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Rational Software Reports Revenue and Pro Forma Net Income for The First Quarter of Fiscal Year 2002.

CUPERTINO, Calif., July 10 /PRNewswire/ --

Rational Software Corporation (Nasdaq: RATL), the e-development company(TM), today announced results for the first fiscal quarter ended June 30, 2001.

Revenue for the first quarter of fiscal 2002 increased to $175.8 million from $170.3 million for the same quarter last year or an increase of 3%.

The company reported pro forma net income and earnings per share on a diluted basis for the first quarter of fiscal 2002 of $16.2 million and $0.08, respectively, compared to pro forma net income and earnings per share of $26.9 million and $0.13, respectively, for the same period last year. This reflects a decrease in first quarter pro forma net income of 40% compared to the same period last year.

"As we stated last week, Rational was negatively impacted by weakness in our international business -- particularly right at the end of the quarter," said Paul Levy, chairman and co-founder of Rational Software. "Highlights of the first quarter include the new products shipped in the latest release of our flagship Rational Suite product line, the broadening of our customer base, and the number of large deals we closed -- demonstrating the attractiveness of Rational's value proposition to our customers. We believe Rational is in a strong position to accelerate our growth once the global economic environment improves."

Pro forma earnings per share for the periods reported exclude one-time charges for purchased in-process R&D, amortization of goodwill and purchased intangibles, amortization of stock-based compensation related to recent acquisitions, and restructuring charges, as well as the net activity (operating expenses and interest income less portion allocated to minority interest) incurred by Catapulse Inc. prior to the completion of the Catapulse acquisition on February 5, 2001.

As reported net loss and loss per share on a diluted basis for the first quarter ended June 30, 2001 was $24.8 million and $0.13, respectively, compared to as reported net income and earnings per share of $19.4 million and $0.10, respectively, for the same period last year.

Management will host a conference call to review today's announcement beginning at 2:00 p.m. Pacific Daylight Time today, 5:00 p.m. Eastern Daylight Time. Domestic parties may access the call by dialing 1.888.769.8713. International parties may access the call by dialing 312.470.7405. The pass code for both dial-in numbers is RATIONAL. Interested parties may also listen to the conference call via live broadcast over the Internet at http://www.rational.com/corpinfo/investor/index.jsp.

For those unable to participate in the live call, a replay will be available approximately two hours after the earnings call ends. The replay numbers are 1.800.810.4033 for domestic callers and 402.280.1620 for international callers. No password is required for the replay.

( Photo: http://www.newscom.com/cgi-bin/prnh/20010417/RATLLOGO )

About Rational Software Corporation

Rational Software provides a platform for software development that speeds time-to-market while improving software quality. This integrated, full life- cycle solution combines software engineering best practices, market-leading tools, and professional services. Ninety of the Fortune 100 and 49 of the Fortune e-50 build software with the Rational solution. This open platform is extended by hundreds of partners providing more than 500 complementary products and services. IDC has recognized Rational as the revenue leader in multiple application development and deployment markets for four years in a row. Founded in 1981, Rational, one of the world's largest software companies, had revenues of $820.4 million in its twelve months ended June, 2001 and employs more than 3,800 people around the world.

Rational is a component of the Nasdaq-100 Index(R). Additional information is available on the Internet at http://www.rational.com/

Rational Software Corporation

Pro Forma Statements of Operations

(in thousands, except percentage figures and per share data)

Three months ended June 30

(unaudited)

2001 % 2000 %

Net product revenue $83,314 47 $99,300 58

Consulting and

support revenue 92,479 53 70,997 42

Total revenue 175,793 100 170,297 100

Cost of product revenue 4,498 3 5,820 3

Cost of consulting

and support revenue 20,400 11 18,176 11

Total cost

of revenue 24,898 14 23,996 14

Gross margin 150,895 86 146,301 86

Operating expenses:

Product research and

development expenses 47,661 27 31,900 19

Sales and

marketing expenses 73,564 42 70,950 41

General and

administrative

expenses 12,964 7 10,025 6

Total

operating

expenses 134,189 76 112,875 66

Operating income 16,706 10 33,426 20

Other income, net 6,393 3 4,982 3

Income before

income taxes 23,099 13 38,408 23

Provision for

income taxes 6,930 4 11,517 7

Net income $16,169 9 $26,891 16

NOTE: PRO FORMA ONLY

Net income per common share:

Basic $0.08 $0.15

Diluted $0.08 $0.13

Shares used in computing per share amounts:

Basic 196,872 182,968

Diluted 211,369 201,330

The above pro forma statements of operations for the quarter ended June 30, 2001 have been adjusted to present the Company's operating results excluding one-time charges for purchased in-process R&D, amortization of goodwill and purchased intangibles, amortization of stock-based compensation related to recent acquisitions, and restructuring charges, as well as the net activity (operating expenses and interest income less portion allocated to minority interest) incurred by Catapulse Inc. prior to the completion of the Catapulse acquisition on February 5, 2001.

The following table reflects the differences between pro forma and as- reported net income (loss) (in thousands):

Three months ended

June 30

(unaudited)

2001 2000

As reported net income (loss) $(24,808) $19,361

Activity relating to Catapulse:

Deferred compensation - 190

Research and development expenses - 6,393

Interest earned on cash and cash equivalents - (1,053)

Minority interest - (1,989)

Total Catapulse activity, net of minority interest - 3,541

Amortization of goodwill and purchased intangibles,

net of tax, relating to

recent acquisitions 19,637 3,989

Amortization of stock based compensation,

net of tax 10,941 -

Restructuring costs, net of tax 10,399 -

Pro forma net income $16,169 $26,891

Rational Software Corporation

Condensed Consolidated Statements of Operations

(in thousands, except percentage figures and per share data)

Three months ended June 30

(unaudited)

2001 % 2000 %

Net product revenue $83,314 47 $99,300 58

Consulting and

support revenue 92,479 53 70,997 42

Total revenue 175,793 100 170,297 100

Cost of product revenue 8,184 5 6,488 4

Cost of consulting and

support revenue 20,400 11 18,176 11

Total cost

of revenue 28,584 16 24,664 15

Gross margin 147,209 84 145,633 85

Operating expenses:

Product research and

development expenses 47,661 27 38,293 23

Sales and marketing

expenses 73,564 42 70,950 41

General and

administrative

expenses 12,964 7 10,025 6

Amortization of goodwill

and purchased

intangibles 17,987 10 3,321 2

Amortization of stock

based compensation 18,236 11 190 -

Restructuring costs 17,331 10 - -

Total operating

expenses 187,743 107 122,779 72

Operating income

(loss) (40,534) (23) 22,854 13

Other income, net 6,393 3 6,035 4

Income (loss)

before income taxes (34,141) (20) 28,889 17

Provision for

income taxes (9,333) (6) 11,517 7

Minority interest - - (1,989) (1)

Net income (loss) $(24,808) (14) $19,361 11

Net income (loss) per common share:

Basic $(0.13) $0.11

Diluted $(0.13) $0.10

Shares used in computing per share amounts:

Basic 196,872 182,968

Diluted 196,872 201,330

Rational Software Corporation

Condensed Consolidated Balance Sheets

(in thousands)

June 30, March 31

2001 2001

(unaudited)

Assets

Current assets:

Cash and cash equivalents

and short-term investments $984,332 $1,040,821

Accounts receivable, net 162,088 206,099

Prepaid expenses and other assets 31,798 21,902

Deferred tax asset 16,727 16,727

Total current assets 1,194,945 1,285,549

Property and equipment, net 100,641 103,239

Goodwill and purchased intangibles, net 291,938 294,824

Other assets, net 26,331 25,711

Total assets $1,613,855 $1,709,323

Liabilities and stockholders' equity

Current liabilities:

Accounts payable $11,308 $23,909

Accrued employee benefits 38,364 68,624

Income taxes payable 25,608 30,788

Other accrued expenses 51,562 49,753

Accrued merger and restructuring expenses 17,528 19,970

Deferred revenue 170,446 166,531

Total current liabilities 314,816 359,575

Convertible subordinated notes 500,000 500,000

Long term deferred tax liabilities 43,906 57,900

Other noncurrent liabilities 24,574 25,594

Total liabilities 883,296 943,069

Stockholders' equity:

Common stock 743,922 754,809

Retained earnings/(Accumulated deficit) (13,363) 11,445

Total stockholders' equity 730,559 766,254

Total liabilities and

stockholders' equity $1,613,855 $1,709,323

The word "Rational" and Rational's products are trademarks of Rational Software Corporation. References to other companies and their products use trademarks owned by the respective companies and are for reference purposes only.

For more information contact:

Rational Software Corporation

18880 Homestead Road

Cupertino, CA 95014

Tel. (408) 863-9900 or (800) 728-1212

Fax (408) 863-4133

Fax-on-demand: 1-800-758-5804 Pin: 113375

E-mail: info@rational.com; Web: www.rational.com

Contacts:

Press:

Bill Durling, Director of Corporate Communications

(781) 372-5886

bdurling@rational.com

Financial:

Timothy A. Brennan, Chief Financial Officer

(408) 863-4500

David Henshall, Treasurer

(408) 863-4500

ir@rational.com

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