Research and Development Expenses. Research and development expenses consist primarily of salaries, project consulting and related overhead costs for product development. Research and development expenses increased 9% to $163.3 million for 1999 from $149.6 million for 1998 and $141.5 million for 1997. The increase in research and development expenses during 1999 was attributable primarily to increased amortization of intangible assets resulting from the acquisition of Red Brick and a slight increase in average headcount during 1999, offset by an increase of $4.0 million in the amount of product development expenditures capitalized in 1999 compared to 1998. The increase for 1998 was primarily due to increased salary and benefits and a 10% decrease in the amount of product development expenditures capitalized in 1998 compared to 1997. This decrease in capitalized expenditures was attributable to the fact that, during the first half of 1997, a large portion of expenditures incurred were on products that had reached technological feasibility but had not yet been commercially released. As a percentage of net revenues, research and development expenses have decreased slightly to 19% for 1999, from 20% and 21% for 1998 and 1997, respectively, which is the level that we believe is consistent with our long-term objectives for research and development spending.

General and Administrative Expenses. General and administrative expenses consist primarily of finance, legal, information systems, human resources, bad debt expense and related overhead costs. General and administrative expenses were $78.6 million in 1999 as compared with $77.0 million in 1998, an increase of 2%. During 1999, general and administrative expenses decreased as a percentage of net revenues to 9% from 10% in 1998. During 1998, general and administrative expenses decreased 13% to $77.0 million from $88.1 million for 1997. The decrease in 1998 in absolute dollars and as a percentage of net revenues was primarily the result of a reduction in bad debt expense due to our efforts to better manage both the amount and credit risk of our accounts receivable balances, offset by increases in legal and other professional service fees, consulting fees and average headcount.

Write-Off of Goodwill and Other Long-Term Assets. During the first quarter of 1997, our Japanese subsidiary experienced a significant sales shortfall and operating losses. Accordingly, we evaluated the ongoing value of the subsidiary’s long-lived assets (primarily computer and other equipment) and goodwill. Based on this evaluation, we determined that the subsidiary’s assets had been impaired and wrote them down by $30.5 million to their estimated fair values. Fair value was determined by using estimated future discounted cash flows and/or resale market quotes as appropriate.

Write-Off of Acquired Research and Development. In connection with our acquisition of Red Brick in December 1998, and our acquisition of Centerview Software, Inc. (“Centerview”) in February 1997, we recorded charges of $2.6 million and $7.0 million in 1998 and 1997, respectively.

Our December 1998 acquisition of Red Brick has been accounted for as a purchase. We issued approximately 7.6 million shares of our Common Stock to acquire all of the outstanding shares of Red Brick common stock. We also reserved an additional 2.5 million shares of our Common Stock for issuance in connection with the assumption of Red Brick’s outstanding stock options and warrants.

The purchase price was allocated to the fair value of the acquired assets and assumed liabilities based on their fair values at the date of acquisition. The total purchase price of $55.8 million included the issuance of stock and the assumption of stock options (together $35.9 million, net of issuance costs), direct acquisition costs of $1.0 million, accrued merger and integration costs of $7.9 million and liabilities assumed of $11.0 million. Of the total purchase price, $2.6 million was allocated to in-process research and development expense that had not yet reached technological feasibility and had no alternative future uses, $7.8 million was allocated to cash and short-term investments, approximately $10.2 million was allocated to other tangible assets, $7.4 million was allocated to capitalized software, $4.7 million was allocated to the acquired workforce and $23.1 million was allocated to goodwill. Goodwill, capitalized software and the acquired workforce are intangible assets which are being amortized over their estimated lives, which average five years.