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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 0-15325

Ascential Software Corporation

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ         No o

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes þ         No o

     The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2002 based on the closing sales price of the Company’s common stock, as reported on The NASDAQ Stock Market, was $691.9 million. Shares of common stock held by each executive officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not intended as a conclusive determination for any other purpose.

     As of February 28, 2003, the registrant had 231,522,363 shares of Common Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant’s definitive proxy statement for its annual meeting of stockholders for the fiscal year ended December 31, 2002, which will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year, are incorporated by reference into Part III hereof.

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ASCENTIAL SOFTWARE CORPORATION

ANNUAL REPORT ON FORM 10-K

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Ascential, DataStage, INTEGRITY and MetaRecon are trademarks of Ascential Software Corporation or its affiliates and may be registered in the United States or other jurisdictions. Other marks are the property of the owners of those marks.

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PART I

      This report contains forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results. These risks and uncertainties include, but are not limited to, those set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Future Results” and elsewhere in, or incorporated by reference into, this report. Readers of this report should review carefully these factors as well as the description of risks and uncertainties, which, together with other detailed information about us, is contained in other documents and periodic reports that we file from time to time with the Securities and Exchange Commission. These forward-looking statements reflect management’s opinions only and only as of the date of this report and we disclaim any obligation to update or revise these statements.

Item 1.     Business

Business Overview

      Overview. Headquartered in Westborough, Massachusetts since July 2001, Ascential Software Corporation is a leading supplier of enterprise integration solutions to the Global 2000 and other large organizations. We believe that our Enterprise Integration Suite, built upon a highly scalable platform, is the industry’s only solution that addresses the full data integration life cycle, and turns data into “Intelligent Information” — information that is reliable, relevant, and complete — so organizations can make better-informed business decisions and drive their strategic application initiatives.

      We were incorporated in Delaware in 1986 and, until the third quarter of 2001, operated under the name “Informix Corporation”. Effective January 1, 2001, we consolidated our business units into two operating segments: (i) Informix Software, which operated our database software systems business, and (ii) Ascential Software, which operated our extract, transform and load (“ETL”) and digital asset management software and solutions business. During the third quarter of 2001, we completed the sale of our database business assets, including the name “Informix”, to IBM for $1.0 billion in cash, which we refer to as the “IBM Transaction” (see Note 14 to the Notes to Consolidated Financial Statements). In connection with the IBM Transaction, we changed our name to “Ascential Software Corporation” and changed the symbol under which our stock is traded on the NASDAQ National Market to “ASCL”. These changes became effective in July 2001. During 2002, after the sale of the assets related to our database business, our sole operating segment has been our Ascential Software business.

      Our revenues for 2002, 2001 and 2000 attributable to all operations were $113.0 million, $481.3 million and $929.3 million, respectively. Net loss in 2002 was $63.6 million, net profit in 2001 was $624.9 million and net loss in 2000 was $98.5 million. Total assets were $910.7 million, $1,079.7 million and $655.9 million, respectively, in 2002, 2001 and 2000. Revenues and profit or loss in 2001 and 2000 include amounts attributable to the Informix Software assets that were sold to IBM in July 2001.

      Industry Background. Data integration is the means by which organizations understand the data scattered throughout or external to their organization, access it and deliver it, adapted for its intended use, to enterprise applications and data warehouses. Historically, many organizations accomplished this through internal hand-coded programs that would extract data from one or more sources and deliver it to a target system. By the mid-1990s companies such as Ascential began developing packaged applications that would efficiently accomplish this basic ETL function. By accessing data from various disparate sources and delivering it to the applications that require it, business users can leverage those applications to make mission-critical decisions.

      Data integration has evolved from earlier ETL functionality to today encompass additional functionality, such as expanded connectivity, data profiling, data quality, bi-directional metadata (data about data) management and highly scalable parallel processing technology. Key factors and trends driving demand for packaged data integration solutions include:

	•	Substantial investments in enterprise applications are failing to realize expected return on investment due to inadequately addressed data issues.

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	•	Data volume and data complexity are both expanding at a rapid pace, straining the ability of in-house coding to keep up.
	•	“Real time” functionality is becoming a much more prevalent requirement, which in-house coding may be ill-equipped to address.
	•	Many in-house programming organizations do not have adequate time or resources to devote to the creation of additional functionality such as data profiling, data quality, bi-directional metadata management and highly scalable parallel processing technology.

      Solution. Our products for automated data profiling, data quality management and cleansing, and data transformation address the needs of organizations that have invested in enterprise applications such as customer relationship management (“CRM”), enterprise resource planning (“ERP”), supply chain management (“SCM”), analytic applications, or data stores such as data warehouses and data marts.

      We have combined the functionality of all of our core integration services onto a single enterprise integration platform that provides end-to-end metadata management. Our integration platform provides definition and history of the data used to drive strategic enterprise applications. It also provides connectivity between virtually any standard data source and target application, and virtually unlimited scalability of operations through parallel processing. This complete offering is called our Enterprise Integration Suite.

      We also offer a full range of consulting, educational and support services to assist our clients through all phases of a project. Based on proven methodologies, these services represent years of accumulated capital in terms of knowledge and experience, gained through many successful engagements across a range of industries and enterprise application requirements.

      We support more than 2,200 customers in such industries as insurance, financial services, healthcare/life sciences, manufacturing, consumer goods, retail, telecommunications and government, in all major markets around the world. One of our reseller partners, IBM, accounted for more than 10% of our revenues in 2002. Termination of our relationship with IBM, if it were to occur, could have a material impact on our financial results if the related revenue is not replaced.

      Products. Our products are designed to operate as part of our Enterprise Integration Suite, or as stand-alone integration components. Our product functionality includes: automated data profiling to analyze and manage source data content and structure; data quality and cleansing to identify, correct and reconcile inaccurate or redundant data; and data transformation to obtain data from a source, format it as required for its intended purpose, and deliver it to a specified target system. Our products are supported by a comprehensive platform of integration services that delivers end-to-end metadata management, connectivity between virtually any standard data source and application, and virtually unlimited scalability by virtue of massively parallel processing technology. This combination of integration products built on a platform of integration services forms our Enterprise Integration Suite.

      Our Enterprise Integration Suite offers a comprehensive, modular solution that can expand with business needs or as customer budgets dictate. We believe our customers benefit from the ability to deploy the complete Enterprise Integration Suite to address the entire enterprise integration life cycle, or use individual integration products and add other components as needed. This approach allows customers to achieve complete integration through purchase of the entire Enterprise Integration Suite, or to realize targeted benefits through purchase of one or more components of the Enterprise Integration Suite, with the ability to later add the other components to create a single, integrated solution.

      Our MetaRecon product, acquired from Metagenix, Inc. (“Metagenix”) on March 31, 2002, is one of the core data profiling products in our Enterprise Integration Suite. MetaRecon facilitates understanding of data sources by profiling source data, analyzing column values and structures, and providing target database recommendations, such as primary keys, foreign keys, and table normalizations. Based on this information,

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      Our INTEGRITY product, acquired through the acquisition of Vality Technology Incorporated (“Vality”) on April 3, 2002, is the core data quality component of our Enterprise Integration Suite. INTEGRITY is designed to ensure that strategic systems deliver accurate, complete information to business users seeking a single view of customers, suppliers, and products from across their enterprise. Through a user-friendly graphical interface, INTEGRITY provides quality control mechanisms over structured data elements — international names and addresses, phone numbers, birth dates, part numbers and descriptions, suppliers, email addresses and other data — and seeks to determine relationships among them. Based on rigorous statistical principles, INTEGRITY’s matching capabilities are designed to detect duplications (despite anomalous, inconsistent, and missing data values) and reconcile or discard records as appropriate.

      DataStage, our data transformation and integration solution, is designed to integrate enterprise information across various sources and targets within specified timeframes. DataStage features a powerful architecture designed to give developers increased speed and flexibility in building, deploying and managing their data integration infrastructure. With features such as a graphical user interface driven “work as you think” design metaphor, a library of over 300 pre-built transformations, support for job reuse, versioning and sharing, and event-based job scheduling, DataStage is designed to enable companies to minimize internal resources allocated to development of integration jobs. Additionally, DataStage incorporates Packaged Application Connectivity Kits (“PACKs”) for many popular enterprise applications, including SAP, Siebel, Oracle and PeopleSoft.

      Our enterprise integration platform is the foundation of our Enterprise Integration Suite. The enterprise integration platform supports our products with core services and capabilities for extensive scalability by virtue of technology gained through our November 2001 acquisition of Torrent Systems Inc. (“Torrent”). Users can design MetaRecon, INTEGRITY and DataStage solutions for simplistic single CPU deployment, and then our patented parallel processing technology will automatically reconfigure the solution to take advantage of complex symmetric multiprocessing or massively parallel processing CPU configurations to significantly increase throughput. This may preserve the longevity of IT investments and minimize the need for skilled personnel to modify jobs in response to increasing volumes or hardware upgrades. Additionally, the integration platform incorporates enterprise metadata management providing cross-tool impact analysis and data lineage reporting. The metadata visibility may increase user understanding and confidence in integrated data while enabling reuse and faster redeployment of preexisting integration jobs.

      Services. We believe that a highly skilled customer service organization is a key factor in our success in the enterprise integration software market. While services are not necessary to benefit from our software products, our professional services consultants offer customers the ability to implement their integration projects faster and can often structure implementation to optimize user-defined objectives. In addition to professional service consulting fees, services revenues consist primarily of software maintenance and support fees and customer training fees.

      We maintain both field-based and centralized corporate technical staffs to provide a comprehensive range of assistance to customers and partners. Services include post-sales technical support, consulting, and product education. Consultants and educators provide services to customers to assist in their use of our products and their design and development of applications that utilize our products.

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      We also provide customer service via telephone, e-mail exchange and web site access. All of our maintenance customers have access to customer service resources, delivered by service professionals focused on resolution of customer issues.

      We offer a variety of consulting services to our customers directly and through third-party systems integrators. Consulting services include implementation assistance, project planning and deployment, and software customization. Our advanced consulting group is focused on helping customers implement new technologies and product releases. We complement our professional service offerings by working with leading international and regional third-party consulting and systems integration firms to provide customers with a full range of service options.

      We offer comprehensive education and training courses that provide a full selection of classroom, computer-based certification, and custom education offerings intended to assist customers and partners to optimally deploy and use our products. Training is also available to value-added resellers, systems integrators and embedded resellers.

      Strategy. Our business objective is to become the leading provider of enterprise integration software solutions to the Global 2000 and governmental entities. Key elements of the strategy to achieve this business objective are as follows:

	•	We have engaged in a deliberate expansion of our original ETL product offering through internal development and through external acquisitions to encompass broader connectivity, data profiling, data quality, rich metadata management and parallel processing technology. Today we have a complete end-to-end data integration offering, which we believe is unique in the industry and provides us meaningful competitive differentiation.
	•	We have expanded relationships with key strategic partners such as IBM, SAP, business intelligence vendors and systems integrators to broaden our market reach. By the end of 2002, the proportion of our license revenue from, or strongly influenced by, partners was approximately 50%. Barring unforeseen circumstances, we expect partners to account for a comparable, or greater, proportion of license revenue in the future.
	•	Our marketing and sales organization is increasing our visibility and brand awareness through a number of initiatives, including establishing a Customer Advisory Board, scheduling our first global user group meeting, conducting public relations activities, participating in major industry and partner events, actively maintaining industry analyst relations, conducting web-based seminars and direct email campaigns, communicating through our web site and continual direct sales and account management contact with customers and prospects.
	•	We have dedicated substantial financial resources to broadening and deepening our enterprise data integration platform, and our plan is to utilize our resources in the future to continue building out a platform that can deliver the combined features of enterprise data, applications and business process integration.

Sales and Marketing

      We distribute products through four main channels: direct sales end-user licensing, value-added resellers, systems integrators and embedded resellers. We also regularly receive customer referrals from enterprise applications and business intelligence vendors whose customers can benefit from the data integration functionality of our products. We use a multiple channel distribution strategy to maintain broad market coverage and competitiveness. Discount policies and reseller licensing programs are intended to support each

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      Historically, our sales patterns have demonstrated seasonality over the course of the year. Typically the first quarter is weaker because many customers have just completed their fourth quarter and used their budget allocations for the prior year. The second quarter generally shows increases in spending over the first quarter. The third quarter tends to be weaker than the second quarter due to extensive vacation and holiday schedules, primarily in Europe, which slows software spending decision cycles. The fourth quarter has historically been the strongest revenue quarter of the year, as customers complete their capital spending for the year. Although these patterns have been prevalent in the past, there is no guarantee that these trends will continue, or that they will persist despite factors that affect the economy or IT investment by companies domestically and abroad. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Future Results”.

      In support of our sales efforts, we conduct comprehensive marketing programs, which include telemarketing, direct mail and e-mail campaigns, public relations activities, seminars, tradeshows and ongoing customer communications programs. The sales cycle begins with the generation of a sales lead, or often the receipt of a request for proposal or request for information from a prospective customer, followed by a qualification of the lead, analysis of the customer’s needs, response to the request for proposal or request for information (if solicited by the customer), one or more presentations to the customer, proof of concept if required, customer internal approval activities, contract negotiation and shipment to the customer. While the sales cycle from customer to customer can vary considerably, the sales cycle has in recent years ranged from approximately three to twelve months.

      Our sales and marketing strategy is based on building and maintaining our position as category and thought leader with our customers and key industry influencers and forging strong relationships with organizations that can positively influence the sale of our products. Our customers and prospective customers often rely on third-party systems integrators or other technology partners, such as analytic, database, enterprise software and hardware vendors to structure, develop, deploy and manage an overall solution that may include our products. We have conducted several joint marketing and sales programs with partners in each of these categories and continue to invest in market development activities that include market education, seminars, direct mail campaigns and conference and exhibition participation.

Long-lived assets

      We have recorded long-lived assets, such as property and equipment, software costs, goodwill, intangible assets and the receivable from the sale of the database business. The total value of these long-lived assets was $205.5 million, $220.7 million and $186.2 million, respectively, at December 31, 2002, 2001 and 2000. In the United States, the value of these long-lived assets was $202.7 million, $212.8 million and $165.7 million at December 31, 2002, 2001 and 2000, respectively. The value of these long-lived assets attributable to international operations was $2.7 million, $8.0 million and $20.5 million at December 31, 2002, 2001 and 2000, respectively. The December 31, 2000 value for these assets includes value attributable to the Informix database business that year.

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Licensing

      We license software to organizations worldwide through a direct sales force. Our infrastructure solutions are sold principally to Global 2000 and government agencies and organizations seeking to convert their volumes of unrefined data into reliable and reusable information assets. Our observation has been that certain organizations have begun to standardize their information solutions enterprise-wide and are entering into more global enterprise agreements. This can result in volume-based discounts for those organizations that deploy our products on a large scale.

      We license products to value-added resellers, such as IBM, who in turn distribute our products as part of their total solutions. A typical reseller sells our products to handle the integration of data into or from their applications (such as a data management solution or an analytic application for risk management). We also work with many business intelligence and applications vendors whose customers demand the capabilities of our product. These vendors usually do not resell our products to their customers directly, but rather refer these customers to us.

      We provide specialized programs to support our reseller distribution channel. Under these programs, we have provided a combination of marketing development services, consulting and technical marketing support and discounts.

      Systems integrators typically do not sell our software. In most cases they include us in a project in which one or more elements of our integration suite is required in order to fulfill their clients’ needs.

      We also conduct business through embedded resellers who sell our technology as components of their offerings, but the amount of revenue from this source is not currently significant.

      We offer our customers a variety of options with respect to software maintenance and upgrade support. Enhanced enterprise support offerings are also available for customers seeking additional services and support. We currently offer four progressive levels of maintenance offerings ranging from web-based e.Support to Premier (8:00–5:00 local) to Premier Anytime (24 X 7) to Enterprise Support, which incorporates service level agreements. We also provide an e.Learning facility that is a key component of our Premier, Premier Anytime and Enterprise Support offerings.

Competition

      The enterprise integration software market is extremely competitive and subject to rapid technological change and frequent new product introductions and enhancements. Our competitors in the market include in-house hand coded solutions, vendors that develop and market certain aspects of the data integration requirement and certain business intelligence vendors who have embedded limited data transformation and loading capabilities into their offerings. Principal competitors relative to our DataStage offering include ETI, Hummingbird, Informatica and Sagent as well as enterprise software vendors who have embedded ETL capabilities. Competitors for MetaRecon, our data profiling offering, include Avellino and Evoke. Competitors for INTEGRITY, our data quality offering, include Firstlogic, Innovative Systems, Group One and Trillium. We believe that there is no single competitor that competes across the full range of our enterprise integration platform at present. We believe that we are a strong competitor in the market with each of our data integration component products, and the industry leader in providing end-to-end data integration.

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      Competitors in the enterprise integration market compete primarily on the basis of product performance and capabilities but also technical product support, services and price. We believe that the following factors influence our competitive position in the market:

	•	Breadth and completeness of each product to meet or exceed the functional requirements of its specific market.
	•	The ability of products to interoperate synergistically together, providing an end-to-end solution for data integration tasks, accelerating time to market while reducing overall implementation costs.
	•	The ability of each product to maximize investments in hardware and software, to achieve operational efficiencies, and scale with increasing and extremely large data volumes.
	•	Reliability and serviceability of products.
	•	Total cost of ownership.
	•	The desire of customers to reduce the number of vendors with whom they do business.
	•	Availability of a comprehensive services offering.
	•	Vendor viability and commitment to the enterprise integration market.
	•	The ability to develop, introduce and support innovative products and the market’s acceptance of such technical innovations.

Product Development

      Major product releases resulting from research and development projects in 2002 included the following:

	•	Enterprise Integration Suite 6.0 combines our three core data integration products into a complete solution powered by our integration platform capable of scaling to process virtually unlimited data loads. The core capabilities of our integration platform include a sophisticated parallel processing engine enabling virtually unlimited scalability, enterprise meta data management, and PACKs for many of today’s most popular enterprise applications. The following product sets are included in the suite:

	•	DataStage, DataStage XE, and DataStage 390, which are our products that provide the complex transformation functionality required for addressing both ETL and enterprise data integration market requirements. These products were significantly enhanced as part of the version 6.0 release, including: massive scalability through parallel processing, enhanced ease of use and improved user productivity, expanded connectivity and improved transformation functionality.
	•	INTEGRITY Version 6.0, which is our data quality solution. Version 6.0 enhancements to INTEGRITY include: massive scalability through parallel processing, integration with the rest of our enterprise integration suite, improved reporting and real-time processing.
	•	MetaRecon Version 6.0, which is our data profiling and data source system analysis product. MetaRecon accelerates the source data investigation phase of an integration project and improves the quality of completeness of this phase. The version 6.0 release of MetaRecon added scalability through integration with our parallel processing engine as well as support for today’s most popular Unix platforms.
	•	Database Adaptors and Connectivity PACKs to most of today’s leading enterprise-class databases, including IBM, DB2, Oracle, Teradata, SYBASE, Microsoft SQL Server, as well as leading enterprise applications, including SAP, Siebel, Peoplesoft, Oracle Financials and J.D. Edwards.

      Our current product development efforts are focused on:

	•	Enhancing the capabilities of our product set to support existing and emerging standards, including XML, JMS, JCA and Web Services.

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	•	Further enhancing performance and scalability.
	•	Extending the real-time capabilities of our data integration infrastructure as well as expanding connectivity to enterprise applications and messaging services.
	•	Enhancing the usability of all of our infrastructure solutions.
	•	Extending the functionality of our data integration infrastructure to address broader market requirements, including enhanced data quality and data-centric application integration.
	•	Enhancing solutions to leverage new hardware platforms and emerging software industry standards, including Linux.

Research and Development Expenditures

      Our research and development expenditures for 2002, 2001 and 2000 were $24.0 million, $87.0 million and $166.1 million, respectively, representing approximately 21%, 18% and 18%, respectively, of net revenues for these periods. Amounts spent on research and development in 2001 and 2000 included expenditures for the Informix database products, sold to IBM in the IBM Transaction, expenditures attributable to product development activities relating to our discontinued content management product line, which was discontinued in the second quarter of 2002 and termination of our i.Sell product that was discontinued in the first quarter of 2001. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Costs and Expenses.”

Intellectual Property

      We regard certain aspects of our internal operations, products and documentation as proprietary, and we primarily rely on a combination of patent, copyright, trademark and trade secret laws and other measures to protect our proprietary rights. We also rely on contractual restrictions in agreements with customers, employees and others to protect our intellectual property rights. However, we cannot ensure that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets will not otherwise become known.

      We currently hold nine United States patents and may continue to file patent applications in the future. We cannot ensure that any patents will result from any such applications or that, if issued, such patents will provide any meaningful competitive advantage. We believe that, because of the rapid pace of technological change in the computer software industry, factors such as the expertise, ability and experience of our employees, frequent software product enhancements and the timeliness and quality of support services are key to our success. This success is also dependent, in part, upon our proprietary technology and other intellectual property rights.

      Our products are typically licensed to end-users on a “right-to-use” basis pursuant to a license that restricts the use of the products for the customer’s internal business purposes. In some regions of the world, we also rely on “click wrap” licenses, which include a notice informing the end-user that, by installing the product, the end-user agrees to be bound by the license agreement displayed on the customer’s computer screen. Despite such precautions, it may be possible for unauthorized third parties to copy aspects of, or the whole of, current or future products or to obtain and use information regarded as proprietary. In particular, we have licensed the source code of our products to certain customers for restricted uses under certain circumstances. We have also entered into source code escrow agreements with a number of significant customers that generally require the release of our source code to the customer in the event of our bankruptcy, insolvency, or discontinuation of our business or support of a product line, in each case where support and maintenance of the product line is not assumed by a third party. The source code for our products is protected both as a trade secret and as a copyrighted work. We cannot ensure that these protections will be adequate or that competitors will not independently develop technologies that are substantially equivalent or superior to our technology or to technology that we may acquire or develop in the future.

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      We believe that our products, trademarks or other proprietary rights do not infringe the proprietary rights of third parties. However, we cannot ensure that third parties will not assert infringement claims against us with respect to current or future products or that any such assertion will not require us to enter into royalty arrangements or result in costly and time consuming litigation.

Employees

      As of December 31, 2002, we employed 639 employees, including 141 in services, 245 in sales and marketing, 158 in research and development and 95 in general and administrative functions. Of these employees, 421 were located in the United States. None of our employees in the United States are represented by a labor union or are subject to a collective bargaining agreement. Certain of our international employees are covered by the customary employment contracts and agreements of the countries in which they are employed.

Executive Officers

      The following table sets forth certain information concerning our executive officers as of December 31, 2002.

      Peter Gyenes has served as the Chairman and Chief Executive Officer of Ascential since July 2000. Mr. Gyenes has more than 30 years of experience in sales, marketing and general management positions within the computer systems and software industry. Prior to our acquisition of Ardent Software, Inc. in March 2000, he was chairman, president and Chief Executive Officer of Ardent, which he joined in May 1996. Before joining Ardent, he was president and Chief Executive Officer of Racal InterLan, Inc. Previously, Mr. Gyenes served in executive sales, marketing, and general management positions at Prime Computer Inc., Encore Computer and Data General Corporation (now part of EMC Corporation). Earlier in his career, Mr. Gyenes held technical positions with Xerox Data Systems and IBM. He serves on the boards of Applix Computer Systems, Concerto Software, the Massachusetts Software and Internet Council and ViryaNet Ltd. Mr. Gyenes received a Bachelor of Arts degree in Mathematics and a Masters of Business Administration degree from Columbia University.

      Peter Fiore has served as the President of Ascential since July 2000. Previously Mr. Fiore served as Senior Vice President of Informix Corporation and President of Ascential Software, Inc., which was a subsidiary of Informix Corporation that was later merged into the Company, after serving as the head of the Informix Business Solutions business unit. Prior to the acquisition by Informix of Ardent Software, Inc. in March 2000, Mr. Fiore held the position of vice president and general manager of the data warehouse business unit of Ardent, which he joined in 1994. Before joining Ardent, Mr. Fiore directed channel marketing for CrossComm Corporation and held sales and marketing management positions at Stratus Computer, Inc. Mr. Fiore received a Bachelor of Arts degree in Engineering and Applied Sciences from Harvard University.

      Robert McBride has served as the Vice President and Chief Financial Officer of Ascential since June 2001. Mr. McBride directs our financial, operational and administrative business functions. He brings more than 25 years of financial and administration experience at Fortune 500 information systems companies to the Company. During a 17-year tenure at Data General Corporation (now part of EMC Corporation), spanning from September 1983 to January 2000, Mr. McBride served as vice president, chief administrative officer, corporate controller and corporate treasurer, among other senior financial management positions. He also held a variety of senior management positions in the Information Systems and Finance areas of Burroughs

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      Scott Semel has served as the Vice President, Legal, General Counsel and Secretary of Ascential since August 2001. Mr. Semel manages our legal matters, and directs our worldwide legal department. Mr. Semel has more than 20 years of extensive legal experience, having previously served as general counsel and corporate secretary to NaviSite, Inc. from June 2000 through July 2001 and Designs, Inc. from December 1986 through February 2000. In addition to his corporate experience, Mr. Semel was previously engaged in the private practice of law in Boston from 1980 to 1986. He received a Bachelor of Arts degree, cum laude, from Boston University and a Juris Doctor degree from New England School of Law.

Access to SEC Filings

      Our SEC filings are available through the SEC web site at http://www.sec.gov, or through our web site at http://www.ascential.com in the Investors section under SEC filings. The annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) are available free of charge through our Internet web site as soon as reasonably practicable after they are electronically filed with the SEC.

      Our corporate headquarters is in a 93,000 square foot facility in Westborough, Massachusetts that was formerly occupied by Ardent Software, Inc. This facility also contains a significant portion of our marketing, finance, sales and administration functions and a significant portion of our customer service, manufacturing and research and development operations. The lease for the Westborough facility expires on December 31, 2008. In addition, significant parts of our research and development organizations are housed in facilities in Los Gatos, California (7,000 square feet) and Milton Keynes, United Kingdom (7,000 square feet). These buildings are under lease until December 2004 and September 2012, respectively.

      We also lease office space, principally for sales and support offices, in a number of facilities in the United States, Canada and outside North America. As of December 31, 2002, we controlled approximately 438,000 square feet of office and/or manufacturing space for these facilities. Approximately 46% of the facility square footage is actively being utilized, 36% of the square footage has been vacated and the remaining 18% of the square footage is being sublet. Of all our leased property, approximately 68% is located in the Americas (United States, Canada and Latin America), 25% is located in Europe, the Middle East and Africa and the remaining 7% is located in the Asia Pacific region. Ascential maintains major sales and service offices in Paris, France (21,000 square feet), which is under lease until March 2005, London, England (19,000 square feet), which is under lease until September 2018, and Sydney, Australia (16,000 square feet), which is under lease until March 2004.

      We believe that our existing facilities are adequate to meet our business needs through the next twelve months.

      We have approximately 156,000 square feet of vacant space that we are seeking to sublease to third parties or surrender to landlords. Management believes that we have adequately provided for the costs to dispose of this space.

      On May 26, 1999, the Company entered into a memorandum of understanding regarding the settlement of pending private securities and related litigation against the Company, including a federal class action, a derivative action, and a state class action. In November 1999, the settlement was approved by the applicable federal and state courts. The settlement resolved all material litigation arising out of the restatement of the Company’s financial statements that was publicly announced in November 1997. In accordance with the

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      In July 1997, the Securities and Exchange Commission (the “SEC”) issued a formal order of private investigation of the Company and certain unidentified other entities and persons with respect to non-specified accounting matters, public disclosures and trading activity in the Company’s securities. During the course of the investigation, the Company learned that the investigation concerned the events leading to the restatement of the Company’s financial statements, including fiscal years 1994, 1995 and 1996, that was publicly announced in November 1997. The Company has entered into a settlement with the SEC regarding the investigation. Pursuant to the settlement, the Company consented to the entry by the SEC of an Order Instituting Public Administrative Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease and Desist Order (the “Order”). The Order was issued by the SEC on January 11, 2000. Pursuant to the Order, the Company neither admitted nor denied the findings, except as to jurisdiction, contained in the Order. The Order directs the Company to cease and desist from committing or causing any violation, and any future violation, of Section 17(a) of the Securities Act of 1933 (“Securities Act”), Sections 10(b), 13(a) and 13(b) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 under the Exchange Act. Pursuant to the Order, the Company is also required to cooperate in the SEC’s continuing investigation of other entities and persons.

      EXPO 2000 filed an action against Ascential Software GmbH (the Company’s German subsidiary) in the Hanover, Germany district court in September 1998 seeking recovery of approximately $6.0 million, plus interest, for breach of a sponsorship contract signed in 1997. The Company filed a counterclaim for breach of contract, seeking recovery of approximately $3.1 million. In August 1999, the court entered a judgment against the Company in the amount of approximately $6.0 million, although approximately $2.1 million of the judgment was conditioned upon the return of certain software by EXPO 2000. The Company filed an appeal and reserved approximately $3.1 million for the expected outcome of the appeal. In April 2001, the German appellate court set aside the lower court’s judgment and issued a judgment in favor of the Company in the amount of approximately $2.5 million. On June 5, 2001 EXPO filed an appeal to the German Federal High Court in Civil Matters. The German Federal High Court decided on May 14, 2002 that the appeal of EXPO would not be accepted. Therefore, the judgment of the Higher Regional Court is final and EXPO was ordered to pay Ascential Software GmbH the sum of approximately $3.0 million including 5% interest from January 19, 1999. This amount was paid to Ascential Software GmbH during the second quarter of fiscal 2002 and is recorded, net of $0.3 million of associated tax, in “Other income, net” for the year ended December 31, 2002. In addition, the Company reversed its prior $3.1 million accrual that was recorded in August 1999 and recorded a $2.8 million decrease, adjusted for foreign currency fluctuations, to “General and administrative” expense for the year ended December 31, 2002.

      The Company is a defendant in one action filed against Unidata, Inc., a company that the Company merged with in 1998 (“Unidata”), in May 1996 in the U.S. District Court for the Western District of Washington, and was previously a defendant in another action filed in September 1996 in the U.S. District Court for the District of Colorado. The plaintiff, a company controlled by a former stockholder of Unidata and

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      The Company was also joined as a party in an action in China filed against Unidata, its former distributor and a customer, by the same plaintiff who filed the U.S. actions against Unidata and a related company. This action, filed in the Guangdong Provincial People’s Superior Court in China, arose out of the same facts at issue in the U.S. actions. The Company entered into a settlement agreement with the plaintiff pursuant to which, among other things, as each of the actions was dismissed, the underlying license terminated, certain intellectual property rights were assigned to the Company by the plaintiff, and the Company was obligated to pay into escrow, and then have released from escrow to the plaintiff, certain amounts totaling approximately $16.0 million to settle all claims in all pending litigation, with the exception of potential claims for indemnity between the Company and other co-defendants relating to attorneys’ fees and related amounts, if any, paid in settlement. Subsequently, the China and Denver actions were dismissed; the plaintiff’s claims in the Washington State action were dismissed; the license agreement was terminated; and the intellectual property rights were assigned to the Company as of the end of the second quarter of fiscal 2002 and the full amount escrowed was released to plaintiff. During the year ended December 31, 2002, the Company paid into escrow the entire amount of the settlement of approximately $16.0 million.

      At the end of October 2002, the Company instituted an arbitration proceeding with the American Arbitration Association in Kansas City against Sprint/ United Management Company (“Sprint”) for non-payment of $6.5 million (the “Sprint Indebtedness”) due and owing under an agreement between Informix Software and Sprint dated effective March 31, 2000 (the “Sprint Agreement”). IBM had been providing services covered by the Sprint Agreement to Sprint pursuant to an agreement between IBM and the Company (the “operating agreement”) signed at the time of the IBM Transaction. The Company instituted the arbitration proceeding because Sprint declined to pay any part of the Sprint Indebtedness. The Company and Sprint executed a settlement agreement, dated as of December 24, 2002, resulting in the termination of the Sprint Agreement, dismissal of all claims, and payment by Sprint to the Company of $4.0 million. Pursuant to the terms of the operating agreement, the Company in turn remitted that $4.0 million payment to IBM on December 30, 2002.

      On May 30, 2002, Informatica Corporation (“Informatica”) filed an action against a former employee of the Company in the United States District Court for the Northern District of California. The complaint alleged, among other things, that the employee, previously employed by Informatica as a district sales manager, misappropriated trade secrets, principally contact information regarding potential customers, and unlawfully used that information to benefit the Company once he joined the Company as a regional sales manager in January 2002. Informatica sought a temporary restraining order, which the employee successfully opposed at a hearing held on June 5, 2002. On June 24, 2002, the employee answered the complaint, in which he denied all material allegations. The employee’s employment by the Company ended on July 5, 2002 after the Company discovered that the employee had retained certain information from his prior employment. On July 19, 2002, Informatica served an amended complaint in which it named the Company as a defendant in the action. The amended complaint alleged misappropriation of trade secrets, unfair competition, intentional interference with prospective economic advantage and violation of federal copyright law, and sought injunctive relief, unspecified damages and attorneys’ fees. On August 2, 2002, the Company served its answer to the amended complaint, in which it denied these claims. A motion by Informatica for a preliminary injunction to enjoin the Company from, among other things, using confidential information brought by the employee to the Company, was heard on December 20, 2002. The court denied Informatica’s preliminary injunction motion. The Company has produced information to Informatica which the Company believes shows there is no merit

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      On August 8, 2001, eNet30, Inc. (“eNet30”) filed suit against the Company in Nevada state court based on a consulting agreement. eNet30 alleges claims for breach of contract, breach of the covenant of good faith and fair dealing, and rescission, and seeks the return of approximately $0.6 million previously paid to the Company. On September 11, 2001, the case was removed to the United States District Court for the District of Nevada, and on October 22, 2001, the Company filed its answer and counterclaims against eNet30 for breach of contract, bad faith and unfair dealing, and unjust enrichment. In May 2002, eNet30 modified its claims to allege that it is entitled to additional damages based upon allegations of fraud and fraudulent inducement. The Company believes that eNet30’s claims are without merit and intends to vigorously defend the suit. On March 28, 2002, eNet30 declared bankruptcy and a trial date has not been set.

      From time to time, in the ordinary course of business, the Company is involved in various other legal proceedings and claims, including but not limited to those related to the operations of the former database business and/or asserted by former employees of the Company relating to their employment or compensation by the Company. The Company does not believe that any of these other proceedings and claims will have a material adverse effect on the Company’s business or financial condition.

      We did not submit any matters to a vote of security holders during the fourth quarter of 2002.

PART II

      Our Common Stock is traded on the NASDAQ National Market under the symbol “ASCL.” The following table lists the high and low sales prices of our Common Stock for the periods indicated.

      At February 28, 2003, there were approximately 10,974 stockholders of record of our Common Stock, as shown in the records of our transfer agent. Because brokers and other institutions hold many of such shares on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

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Dividend Policy

      We have never declared or paid cash dividends on our Common Stock. We expect to retain future earnings, if any, for use in the operation of our business and do not anticipate paying any cash dividends on our Common Stock in the foreseeable future.

Financial Overview

      The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the related notes, and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this report. From 1998 through 2002, we have acquired five companies and disposed of the assets of our database business. In December 1998, we acquired Red Brick Systems, Inc. (“Redbrick”). Ardent Software, Inc. (“Ardent”) acquired Prism Solutions, Inc. (“Prism”) in April 1999, and we acquired Cloudscape, Inc. (“Cloudscape”) in October 1999. In March 2000, we completed the acquisition of Ardent. We sold the assets of our database business to IBM in July 2001, (see Note 14 to Notes to Consolidated Financial Statements) and we acquired Torrent in November 2001. In April 2002, we acquired Vality.

(1)

During 2002, we recorded merger, realignment and other charges of $23.7 million. In June 2002, we ceased efforts to find a buyer for our content management product line and recorded a $4.5 million charge for the impairment of software costs previously capitalized (see Note 15 to Notes to Consolidated Financial Statements). During the fourth quarter of 2002, we recorded impairment losses on long-term, publicly traded equity investments of $2.2 million. In connection with the Vality acquisition, we recorded a charge of $1.2 million for in-process research and development that had not yet reached technological feasibility and had no alternative future use. During 2002, we recorded $3.0 million of adjustments to gain on sale of database business (see Note 14 to Notes to Consolidated Financial Statements). In 2002, we reversed accruals of $2.8 million and recorded $2.6 million of other income in connection with the favorable judgment rendered in the EXPO 2000 litigation (see Note 13 to Notes to Consolidated Financial Statements). Effective January 1, 2002, we completed our adoption of Statement of Financial Accounting Standard No. 142, which required that goodwill and intangible assets with indefinite lives no longer be amortized, but instead be tested for impairment at least annually (see Note 11 to Notes to Consolidated Financial Statements).

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(2)	In July 2001, we sold the assets of our database business to IBM (see Note 14 to Notes to Consolidated Financial Statements) which resulted in a gain of $865.7 million that was recorded in 2001. In 2001, we also recorded merger, realignment and other charges of $54.4 million. In connection with the Torrent acquisition, we recorded a charge of $5.5 million for in-process research and development that had not yet reached technological feasibility and had no alternative future use. In addition, during 2001, we recorded impairment losses on long-term investments of $10.2 million, which relates to both publicly traded and non-marketable investments.
(3)	In 2000, we recorded merger, realignment and other charges of $126.8 million.
(4)	In 1999, we recorded restructuring-related adjustments that increased operating income by $0.6 million and, in connection with our acquisition of Cloudscape in October 1999, we recorded a charge of $2.8 million for merger related expenses. In addition, we recorded a charge of $97.0 million related to the settlement of private securities and related litigation against us. In connection with Ardent’s acquisition of Prism, we recorded a charge of $9.9 million for merger and restructuring charges as well as a $5.1 million charge for in-process research and development that had not yet reached technological feasibility and had no alternative future uses.
(5)	In 1998, we recorded restructuring-related adjustments that increased operating income by $10.3 million and, in connection with our acquisition of Red Brick in December 1998, we recorded a charge of $2.6 million for in-process research and development that had not yet reached technological feasibility and had no alternative future uses. In addition, we recorded a charge of $14.9 million for merger and restructuring charges related to Ardent’s merger with Unidata.

      Selected financial data should be reviewed with “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Future Results” found in Item 7.

      The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to future events or our future financial performance, which involve risks and uncertainties. Such forward-looking statements address, for example, the functionality, characteristics, quality and performance capabilities of our products and technology; the ability of organizations to make more informed decisions and drive strategic application initiatives; expected transitional costs and other transitional matters arising from the IBM Transaction; industry trends; targeted ratio of license to service revenue; net loss from our content management product line; the timing of closing large license transactions and quarter-to-quarter fluctuations; future growth of consulting, maintenance and education revenue; decline of the content management revenue stream; the impact of new license revenue on consulting and education revenue; future amortization costs; trends in services margins; costs associated with the content management business; potential increases in sales headcount; projected research and development expenses; expected decline in bad debt expense; anticipated completion of research and development projects and associated investments required; impact of realignment activities including expense reduction; future savings resulting from cost cutting initiatives; continued investment in property and equipment; sufficiency of our liquid assets and other resources for our business operations, repurchases of common stock, facilities, obligations and restructuring initiatives; and effect of changes in interest rates and fluctuations of equity price of marketable securities. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Factors That May Affect Future Results,” and elsewhere in this annual report on Form 10-K. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report.

Overview

      Headquartered in Westborough, Massachusetts since July 2001, Ascential Software Corporation is a leading supplier of enterprise integration solutions to the Global 2000 and other large organizations. We believe that our Enterprise Integration Suite, built upon a highly scalable platform, is the industry’s only

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      Our products for automated data profiling, data quality management and cleansing, and data extraction, transformation, and loading are built on an enterprise integration platform of core integration services that are intended to provide end-to-end meta data management for a clear, unambiguous definition and history of the data used to drive strategic enterprise applications. We also provide connectivity between virtually any data source and application and virtually unlimited scalability to manage the massive volumes of corporate data generated through high-performance processing through the platform. This complete offering is called the Enterprise Integration Suite and is currently, we believe, the only platform of its type available from a single vendor.

      We also offer a full range of consulting, educational and support services to assist customers through all phases of a project. Based on proven methodologies, these services represent years of accumulated intellectual capital in terms of knowledge and experience, gained through many successful engagements across a range of industries and enterprise application requirements.

      We support more than 2,200 customers in such industries as telecommunications, insurance, financial services, healthcare/life sciences, manufacturing, consumer goods, and retail. We had 639 employees as of December 31, 2002.

      We were incorporated in Delaware in 1986 and, until the third quarter of 2001, operated under the name “Informix Corporation”. Effective January 1, 2001, we consolidated our business units into two operating segments: (1) Informix Software, which operated our database software systems business, and (2) Ascential Software, which operated our extract, transform and load (“ETL”) and digital asset management software and solutions business. During the third quarter of 2001, we completed the sale of the assets of our database business, including the name “Informix”, to IBM for $1.0 billion in cash, which we refer to as the “IBM Transaction” (see Note 14 to the Notes to Consolidated Financial Statements). In connection with the IBM Transaction, we changed our name to “Ascential Software Corporation” and changed the symbol under which our stock is traded on the NASDAQ National Market to “ASCL”. These changes became effective in July 2001. During 2002, after the sale of the assets of our database business, our sole operating segment has been our Ascential Software business; however we continue to incur costs associated with the termination of our database business. Barring unforeseen circumstances, costs associated with the termination of our database business are expected to decrease throughout the year ended December 31, 2003 to a relatively insignificant amount.

      Enterprises are faced with managing the exploding growth of data and gaining a more accurate view of the factors that impact their performance. Enterprises are also coping with the requirement to access data from an increasing number of disparate sources of data which frequently contain incomplete, inaccurate, inconsistent or duplicate information. We believe these organizations want to be able to use the data efficiently and effectively to increase their revenue and market share, decrease operating costs and improve asset utilization. Our overall business strategy is to establish Ascential Software Corporation as the leader in the enterprise integration market by delivering what we believe is the industry’s most comprehensive data integration product solution by continuing to expand our product offerings through internal development and strategic technology and business acquisitions. We are focused on accelerating revenue growth by leveraging our large customer base and the completeness of our enterprise data integration offerings, and by expanding our worldwide distribution through partnerships with recognized industry leaders. We also intend to use our global professional services organization to accelerate the adoption of our product offerings and provide a variety of value-added services to our existing customers. We have targeted a revenue mix of 55% to 60% from licenses with the balance from services.

      We use a number of key financial metrics internally to track our progress against these objectives. We measure our progress against achieving increased market penetration by: (1) the number of new customers signed each quarter, (2) the number of Fortune 500 companies that are our customers, and (3) the amount of additional revenue generated from our existing installed base. We monitor the success of our strategic partners

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      On January 22, 2002, our board of directors endorsed the decision to divest our content management product line because it did not align with our strategic goals. We engaged an investment bank to assist in the divestiture process and sought potential buyers for the product line during the six months ended June 30, 2002. In June 2002, we ceased efforts to find a buyer for the product line as no interested buyers were identified and terminated the related operations, except for the completion of previously committed consulting and support contracts. As a result, in June 2002 we recorded a charge totaling $7.3 million consisting of $4.5 million charged to “Cost of software” for the impairment of software costs previously capitalized and $2.8 million charged to “Merger, realignment and other charges” for severance costs, computer equipment impairment costs and professional fees incurred in connection with efforts to sell the product line. Barring unforeseen circumstances, we expect to incur a relatively insignificant net loss from the content management product line during the year ended December 31, 2003, as we fulfill remaining contractual customer support obligations.

      On April 3, 2002, we acquired Vality Technology Incorporated (“Vality”) for $94.2 million, consisting of $91.4 million paid to acquire outstanding stock and vested stock options net of $7.0 million of cash acquired from Vality, and $2.8 million for transaction costs. Vality, headquartered in Boston, Massachusetts, was a privately held company that specialized in enterprise data quality management. Concurrent with the acquisition, we awarded 0.3 million shares of restricted stock to Vality’s former chief executive officer. On May 1, 2002, Vality’s former chief executive officer left our company and his shares became fully vested, resulting in a $0.9 million charge for non-cash compensation recorded to “Merger, realignment, and other charges” in the year ended December 31, 2002. In connection with the acquisition of Vality, we also recorded a charge of $1.2 million for the write off of in-process research and development. Vality’s products have been integrated into our Enterprise Integration Suite.

Products and Services

      Our products are designed to operate as part of our Enterprise Integration Suite, or as stand-alone integration components. Our product functionality includes: automated data profiling to analyze and manage source data content and structure; data quality and cleansing to identify, correct and reconcile inaccurate or redundant data; and data extraction, transformation and loading to obtain data from a source, format it as required, and deliver it to a specified target. Our products are supported by a comprehensive platform of integration services that deliver end-to-end meta-data management, connectivity between virtually any standard data source and application, and virtually unlimited scalability and performance. This combination of integration products built on a platform of integration services forms our Enterprise Integration Suite.

      Our Enterprise Integration Suite offers a comprehensive, modular solution that can expand with business needs or as customer budgets dictate. Our customers can deploy the complete Enterprise Integration Suite to address the entire enterprise integration life cycle, or use individual integration products as needed in support of more limited scope implementation requirements.

      Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates

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      Revenue consists principally of fees for licenses of the Company’s software products, maintenance, consulting, and training. As part of the revenue recognition process, significant management judgments and estimates must be made and used to determine the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if we made different judgments or utilized different estimates.

      We recognize revenue using the residual method in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions. Under the residual method, revenue is recognized in a multiple element arrangement in which Company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. Company-specific objective evidence of fair value of maintenance and other services is based on our customary pricing for such maintenance and/or services when sold separately. We have analyzed all of the elements included in our multiple-element arrangements and believe that we have sufficient Company-specific objective evidence to allocate revenue to the maintenance services and professional services components of our license arrangements. We sell our professional services separately, generally, on a time-and-materials basis and at times without a software license, and we have established Company-specific objective evidence on this basis. Company-specific objective evidence for maintenance is determined based upon either renewal rates when maintenance is sold separately or the option price for annual maintenance renewals included in the underlying customer contract. At the outset of the arrangement with the customer, we defer revenue for the fair value of any undelivered elements (e.g., maintenance, consulting, and training) and recognize revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement (i.e., software product) when the basic criteria in SOP 97-2 have been met. If such evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist or until all elements of the arrangement are delivered. Changes to the elements of a software arrangement, the ability to identify Company-specific objective evidence and the ability to measure the fair value of the respective elements could materially impact the amount of earned and deferred revenue.

      Under SOP 97-2, revenue attributable to an element in a customer arrangement is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, collection of the resulting receivable is probable, and the arrangement does not require services that are essential to the functionality of the software. Our ability to estimate if the collection of the resulting receivable is probable could materially impact the amount of revenue we record.

      Persuasive evidence of an arrangement exists. For our license arrangements with end-users, our customary practice is to have a signed written agreement or, in some cases, either a click-wrap or shrink-wrap license. Existing customers with a license agreement in place may purchase additional products through a purchase order governed by the license agreement. Sales to most of our resellers are evidenced by a master agreement governing the relationship together with purchase orders on a transaction-by-transaction basis.

      Delivery has occurred. Our software may be either physically or electronically delivered to the customer. Delivery is deemed to have occurred upon the shipment of physical product, provided title and risk of loss have passed to the customer, or upon online availability of product to the customer. If undelivered products or services exist in an arrangement that are essential to the functionality of the delivered product,

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      The fee is fixed or determinable. We consider a fee fixed only if (1) it is required to be paid at a set amount; (2) it is not subject to refund or adjustment; and (3) payments are due on a known or fixed schedule. We generally consider arrangements with payment terms extending beyond one year not to be fixed and determinable. If the fee is not fixed and determinable, we recognize revenue as payments become due from the customer. Amounts received from customers in advance of revenue being recognized are recorded as a liability as a component of “deferred revenue” in our financial statements.

      Collectibility is probable. Collectibility is assessed on a customer-by-customer basis. Prior to the IBM Transaction, we frequently sold to customers for whom we had a history of successful collection. Subsequent to the IBM Transaction, a portion of our business is generated from new customers which are subjected to a credit review process that evaluates each customer’s financial position and ultimately their ability to pay. If it is determined from the outset of an arrangement that collectibility is not probable based upon our credit review process, revenue is recognized only as cash is collected.

      Functionality of the software. Our professional services generally are not essential to the functionality of the software. Our software products are fully functional upon delivery and implementation and do not require any significant modification or alteration. Customers purchase these professional services to facilitate the adoption of our technology and dedicate personnel to participate in the services being performed, but they may also decide to use their own resources or appoint other professional service organizations to provide these services. Software products are billed separately and independently from professional services, which are generally billed on a time-and-materials or milestone-achieved basis. We generally recognize revenue from professional services as the services are performed. If consulting services are essential to the functionality of the licensed software, then both the license revenue and the consulting service revenue are recognized under either the percentage of completion or the completed contract method of contract accounting.

      Our arrangements do not generally include acceptance clauses. However, if an arrangement includes an acceptance provision, acceptance occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period. Our arrangements do not generally provide for a right of return, and historically product returns have not been significant. We provide for sales return allowances on an estimated basis.

      Deferred revenue includes amounts received from customers for which revenue has not been recognized that generally result from deferred maintenance and support, consulting or training services not yet rendered and license revenue deferred until all requirements under SOP 97-2 are met. Deferred revenue is recognized upon delivery of our product, as services are rendered, or as other requirements requiring deferral under SOP 97-2 are satisfied. Accounts receivable include only amounts due from customers for which revenue has been recognized.

      We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided based on historical collection experience. If the data we use to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

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      We account for software development costs in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. SFAS No. 86 specifies that costs incurred internally in creating a computer software product should be charged to expense when incurred as research and development costs until technological feasibility has been established for the product. Once technological feasibility is established, all development costs should be capitalized until the product is available for general release to customers. For new versions of our products, we typically achieve technological feasibility far enough in advance of general release to warrant the capitalization of subsequent development costs. Judgment is required in determining when the technological feasibility of a product is established, in estimating the life of the product for which the capitalized costs will be amortized and in estimating if the carrying value of capitalized software costs is equal to or less than future operating profits from the associated products.

      We have a significant amount of intangible assets related to goodwill and other acquired intangibles. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgment. We account for the valuation of goodwill and other intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets. Changes in market conditions, business conditions or strategy could significantly impact these judgments and require negative adjustments to recorded asset balances. We performed the first of the required annual impairment tests of goodwill in the fourth quarter of 2002 and determined that no adjustments were required.

      We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. In preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. This process also includes estimating tax liabilities related to tax audits that can be conducted in any jurisdiction where we have operated. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. We then assess the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense within the tax provision of the Consolidated Statement of Operations.

      Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. We record a valuation allowance due to uncertainties related to our ability to utilize some of the deferred tax assets, primarily consisting of certain net operating losses carried forward, foreign tax credits and general business credits, before they expire. The valuation allowance is based on estimates of taxable income by jurisdiction in which we operate and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust our valuation allowance, which could materially impact our financial position and results of operations.

      We account for merger, realignment and other charges in accordance with FASB Emerging Issues Task Force (“EITF”) Topic No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity, and EITF No. 95-3, Recognition of Liabilities in Connection with a Purchase

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Results of Operations

      The discussion and analysis of our results of operations for the years ended December 31, 2002, 2001, 2000 is structured to take the following events into account:

	•	The IBM Transaction, which was completed during the quarter ended September 30, 2001. The database business, the assets of which were sold to IBM, accounted for 84% of our revenue during the first half of 2001 and 74% for the year ended December 31, 2001.
	•	The strategic realignment that we undertook during the second half of 2000. This realignment led to a transition from five former business units into two operating businesses — Ascential Software and Informix Software (the database business that we sold to IBM in the IBM Transaction).

      References to “Ascential Software” in this report refer to our existing enterprise integration business, references to “Informix Software” refer to our legacy database business assets sold to IBM on July 1, 2001, and references to “Ascential Software Corporation” refer to Ascential Software and Informix Software on a combined basis.

      A comparison of revenue and expenses for the years ended December 31, 2001 and 2000, respectively, provides little insight as a result of the IBM Transaction. Accordingly, the discussion and analysis of our results of operations is presented as follows:

	I.	Overview of Results of Operations — Ascential Software Corporation

	Revenues and expenses for Ascential Software Corporation are presented as a percentage of total net revenues for the years ended December 31, 2002, 2001 and 2000.

	II.	Revenues — Ascential Software and Informix Software

Discussion and analysis of revenues, including: (1) a table of revenues by type for Ascential Software and Informix Software for the years ended December 31, 2002, 2001 and 2000, respectively; (2) a description of revenues for Ascential Software and Informix Software; (3) a discussion and analysis of Ascential Software revenues for the years ended December 31, 2002, 2001 and 2000, respectively; and (4) a discussion and analysis of Informix Software revenues for the six-month periods ended June 30, 2001 and December 31, 2001, respectively, with each as compared to the corresponding periods in 2000.

	III.	Costs and Expenses — Ascential Software, Informix Software and Ascential Software Corporation

Discussion and analysis of costs and expenses including: (1) a table of costs and expenses by type for Ascential Software and Informix Software for the years ended December 31, 2002 and 2001 and Ascential Software Corporation for the year ended December 31, 2000; (2) a discussion and analysis of Ascential Software costs and expenses for the years ended December 31, 2002 and 2001; (3) a discussion and analysis of costs associated with Informix Software for the six months ended December 31, 2001 and the year ended December 31, 2002; and (4) a discussion and analysis of costs and expenses for Ascential Software Corporation (being the combined total of Informix Software and Ascential Software) for the six months ended June 30, 2001 as compared to the corresponding period in 2000.

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	IV.	Merger, Realignment and Other Charges — Ascential Software Corporation

	Discussion and analysis of Merger, Realignment and Other Charges of Ascential Software Corporation recorded during the years ended December 31, 2002, 2001 and 2000.

	V.	Other Income (Expense) — Ascential Software Corporation

	Discussion and analysis of other income (expense) of Ascential Software Corporation for the years ended December 31, 2002, 2001 and 2000.

	VI.	Income Taxes — Ascential Software Corporation

	Discussion and analysis of income taxes of Ascential Software Corporation for the years ended December 31, 2002, 2001 and 2000.

      The following table compares the results of operations of Ascential Software Corporation for the years ended December 31, 2002, 2001 and 2000.

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      The following table compares the revenue for the businesses of Ascential Software and Informix Software for the years ended December 31, 2002, 2001 and 2000 (in millions):

      We derive revenue from licensing software and providing post-license technical product support and updates to customers and from consulting and education services. As described above, we have identified revenue recognition as one of our critical accounting policies. As part of the revenue recognition process, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter.

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      License Revenue. License revenue may involve our shipment of product or our granting of a license to a customer to manufacture products that incorporate our technology. Our products are sold directly to end-user customers or through resellers, including original equipment manufacturers (“OEMs”), distributors and value added resellers (“VARs”). Revenue from license agreements with resellers is recognized as earned by us, generally, when “sell-through” has occurred; the licenses are resold or utilized by the reseller and all of our related obligations have been satisfied.

      Our license transactions can vary in size and it is difficult to forecast both the timing and dollar value of transactions. As a result, license transactions have caused fluctuations in net revenues and net income (loss) because of the relatively high gross margin on such revenues. As is common in the software industry, a disproportionate amount of our license revenue is derived from transactions that close in the last weeks or days of a quarter. The timing of closing large license agreements also increases the risk of quarter-to-quarter fluctuations. We expect that these types of transactions and the resulting fluctuations in revenue will continue.

      Service Revenue. Service revenue is comprised of maintenance, consulting and education revenues. Maintenance contracts generally call for us to provide technical support and software updates to customers. Maintenance revenue is recognized ratably over the term of the maintenance contract, generally on a straight-line basis when all revenue recognition requirements are met. Other service revenue, primarily training and consulting, is generally recognized at the time the service is performed and it is determined that we have fulfilled our obligations resulting from the services contract.

      The following table compares the license revenue for the Ascential Software product lines for the years ended December 31, 2002, 2001 and 2000 (in millions):

      During 2001 and 2002, we terminated various product lines in an effort to focus product sales on our enterprise integration product offerings that had been expanded during that time. As a result, license revenue for Ascential Software for the twelve months ended December 31, 2002 decreased 4% or $2.8 million to $59.6 million from $62.4 million for the same period in 2001. The decrease consists of an $8.5 million decrease in revenue from our content management product line, which we stopped selling during the quarter ended June 30, 2002, a $4.1 million decrease in revenue from our i.Decide product, which was abandoned as a result of the sale of the assets related to our database business, and a $1.5 million decrease in revenue from our i.Sell product, which was discontinued in the first quarter of 2001. These declines were partially offset by a 23% or $11.3 million increase in revenue from enterprise integration products. This increase was caused by the addition of products and technology acquired from Torrent, Vality and Metagenix that were integrated into our enterprise integration product offering and the release of new products during 2002. This expanded offering contributed to increased sales volume and an increase to the list prices of our products that enabled us to achieve higher average selling prices in 2002. The overall increase in sales of enterprise integration products was positively impacted during 2002 by leveraging the reseller arrangement that we entered into with IBM during the second half of 2001 whereby IBM sells our products. License revenue under this arrangement increased $9.5 million during 2002. Total revenue from IBM represented 10.8% of our total revenue in 2002. Termination of this arrangement with IBM, should it occur, could have a material impact on our future financial results if we are unable to replace the revenue.

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      License revenue decreased 6% or $4.3 million to $62.4 million in 2001 from $66.7 million in 2000. This decrease was due primarily to the termination of sales of our e-commerce solution product, i.Sell, during the first quarter of 2001 resulting in a $13.3 million decline in license revenue while sales of our content management products declined during 2001 by $2.0 million. This decrease was partially offset by license revenues for enterprise integration products that increased 25% to $48.2 million from $38.6 million in 2000 and license revenue from our analytic offering, i.Decide, that increased $1.4 million from $2.7 million in 2000 to $4.1 million in 2001 due to the early stage of this product. We experienced a slowing of license revenue growth during the second half of 2001. We believe this was due in part to certain customers and potential customers deferring spending on information technology as a result of the general economic downturn.

      The following table compares service revenue for the Ascential Software product lines for the years ended December 31, 2002, 2001 and 2000 (in millions):

      As discussed above, during 2001 and 2002 we terminated various product lines in an effort to focus sales on our enterprise integration product offerings that had been expanded during that time. As such, the service revenue associated with those sales declined resulting in a 13% or $8.1 million decrease during the twelve months ended December 31, 2002 to $53.4 million from $61.5 million for the same period in 2001. This is primarily due to a $6.6 million decline in service revenue associated with content management products, a $6.7 million decline in service revenues from our analytic offering i.Decide and a $1.4 million decline in service revenue from our i.Sell product. These declines were partially offset by an increase in total enterprise integration service revenue, the components of which are described below.

      Total maintenance revenue increased by 39% or $0.9 million to $30.0 million in the twelve months ended December 31, 2002 from $29.1 million for the same period in 2001. The increase is due to a 47% or $9.3 million increase in maintenance revenue from enterprise integration products that is attributable to the growing installed base of customers, including customers acquired from Vality and Torrent. The increase was partially offset by decreased maintenance revenue related to the termination of products and the associated decline in their maintenance revenue streams, including a $5.0 million decrease in maintenance revenue

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      Revenue derived from consulting and training decreased 28% or $9.0 million to $23.4 million in the twelve months ended December 31, 2002 from $32.4 million for the same period in 2001. This decrease is attributable to a $4.2 million decrease in consulting revenue associated with content management products, a $1.7 million decrease in consulting and training revenue primarily associated with the discontinuation of our i.Decide product, a $0.4 million decrease associated with the discontinuation of our i.Sell products and an 11% or $2.7 million decrease in consulting revenue related to enterprise integration product offerings. This decrease of $2.7 million consists of a $6.4 million decrease due principally to three large consulting projects that were in process during 2001 but which were completed during 2002 and not completely replaced by new projects, a decline in product license revenue in the first quarter of 2002, which had an impact on follow-on services purchased, and an increase in indirect sales of products whereby the associated services are delivered by third parties. These declines were partially offset by an increase in consulting and training revenue associated with new licenses. We expect that, barring unforeseen circumstances, future growth of consulting, maintenance and education revenue will be largely dependent on the growth of license revenue.

      Service revenue for the twelve months ended December 31, 2002 includes $1.4 million of revenue associated with the content management product line. We expect that the content management revenue stream will continue to decline over the first half of 2003 until all the related service contracts are fulfilled.

      Service revenue increased 12% to $61.5 million in 2001 from $55.0 million in 2000, despite a $13.0 million decline resulting from the termination of the i.Sell product offering. Maintenance revenue increased 45% to $29.1 million in 2001 from $20.1 million in 2000. This is principally due to a $9.1 million increase in enterprise integration maintenance revenue as we continued to build our installed customer base, and $2.5 and $0.9 million increases in content management and i.Decide maintenance revenue, respectively, during that time due to their early stage as products. These increases were offset by a $3.5 million decline in i.Sell maintenance revenue. Consulting and education revenue decreased 7% to $32.4 million in 2001 from $34.9 million in 2000. This decrease is primarily due to a $9.5 million decline in revenue derived from i.Sell education and consulting. This decline was partially offset by $1.9 million and $1.5 million increases in content management and i.Decide consulting and education revenue, respectively, due to the early stage of those products in 2001 and a $3.6 million increase in enterprise integration consulting revenue which is primarily a result of the increase in license revenue during 2001, as consulting and education revenue have historically been driven by engagements and projects associated with new license revenue. There were three large DataStage consulting engagements initiated during 2001 that generated approximately $7.0 million in consulting revenue.

      Due to the IBM Transaction, we separately discuss the revenue of Informix Software for the first and second halves of 2001 compared to the corresponding periods in 2000. There was no revenue derived from Informix Software in 2002. The following table compares the revenue for Informix Software for the six-month

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      License revenue — six months ended June 30, 2001 and 2000. License revenue decreased 21% to $149.2 million for the six months ended June 30, 2001 from $188.0 million for the same period in 2000. The decline was primarily a result of a decrease in license revenue from the traditional client-server products of the database business and also from a decrease in large enterprise transactions. These trends resulted from our being less successful in attracting significant new database customers and in securing additional business from our existing database customers. Our principal competitors in the database business, Oracle, IBM and Microsoft, were much larger, much better financed, and continued to invest substantially in their database businesses. Strategic partners in the database business (including the major enterprise software application providers) therefore promoted our competitors’ products more than they promoted our database products. As a result, we were not successful in attracting significant new database customers. In addition, most of our database customers who had invested in our traditional client-server and tools products were in the process of replacing those products and purchasing newer products. Because of our competitive position described above, many of our database customers chose to purchase newer database products from our competitors. We also believe that the prevailing economic slowdown had led to a deferral by some existing customers and potential customers of their decisions to enter into large enterprise transactions. In addition, we believe the impending closing of the IBM Transaction may have impaired our ability to close certain transactions during the second quarter of 2001.

      During 2001, we recognized revenue from resellers with previously recorded customer advances of $8.4 million primarily related to sales of Informix Software products. The $8.4 million recognized included $8.2 million of revenues related to licenses that were resold or utilized by the reseller and $0.2 million related to contractual reductions in customer advances, which typically arise when a reseller agreement expires before the advance balance is fully utilized. In addition, we recorded $2.0 million of further reductions to the customer advances liabilities during 2001 as the net result of the transfer of the database customer advances to IBM (as part of the IBM Transaction), which were offset by any additional amounts we received from customers during 2001. During 2000, we recognized revenue of $11.1 million as a result of contractual reductions in customer advances. During 2001, we recorded $1.1 million of revenue from the customer advances balance in respect of a transaction with a customer that was previously a supplier of services to Informix Software under a long-term contract. Concurrent with the revenue transaction with this customer, we entered into an arrangement to terminate these services, pursuant to which we paid a termination fee of $3.0 million.

      Service revenue — six months ended June 30, 2001 and 2000. Service revenue for the six months ended June 30, 2001 decreased 15% to $206.7 million from $244.4 million for the same period in 2000. Service revenue accounted for 58% and 57% of total revenues during the first half of 2001 and 2000, respectively. The decrease in service revenue in 2001 was attributable primarily to a decline in consulting revenue in our database business. The increase in service revenue, as a percentage of total revenues in 2001, was attributable primarily to the decline in the license revenue of our database business. Maintenance revenue decreased 9% to $182.5 million for the six months ended June 30, 2001 from $199.8 million for the same period in 2000. The

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      License and service revenue — six months ended December 31, 2001 and 2000. We closed the IBM Transaction in two phases — the first with respect to operations in the United States and certain countries abroad on July 1, 2001, and the second with respect to nine remaining countries (the “Phase 2 countries”) on August 1, 2001. During July 2001, and as Informix Software’s principal revenue for the six months ended December 31, 2001, license revenue generated by the Phase 2 countries was $0.1 million and service revenue generated by the Phase 2 countries was $1.4 million. For the corresponding six months ended December 31, 2000, license and service revenue for Informix Software were $149.7 million and $225.5 million, respectively.

      The following table compares the costs and expenses for the businesses of Ascential Software and Informix Software for the years ended December 31, 2002 and 2001 together with the total costs of Ascential Software Corporation for the years ended December 31, 2002, 2001 and 2000. Cost and expense information is not shown separately for Ascential Software and Informix Software for the year ended December 31, 2000 because the cost infrastructure supporting the data integration and database businesses were not separated:

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      Cost of software. Cost of software consists primarily of: (1) amortization of capitalized or acquired software development costs and write-offs of previously capitalized software, (2) third-party royalties, and (3) distribution and documentation costs. During the twelve months ended December 31, 2002, cost of software increased by 7% or $1.2 million to $17.5 million from $16.3 million during the same period of 2001. The most significant item contributing to the increase was $5.2 million of impairment charges related to the termination of product lines, $4.5 million associated with the content management product line and $0.7 million associated with our former Axielle product, our portal offering. Software amortization increased by $2.1 million as a result of a $3.2 million increase in amortization of purchased technology, principally related to the acquisitions of Torrent and Vality, and $0.9 million of amortization related to the acquisition of the MetaRecon technology. Software amortization related to internally capitalized software declined by $2.0 million primarily as a result of the impairment of the content management and Axielle technology. We acquired $4.1 million of completed technology through the Torrent acquisition on November 28, 2001 and $8.2 million of completed technology through the Vality acquisition on April 3, 2002. Both are being amortized over three years on a straight-line basis. We have paid approximately $4.3 million through December 31, 2002 to acquire and further develop MetaRecon and are amortizing payments over three years on a straight-line basis. Future amortization costs may increase if we acquire new technology through strategic business combinations or technology purchases.

      Royalty costs declined by $6.8 million primarily related to the decline in sales of content management and i.Sell product offerings that were sold with much higher third party royalty costs than enterprise integration products. Once these product lines were terminated, we were no longer required to pay the related royalties. As part of the settlement of a dispute with former shareholders of IntegraSoft, Inc., which we acquired in 1998, we recorded $2.1 million of prepaid royalties that we are amortizing over eighteen months on a straight-line basis and will be fully amortized by December 31, 2003. The amortization of this prepaid royalty is the most significant component of ongoing royalty costs.

      The costs of distribution personnel and media increased by $0.7 million during 2002. This is due to the fact that this function was shared with the Informix database business during most of 2001 and the costs to operate the function on a stand alone basis exceed the portion of shared costs previously allocated to the Ascential Software operation.

      Cost of services. Cost of services consists of maintenance, consulting and training personnel expenses and subcontracting costs. Cost of services for the twelve months ended December 31, 2002 decreased 27% or $12.1 million to $33.1 million from $45.2 million for the same period in 2001. The decrease is primarily a result of a 30% reduction in services headcount between December 31, 2001 and December 31, 2002 even after we added approximately 22 services employees through the acquisition of Vality. The cost savings related to the headcount reductions were offset somewhat by increased subcontracting costs as we moved toward a

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      The total service margin has improved to 38% in the twelve months ended December 31, 2002 from 27% in the same period in 2001. This improvement is caused, in part, by an increase in the proportion of the higher margin maintenance revenue to total services revenue for the same periods. For the twelve months ended December 31, 2002, the maintenance business represented 56% of total service revenue and generated a margin of 73% while, for the twelve months ended December 31, 2001, the maintenance business represented 47% of total service revenue and generated a margin of 74%. Barring unforeseen circumstances, we expect maintenance margins to continue to improve slightly during 2003 as the number of customers subscribing to maintenance increases and we further leverage our technical support personnel as well as our e.Service web support site to resolve customer issues.

      The improvement in the 2002 consulting and education margins to (7)% in 2002 from (15)% in 2001 is a result of cost control efforts and improved utilization of consultants. This margin improvement was partially offset by the wind down of the content management business where the completion of consulting engagements for that business required additional use of third parties and yielded a loss. Cost of services for the year ended December 31, 2002 includes $3.7 million of costs associated with the content management business. As the utilization of consultants on non-revenue generating projects and activities focused on procuring new business decreases during 2003, barring unforeseen circumstances, we expect the margin improvement to continue and be positive in 2003. We expect that, barring unforeseen circumstances, costs associated with the content management business will continue to decline in 2003 and do not expect such costs to recur beyond the second quarter of 2003 when substantially all consulting, service and support contracts associated with that product line should end.

      Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries, commissions, marketing and communications programs and related overhead costs. Sales and marketing expenses for the twelve months ended December 31, 2002 decreased 21% to $73.1 million from $92.3 million for the same period in 2001. This decrease is primarily due to a 33% reduction in sales and marketing headcount between December 31, 2001 and December 31, 2002 as well as a reduction in marketing program expenditures. Approximately 45 sales and marketing employees were added through the acquisition of Vality, however these increases were more than offset by reductions to the total sales and marketing headcount, which was 245 at December 31, 2002, including 67 quota carrying sales representatives. Although headcount was reduced during 2002, our focus throughout the year was also to shift sales headcount to those regions with more revenue growth potential and to improve the sales productivity of our sales force. We believe that we have made significant progress in both these initiatives. Sales headcount may increase during 2003 depending on the revenue, productivity and growth levels that we may experience.

      Sales and marketing expenses for the twelve months ended December 31, 2002 include $0.8 million of costs associated with the content management business, which we do not expect to recur beyond 2002, barring unforeseen circumstances.

      Research and development expenses. Research and development expenses consist primarily of salaries, third-party project consulting and related overhead costs for product development. Development efforts during 2002 were focused on integrating the technology acquired from Vality, Torrent and Metagenix and creating major enhancements to our enterprise integration product suite. Research and development expense for the twelve months ended December 31, 2002 decreased 26%, or $8.5 million, to $24.0 million from $32.5 million

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      Research and development expenses for the twelve months ended December 31, 2002 included $3.1 million of costs associated with the content management business, which, barring unforeseen circumstances, we do not expect to recur past 2002.

      General and administrative expenses. General and administrative expenses consist primarily of finance, legal, information systems, human resources, bad debt expense and related overhead costs. During the twelve months ended December 31, 2002, general and administrative expenses increased 12% or $3.1 million to $28.5 million from $25.4 million for the same twelve months in 2001. The increase in general and administrative expenses experienced during the year is attributable to several factors. The entire year of 2002 included personnel and information technology infrastructure costs for a fully staffed and independent general and administrative function. In contrast, general and administrative expenses for the first three quarters of 2001 were ratably distributed over the Ascential Software business and the Informix Software business. In order to function independently, we were required to appropriately staff these functions and our corporate expenditures for audit and tax advisory fees, insurance costs, and similar services also increased resulting in an overall increase of administrative costs of $6.0 million compared to 2001. In addition, the twelve months ended December 31, 2002 includes an increase of $2.3 million in certain, primarily litigation and dispute-related, legal costs compared to the same period of the previous year. The increased costs in the twelve months ended December 31, 2002 are offset by a decline of $5.2 million in bad debt expense. Following the sale of assets related to our database business and during the segmentation of accounts receivable balances in connection with that sale, several Ascential Software accounts were identified which were deemed to be uncollectible. This segmentation process, combined with the termination of the i.Sell product resulted in an unusually high bad debt expense during 2001 of $7.7 million. While bad debt expense declined significantly during 2002, $1.6 million of the amount recorded in 2002 related to accounts associated with sales of content management products which became uncollectible as a result of the change in strategy for that product line during 2002. As a result of the reserves recorded for the content management product receivable and improvement in the collectibility of receivable balances due to increased transactions with Fortune 500 companies we reported DSO, or days sales outstanding, of 72 days at December 31, 2002 compared to 98 days at December 31, 2001. DSO is calculated by dividing accounts receivable net, as of the balance sheet date, by the quotient determined by dividing the current quarter’s net revenue by ninety days. Barring unforeseen circumstances, we expect that our bad debt expense will decline during 2003 as compared to 2002.

      As discussed above, we believe that the recording of the allowance for doubtful accounts is one of our critical accounting policies. The preparation of financial statements requires our management to assess the collectibility of our accounts receivables and make estimates of any allowances required with respect to doubtful accounts. We record an increase in the allowance for doubtful accounts when the prospect of collecting a specific account receivable becomes doubtful. We regularly review the adequacy of our allowance for doubtful accounts after considering the size of the accounts receivable aging, the age of each invoice, each customer’s expected ability to pay and our collection history with each customer. We review any invoice greater than 90 days past due to determine if an allowance is appropriate based on the risk category using the factors discussed above. For all invoices that are not specifically reserved, we maintain a reserve based on an estimate of potentially uncollectible receivables. The allowance for doubtful accounts represents our best

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      General and administrative expenses for the twelve months ended December 31, 2002, included $2.2 million of costs associated with the content management business, principally bad debt expense. Barring unforeseen circumstances, we do not expect these costs to recur beyond 2002.

      Merger, realignment and other costs. These costs are discussed separately in section IV. Merger, Realignment and Other Charges — Ascential Software Corporation below.

      Write-off of acquired in-process research and development — Ascential Software. In connection with the Vality acquisition in April 2002, we recorded a charge of $1.2 million, or approximately 1% of the $98.3 million in total consideration and liabilities assumed, for in-process research and development costs (“IPRD”). The value allocated to the project identified as IPRD was charged to operations during the three months ended June 30, 2002.

      At the acquisition date, Vality’s in-process projects were WAVE, IRT and AUTO. The WAVE product provides capabilities to allow end users with extensive multinational files to easily invoke a single process to standardize, enhance and verify input address information using relevant postal reference files. The in-process WAVE project sought to produce a technical design that would allow the existing WAVES product to function on a new operating platform. The WAVE project was initiated in June 2001 and completed by the end of July 2002. At the acquisition date, IPRD was approximately 9% complete, based on costs expended to date and estimated costs to complete the product. We incurred $0.3 million of costs to complete this project, which was consistent with management’s estimate as of the acquisition date.

      The IRT project seeks to produce a new application protocol interface that will provide a new paradigm for the development and deployment of real time data quality applications on a new operating platform. The project was initiated in October 2001 and was completed by the end of July 2002. At the acquisition date, IPRD was approximately 4% complete based on costs expended to date and estimated costs to complete the project. We incurred another $0.3 million of costs to complete this project, which was consistent with management’s estimate as of the acquisition date.

      The AUTO project is intended to provide a learning engine that can generate new pattern action language rule sets with the use of advanced mathematical techniques. The AUTO project was initiated in April 2001 and at the date of the acquisition management estimated that the completion of the project would be accomplished by the end of November 2002. At the acquisition date, management had estimated that IPRD was approximately 25% complete, based on costs expended to date and estimated costs to complete the product. At the date of the acquisition, we expected to invest another $0.2 million of development costs in this product. Due to turnover of research and development personnel, management now estimates, barring unforeseen circumstances, that this project will be completed by the end of the second quarter of 2004 and we expect to invest approximately another $0.5 million into development in order to do so.

      As of the Vality acquisition date, WAVE, IRT or AUTO technologies had not yet reached technological feasibility and had no alternative uses. The technological feasibility of the in-process product is established when the enterprise has completed all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet its design specifications.

      The value of IPRD was determined using an income approach. This approach takes into consideration earnings remaining after deducting from cash flows related to the in-process technology, the market rates of return on contributory assets, including assembled workforce, customer accounts and existing technology. The cash flows are then discounted to present value at an appropriate rate. Discount rates are determined by an analysis of the risks associated with each of the identified intangible assets. The discount rate used for IPRD ranged from 40 to 50%, consistent with the characteristics of each IPRD project, a premium over the estimated weighted-average cost of capital of 21%. The resulting net cash flows to which the discount rate was applied are based on management’s estimates of revenues, operating expenses, and income taxes from such acquired technology.

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      In connection with the Torrent acquisition in November 2001, we recorded a charge of $5.5 million, or 10.9% of the $50.7 million in total consideration and liabilities assumed, for IPRD. The value allocated to the project identified as IPRD was charged to operations in the fourth quarter of 2001.

      At the acquisition date, Torrent’s major in-process project was to add a new graphical user interface as well as additional features and functionality to an existing product. This technology had not yet reached technological feasibility and had no alternative uses. The technological feasibility of the in-process product is established when the enterprise has completed all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet its design specifications.

      At the date of the acquisition, management estimated that completion of the project would be accomplished by the end of February 2002. The initial development effort commenced in January 2001. At the acquisition date, IPRD was approximately 50% complete, based on costs expended to date and estimated costs to complete the product. At the date of the acquisition, we expected to invest another $1.3 million of development costs in this product. During 2002, we decided not to complete this project but instead to integrate Torrent’s products into our Enterprise Integration Suite.

      The value of IPRD was determined using an income approach. This approach takes into consideration earnings remaining after deducting from cash flows related to the in-process technology, the market rates of return on contributory assets including assembled workforce, customer accounts and existing technology. The cash flows are then discounted to present value at an appropriate rate. Discount rates are determined by an analysis of the risks associated with each of the identified intangible assets. The discount rate used for IPRD was 35%, a premium over the estimated weighted-average cost of capital of 26%. The resulting net cash flows to which the discount rate was applied are based on management’s estimates of revenues, operating expenses, and income taxes from such acquired technology. See Note 12 of Notes to Consolidated Financial Statements.

      The following table presents the costs and expenses of Informix Software for the year ended December 31, 2002 and the six months ended December 31, 2001: