB issued FIN No. 46,~~~~Consolidation of Variable Interest Entities,~~which addresses consolidation by a business of variable interest entities in which it is the primary beneficiary. FIN No. 46 is effective immediately for certain disclosure requirements and for variable interest entities created after January 1, 2003, and in the first fiscal year or interim period beginning after June 15, 2003 for all other variable interest entities.future. The Company is currently in the process of determining the effects ~~if any,~~ on its financial position, results of operations and cash flows that will result from the adoption of ~~FIN~~SFAS No. ~~46.~~123R.


~~16.~~ CITRIX SYSTEMS, INC.	~~LEGAL MATTERS~~

In February 2002, a stockholder filed a complaint (the “Complaint”) in the Court of Chancery of the State of Delaware against the Company and certain of its current and former officers and directors. The Complaint purported to state a direct claim on behalf of a putative class of stockholders and a derivative claim nominally on behalf of the Company for breach of fiduciary duty based on the Company’s alleged failure to disclose all material information concerning the Company’s business and operations in connection with a proposal to be voted on at the Company’s annual meeting of stockholders in May 2000. The Complaint asserted claims similar to those alleged by such stockholder in a suit that was filed in September 2000, and subsequently voluntarily dismissed without prejudice in July 2001. The Complaint sought compensatory damages, rescission of the Company’s 2000 Director and Officer Stock Option and Incentive Plan, and other related relief. The parties have since agreed to a non-monetary settlement of the action not involving the validity of the 2000 Director and Officer Stock Option and Incentive Plan. The settlement is subject to approval by the court. A hearing on the approval of the settlement has not yet been scheduled.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~In addition, the~~

16. LEGAL MATTERS

The Company is a defendant in various litigation matters ~~of litigation~~ generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with counsel, that ~~any~~the ultimate ~~liability would~~outcome will not materially affect the Company’s business, financial position, ~~result~~results of operations or cash flows.

~~F-35~~

SUPPLEMENTAL FINANCIAL INFORMATION

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

First Second Third Fourth
Quarter Quarter Quarter Quarter Total Year
(In thousands, except per share amounts)
2002

Net revenues $ 142,310 $ 117,456 $ 118,898 $ 148,784 $ 527,448
Gross margin 137,558 112,698 114,523 143,639 508,418
Income from operations 30,942 10,276 17,368 45,274 103,860
Net income 26,689 10,849 16,815 39,567 93,920
Basic earnings per common share 0.14 0.06 0.10 0.23 0.53
Diluted earnings per common share 0.14 0.06 0.10 0.23 0.52 (a)
2001

Net revenues $ 132,812 $ 147,274 $ 153,495 $ 158,048 $ 591,629
Gross margin 125,500 140,051 145,922 150,308 561,781
Income from operations 35,596 31,192 32,384 34,179 133,351
Net income 28,935 22,894 27,790 25,641 105,260
Basic earnings per common share 0.16 0.12 0.15 0.14 0.57
Diluted earnings per common share 0.15 0.12 0.14 0.13 0.54


	First Quarter		Second Quarter		Third Quarter		Fourth Quarter			Total Year
	(In thousands, except per share amounts)
2004
Net revenues	$	161,310	$	178,302	$	187,578	$	213,967		$	741,157
Gross margin		154,040		169,779		178,803		212,112			714,734
Income from operations		16,697		37,092		46,323		58,879	^(a)		158,991
Net income		9,325		31,475		38,448		52,298	^(a)		131,546
Basic earnings per common share		0.06		0.18		0.23		0.31	^(a)		0.78
Diluted earnings per common share		0.05		0.18		0.22		0.30	^(a)		0.75
2003
Net revenues	$	143,491	$	143,049	$	144,341	$	157,744		$	588,625
Gross margin		135,886		135,376		136,190		150,101			557,553
Income from operations		37,928		35,498		38,716		42,247			154,389
Net income		30,329		29,344		30,995		36,275			126,943
Basic earnings per common share		0.18		0.18		0.19		0.22			0.77
Diluted earnings per common share		0.18		0.17		0.18		0.21			0.74

(a) ~~The sum~~In the fourth quarter, the Company recorded a reduction of amortization expense of $4.4 million, net of related tax effect of $2.8 million, resulting from the ~~quarterly earnings per share amounts do not add~~reclassification of certain intangible assets to goodwill to adjust the ~~annual earnings per share amount due to the weighting of common and common equivalent shares outstanding during each of the respective periods.~~purchase price allocation from a 2001 acquisition.

~~F-36~~

CITRIX SYSTEMS, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

Charged to Charged Balance
Beginning Costs and to Other at End
of Period Expenses Accounts Deductions of Period
(In thousands)
2002

Deducted from asset accounts:
Allowance for doubtful accounts $ 3,726 $ 3,486 $ — $ 1,162 (2) $ 6,050
Allowance for returns 8,343 — 25,282 (1) 23,137 10,488
Allowance for inventory obsolescence 1,570 1,407 — 2,473 504
2001

Deducted from asset accounts:
Allowance for doubtful accounts $ 1,431 $ 2,784 $ 2,483 (3) $ 2,972 (2) $ 3,726
Allowance for returns 9,170 — 22,533 (1) 23,360 8,343
Allowance for inventory obsolescence 722 2,292 — 1,444 1,570
2000

Deducted from asset accounts:
Allowance for doubtful accounts $ 1,545 $ 377 $ — $ 491 (2) $ 1,431
Allowance for returns 6,696 — 27,883 (1) 25,409 9,170
Allowance for inventory obsolescence 912 6,932 — 7,122 722


	Beginning of Period		Charged (Credited) to Costs and Expenses			Charged to Other Accounts			Deductions			Balance at End of Period
	(In thousands)
2004
Deducted from asset accounts:
Allowance for doubtful accounts	$	3,364	$	1,108		$	879	⁽³⁾	$	2,708	⁽²⁾	$	2,643
Allowance for returns		3,001		—			6,663	⁽¹⁾		7,391	⁽⁴⁾		2,273
Allowance for inventory obsolescence		129		428			9			433			133
Valuation allowance for deferred tax assets		2,145		—			—			813			1,332
2003
Deducted from asset accounts:
Allowance for doubtful accounts	$	6,050	$	522		$	—		$	3,208	⁽²⁾	$	3,364
Allowance for returns		10,488		—			3,825	⁽¹⁾		11,312	⁽⁴⁾		3,001
Allowance for inventory obsolescence		504		(4	)		—			371			129
Valuation allowance for deferred tax assets		—		2,145			—			—			2,145
2002
Deducted from asset accounts:
Allowance for doubtful accounts	$	3,726	$	3,486		$	—		$	1,162	⁽²⁾	$	6,050
Allowance for returns		8,343		—			25,282	⁽¹⁾		23,137	⁽⁴⁾		10,488
Allowance for inventory obsolescence		1,570		1,407			—			2,473			504

(1) Netted against revenues.

(2)	Uncollectible accounts written off, net of recoveries.

(3)	Addition from the ~~Sequoia acquisition.~~Expertcity and Net6 acquisitions.

(4)	Credits issued for stock balancing rights.

~~F-37~~

EXHIBIT INDEX

Exhibit
No. Description
2 .3(1) Asset Purchase Agreement dated February 15, 2000 by and among the Company, Innovex Group, Inc. and certain stockholders of Innovex
2 .4(9) Agreement and Plan of Merger, dated as of March 20, 2001, by and among Citrix Systems, Inc., Soundgarden Acquisition Corp. and Sequoia Software Corporation
3 .1(2) Amended and Restated Certificate of Incorporation of the Company
3 .2(2) Amended and Restated By-laws of the Company
3 .3(3) Certificate of Amendment of Amended and Restated Certificate of Incorporation
4 .1(2) Specimen certificate representing the Common Stock
4 .2(4) Indenture by and between the Company and State Street Bank and Trust Company as Trustee dated as of March 22, 1999, including the form of Debenture.
4 .3(4) Form of Debenture (included in Exhibit 4.2).
4 .3(4) Registration Rights Agreement by and between the Company and Credit Suisse First Boston Corporation dated as of March 22, 1999.
10 .1(2)* 1989 Stock Option Plan
10 .2(10)* Third Amended and Restated 1995 Stock Plan
10 .3(10)* Second Amended and Restated 1995 Non-Employee Director Stock Option Plan
10 .4* Third Amended and Restated 1995 Employee Stock Purchase Plan
10 .5(5)* Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan
10 .6(2) Microsoft Corporation Source Code Agreement between the Company and Microsoft Corporation (“Microsoft”) dated November 15, 1989
10 .7(2) Amendment No. 1 to the Source Code Agreement between the Company and Microsoft dated October 1, 1992
10 .8(2) License Agreement for Microsoft OS/2 Version Releases 1.x, 2.x between the Company and Microsoft dated August 15, 1990
10 .9(2) Amendment No. 1 to the License Agreement between the Company and Microsoft dated August 15, 1990, Contract No. 5198-0228 dated May 6, 1991
10 .10(2) Amendment No. 2 to License Agreement between the Company and Microsoft for Microsoft OS/2 Version Releases 1.x, 2.x, dated October 1, 1992
10 .11(2) Amendment No. 3 to the License Agreement between the Company and Microsoft dated August 15, 1990, Contract No. 5198-0228 dated January 1, 1994
10 .12(2) Amendment No. 4 to the License Agreement between the Company and Microsoft dated August 15, 1990, dated January 31, 1995
10 .13(2) Strategic Alliance Agreement between the Company and Microsoft dated December 12, 1991
10 .14(2) Form of Indemnification Agreement
10 .15(6) License, Development and Marketing Agreement dated July 9, 1996 between the Company and Microsoft Corporation
10 .16(7) License, Development and Marketing Agreement dated May 9, 1997 between the Company and Microsoft Corporation
10 .17(8) Amendment No. 1 to License, Development and Marketing Agreement dated May 9, 1997 between The Company and Microsoft Corporation
10 .18(10) Employment Agreement dated as of August 1, 2001 by and between the Company and Roger W. Roberts
10 .19(10) Amendment to Employment Agreement with Roger W. Roberts as of January 17, 2002
10 .20(11) Microsoft Master Source Code Agreement by and between the Company and Microsoft, dated May 15, 2002

Exhibit
No. Description
10 .21(11) License Form by and between the Company and Microsoft Corporation, dated May 15, 2002 (with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission)
10 .22(11) Participation Agreement dated as of April 23, 2002, by and among Citrix Systems, Inc., Citrix Capital Corp., Selco Service Corporation and Key Corporate Capital, Inc. (the “Participation Agreement”) (with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission)
10 .23(11) Amendment No. 1 to Participation Agreement dated as of June 17, 2002 (with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission)
10 .24(11) Master Lease dated as of April 23, 2002 by and between Citrix Systems, Inc. and Selco Service Corporation (with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission)
10 .25 Amendment to Employment Agreement with Roger W. Roberts as of July 31, 2002
21 .1 List of Subsidiaries
23 .1 Consent of Ernst & Young LLP
24 .1 Power of Attorney (Included in signature page)
99 .1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99 .2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit No.
* ~~Indicates a management contract or any compensatory plan, contract or arrangement.~~
No. Description
2.1(6) ~~(1)~~ ~~Incorporated herein~~Agreement and Plan of Merger, dated as of March 20, 2001, by ~~reference to Exhibit~~ and among Citrix Systems, Inc., Soundgarden Acquisition Corp. and Sequoia Software Corporation
2.2(10) Agreement and Plan of Merger dated as of December 18, 2003 by and among Citrix Systems, Inc., EAC Acquisition Corporation, Expertcity.com, Inc., Edward G. Sim and Andreas von Blottnitz
2.3 Agreement and Plan of Merger dated as of November 21, 2004 by and among Citrix Systems, Inc., Hal Acquisition Corporation, Net6, Inc., and Tim Guleri
3.1(1) Amended and Restated Certificate of Incorporation of the ~~Company’s Annual Report on Form 10-K for the year ended December 31, 1999.~~Company
3.2(12) ~~(2)~~ Amended and Restated By-laws of the Company
3.3(2) Certificate of Amendment of Amended and Restated Certificate of Incorporation
4.1(1) Specimen certificate representing the Common Stock
10.1(11)* Fourth Amended and Restated 1995 Stock Plan
10.2(14)* Second Amended and Restated 1995 Non-Employee Director Stock Option Plan
10.3(8)* Third Amended and Restated 1995 Employee Stock Purchase Plan
10.4(9)* Second Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan
10.5(13)* 2000 Director and Officer Stock Option and Incentive Plan, Non-Qualified Stock Option Agreement
10.6(13)* 2000 Director and Officer Stock Option and Incentive Plan, Incentive Stock Option Agreement
10.7* Amended and Restated 2000 Stock Incentive Plan of Net6 Inc. (a subsidiary of Citrix Systems, Inc.)
10.8* Amended and Restated 2003 Stock Incentive Plan of Net6 Inc. (a subsidiary of Citrix Systems, Inc.)
10.9(4) License, Development and Marketing Agreement dated May 9, 1997 between the Company and Microsoft Corporation
10.10(5) Amendment No. 1 to License, Development and Marketing Agreement dated May 9, 1997 between the Company and Microsoft Corporation
10.11 Microsoft Master Source Code Agreement by and between the Company and Microsoft dated December 16, 2004
10.12 License Form by and between the Company and Microsoft Corporation dated December 16, 2004 (with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission)
10.13(7) Participation Agreement dated as of April 23, 2002, by and among Citrix Systems, Inc., Citrix Capital Corp., Selco Service Corporation and Key Corporate Capital, Inc. (the “Participation Agreement”) (with certain information omitted pursuant to a grant of confidential treatment and filed separately with the Securities and Exchange Commission)
10.14(7) Amendment No. 1 to Participation Agreement dated as of June 17, 2002 (with certain information omitted pursuant to a grant of confidential treatment and filed separately with the Securities and Exchange Commission)



10.15(7)		Master Lease dated as of April 23, 2002 by and between Citrix Systems, Inc. and Selco Service Corporation (with certain information omitted pursuant to a grant of confidential treatment and filed separately with the Securities and Exchange Commission)

10.16(15)*		2005 Executive Bonus Plan

21.1		List of Subsidiaries

23.1		Consent of Ernst & Young LLP

24.1		Power of Attorney (Included in signature page)

31.1		Rule 13a-14(a) / 15d-14(a) Certifications

31.2		Rule 13a-14(a) / 15d-14(a) Certifications

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

* Indicates a management contract or any compensatory plan, contract or arrangement.

(1)	Incorporated herein by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 33-98542), as amended.


	~~(3)~~ (2)	Incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.


	~~(4)~~ (3)	Incorporated herein by reference to exhibits of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.


	~~(5)~~	~~Incorporated herein by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.~~

	~~(6)~~	~~Incorporated herein by reference to Exhibit 10 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.~~

	~~(7)~~ (4)	Incorporated herein by reference to Exhibit 10 of the Company’s Current Report on Form 8-K dated as of May 9, 1997.


	~~(8)~~ (5)	Incorporated herein by reference to Exhibit 10 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.


	~~(9)~~ (6)	Incorporated by reference herein to Exhibit 2 of the Company’s Schedule 13D Report dated as of March 28, 2001.

~~(10)~~ ~~Incorporated herein by reference to exhibits to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.~~
~~(11)~~ (7) Incorporated by reference herein to exhibits of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.

(8)	Incorporated by reference herein to exhibits of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

(9)	Incorporated by reference herein to exhibits of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.

(10)	Incorporated herein by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K dated as of December 30, 2003.

(11)	Incorporated by reference herein to exhibits of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

(12)	Incorporated by reference herein to exhibits of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

(13)	Incorporated by reference herein to exhibits of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.

(14)	Incorporated by reference herein to exhibits of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

(15)	Incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated as of February 10, 2005.


¨		~~For the fiscal year ended December 31, 2002~~

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]


Delaware		75-2275152
~~Delaware~~		~~75-2275152~~
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

851 West Cypress Creek Road Fort Lauderdale, Florida		33309
(Address of principal executive offices)		~~33309~~ (Zip Code)


Part I:	~~ITEM 1. BUSINESS~~

Item 1.		~~ITEM 2. PROPERTIES~~Business	3

Item 2.		~~ITEM 3. LEGAL PROCEEDINGS~~Properties	11
	~~ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~
Item 3.		~~PART II~~Legal Proceedings	11

Item 4.		~~ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS~~Submission of Matters to a Vote of Security Holders	11
	~~ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA~~
~~ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~Part II:

Item 5.		~~ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~Market for Registrant’s Common Equity and Related Stockholder Matters, and Issuer Purchases Of Equity Securities	12

Item 6.		~~ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES~~Selected Consolidated Financial Data	14
	~~ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE~~
Item 7.		~~PART III~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 7a.		~~ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT~~Quantitative and Qualitative Disclosures About Market Risk	15

Item 8.		~~ITEM 11. EXECUTIVE COMPENSATION~~Financial Statements and Supplementary Data	44

Item 9.		~~ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT~~Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	44

Item 9a.		~~ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS~~Controls and Procedures	44

Item 9b.		~~ITEM 14. CONTROLS AND PROCEDURES~~Other Information	46
	~~ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K~~
~~SIGNATURES~~Part III:
~~POWER OF ATTORNEY AND SIGNATURES~~
Item 10.		~~CERTIFICATIONS~~Directors and Executive Officers of the Registrant	46
~~REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS~~
Item 11.		~~CONSOLIDATED BALANCE SHEETS~~Executive Compensation	46
~~CONSOLIDATED STATEMENTS OF INCOME~~
Item 12.		~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME~~Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	46
~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~
Item 13.		~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~Certain Relationships and Related Transactions	46
~~QUARTERLY FINANCIAL INFORMATION (UNAUDITED)~~
Item 14.		~~SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS~~Principal Accountant Fees and Services	46
~~EXHIBIT INDEX~~
~~Ex-10.4 Amended Employee Stock Purchase Plan~~Part IV:
~~Ex-10.25 Employment Agreement - Roger Roberts~~
Item 15.		~~Ex-21.1 Subsidiaries~~Exhibits and Financial Statement Schedules
~~Ex-23.1 Consent of Ernst & Young LLP~~
~~Ex-99.1 Certification of CEO~~
~~Ex-99.2 Certification of CFO~~47


		High		Low

Year Ended December 31, 2003:
	First quarter (through March 7, 2003)	$	14.76	$	11.59
Year Ended December 31, 2002:
	Fourth quarter	$	13.33	$	5.87
	Third quarter	$	6.52	$	5.00
	Second quarter	$	17.39	$	5.51
	First quarter	$	23.98	$	13.50
Year Ended December 31, 2001:
	Fourth quarter	$	25.80	$	19.81
	Third quarter	$	36.69	$	18.38
	Second quarter	$	34.90	$	18.19
	First quarter	$	36.63	$	17.31


	High		Low
Year Ended December 31, 2005:
First quarter (through March 8, 2005)	$	24.00	$	23.28
Year Ended December 31, 2004:
Fourth quarter	$	25.82	$	19.07
Third quarter	$	19.16	$	15.09
Second quarter	$	23.10	$	18.86
First quarter	$	22.72	$	18.50
Year Ended December 31, 2003:
Fourth quarter	$	26.94	$	21.16
Third quarter	$	24.50	$	16.93
Second quarter	$	23.26	$	13.30
First quarter	$	14.76	$	10.98

x
~~(Mark One)~~
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]


	•	~~Mixed Application Environments.~~Many businesses today use a mix of application platforms, making it difficult to deploy applications and information to all users. For example, deploying both UNIX and Windows applications to a user may require separate devices or emulation software.

	•	~~Mixed Device Environments.~~The growing popularity of wireless and diverse information appliances is adding to the wide array of client devices used in many enterprises. Such a mix of devices can cause accessibility and support problems.

	•	~~Remote Users.~~The diversity of network connection types, protocols and transmission speeds limits the ability of organizations to deploy Windows, UNIX, Java™ and Web-based applications on a cost-effective and efficient basis to remote users such as mobile workers, telecommuters and branch office personnel.

	•	~~Extended Enterprise.~~The extension of enterprise information systems to external users, such as suppliers, distributors and customers, creates application deployment issues that are outside the control of information systems managers. These include the quality, performance and security of the network connection, the client platform involved and the technical expertise of the external user.

	•	~~Internet and e-Business Initiatives.~~With the global adoption of the Internet and the drive to e-business, organizations need solutions for Web-enabling existing business applications without the time and cost required for re-engineering so they can be quickly included in corporate portals, intranets, extranets, and e-business infrastructures.

	•	~~Security.~~~~Delivering sensitive business information to remote users, especially over the Internet, raises concerns about protecting data and ensuring privacy.~~


	•		Citrix~~Remote Office Connectivity.~~^® MetaFrame^® Presentation Server for Windows. The foundation of the MetaFrame Access Suite, Citrix ~~provides users in remote offices with what~~MetaFrame Presentation Server is one of the world’s most widely deployed presentation servers for centrally managing heterogeneous applications and delivering their functionality as a service to workers, wherever they ~~need for maximum productivity: full-featured access~~may be. MetaFrame Presentation Server is certified to run on Microsoft^® Windows^® 2000 Server and Windows Server^™ 2003, and supports virtually any ~~application, quickly~~custom or commercially packaged Windows or Web application. MetaFrame Presentation Server provides an exceptional foundation to build highly scalable, flexible, secure, manageable access solutions that reduce computing costs and ~~with no compromise to~~increase the ~~user experience, and with consistent and reliable performance. Citrix’s scalable server-based architecture allows instant delivery~~utility of enterprise applications, which means new application or user provisioning that once took weeks can now be completed in minutes. Companies can leverage existing IT investments and extend their existing computing environments to offices nearly anywhere. And because control is server-based, applications can be delivered and managed with speed, ease, and confidence from a single reliable point.any information system.

	•		Citrix~~Application Deployment.~~^® MetaFrame^® Presentation Server for UNIX^®. With Citrix ~~provides a server-based system~~MetaFrame Presentation Server for UNIX, remote, mobile, and local end-users in heterogeneous environments can access UNIX and Java^™ applications from any device, over any connection, and no longer need multiple desktops or software emulation packages. Citrix MetaFrame Presentation Server for UNIX supports Sun Microsystems’ Solaris^™ SPARC 9, Sun Solaris Intel, Hewlett-Packard’s HP-UX^®, and IBM’s AIX^®, and now includes new features to ~~streamline application delivery, consolidate key corporate data~~extend performance, usability and reduce the time and resources required to deploy, implement and manage a full range of business applications — from enterprise resource planning and customer resource management to office productivity software. Updates to client code occur on a centralized server, reducing the impact on users and IT staff when market pressures force business processes to change. New users and acquired companies can be quickly added to the application user base, leading to near-immediate access and productivity. This solution Web-enables any existing Windows or UNIX applications, makes Web-based applications more efficient and easier to manage, and can offer substantial savings and improvements in security and stability.security.

	•	~~Workforce Mobility.~~Citrix access infrastructure software and services enhance workforce productivity by allowing virtually “any location, any device, any network” connectivity to full-featured enterprise applications and information without the need to download data provided minimum system and network requirements are met. With Citrix workforce mobility solutions, mobile professionals can access the same feature-rich software as their colleagues at headquarters. IT staffs gain the ability to centrally add and more easily support new users and applications as needs change. And corporate leaders appreciate the cost effectiveness of enhanced performance and security provided by a system in which applications and data reside safely on a centrally managed server with only mouse clicks and screen refreshes crossing the network.

	•	Citrix~~Business Continuity.~~^® MetaFrameCitrix access infrastructure software and services are designed to deliver uninterrupted access to enterprise applications across servers when a sudden information system interruption occurs. Citrix provides a vital component of a complete business continuity solution that can reduce the impact of natural, accidental, or man-made disruptions to the business by securely delivering critical applications and information from a fail-over data center not affected by the interruption. Files and applications are stored and managed centrally, giving users fast, easy and secure Web-based access to the resources they need and freeing IT staffs to focus on restoring corporate systems rather than reinstalling individual desktops. Citrix technology can preserve employees’ ability to access corporate information from alternative locations, enabling the organization to conduct business without significant interruption.^®


	•	~~MetaFrame Presentation Servers.~~Citrix MetaFrame presentation servers are available for both Windows based applications and UNIX based applications. The MetaFrame XP presentation servers for Windows based products are optimized for Windows NT®, Windows 2000 and Windows XP applications. These servers are designed to support large-scale implementations with as many as 100,000 users on 1,000 or more servers. MetaFrame XP presentation server for Windows is offered in three editions — MetaFrame XPs, MetaFrame XPa and MetaFrame XPe. Each edition is tailored to specific customer needs and computing environments.

	•	~~Citrix MetaFrame~~ Secure Access Manager.~~Introduced in June 2002 as NFuse® Elite,~~ Citrix MetaFrame Secure Access Manager is ~~based on technology acquired from Sequoia Software Corporation in April 2001. Citrix MetaFrame Secure Access Manager~~an access control center that provides, ~~secure, single-point access over the Web to a wide range of internal~~protects and external information resources including applications, data resources, documents, Web content and services. With a powerful set of easy-to-use, wizard-driven configuration tools, information technology administrators can enable browser-basedmanages access to business information without compromising security, even across public networks, by providing granular resource control through SmartAccess capabilities. SmartAccess provides identity-driven access tailored to virtually any end-user environment by sense-and-respond technology, improving productivity for end-users while ensuring a highly secure access environment for the ~~entire enterprise — personalized~~business. Citrix’s unique sense-and-respond technology autonomically analyzes the access scenario, then delivers the appropriate level of access without compromising security. Depending on who and where end-users are and what device and network they are using, end-users may be granted different levels of access – the ability to ~~each user’s needs, with secure connectivity over~~preview applications and documents but not edit them, for example, or the ~~Web.~~ability to edit but not save locally.


	•		Citrix ~~Consulting Services~~^TMConsulting. ~~(“CCS”).~~ The objective of ~~CCS~~Citrix Consulting is to help ensure the successful implementation of Citrix ~~technologies.~~access infrastructure solutions. Tested methodologies, certified professionals and best practices developed from real-world experience allow ~~CCS~~Citrix Consulting to provide expert guidance and support to our partners and customers to maximize the effectiveness of their total application ~~server computing~~access strategy and access infrastructure environment.

	•		Citrix Technical Support Services.To accommodate the unique ongoing support needs of customers, ~~preferred support services~~Citrix Technical Support Services are specifically designed to address the variety of challenges facing application server software environments. Citrix offers five support-level options, global coverage and personalized ~~relations~~relationship management.


~~ITEM 4.~~	*~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~*


ITEM 5.	*MARKET FOR REGISTRANT’S COMMON EQUITY, ~~AND~~ RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES*


	Total Number of Shares Purchased (1)	Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate dollar value of Shares that may yet be Purchased under the Plans or Programs (in thousands)
October 1, 2004 through October 31, 2004	155,590	$	20.17	(2)	155,590	$	81,049
November 1, 2004 through November 30, 2004	126,463	$	17.67	(2)	126,463	$	91,953	(3)
December 1, 2004 through December 31, 2004	164,051	$	24.93	(2)	164,051	$	41,954

Total	446,104	$	21.21	(2)	446,104	$	41,954


~~ITEM 6.~~	*~~SELECTED CONSOLIDATED FINANCIAL DATA~~*



			Year Ended December 31,

			2002			2001			2000			1999			1998


			(In thousands, except per share data)
Consolidated Statements of Income Data:
Net revenues			$	527,448		$	591,629		$	470,446		$	403,285		$	248,636
Cost of revenues (excluding amortization, presented separately below)				19,030			29,848			29,054			14,579			16,682

Gross margin				508,418			561,781			441,392			388,706			231,954
Operating expenses:
	Research and development			68,923			67,699			50,622			37,363			22,858
	Sales, marketing and support			235,393			224,108			180,384			121,302			74,855
	General and administrative			88,946			85,212			58,685			37,757			20,131
	Amortization of intangible assets(a)			11,296			48,831			30,395			18,480			10,190
	In-process research and development			—			2,580			—			2,300			18,416
	Write-down of technology(b)			—			—			9,081			—			—

		Total operating expenses		404,558			428,430			329,167			217,202			146,450

Income from operations				103,860			133,351			112,225			171,504			85,504
Interest income				30,943			42,006			41,313			25,302			10,878
Interest expense				(18,163	)		(20,553	)		(17,099	)		(12,532	)		(133	)
Other expense, net				(3,483	)		(2,253	)		(1,422	)		(1,549	)		(777	)

Income before income taxes				113,157			152,551			135,017			182,725			95,472
Income taxes				19,237			47,291			40,505			65,781			34,370
												��
Net income			$	93,920		$	105,260		$	94,512		$	116,944		$	61,102

Diluted earnings per share(c)			$	0.52		$	0.54		$	0.47		$	0.61		$	0.33

Diluted weighted-average shares outstanding(c)(d)				179,359			194,498			199,731			192,566			182,594



	December 31,

	2002		2001		2000		1999		1998


	(In thousands)
Consolidated Balance Sheet Data:
Working capital	$	186,410	$	153,554	$	427,344	$	433,249	$	158,900
Total assets		1,161,531		1,208,230		1,112,573		1,037,857		431,380
Long term debt, capital lease obligations, put warrants and common stock subject to repurchase		350,024		362,768		346,229		313,940		48
Stockholders’ equity		614,590		647,330		592,875		533,070		297,454


(a)	On January 1, 2002 the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible ~~Assets~~Assets.. Pursuant to SFAS No. 142, the Company ceased amortizing goodwill. ~~See Note 2 to the Company’s consolidated financial statements.~~

(b)	~~In the fourth quarter of~~During 2000, the Company recorded impairment write-downs of previously acquired core technology of $9.1 ~~million, as further discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.”~~million.


	~~the form of a stock dividend declared on March 1, 1999 and paid on March 25, 1999 to holders of record of the Company’s Common Stock on March 17, 1999; and~~ the two-for-one stock split in the form of a stock dividend declared on January 19, 2000 and paid on February 16, 2000 to holders of record of the Company’s Common Stock on January 31, 2000.


ITEM 7.	*MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*


	Expertcity			Net6
	Purchase Price Allocation		Asset Life	Purchase Price Allocation		Asset Life
Current assets	$	26,085		$	2,107
Property and equipment		1,998	Various		204	Various
In-process research and development		18,700			400
Intangible assets		50,800	3-7 years		20,300	3-7 years
Goodwill		165,758	Indefinite		33,506	Indefinite

Assets acquired		263,341			56,517
Current liabilities		13,617			2,836
Deferred tax liability		8,292			2,812

Total liabilities assumed		21,909			5,648

Net assets acquired, including direct transaction costs	$	241,432		$	50,869


	•	Delivery has occurred and we have no remaining obligations. Our standard delivery method is free-on-board shipping point. Consequently, we consider delivery of our packaged product to have occurred when the products are shipped to distributors pursuant to an agreement and purchase order. We consider delivery of licenses under electronic licensing agreements to have occurred when the related products are shipped and the end-customer has been electronically provided with the licenses that include the activation keys that allow the end-customer to take immediate possession of the software. For training and service revenue recognition, we fulfill our obligation when the services are performed.

	•	The fee is fixed or determinable. In the normal course of business, we do not provide end-customers the right to a refund of any portion of their license fees or extended payment terms. When we sell our software products separately, we determine vendor specific objective evidence, or VSOE, by the price charged for each product. In software arrangements that include the rights to multiple software products, post-contract customer support, or PCS, and/or other services, we allocate the total arrangement fee among each deliverable based on the relative fair value of each of the deliverables based on VSOE. If we cannot objectively determine the fair value of each undelivered element based on VSOE, we defer revenue until all elements are delivered, all services have been performed, or until fair value can be objectively determined.

	•	Collectibility is probable. We determine collectibility on a customer-by-customer basis. We typically sell to distributors or resellers for whom there are histories of successful collection. New customers are subject to a credit review process that evaluates the customers’ financial position and ultimately their ability to pay. Customers are subject to an ongoing credit review process. If we determine from the outset of an arrangement that collectibility is not probable, we defer revenue recognition until customer payment is received and the other parameters of revenue recognition described above have been achieved. Our judgment is required in assessing the probability of collection, which is generally based on evaluation of customer specific information, historical experience and economic market conditions. If market conditions decline, or, if the financial condition of our distributors or end-customers deteriorates, we may be unable to determine that collectibility is probable, and we could be required to defer the recognition of revenues until we receive customer payment.


	(A)	(B)		(C)
Plan	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (A))
Equity compensation plans approved by security holders	36,876	$	25.23	42,872
Equity compensation plans not approved by security holders*	52		3.86	—

Total	36,928	$	25.20	42,872


			Options Outstanding
	Options Available for Grant		Number of Shares		Weighted Average Exercise Price
Balance at December 31, 2002	30,001		41,221		$	24.51
Granted at market value	(5,575	)	5,575			16.19
Granted above market value	(349	)	349			12.00
Exercised	—		(4,723	)		11.64
Forfeited/cancelled	4,199		(4,199	)		28.14
Reduction in plan shares (1)	(500	)	N/A			N/A
Additional shares reserved	9,249		N/A			N/A

Balance at December 31, 2003	37,025		38,222			24.56

Granted at market value	(5,638	)	5,638			20.97
Granted below market value	(52	)	52			3.86
Exercised	—		(4,492	)		13.06
Forfeited/cancelled	2,491		(2,491	)		25.14
Additional shares reserved	9,046		N/A			N/A

Balance at December 31, 2004	42,872		36,928		$	25.20


	Exercisable			Unexercisable			Total
	Shares	Weighted Exercise Price		Shares	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
In-the-money	13,700	$	16.48	10,190	$	16.20	23,890	$	16.36
Out-of-the-money	11,825		42.68	1,213		28.84	13,038		41.39

Total options outstanding	25,525		28.62	11,403		17.55	36,928		25.20


	Individual Grants(1)
	Number of Securities Underlying Options Granted (#)	Exercise Price ($/share)		Expiration Date
Mark Templeton	37,500 37,500	$ $	22.47 17.55	April 13, 2009 August 2, 2009
John Burris	25,000 25,000 25,000	$ $ $	22.47 17.55 22.94	April 13, 2009 August 2, 2009 October 25, 2009
David Friedman	15,000 15,000	$ $	22.47 17.55	April 13, 2009 August 2, 2009
Stefan Sjostrom	12,500 22,500	$ $	22.47 17.55	April 13, 2009 August 2, 2009
David Henshall	17,500 17,500 25,000	$ $ $	22.47 17.55 22.94	April 13, 2009 August 2, 2009 October 25, 2009


	Shares Acquired on Exercise (#)	Value Realized ($)(1)		Number of Securities Underlying Unexercised Options at December 31, 2004		Values of Unexercised In- the-Money Options at December 31, 2004 ($)
	Shares Acquired on Exercise (#)	Value Realized ($)(1)		Exercisable	Unexercisable	Exercisable		Unexercisable(2)
Mark Templeton	—		—	2,011,458	191,042	$	9,656,322	$	1,514,173
John Burris	30,624	$	571,138	435,829	144,297	$	729,912	$	1,016,313
David Friedman	—		—	62,864	127,136	$	1,033,877	$	1,711,098
Stefan Sjostrom	27,187	$	459,186	233,432	101,631	$	354,767	$	781,473
David Henshall	—		—	83,333	176,667	$	841,663	$	1,372,087


	Year Ended December 31,									2004 Compared to 2003		2003 Compared to 2002
	2004			2003			2002			2004 Compared to 2003		2003 Compared to 2002
Revenues:
Software licenses	$	369,826		$	374,403		$	363,145		(1.2	)%	3.1	%
Software license updates		271,547			168,793			105,682		60.9		59.7
Services		99,784			45,429			44,539		119.6		2.0
Other		—			—			14,082		*		*

Total net revenues		741,157			588,625			527,448		25.9		11.6
Cost of revenues:
Cost of software license revenues		3,824			13,555			12,444		(71.8	)	8.9
Cost of services revenues		16,472			6,481			6,586		154.2		(1.6	)
Amortization of core and product technology		6,127			11,036			10,811		(44.5	)	2.1

Total cost of revenues		26,423			31,072			29,841		(15.0	)	4.1

Gross margin		714,734			557,553			497,607		28.2		12.0
Operating expenses:
Research and development		86,357			64,443			68,923		34.0		(6.5	)
Sales, marketing and support		337,566			252,749			235,393		33.6		7.4
General and administrative		106,516			85,672			88,946		24.3		(3.7	)
Amortization of other intangible assets		6,204			300			485		*		(38.1	)
In-process research and development		19,100			—			—		*		*

Total operating expenses		555,743			403,164			393,747		37.8		2.4

Income from operations		158,991			154,389			103,860		3.0		48.7
Interest income		14,274			21,120			30,943		(32.4	)	(31.7	)
Interest expense		(4,367	)		(18,280	)		(18,163	)	(76.1	)	0.6
Write-off of deferred debt issuance costs		(7,219	)		—			—		*		*
Other income (expense), net		2,754			3,458			(3,483	)	(20.4	)	199.3

Income before income taxes		164,433			160,687			113,157		2.3		42.0
Income taxes		32,887			33,744			19,237		(2.5	)	75.4

Net income	$	131,546		$	126,943		$	93,920		3.6		35.2



	Year Ended December 31,						Revenue			Revenue
							Growth			Growth
	2002		2001		2000		2001 to 2002			2000 to 2001

License Revenue	$	468,827	$	511,147	$	400,156		(8.3	)%		27.7	%
Technical Services Revenue		44,539		40,652		30,392		9.6			33.8
Royalty Revenue		14,082		39,830		39,898		(64.6	)		(0.2	)

Net Revenues	$	527,448	$	591,629	$	470,446		(10.8	)		25.8


	Year Ended December 31,						Revenue Growth 2003 to 2004		Revenue Growth 2002 to 2003
	2004		2003		2002		Revenue Growth 2003 to 2004		Revenue Growth 2002 to 2003
Americas(1)	$	335,436	$	291,470	$	255,438	15.1	%	14.1	%
EMEA(2)		293,690		243,890		209,520	20.4		16.4
Asia-Pacific		67,930		53,265		48,408	27.5		10.0
Citrix Online division		44,101		—		—	100.0		—
Other(3)		—				14,082	—		(100.0	)

Consolidated net revenues	$	741,157	$	588,625	$	527,448	25.9		11.6


(1)	Our Americas segment is comprised of the United States, Canada and Latin America.


	Payments due by period
	Total		Less than 1 Year		1-3 Years		4-5 Years		More than 5 Years
Operating lease obligations	$	106,243	$	20,813	$	29,524	$	17,407	$	38,499
Synthetic lease obligations		11,563		2,252		5,290		4,021		—

Total contractual obligations (1)	$	117,806	$	23,065	$	34,814	$	21,428	$	38,499