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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

     (Mark One)

Commission File Number 0-15325

ASCENTIAL SOFTWARE CORPORATION

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES þ      NO o

At April 30, 2003, 231,974,051 shares of the registrant’s common stock were outstanding.

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ASCENTIAL SOFTWARE CORPORATION
FORM 10-Q
Quarterly Period Ended March 31, 2003

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FORWARD–LOOKING STATEMENTS

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 the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Future Results” and included elsewhere in 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 the Company, is contained in other documents and periodic reports that the Company files 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 the Company disclaims any obligation to update or revise these statements.

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

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

ASCENTIAL SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)

See Notes to Unaudited Condensed Consolidated Financial Statements.

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ASCENTIAL SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)

See Notes to Unaudited Condensed Consolidated Financial Statements.

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ASCENTIAL SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

See Notes to Unaudited Condensed Consolidated Financial Statements.

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ASCENTIAL SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)

See Notes to Unaudited Condensed Consolidated Financial Statements.

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ASCENTIAL SOFTWARE CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements

Note A — Summary of Significant Accounting Policies

     Organization and Operations. Ascential Software Corporation (“Ascential” or the “Company”) was incorporated in Delaware in 1986 and, until the third quarter of 2001, operated under the name “Informix Corporation.” During the third quarter of 2001, the Company sold to International Business Machines Corporation (“IBM”) substantially all of the assets relating to its database management systems business, including the name “Informix,” for a purchase price of $1.0 billion in cash (the “IBM Transaction" — see Note F). In connection with the sale to IBM, the Company changed its name to Ascential Software Corporation.

     Ascential is a global provider of enterprise integration software and services. Ascential designs, develops, markets and supports enterprise integration software products and solutions to allow its worldwide customers, mid-sized and large organizations and governmental institutions, to turn vast amounts of disparate, unrefined data into reliable, reusable information assets. The Company also offers to its customers a variety of services such as consulting, including implementation assistance and project planning and deployment, software product enhancements and support, and education.

     The principal geographic markets for the Company’s products are North America, Europe and Asia/ Pacific. Customers include businesses ranging from medium-sized corporations to Global 2000 companies, principally in the manufacturing, financial services, telecommunications, media, retail/wholesale, hospitality, and government services sectors.

     Basis of Presentation. The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements for the year ended December 31, 2002 included in the Company’s most recent Annual Report on Form 10-K. In the opinion of management, all significant adjustments, which are normal, recurring in nature and necessary for a fair presentation of the financial position and results of the operations of the Company, have been consistently recorded. The operating results for the interim periods presented are not necessarily indicative of expected performance for the entire year. The unaudited information should be read in conjunction with the audited financial statements of the Company, and the notes thereto, for the year ended December 31, 2002 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2003.

     Stock-Based Compensation.

     In December 2002, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“SFAS No. 148”). SFAS No. 148 amends the disclosure requirements of Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), to require prominent disclosure in the Company’s annual and interim financial statements about the method used by the Company for stock-based compensation and the effect of the method used on reported results. As permitted by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and SFAS No. 123, the Company utilizes the intrinsic value method to account for awards to employees, directors, and officers under its plans. Under the intrinsic value method, the Company generally recognizes no compensation expense with respect to such awards granted under the terms of the Company’s various stock option plans as all options granted under those plans typically have an exercise price equal to the market value of the underlying common stock on the date of grant.

     Pro forma information regarding the net loss and net loss per share is required by SFAS No. 123 and SFAS No. 148 as if the Company had accounted for its stock-based awards to employees under the fair value method is presented below. The Company estimates the fair value of stock-based awards to employees using the Black-Scholes option-pricing model. For pro forma purposes, the estimated fair value of the Company’s stock-based awards is amortized over the award’s vesting period (for options) and the three-month purchase period (for stock purchases under the Company’s employee stock purchase plan). The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value method to stock-based employee compensation (in thousands, except per share information):

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Note B — Goodwill and Other Intangible Assets

     As of March 31, 2003 the Company had goodwill in the amount of $162.6 million. There were no material changes in carrying value from December 31, 2002. The Company determined, in accordance with SFAS 142, that it would assess the impairment of goodwill and other intangible assets with indefinite lives annually in the fourth quarter, or more frequently if other indicators of impairment arise. Other intangible assets amounted to $9.7 million (net of accumulated amortization of $8.2 million) and $11.1 million (net of accumulated amortization of $6.9 million) at March 31, 2003 and December 31, 2002, respectively. These intangible assets consist primarily of customer lists and patented technology acquired through business combinations. The Company is amortizing these assets over their estimated useful lives, generally three years. There are no expected residual values related to these intangible assets. Amortization expense for the three months ended March 31, 2003 and 2002, was $1.3 million and $0.6 million, respectively.

Note C — Net Loss Per Share

     The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except per share data):

     Potential common shares, calculated using the treasury method, relating to options to purchase shares of the Company’s common stock (“Common Stock”) with exercise prices below the average market price of the Common Stock for the three months ended March 31, 2003 and 2002, totaled 1.6 million and 2.8 million, respectively, and have been excluded from the diluted calculation as the potential common shares associated with these options are anti-dilutive due to the net losses for those periods. These options have exercise prices ranging from $0.05 to $2.86 in 2003 and $0.05 to $4.30 in 2002.

     Additionally, the Company excluded other potential common shares for the three months ended March 31, 2003 and 2002, from its

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diluted net loss per share computation because the exercise price of these securities were equal to or exceeded the average market value of the Common Stock for the same periods and, therefore, these securities were anti-dilutive. The following is a summary of the excluded potential common shares and the related exercise/conversion features for the three months ended March 31, 2003 and 2002 (in thousands):

     The stock options had per share exercise prices ranging from $2.89 to $22.25 per share in the three months ended March 31, 2003. These stock options are exercisable at various dates through March 2013. The stock options had exercise prices ranging from $4.37 to $28.10 per share in the three months ended March 31, 2002. Options outstanding during 2002 included options to purchase 12.9 million shares of Common Stock, the terms of which were extended in conjunction with the IBM Transaction. These options to purchase 12.9 million shares of Common Stock expired on October 29, 2002 and had exercise prices ranging from $0.20 to $28.10 per share.

     The warrants to purchase shares of Common Stock (the “Series B Warrants”) were issued in connection with the conversion of certain shares of the Company’s Series B convertible preferred stock (“Series B Preferred”) into shares of Common Stock in July 2000. Upon conversion of the Series B Preferred, the holders received Series B Warrants exercisable for a number of shares of Common Stock equal to 20% of the shares of Common Stock into which the shares of Series B Preferred were converted. As of March 31, 2002, Series B Warrants exercisable for 2.3 million shares of Common Stock were outstanding and exercisable at a per share exercise price of $7.84. These warrants expired on November 19, 2002.

Note D — Comprehensive Loss

     Accumulated other comprehensive loss on the balance sheet is comprised of the following at March 31, 2003 and December 31, 2002 (in thousands):

Note E — Stockholders’ Equity

     The Company had 33,571,117 and 33,971,117 shares of Common Stock in treasury at March 31, 2003 and December 31, 2002, respectively. As of March 31, 2003, the Company had repurchased an aggregate of approximately 60.5 million shares for an aggregate purchase price of approximately $217.2 million as part of its previously approved stock repurchase program that commenced in the second quarter of 2001. The Company is authorized to repurchase up to $350.0 million of Common Stock under this program.

     On April 30, 2003, the Company filed a definitive proxy statement describing various proposed matters to be submitted for stockholder approval at the Company’s Annual Meeting of Stockholders scheduled to be held on June 17, 2003. These proposals include a one-for-four reverse stock split of the Common Stock. If approved by stockholders at the Annual Meeting, the Company’s Board of Directors would have the authority to declare a one-for-four reverse stock split at any time until the Company’s 2004 Annual Meeting of Stockholders.

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Note F — Sale of the Database Business

     Holdback. On July 1, 2001, the Company completed the initial closing of the IBM Transaction, which consisted of the sale to IBM of substantially all of the assets and certain liabilities of the Company’s database business for $1.0 billion in cash. The IBM Transaction was completed on August 1, 2001, upon the closing of the sale of the assets related to the database business in the nine remaining countries that were not closed on July 1, 2001. As part of the IBM Transaction, IBM retained $100.0 million of the sale proceeds as a holdback (the “Holdback”) to satisfy the indemnification obligations that might arise under the IBM Transaction purchase agreement (the “MPA”). The MPA provided that the Company would indemnify IBM and its affiliates against any loss, claim, damage, liability or other expense incurred in connection with (i) any failure of any representation or warranty of the Company under the MPA to be true and correct in all respects; provided, however, that any such liability, in the aggregate, exceeds on a cumulative basis $10.0 million (and only to the extent of any such excess); (ii) any breach of any obligation of the Company under the MPA; (iii) any of the Excluded Liabilities, as defined in the MPA; or (iv) the operation or ownership of the Excluded Assets, as defined in the MPA. The MPA provided that IBM would retain the Holdback until January 1, 2003, except for any funds necessary to provide for any claims made prior to that date. The MPA also provided that the Company would receive interest from July 1, 2001 to the payment date of the Holdback. In January 2003, IBM released the full amount of the Holdback to the Company, in the amount of $109.3 million, which included accrued interest. Indemnification obligations of the Company with respect to certain representations and warranties under the MPA will terminate on July 1, 2003.

     Working Capital Adjustment. Under the terms of the MPA, the Company was obligated to transfer $124.0 million in net working capital to IBM from the database business operations (the “Working Capital Adjustment”) as of July 1, 2001. Working Capital was defined in the MPA as the sum of (i) net accounts receivable and (ii) prepaid expenses; minus (a) ordinary course trade payables and (b) accrued ordinary course expenses (other than any such expenses incurred in connection with former employees, officers, directors, or independent contractors). These items were a subset of the various assets and liabilities of the database business that were transferred to IBM upon the closing of the IBM Transaction.

     If the net working capital transferred to IBM on the closing date exceeded $124.0 million, IBM would pay the Company 50% of the excess over $124.0 million. If the net working capital transferred to IBM was less than $124.0 million, the Company would pay IBM an amount equal to the shortfall. As of December 31, 2001, the Company expected to be reimbursed at least $3.7 million from IBM, which it estimated to be the minimum net working capital adjustment. Accordingly, the Company had recognized the minimum net working capital adjustment of $3.7 million as a reduction to the gain resulting from the IBM Transaction. On March 29, 2002, the Company was paid $11.0 million by IBM in final settlement of the net working capital adjustment. Accordingly, the Company recorded the incremental $7.3 million received in “Gain on sale of database business, net of adjustments” during the first quarter of 2002.

     Gain Adjustment. During 2002, the Company also recorded a gain adjustment of $0.3 million, primarily to decrease the long-term assets sold to IBM and a $1.4 million loss to “Gain on sale of database business, net”. The $1.4 million loss consists of $0.9 million of accrued professional and administrative fees required to dissolve subsidiaries rendered inactive as a consequence of the IBM Transaction and $0.5 million to adjust the segmentation of accounts receivable sold to IBM as part of the sale of the database business assets.

     Accrued IBM Transaction Costs. As a result of the IBM Transaction, the Company recorded a $41.9 million charge during 2001 to accrue for costs associated with the sale of the database business assets. The following table sets forth the components of the accrued transaction costs and related cash payments made during the three months ended March 31, 2003 (in millions):

     Professional fees primarily consist of fees for investment bankers, attorneys and accountants for services provided related to the IBM Transaction. Severance and employment-related charges primarily consist of (i) severance payments and related taxes for approximately 30 sales and marketing employees and 70 general and administrative employees of the database business who did not

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join IBM after the IBM Transaction, and (ii) a $4.7 million charge that related to the modification of vesting and exercise terms of stock options for certain terminated executives and for database employees who joined IBM. As discussed above, during the third quarter of 2002, the Company accrued $0.9 million of professional and administrative fees required to dissolve subsidiaries made inactive as a consequence of the IBM Transaction. During 2002, the Company reversed $0.9 million of accrued severance and related costs, as certain employees terminated employment voluntarily, reversed $0.3 million of accrued transfer taxes as the Company was ultimately required to pay less than what was originally estimated, and accrued $1.2 million of professional fees to reflect an increase in estimated costs to reorganize the Company as a consequence of the IBM Transaction. As of March 31, 2003, severance payments and related taxes had been paid to terminate 81 employees. The remaining accrual balance of $4.4 million, which includes severance and related taxes, is expected to be paid on various dates extending through 2006. The remaining accrual balance of $1.0 million for professional fees is expected to be paid by December 31, 2003.

Note G — Accrued Merger, Realignment and Other Charges

     The following table summarizes the components of the “Accrued merger, realignment and other charges” at March 31, 2003 and December 31, 2002 (in millions):

     The components of the Company’s net merger, realignment and other charges are outlined below.

Facility and Equipment Charges resulting from IBM Transaction

     As a result of the IBM Transaction (see Note F) the Company no longer required as much facility space and recorded charges and adjustment during 2001 and 2002 for facilities and equipment costs related to the Company’s vacant, or partially vacant, facilities resulting from the sale of the database business assets. The accumulated charges were comprised of reserves for residual lease obligations and restoration costs and write-offs related to leasehold improvements and other fixed assets at these vacated, and partially vacated, facilities. The following table summarizes the accrual activity for the quarter ended March 31, 2003 (in millions):

     The $10.4 million of residual lease obligations is comprised of $9.4 million of lease-related payments that the Company estimates it will make from the date of the Company’s exit from each facility to the end of the corresponding lease term, net of rental payments from IBM or other sub–lessees, and $1.0 million of estimated restoration costs for facilities that the Company has either exited or finalized plans to exit. The unpaid residual lease obligations and restoration costs relate to facilities that the Company has exited or plans to exit at March 31, 2003 and expire from 2003 through 2008.

     The Company may need to record additional adjustments or charges in the future due to changes in estimates arising from the size and quantity of its facilities that are being exited and the volatility of the real estate markets in which the Company’s facilities are located. As of March 31, 2003, barring unforeseen circumstances, the Company does not expect future charges related to undiscounted lease obligations, excluding estimated sublease income, and restoration costs, to exceed $6.2 million, the maximum remaining unaccrued obligation under existing contractual lease terms.

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Other Merger and Realignment Charges

     The Company recorded various merger and realignment charges as a result of other actions initiated during 2001 and 2002, including the third quarter 2002 realignment, the 2000 strategic realignment, and the Ardent and other charges activities. The following table sets forth the activity related to those remaining balances occurring during the three months ended March 31, 2003 as well as the accrued balance remaining at March 31, 2003 (in millions):

     The unpaid severance balance of $0.4 million as of March 31, 2003 is expected to be paid by September 30, 2003 and relates primarily to bi-monthly severance payments for employees who have already been terminated and severance payments for employees who, barring unforeseen circumstances, are expected to be terminated by the end of September 30, 2003. Of the $0.4 million in remaining facility exit costs at March 31, 2003, $0.2 million are for residual lease obligations and $0.2 million are for restoration costs on idle facilities with leases that expire at various dates through 2004.

Note H — Business Segments

     The Company operates under two segments that report to the Company’s chief executive officer (the “Chief Operating Decision Maker”). The first segment, Ascential Software, develops and markets data integration software and related services worldwide. The second segment, Informix Software,

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provided database management systems for data warehousing, transaction processing, and e-business applications. The “Company” or “Ascential Software Corporation” refers to Ascential Software and Informix Software on a combined basis. Segment operating performance is evaluated primarily on income before taxes. As discussed in Note F, the Company completed the IBM Transaction during the third quarter of 2001. Accordingly, the Company derived no revenue from operations of the Informix Software segment after 2001 and the only remaining operating segment subsequent to the sale is Ascential Software. Expenses continued to be incurred by the Informix Software segment related to the winding down of issues with respect to the sale of that business. Below is a summary of the results of operations based on the two operating businesses for the three months ended March 31, 2003 and March 31, 2002 (in thousands):

     The operating loss for Informix Software for the three months ended March 31, 2003 and March 31, 2002 relates principally to the costs of settlement of disputes associated with the historical database operations, net of recoveries, adjustments to facility and severance reserves and the general and administrative costs associated with consolidating the infrastructure of the database business into the Company infrastructure. In addition to these items, the loss before income taxes for Informix Software for the three months ended March 31, 2002 includes $7.7 million in income associated with an adjustment to the gain on the sale of the database business assets.

     For the three months ended and as of March 31, 2003 and 2002, all revenue, depreciation and amortization, identifiable assets and capital expenditures are related to the Ascential Software business segment.

     For the three months ended March 31, 2003, no single customer accounted for greater than 10% of revenues. For the three months ended March 31, 2002, the Company had one customer who accounted for 11% of revenues.

Note I — Commitments and Contingencies

     Guarantees. Effective December 31, 2002, the Company adopted the disclosure provisions of FIN 45 which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The Company’s guarantees consist of a contingent liability for the assignment of a facility lease, indemnification agreements and standby letters of credit.

     In November 1996, the Company leased approximately 200,000 square feet of office space in Santa Clara, California. The lease term extends through March 2013 and the remaining minimum lease payments amount to approximately $58.9 million. We assigned this lease to Network Associates, Inc., an unrelated third party, in the fourth quarter of 1997. The Company remains contingently liable for minimum lease payments under this assignment.

     As part of the IBM Transaction, the Company agreed to indemnify IBM for certain representations and warranties that were made under the terms of the IBM Transaction agreements. IBM had retained $100.0 million of the sale proceeds as a holdback to satisfy any indemnification obligations that might arise for any representations or warranties made by the Company as part of the IBM Transaction. The agreement with IBM provided that the Company would indemnify IBM and its affiliates against any loss, claim, damage, liability or other expense incurred in connection with (i) any failure of any representation or warranty of the Company to be true and correct in all respects; provided, however, that any such liability, in the aggregate, exceeds on a cumulative basis $10.0 million (and only to the extent of any such excess); (ii) any breach of any obligation of the Company; (iii) any of the Excluded Liabilities, as defined in the agreement; or (iv) the operation or ownership of the Excluded Assets, as defined in the agreement. The Company received the $100.0 million holdback payment from IBM, plus accrued interest, in January 2003. No formal indemnification claims have been made by IBM from the time that the Company received the holdback payment through the date of this filing.

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     Indemnification obligations of the Company with respect to certain representations and warranties under the agreement with IBM will terminate on July 1, 2003 (see Note F).

     The Company is obligated to indemnify current and prior directors, officers and certain employees for various matters arising from their actions during the period they were employed or associated with the Company. The Company is paying the legal fees of one former officer, which payments are currently not expected to have a material adverse effect on the Company’s financial condition. The Company’s indemnification obligations are defined by indemnification agreements and the Company’s charter and by-laws. The Company is insured for certain costs and losses that could be incurred by virtue of its indemnification obligations. The Company may be entitled to seek reimbursement from such individuals for these payments if certain conditions are satisfied.

     In May 2002, the Company entered into a standby letter of credit that expires by May 2006 which guarantees $0.7 million of potential tax payments related to certain payments made to one of the former officers of the Company. These potential tax payments, which have been fully reserved, relate to severance paid to that former officer in accordance with a change in control agreement that was triggered by the IBM Transaction (see Note F). Payment under the standby letter of credit may be due upon final determination of this tax liability.

     The Company was also required to enter into standby letters of credit to guarantee approximately $0.6 million of lease payments for certain facilities in Europe. These guarantees do not have expiration dates and would allow landlords to obtain lease payments from the Company’s bank if the Company defaulted on its lease payment obligations.

     The Company generally offers a 90 day warranty with respect to its products and indemnification with respect to infringement of third party intellectual property. Historically, the Company has recorded minimal costs related to warranties and indemnities.

Note J — Litigation

     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 retained by the employee to the Company, was heard on December 20, 2002. The court did not grant Informatica’s motion for a preliminary injunction. The Company has produced information to Informatica which the Company believes shows there is no merit to Informatica’s claims against the Company. Among other things, the Company does not believe that the information retained by the employee constitutes protectable trade secrets or that any material harm to Informatica can be demonstrated. In January 2003, Informatica amended its complaint to add claims against a second Ascential employee previously employed by Informatica, and against the Company with respect to actions allegedly taken by such second employee. The second employee’s employment by the Company ended on March 5, 2003. The court granted Informatica’s motion to amend its complaint, to which the Company filed its answer in March 2003 and the second employee filed his answer in April 2003. The Company intends to defend itself vigorously.

     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 moved 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 yet been set.

     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 a distributor of its products in certain parts of Asia, alleged in both actions the improper distribution of certain Unidata products in the plaintiff’s exclusive territory and asserted damages of approximately $30.0 million (among other relief) under claims for fraud, breach of contract, unfair competition, racketeering and corruption, and trademark and copyright infringement. Unidata denied the allegations against it in its answers to the complaints. In the Colorado action, Unidata moved that the matter be resolved by arbitration in accordance with its distribution agreement with the plaintiff. In May 1999, the U.S. District Court for the District of Colorado issued an order compelling arbitration and in September 2000, the arbitrator issued an award against the Company for $3.5 million plus attorneys’ fees and expenses estimated to be approximately $0.8 million. 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 as a consequence of the outcome of outstanding claims in the State of Washington. 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.

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     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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     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; trends in performance and operating results; future growth of consulting, maintenance and education revenue; decline in revenue and costs associated with our content management product line; improvement in professional services margins during 2003; sales headcount; research and development expenses; investments in research and development, sales and marketing, product support, and property and equipment; sufficiency of Cash (as defined) and short-term investments to meet working capital requirements and sufficiency of resources to fund repurchases of common stock. 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 quarterly report on Form 10-Q. 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 solution that is intended to address the full data integration life cycle, and turns corporate 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.

     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 any application and provide virtually unlimited scalability to manage the massive volumes of corporate data generated through high-performance processing. 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 615 employees as of March 31, 2003.

     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 that we refer to as the “IBM Transaction” (See Note F of the Notes to the Unaudited Condensed 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. 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 during the year ended December 31, 2003 to a relatively insignificant amount.

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

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scope implementation requirements. In June 2002, in an effort to focus sales on our enterprise integration products, we terminated our content management product line that included our Media360 and i.Reach products.

Critical Accounting Policies

     Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting periods. Areas where significant judgments are made include, but are not limited to, revenue recognition; allowance for doubtful accounts; software development costs; goodwill and intangible assets; income taxes; merger, realignment and other charges; and business combinations. Actual results could differ materially from these estimates. For a more detailed explanation of the judgments made in these areas, please refer to our Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on March 27, 2003.

RESULTS OF OPERATIONS

     The discussion and analysis of our results of operations for the three months ended March 31, 2003 is structured to take into account the sale of the database business during the third quarter of 2001. References to “Ascential Software” in this report refer to our existing enterprise integration business; references to “Informix Software” refer to our legacy database business, the assets of which were sold to IBM in the IBM Transaction, and references to “Ascential Software Corporation” refer to Ascential Software and Informix Software on a combined basis. During 2003 and 2002, we continued to incur ongoing transitional costs associated with the database business. Therefore, we believe that comparisons of total expenses for the three months ended March 31, 2003 and 2002 are not meaningful. Accordingly, the discussion and analysis of our results of operations is structured as follows:

I.

Overview of Results of Operations—Ascential Software

Revenues and expenses of Ascential Software are presented as a percentage of revenues for the three months ended March 31, 2003 and 2002. This presentation excludes the results of the database business and accommodates our discussion of the results of the Ascential Software operations during the same periods.

II.

Revenue—Ascential Software Corporation

Discussion and analysis of revenue for Ascential Software Corporation including: (1) a table of revenues by type; and (2) a discussion and analysis of revenue for the three months ended March 31, 2003 as compared to the corresponding period in 2002.

III.

Costs and Expenses—Ascential Software and Informix Software

Discussion and analysis of costs and expenses, including: (1) a table of expenses by type for Ascential Software and Informix Software for the three months ended March 31, 2003 and 2002; (2) a discussion and analysis of Ascential Software costs and expenses for the three months ended March 31, 2003 as compared to the corresponding period in 2002; and (3) a description of the costs associated with Informix Software for the three months ended March 31, 2003 and 2002.

IV.

Other Income (Expense)—Ascential Software Corporation

Discussion and analysis of other income (expense) of Ascential Software Corporation for the three months ended March 31, 2003 and 2002.

V.

Income Taxes—Ascential Software Corporation

Discussion and analysis of income taxes of Ascential Software Corporation for the three months ended March 31, 2003 and 2002.

VI.

Other Items

Information recommended by the American Electronics Association for technology companies to voluntarily expand disclosures relating to stock compensation.

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I.

Overview of Results of Operations — Ascential Software

     The following table compares the results of operations for Ascential Software for the three months ended March 31, 2003 and 2002, respectively. This presentation excludes the results of the database business that was sold during the third quarter of 2001.

II.

Revenue — Ascential Software Corporation

     The following table and discussion compares the revenues by product type for the three months ended March 31, 2003 and 2002 (in millions):

     Licenses revenue. Licenses revenue for the three months ended March 31, 2003 increased 78% to $19.2 million from $10.8 million for the same period in 2002. The $8.4 million increase is a result of a $8.5 million increase in license revenue from enterprise integration products offset by a $0.1 million decrease in license revenue from the content management product line, which was terminated during the second quarter of 2002. The increase in revenue from the enterprise integration products was driven by

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increased volume as well as an increase to the overall average license selling price. The number of license transactions greater than $25,000, the total of which represents greater than 95% of license revenue in both periods presented, increased 45% from the first quarter of 2002 to the first quarter of 2003. This increase in volume resulted from improved sales force productivity on a worldwide basis and increased leverage of our partner relationships, including IBM. The average license selling price of transactions greater than $25,000 increased 32% from the first quarter of 2002 to the first quarter of 2003. This increase in average selling price was caused by increases in list prices that occurred during 2002 resulting from an expanded product offering following the addition of products and technology acquired from Torrent Systems, Inc. (“Torrent”), Vality Technology Incorporated (“Vality”) and Metagenix, Inc. that were integrated into our enterprise integration product offering, the release of new products and enhancements to all existing products during the second half of 2002 and by two international license transactions in the first quarter of 2003 that together represented 16% of our license revenue. For the three months ended March 31, 2003, no single customer was responsible for greater than 10% of total revenue. For the three months ended March 31, 2002 one customer was responsible for 11% of total revenue.

     Service revenue. Service revenue for the three months ended March 31, 2003 increased 61% to $16.1 million from $10.0 million for the same period in 2002. Maintenance revenue increased by $4.0 million or 71% to $9.6 million in the first quarter of 2003 from $5.6 million for the same period in 2002. The increase in maintenance revenue is attributable to a $4.2 million increase in maintenance revenue associated with enterprise integration product offerings sold to the growing installed base of customers, including customers acquired from Vality and Torrent, and corresponds with the 78% increase in license revenue over the same period. This increase was offset by a $0.2 million decline in maintenance revenue from the content management product line that was terminated in the second quarter of 2002. Revenue derived from consulting and training increased $2.1 million or 48% to $6.5 million in the first quarter of 2003 from $4.4 million in the same period of 2002. This increase was caused by an increase in consulting and training associated with enterprise integration products and is net of a $0.4 million decline in consulting and training associated with the content management product line. The increase in consulting and training revenue is attributable to an increase in volume of consulting engagements, principally in North America, associated with the increased penetration of that geographic market that has been positively influenced by the expansion of our product offering as discussed above. We expect that future growth of consulting, maintenance and education revenue, barring unforeseen circumstances, will be largely dependent on the growth of license revenue.

     Service revenue for the three months ended March 31, 2003 includes $0.1 million of revenue associated with the content management product line. We expect that the content management revenue stream will continue to decline during 2003 until all the related service contracts are fulfilled.

III.

Costs and Expenses — Ascential Software and Informix Software

     The following table and discussion compares the costs and expenses for the businesses of Ascential Software and Informix Software for the three months ended March 31, 2003 and 2002 (in millions):