ASCENTIAL SOFTWARE CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended June 30, 2003.

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Transition Period from to

Commission File Number 0-15325

ASCENTIAL SOFTWARE CORPORATION

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		94-3011736 (I.R.S. Employer Identification No.)

50 Washington Street, Westborough, MA (Address of principal executive office)		01581 (zip code)

Registrant’s telephone number, including area code:		(508) 366-3888

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 July 31, 2003, 58,123,483 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS


Part I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
		CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
		CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
		Notes to Unaudited Condensed Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
INDEX TO EXHIBITS
EX-3.1 RESTATED CERTIFICATE OF INCORPORATION
EX-10.1 1994 STOCK OPTION AND AWARD PLAN
EX-10.2 1989 OUTSIDE DIRECTORS STOCK OPTION PLAN
EX-10.3 1997 EMPLOYEE STOCK PURCHASE PLAN
EX-10.4 1998 NON-STATUTORY STOCK OPTION AND ...
EX-31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
EX-31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

Table of Contents

ASCENTIAL SOFTWARE CORPORATION
FORM 10-Q
Quarterly Period Ended June 30, 2003
Table of Contents


			Page

		PART I. Financial Information
	Item 1. Financial Statements (Unaudited)			3
		Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002		3
		Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002		4
		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002		5
		Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2003 and 2002		6
		Notes to Unaudited Condensed Consolidated Financial Statements		7
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			37
	Item 4. Controls and Procedures			37
		PART II. Other Information
	Item 1. Legal Proceedings			38
	Item 4. Submission of Matters to a Vote of Security Holders			39
	Item 6. Exhibits and Reports on Form 8-K			40
Signature				42

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.

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

ASCENTIAL SOFTWARE CORPORATION

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


		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2003			2002			2003			2002

NET REVENUES
	Licenses	$	21,016		$	15,116		$	40,186		$	25,867
	Services		18,913			12,846			35,039			22,888

			39,929			27,962			75,225			48,755
COSTS AND EXPENSES
	Cost of licenses		3,353			7,921			6,954			11,070
	Cost of services		8,828			8,567			16,075			16,577
	Sales and marketing		16,849			20,247			33,544			38,931
	Research and development		5,510			6,674			10,880			13,107
	General and administrative		6,962			7,989			13,371			22,534
	Merger, realignment and other charges		432			6,987			432			11,666
	Write-off of acquired in-process research and development		—			1,170			—			1,170

			41,934			59,555			81,256			115,055

Operating loss			(2,005	)		(31,593	)		(6,031	)		(66,300	)
OTHER INCOME (EXPENSE)
	Interest income		2,903			5,228			6,215			11,461
	Interest expense		(7	)		(18	)		(30	)		(39	)
	Gain on sale of database business, net		—			—			—			7,634
	Other income (expense), net		102			2,095			76			929

INCOME (LOSS) BEFORE INCOME TAXES			993			(24,288	)		230			(46,315	)
	Income tax expense (benefit)		298			(3,660	)		69			(9,167	)

NET INCOME (LOSS)		$	695		$	(20,628	)	$	161		$	(37,148	)

NET INCOME (LOSS) PER COMMON SHARE
Basic		$	0.01		$	(0.33	)	$	0.00		$	(0.58	)
Diluted		$	0.01		$	(0.33	)	$	0.00		$	(0.58	)
SHARES USED IN PER SHARE CALCULATIONS
Basic			58,009			63,094			57,942			63,610
Diluted			59,059			63,094			58,671			63,610

See Notes to Unaudited Condensed Consolidated Financial Statements.

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


				June 30,			December 31,
				2003			2002

			ASSETS
Current assets
		Cash and cash equivalents		$	352,408		$	216,551
		Short-term investments			272,153			288,199
		Accounts receivable, net			25,730			27,112
		Receivable from sale of database business			—			109,200
		Recoverable income taxes			1,212			17,448
		Other current assets			12,600			13,688

Total current assets					664,103			672,198
Property and equipment, net					5,774			5,427
Software development costs, net					14,458			14,124
Long-term investments					1,246			966
Goodwill					162,301			162,670
Intangible assets, net					8,452			11,070
Deferred income taxes					28,412			28,515
Other assets					10,339			11,280

Total assets				$	895,085		$	906,250

	LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
		Accounts payable		$	8,992		$	8,136
		Accrued expenses			21,574			23,137
		Accrued employee compensation			13,315			14,861
		Income taxes payable			86,634			98,916
		Deferred revenue			23,233			17,666
		Accrued merger, realignment and other charges			10,054			15,698
		Deferred income taxes			33,168			33,171
		Other current liabilities			687			479

Total current liabilities					197,657			212,064

Commitments and contingencies (Note I)
Stockholders’ equity
		Common stock			665			663
		Additional paid-in capital			603,614			602,514
		Treasury stock, at cost			(98,454	)		(99,626	)
		Retained earnings			202,404			202,243
		Deferred compensation			(160	)		(235	)
		Accumulated other comprehensive loss			(10,641	)		(11,373	)

Total stockholders’ equity					697,428			694,186

Total liabilities and stockholders’ equity				$	895,085		$	906,250

See Notes to Unaudited Condensed Consolidated Financial Statements.

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


					Six Months Ended
					June 30,

					2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES
		Net income (loss)			$	161		$	(37,148	)
		Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by (used in) operating activities:
			Depreciation and amortization			4,014			4,859
			Amortization of capitalized software development costs			3,349			3,288
			Write-off of capitalized software development costs			—			5,200
			Write-off of acquired in process research and development			—			1,170
			Foreign currency transaction (gain) loss			(1,697	)		2,071
			Loss on disposal of property and equipment			49			740
			Deferred income taxes			27			9,533
			Provisions for losses on accounts receivable			33			2,083
			Merger, realignment and other charges			432			11,469
			Gain on sale of database business, net of adjustments			—			(7,634	)
			Stock-based employee compensation			75			—
			Changes in operating assets and liabilities, net of impact of acquisition:
				Accounts receivable		2,268			1,530
				Other current and non-current assets		18,489			5,809
				Accounts payable, accrued expenses and other liabilities		(21,092	)		(74,590	)
				Deferred revenue		4,822			2,211

Net cash and cash equivalents provided by (used in) operating activities						10,930			(69,409	)

CASH FLOWS FROM INVESTING ACTIVITIES
	Purchases of available-for-sale securities					(455,525	)		(183,325	)
	Maturities of available-for-sale securities					341,036			129,479
	Sales of available-for-sale securities					130,485			69,649
	Business combination, net of cash acquired					—			(99,767	)
	Purchases of property and equipment					(1,927	)		(2,554	)
	Additions to capitalized software development costs					(3,683	)		(6,640	)
	Proceeds from sale of database business assets, net					109,328			11,000
	Other					—			907

Net cash and cash equivalents provided by (used in) investing activities						119,714			(81,251	)

CASH FLOWS FROM FINANCING ACTIVITIES
	Proceeds from issuance of common stock					2,274			2,520
	Purchases of treasury stock					—			(29,001	)

Net cash and cash equivalents provided by (used in) financing activities						2,274			(26,481	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS						2,939			363

Increase (decrease) in cash and cash equivalents						135,857			(176,778	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD						216,551			489,307

CASH AND CASH EQUIVALENTS AT END OF PERIOD					$	352,408		$	312,529

See Notes to Unaudited Condensed Consolidated Financial Statements.

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


		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2003			2002			2003			2002

	Net income (loss)	$	695			(20,628	)	$	161		$	(37,148	)

Other comprehensive income:
	Unrealized gains on available-for-sale securities, net of tax expense of $92 and $6 for the three and six months ended June 30, 2003 (See Note A)		780			1,741			968			1,009
	Reclassification adjustment for realized losses included in net income (loss)		(767	)		(169	)		(830	)		(337	)
	Change in cumulative foreign currency exchange translation adjustment		1,339			3,336			594			2,551

	Other comprehensive income		1,352			4,908			732			3,223

	Comprehensive income (loss)	$	2,047		$	(15,720	)	$	893		$	(33,925	)

See Notes to Unaudited Condensed Consolidated Financial Statements.

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 data integration software and services. Ascential designs, develops, markets and supports enterprise data 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 that is included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2003. Certain prior period amounts have been reclassified to conform to the current period presentation.

Reverse Stock Split. On June 17, 2003, the Company effected a one-for-four reverse stock split. Accordingly, all share and earnings per share figures have been restated as though the reverse split had been in effect for all periods presented.

Comprehensive Income. Through June 30, 2002, the Company did not record deferred tax expense related to unrealized gains in comprehensive income, as none were required due to the Company’s consolidated tax position.

Stock-Based Compensation. In December 2002, the Financial Accounting Standards 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 regarding 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 income (loss) and net income (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 (loss) and net income (loss) per share as if the Company had applied the fair value method to stock-based employee compensation (in thousands, except per share information):

ASCENTIAL SOFTWARE CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)


			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2003			2002			2003			2002

	Net income (loss) to common stockholders:
		As reported	$	695		$	(20,628	)	$	161		$	(37,148	)
	Deduct:
		Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		(8,605	)		(9,033	)		(17,237	)		(17,935	)

	Net loss applicable to common stockholders:
		Pro forma	$	(7,910	)	$	(29,661	)	$	(17,076	)	$	(55,083	)

	Net income (loss) per common share:
		Basic, as reported	$	0.01		$	(0.33	)	$	0.00		$	(0.58	)
		Diluted, as reported	$	0.01		$	(0.33	)	$	0.00		$	(0.58	)
		Basic and diluted, pro forma	$	(0.14	)	$	(0.47	)	$	(0.29	)	$	(0.86	)
Shares used in calculations, as reported
		Basic, as reported		58,009			63,094			57,942			63,610
		Diluted, as reported		59,059			63,094			58,671			63,610
		Basic and diluted, pro forma		58,009			63,094			57,942			63,610
The fair value of each option grant is estimated on the date of grant using the following weighted average assumptions and resulting fair market values:
		Risk free interest rate		2.38	%		4.11	%		2.82	%		4.11	%
		Expected life of the option	4.5 years			4.5 years			4.5 years			4.5 years
		Expected volatility		82	%		85	%		82	%		85	%
		Expected dividend yield		—	%		—	%		—	%		—	%
		Weighted average fair value of option grants	$	9.66		$	2.02		$	1.85		$	2.06

Recent accounting pronouncements. The Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, (“FIN 46”) in January 2003. This interpretation of Accounting Research Bulletin No. 51 requires the consolidation of certain variable interest entities by the primary beneficiary. FIN 46 became effective immediately for all variable interest entities created after January 31, 2003, and applies in the first interim or annual period occurring subsequent to June 15, 2003 for variable interest entities created prior to February 1, 2003. The Company currently does not expect the adoption of FIN 46 to have a material effect on its operating results or financial position.

In April 2003, FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. This statement is effective for contracts entered into or modified, and for hedging relationships, designated after June 30, 2003. The Company does not currently hold any derivative instruments, other than foreign currency forward exchange contracts, and does not expect the adoption of this statement to have a material impact on its operating results or financial position.

In May 2003, FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. The statement revises the accounting for three types of financial instruments that were previously accounted for as equity – mandatorily redeemable shares, instruments that may require the issuer to buy back shares and certain obligations that can be settled with shares. The statement requires that those instruments be accounted for as liabilities in the statement of financial position. The statement is

ASCENTIAL SOFTWARE CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)

effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company currently does not expect the adoption of this statement to have a material impact on its operating results or financial position.

Note B — Goodwill and Other Intangible Assets

As of June 30, 2003 the Company had goodwill in the amount of $162.3 million. There was a reduction of $0.4 million in the carrying value from December 31, 2002. This reduction related to the final valuation of the assets and obligations of Vality Technology Incorporated (“Vality”). The Company determined, in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, 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 $8.5 million (net of accumulated amortization of $9.5 million) and $11.1 million (net of accumulated amortization of $6.9 million) at June 30, 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 and six months ended June 30, 2003 was $1.3 million and $2.6 million, respectively. Amortization expense for the three and six months ended June 30, 2002 was $1.3 million and $1.9 million, respectively. Amortization expense associated with current intangible assets, is expected to be $2.6 million for the remainder of 2003, and amortization expense for each of the years ended December 31, 2004, 2005, and 2006, is expected to be $5.0 million, $1.0 million, and $0.2 million, respectively.

Note C — Net Income (Loss) Per Share

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


			Three Months Ended					Six Months Ended
			June 30,					June 30,

			2003		2002			2003		2002

Numerator:
	Net income (loss)		$	695	$	(20,628	)	$	161	$	(37,148	)

Denominator:
	Denominator for basic net loss per common share -
	Weighted-average shares outstanding			58,009		63,094			57,942		63,610
	Effect of dilutive securities:
		Employee stock options		1,050		—			729		—

Denominator for diluted net loss per common share -
	Adjusted weighted-average shares and assumed conversions			59,059		63,094			58,671		63,610

Basic net income (loss) per common share			$	0.01	$	(0.33	)	$	0.00	$	(0.58	)
Diluted net income (loss) per common share			$	0.01	$	(0.33	)	$	0.00	$	(0.58	)

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 and six months ended June 30, 2003 are represented in the table above. During the three and six months ended June 30, 2002, potential common shares totaled 2.6 million and 3.2 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 $0.20 to $13.12 and $0.20 to $15.16 for the three and six months ended June 30, 2002, respectively.

Additionally, the Company excluded other potential common shares for the three and six months ended June 30, 2003 and 2002, from its diluted net loss per share computation because the exercise price of these securities were equal to or exceeded the average market value of the

ASCENTIAL SOFTWARE CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)

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 and six months ended June 30, 2003 and 2002 (in thousands):


		Three Months Ended				Six Months Ended
		June 30,				June 30,

		2003		2002		2003		2002

	Potential common shares:
Stock options			6,225		8,261		6,546		7,649
Common stock warrants (Series B Warrants)			—		576		—		576

The stock options had per share exercise prices ranging from $15.14 to $89.00 and from $13.36 to $89.00 per share in the three and six months ended June 30, 2003, respectively. These stock options are exercisable at various dates through June 30, 2013. During the three and six months ended June 30, 2002, the above stock options had exercise prices ranging from $13.36 to $112.40 per share and from $15.44 to $112.40 per share, respectively.

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. As of June 30, 2002, Series B Warrants exercisable for 0.6 million shares of Common Stock were outstanding and exercisable at a per share exercise price of $31.36. 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 June 30, 2003 and December 31, 2002 (in thousands):


	June 30,			December 31,
	2003			2002

Cumulative foreign exchange translation adjustment	$	(12,458	)	$	(13,052	)
Unrealized gains on available for sales securities, net of taxes of $1,211 at June 30, 2003 and $1,119 at December 31, 2002		1,817			1,679

	$	(10,641	)	$	(11,373	)

ASCENTIAL SOFTWARE CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)

Note E — Stockholders’ Equity

The following table reconciles Common Stock shares issued and outstanding at June 30, 2003 and December 31, 2002.


Reconciliation of Common Stock shares issued (in thousands):
	Shares outstanding at December 31, 2002	66,361
	Shares issued upon exercises of stock options	133
	Shares sold and issued to employees under the Company’s employee stock purchase plan	100
	Treasury shares retired	(100	)
	Fractional shares redeemed due to 1 for 4 reverse stock split	(2	)

	Shares issued at June 30, 2003	66,492
Less shares in treasury at June 30, 2003		(8,393	)

Net Common Stock shares outstanding at June 30, 2003		58,099

The Company had 8,392,779 and 8,492,779 shares of Common Stock in treasury at June 30, 2003 and December 31, 2002, respectively. As of June 30, 2003, the Company had repurchased an aggregate of approximately 15.1 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.

Note F — Sale of the Database Business Assets

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 terminated 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.

On March 29, 2002, the Company was paid $11.0 million by IBM in final settlement of the net working capital adjustment. 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 previously recognized the minimum net working capital adjustment of $3.7 million as an increase to the gain resulting from the IBM Transaction. As a result, 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.

ASCENTIAL SOFTWARE CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)

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 six months ended June 30, 2003 (in millions):


	Accrual
	Balance
	December 31,		Cash		Accrual Balance
	2002		Payments		June 30, 2003

Professional fees	$	1.2	$	0.4	$	0.8
Severance and employment-related costs		4.4		—		4.4

Accrued transaction costs and related charges included in accrued expenses	$	5.6	$	0.4	$	5.2

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 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 rendered 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 June 30, 2003, severance payments and related taxes had been paid in connection with the termination of 81 employees. The accrual balance of $4.4 million, which includes severance and related taxes, is expected to be paid on various dates extending through 2007. The accrual balance of $0.8 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 balance of components of the “Accrued merger, realignment and other charges” at June 30, 2003 and December 31, 2002 (in millions):


			June 30, 2003		December 31, 2002

Facility and equipment charges resulting from the IBM Transaction			$	9.3	$	13.0
Other merger and realignment charges:
	Third quarter 2002 realignment			0.5		1.5
	2000 strategic realignment			—		0.7
	Ardent merger and other			0.3		0.5

		Total other merger and realignment charges	$	0.8	$	2.7

		Total accrued merger, realignment and other charges	$	10.1	$	15.7

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 adjustments during 2002 and 2001 for facilities and equipment costs related to the Company’s vacant, or partially vacant, facilities. 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 six months ended June 30, 2003 (in millions):

ASCENTIAL SOFTWARE CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)


	Accrual							Accrual
	Balance at							Balance at
	December 31,		Cash			Charges and		June 30,
	2002		Payments			Adjustments		2003

Residual lease obligations and restoration costs	$	13.0	$	(4.2	)	$	0.5	$	9.3

The $9.3 million of residual lease obligations is comprised of $8.6 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 $0.7 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 had plans to exit at June 30, 2003 and expire from 2003 through 2008.

The Company may 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 June 30, 2003, barring unforeseen circumstances, the Company does not expect future charges related to undiscounted lease obligations and restoration costs, excluding estimated sublease income, to exceed $4.7 million, the maximum remaining unaccrued obligation under existing contractual lease terms.

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 acquisition of Ardent Software, Inc. (“Ardent”) and other charges. The following table sets forth the activity related to those remaining balances occurring during the six months ended June 30, 2003 as well as the accrued balance remaining at June 30, 2003 (in millions):


						Balance at
	Balance at					June 30,
	December 31, 2002		Payments			2003

Severance and employment costs	$	1.3	$	(0.9	)	$	0.4
Facility exit costs		1.2		(0.9	)		0.3
Other exit costs		0.2		(0.1	)		0.1

Total	$	2.7	$	(1.9	)	$	0.8

The unpaid severance balance of $0.4 million as of June 30, 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 or are expected to be terminated by the end of September 30, 2003. Of the $0.3 million in remaining facility exit costs at June 30, 2003, $0.1 million is for residual lease obligations and $0.2 million is 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, 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 IBM Transaction 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 and six months ended June 30, 2003 and 2002 (in thousands):

ASCENTIAL SOFTWARE CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)


		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2003			2002			2003			2002

Operating loss:
	Ascential Software	$	(1.1	)	$	(29.7	)	$	(3.9	)	$	(53.6	)
	Informix Software		(0.9	)		(1.9	)		(2.1	)		(12.7	)

	Total Ascential Software Corporation	$	(2.0	)	$	(31.6	)	$	(6.0	)	$	(66.3	)

Income (loss) before income taxes:						—						—
	Ascential Software	$	1.9		$	(25.5	)	$	2.3		$	(44.3	)
	Informix Software		(0.9	)		1.2			(2.1	)		(2.0	)

	Total Ascential Software Corporation	$	1.0		$	(24.3	)	$	0.2		$	(46.3	)

The operating loss for Informix Software for the three and six months ended June 30, 2003 and 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 six months ended June 30, 2002 includes $7.6 million in income associated with an adjustment to the gain on the sale of the database business assets and for the three and six months ended June 30, 2002 includes $3.1 million of income related to the proceeds received in connection with the favorable settlement of litigation. See Note F for discussion of these items.

For the three and six months ended and as of June 30, 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 June 30, 2003, one customer accounted for greater than 13% of revenue. For the six months ended June 30, 2003, that same customer accounted for 11% of revenue. For the three and six months ended June 30, 2002, no single customer accounted for more than 10% of revenue.

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

ASCENTIAL SOFTWARE CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)

through the date of this filing. Indemnification obligations of the Company with respect to certain representations and warranties under the agreement with IBM terminated 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 produced information to Informatica which the Company believed showed 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 constituted protectable trade secrets or that any material harm to Informatica could 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. On July 11, 2003, in order to avoid the further expense and inconvenience of litigation, the Company and Informatica entered into a settlement agreement, including a mutual release of claims, pursuant to which the Company paid Informatica $1.6 million. The settlement agreement also provided for a six month period during which the Company agreed not to solicit for employment, or hire, employees of Informatica, and for the destruction or return of Informatica information received from either of the two employees previously employed by Informatica.

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.

ASCENTIAL SOFTWARE CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
(Continued)

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.

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.

Note K — Business Combinations

On April 3, 2002, the Company acquired Vality, a private company that specialized in enterprise data quality management. The results of Vality’s operations have been included in the consolidated financial statements since the date of the acquisition. The Company expects this acquisition to enable the Company to create a market leading offering that integrates ETL (extraction, transformation, and load), meta data management, and data quality and data cleansing technologies. As of June 30, 2003, the Company has paid the net amount of $95.6 million to acquire Vality, which consists of $91.4 million paid to acquire 100% of the outstanding common and preferred shares of Vality and vested stock options and $2.8 million for transaction costs, which is net of $7.0 million of cash acquired from Vality. The acquisition was accounted for using the purchase method of accounting, and a summary of the purchase price for the acquisition is as follows (in millions):


Cash paid to acquire stock and options (less cash acquired of $7.0 million)	$	91.4
Cash paid for transaction costs		4.2
Accrued amount payable to stockholders and option holders		0.1
Accrued merger costs		2.6

Total	$	98.3

The purchase price was allocated as follows:


Net liabilities assumed, net of cash acquired		$	(2.4	)
Deferred income taxes			(1.9	)
Intangible assets:
	Existing technology		8.2
	Covenant not to compete		0.3
	Goodwill		92.9

	Total intangible assets		101.4
In-process research and development			1.2

Total		$	98.3

The portion of the purchase price allocated to in-process research and development (“IPRD”) costs in the Vality acquisition was $1.2 million, or approximately 1% of the total purchase price. The value allocated to the project identified as in process was charged to operations in the second quarter of 2002.

The remaining identified intangible assets acquired, including, without limitation, technology and covenants not to compete between the Company and certain former members of senior management of Vality, were assigned fair values based upon an independent appraisal and amounted to $8.5 million in the aggregate. The Company believes that these identified intangible assets have no residual value. The excess of the purchase price over the identified tangible and intangible assets was recorded as goodwill and amounted to approximately $92.9 million. The existing technology is being amortized over three years and the covenant not to compete was amortized over one year. In accordance with current accounting standards, the goodwill is not being amortized and will be tested for impairment as required by SFAS No. 142 (See

Note 11 of these Notes to Consolidated Financial Statements). The Company anticipates that none of the $101.4 million of the intangible assets recorded in connection with the Vality acquisition will be deductible for income tax purposes.

Note L — Subsequent Events

On August 2, 2003, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, Greek Acquisition Corporation, a wholly-owned subsidiary of the Company (“Merger Sub”), and Mercator Software, Inc. (“Mercator”), pursuant to which the Company has agreed, through Merger Sub, to commence an offer to purchase all of the outstanding common shares of Mercator, $0.01 par value (such shares, together with any associated preferred stock rights, the “Mercator Shares”), at a price per share of $3.00, net to the stockholder in cash without interest thereon (the “Offer Price”), upon the terms and subject to the conditions set forth in an Offer to Purchase and related Letter of Transmittal (which together with any amendments or supplements thereto constitute the “Offer”) distributed to Mercator’s stockholders. The total amount of funds required to consummate the Offer and the Merger is estimated to be approximately $106.0 million plus any related transaction fees and expenses that are estimated to be approximately $30.0 million.

On August 8, 2003, the Company, through Merger Sub, commenced the Offer.

The Merger Agreement provides that, subject to certain exceptions, following satisfaction or waiver of the conditions of the Offer, Merger Sub will purchase all of the outstanding Mercator Shares validly tendered pursuant to the Offer and not withdrawn. The Offer is subject to certain conditions, including the receipt of tenders of at least 51% of the outstanding Mercator Shares, on a fully diluted basis. The Merger Agreement provides that, subject to the satisfaction or waiver of certain conditions, after the purchase of Mercator Shares by Merger Sub in the Offer, Merger Sub will be merged with and into Mercator (the “Merger”), with Mercator surviving the merger as the surviving corporation. Pursuant to the Merger Agreement, at the effective time of the merger, each Mercator Share outstanding immediately prior to the effective time of the merger (other than Mercator Shares held by Mercator, the Company or their respective subsidiaries (including Merger Sub), all of which shall be cancelled, or holders of Mercator Shares who have perfected their dissenters rights under Delaware law) will be converted into the right to receive the Offer Price, without interest.

In connection with the Offer and the Merger, the Company, Merger Sub and certain directors, executive officers and officers of Mercator identified therein entered into a Stock Tender Agreement (the “Stock Tender Agreement”), dated as of August 2, 2003, which provides for the tender by such individuals of their Mercator Shares pursuant to the Offer, the grant by such individuals of an irrevocable proxy to officers of Merger Sub to vote their Mercator Shares in favor of the Merger and the Merger Agreement and against any action or agreement that is contrary to the Merger Agreement, and the grant by each such individual to Merger Sub of an option to purchase such individual’s Mercator Shares in the event such individual fails to comply with the terms of the Stock Tender Agreement. The Mercator Shares held by such individuals represent approximately 6% of the outstanding Mercator Shares as of July 31, 2003.

In connection with the Offer and the Merger, the Company, Merger Sub and Mercator entered into a Common Stock Option Agreement (the “Option Agreement”), dated as of August 2, 2003, pursuant to which Mercator has granted Merger Sub an option (the “Option”) to purchase up to 19.99% of the then outstanding Mercator Shares at a purchase price per share equal to the Offer Price if Merger Sub has accepted and paid for the Mercator Shares in the Offer and if following the exercise of the Option, Merger Sub will own at least 90% of the then outstanding Mercator Shares.

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;recognition of content management revenue and non-recurrence of costs associated with the content management business; increases in professional services margins during 2003; sales headcount; completion of the AUTO project; decline in transitional costs associated with Informix Software; completion of the cash tender offer to acquire the capital stock of Mercator Software, Inc. and completion of the proposed acquisition of Mercator Software, Inc.; 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 data integration solutions to the Global 2000 and other large organizations. We believe that our Enterprise Data Integration Suite, built upon a highly scalable platform, is the industry’s only solution that addresses 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 data 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. Our products 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 Data 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, financial services, healthcare/life sciences, manufacturing, consumer goods, retail and government. We had 615 employees as of June 30, 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, which 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.

On August 8, 2003, the Company, through Merger Sub, commenced the Offer.

Products and Services

Our products are designed to operate as part of our Enterprise Data 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 Data Integration Suite. Our Enterprise Data 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 Data Integration Suite to address the entire enterprise data integration life cycle, or use the suite’s individual integration products as needed in support of more limited scope implementation requirements. In June 2002, in an effort to focus sales on our enterprise data integration products, we exited 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; capitalization of 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 (“SEC”) on March 27, 2003.

RESULTS OF OPERATIONS

The discussion and analysis of our results of operations for the three and six months ended June 30, 2003 is structured to take into account the sale of the database business assets during the third quarter of 2001. References to “Ascential Software” in this report refer to our existing enterprise data 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 and six months ended June 30, 2003 and 2002 are not meaningful. Accordingly, the discussion and analysis of our results of operations is organized as follows:

I. Revenue — Ascential Software Corporation

Discussion and analysis of revenue for Ascential Software Corporation for the three and six months ended June 30, 2003 as compared to the corresponding periods in 2002, including: (1) a table of revenues by type; and (2) a discussion and analysis of sources of revenue.

II. 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 and six months ended June 30, 2003 and 2002; (2) a discussion and analysis of Ascential Software costs and expenses for the three and six months ended June 30, 2003 as compared to the corresponding periods in 2002; and (3) a description of the costs associated with Informix Software for the three and six months ended June 30, 2003 and 2002.

III. Other Income (Expense) — Ascential Software Corporation

Discussion and analysis of other income (expense) of Ascential Software Corporation for the three and six months ended June 30, 2003 and 2002.

IV. Income Taxes — Ascential Software Corporation

Discussion and analysis of income taxes of Ascential Software Corporation for the three and six months ended June 30, 2003 and 2002.

V. Other Items

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

I. Revenue — Ascential Software Corporation

The following table and discussion compares the revenues by product type for the three and six months ended June 30, 2003 and 2002 (in millions):


		Three Months Ended				Six Months Ended
		June 30,				June 30,

		2003		2002		2003		2002

Licenses revenue:
	Enterprise data integration	$	21.0	$	15.1	$	40.2	$	25.8
	Content management		—		—		—		0.1

Total licenses revenue			21.0		15.1		40.2		25.9

Maintenance revenue:
	Enterprise data integration		10.4		7.0		19.9		12.3
	Content management		0.1		0.3		0.2		0.6

Total maintenance revenue			10.5		7.3		20.1		12.9

Consulting and training revenue:
	Enterprise data integration		8.4		5.5		14.9		9.5
	Content management		—		0.1		—		0.5

Total consulting and training revenue			8.4		5.6		14.9		10.0

Total services revenue:
	Enterprise data integration		18.8		12.5		34.8		21.8
	Content management		0.1		0.4		0.2		1.1

Total services revenue			18.9		12.9		35.0		22.9

Total revenue:
	Enterprise data integration		39.8		27.6		75.0		47.6
	Content management		0.1		0.4		0.2		1.2

Total revenue		$	39.9	$	28.0	$	75.2	$	48.8

License revenue. License revenue for the three months ended June 30, 2003 increased 39% to $21.0 million from $15.1 million for the same period in 2002. The $5.9 million increase is entirely attributable to enterprise data integration products. This increase was driven by increases in both price and volume. More than 95% of the license revenue in both periods presented was generated by transactions greater than $25,000; and the number of such transactions increased 24% from the second quarter of 2002 to the second quarter of 2003. This increase in volume resulted from improved sales force productivity on a worldwide basis, evidenced by an 81% increase in the average license revenue per quota carrying sales representative. This productivity improvement was influenced by a 46% increase in transactions sold through and influenced by our partners, including IBM. The average selling price of licensed products in license transactions greater than $25,000 increased 15% from the second quarter of 2002 to the second quarter of 2003. This increase in average selling price was caused by increases in list prices that occurred during 2002, resulting from: (1) one domestic license transaction in the second quarter of 2003 that represented 13% of our license revenue, (2) 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 data integration product, and (3) offering the release of new products and enhancements to all existing products during the second half of 2002.

License revenue for the six months ended June 30, 2003 increased 55% to $40.2 million from $25.9 million for the same period in 2002. This $14.3 million increase is comprised of a $14.4 million increase from enterprise data integration products with an offsetting $0.1 million decrease from content management products following the termination of that product line during the second quarter of 2002. More than 95% of the license revenue in both periods presented was generated by transactions greater than $25,000; and the number of such transactions increased 33% from the first six months of 2002 to the first six months of 2003. This increase in volume resulted from improved sales force productivity on a worldwide basis evidenced by a doubling of the average license revenue per quota carrying sales representative. This productivity improvement was influenced by a 68% overall increase in transactions sold through and influenced by our partners, principally IBM. The average selling price of licensed products in license transactions greater than $25,000 increased 23% from the first six months of 2002 to the first six months of 2003. This increase in average selling price was due to increases in list prices that occurred during 2002 resulting from an expanded product offering as described above as well as two license transactions in the six months ended June 30, 2003 that together represented 14% of our license revenue during that period.

Service revenue. Service revenue consists of maintenance, consulting, and training revenue. Service revenue for the three months ended June 30, 2003 increased 47% to $18.9 million from $12.9 million for the same period in 2002. Maintenance revenue increased by $3.2 million, or 44%, to $10.5 million in the second quarter of 2003 from $7.3 million for the same period in 2002. The increase in maintenance revenue is attributable to a $3.4 million increase in maintenance revenue associated with enterprise data integration product offerings sold to the growing installed base of customers, including customers acquired from Vality and Torrent, and corresponds with the 39% 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 $2.8 million, or 50%, to $8.4 million in the second quarter of 2003 from $5.6 million in the same period of 2002. This increase in consulting and training revenue is attributable to an increase in volume of consulting engagements associated with enterprise data integration products, principally in North America and Europe. The increased penetration of those geographic markets has been positively influenced by the expansion of our product offering as discussed above. Additionally, there were two large consulting engagements in Europe during the second quarter of 2003 that contributed to the growth.

Services revenue for the six months ended June 30, 2003 increased 53% to $35.0 million from $22.9 million for the same period in 2002. Maintenance revenue increased by $7.2 million, or 56%, to $20.1 million in the first half of 2003 from $12.9 million for the same period in 2002. The increase in maintenance revenue is attributable to a $7.6 million, or 62%, increase in maintenance revenue associated with enterprise data integration product offerings sold to the growing installed base of customers, including customers acquired from Vality and Torrent, and corresponds with the 56% increase in enterprise data integration licenses revenue over the same period. This increase was offset by a $0.4 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 $4.9 million, or 49%, to $14.9 million in the first half of 2003 from $10.0 million in the same period of 2002. This increase was caused by an increase in consulting and training associated with enterprise data integration products and is net of a $0.5 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 and Europe, associated with the increased penetration of those geographic markets that has been positively influenced by the expansion of our product offering as discussed above. Additionally, there were two large consulting engagements in Europe during the second quarter of 2003 that contributed to the growth. 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 and six months ended June 30, 2003 includes $0.1 and $0.2 million of revenue, respectively, associated with the content management product line. We do not expect to recognize any more content management revenue, barring unforeseen circumstances.

Total Revenue. For the three and six months ended June 30, 2003, one customer accounted for 13% and 11%, respectively, of total revenue. For the three and six months ended June 30, 2002, no single customer accounted for more than 10% of total revenue.

II. 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 and six months ended June 30, 2003 and 2002 (in millions):


		Three Months Ended				Six Months Ended
		June 30,				June 30,

		2003		2002		2003		2002

*Ascential Software*
	Cost of licenses	$	3.4	$	7.9	$	7.0	$	10.3
	Cost of services		8.8		8.6		16.1		16.6
	Sales and marketing		16.8		20.2		33.5		38.9
	Research and development		5.5		6.7		10.9		13.1
	General and administrative		6.5		6.6		11.7		15.5
	Merger, realignment and other charges		—		6.5		—		6.8
	In-process research and development		—		1.2		—		1.2

	Total costs and expenses	$	41.0	$	57.7	$	79.2	$	102.4

*Informix Software*
	Cost of licenses	$	—	$	—	$		$	0.8
	Cost of services		—		—				—
	Sales and marketing		—		—				—
	Research and development		—		—				—
	General and administrative		0.5		1.4		1.7		7.0
	Merger, realignment and other charges		0.4		0.5		0.4		4.9

	Total costs and expenses	$	0.9	$	1.9	$	2.1	$	12.7

*Ascential Software Corporation*
	Cost of licenses	$	3.4	$	7.9	$	7.0	$	11.1
	Cost of services		8.8		8.6		16.1		16.6
	Sales and marketing		16.8		20.2		33.5		38.9
	Research and development		5.5		6.7		10.9		13.1
	General and administrative		7.0		8.0		13.4		22.5
	Merger, realignment and other charges		0.4		7.0		0.4		11.7
	In-process research and development		—		1.2		—		1.2

	Total costs and expenses	$	41.9	$	59.6	$	81.3	$	115.1

Ascential Software — Costs and Expenses

Cost of licenses. Cost of licenses consists primarily of: (1) amortization of capitalized or acquired software development costs and previously capitalized software that was written off, (2) third-party royalties, and (3) distribution and manufacturing personnel costs. During the three months ended June 30, 2003, cost of licenses decreased $4.5 million, or 57%, to $3.4 million from $7.9 million in the same period of 2002. This decrease was the result of several factors. First, amortization and impairment costs decreased by $5.0 million because the second quarter of 2002 included $5.2 million in asset impairment costs related principally to the write off of content management and Axielle capitalized software following the termination of those product lines in the second quarter of 2002. Axielle had been a portal product offering. This decline in amortization was offset by a $0.2 million increase in amortization of capitalized software development costs associated with enterprise data integration products. This decline in amortization expense was partially offset by increases in third-party royalties of $0.3 million in the second quarter of 2003 as compared with the second quarter of 2002. The lower third-party royalties in the second quarter of 2002 was the result of a settlement of a dispute with former shareholders of IntegraSoft, Inc. IntegraSoft was acquired in 1998, and as part of the settlement, we recorded $2.1 million of prepaid license 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 license royalty is the most significant component of ongoing royalty costs. Also offsetting the decline in amortization was an increase in software distribution costs of $0.2 million due, in part, to the increase in license transactions.

During the six months ended June 30, 2003, cost of licenses decreased $3.3 million, or 32%, to $7.0 million from $10.3 million in the same period of 2002. This decrease was the result of multiple factors. First, amortization costs decreased by $4.2 because the second quarter of 2002 included $5.2 million in asset impairment costs related principally to the write off of content management and Axielle capitalized software following the termination of those product lines in the second quarter of 2002. This decline in amortization was partially offset by $0.3 million increase in amortization of capitalized software development costs associated with enterprise data integration products and a $0.7 million increase in software amortization principally related to developed technology acquired through the Vality acquisition. The Vality acquisition did not occur until the second quarter of 2002. As a result, we began to recognize amortization expense related to the Vality developed technology in the second quarter of 2002. Second, third-party royalties increased $0.7 million due principally to an additional $0.4 million during the first six months of 2003 in amortization of prepaid license royalties acquired in connection with the June 28, 2002 settlement of a dispute with former shareholders of IntegraSoft, Inc, discussed above. Additionally, the first six months of 2002 included a net credit to royalty costs recorded in connection with that settlement. Third, distribution costs increased $0.2 million due, in part, to the increase in license transactions.

Cost of services. Cost of services consists of maintenance, consulting and training personnel expenses and subcontracting costs. Cost of services for the three months ended June 30, 2003 increased 2%, or $0.2 million, to $8.8 million from $8.6 million in the same period of 2002. This increase is comprised of a $1.4 million increase in subcontracting, commission and travel costs associated with generating $6.3 million in additional enterprise data integration revenue offset by a $1.2 million decline in costs associated with the content management business that was held for sale during the first quarter of 2002 and terminated at the end of the second quarter of 2002. Cost of services for the six months ended June 30, 2003 decreased 3%, or $0.5 million, to $16.1 million from $16.6 million in the same period of 2002. This decrease is driven by a $2.6 million decline in costs associated with the content management business offset by $2.1 million in additional costs, principally subcontracting, commissions and travel, associated with a $13.0 million increase in enterprise data integration revenue. Although there was only $0.4 million and $1.1 million in associated content management service revenue in the second quarter and first six months of 2002, respectively, the completion of certain engagements required the additional use of third party consultants and generated a loss. Additionally, we attempted to keep the base of technical employees intact during the process of seeking a buyer for the content management business in the first and most of the second quarter of 2002 although revenue opportunities had decreased in response to the announcement that the business was for sale. The following table depicts the trend in service margins for the three and six months ended June 30, 2003 and 2002, respectively:


		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2003			2002			2003			2002

*Ascential Software*
	Maintenance margin		82	%		73	%		82	%		69	%
	Consulting and training margin		17	%		(18	%)		17	%		(26	%)
	Total service margin		53	%		33	%		54	%		28	%

The total services margin increased to 53% for the second quarter of 2003 and 54% for the first six months of 2003 from 33% and 28% during the same period of 2002, respectively, due to substantial improvements in both maintenance and consulting and training margins during that time. The improvement in our maintenance margin is a result of our ability to increase maintenance revenue by $3.2 million in the

comparative three month periods and $7.2 million in the comparative six month periods without any increase to headcount. We have accomplished this by leveraging our technical support personnel as well as our on-line support website in providing customer support. The improvement in consulting and training margins is a result of the removal of the loss-generating content management business, as described above, as well as an increase in enterprise data integration consulting revenue that enabled improved utilization of our enterprise data integration consultants. Barring unforeseen circumstances, we expect increases in professional services margins during 2003.

Cost of services for the three and six months ended June 30, 2003 include $0.1 million and $0.2 million, respectively, of costs associated with the content management business. We expect that, barring unforeseen circumstances, these costs will not recur after the second quarter of 2003 because all the consulting, service and support contracts associated with that product line have been fulfilled.

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 three months ended June 30, 2003 decreased 17%, or $3.4 million, to $16.8 million from $20.2 million for the same period in 2002. Sales and marketing expenses for the six months ended June 30, 2003 decreased 14%, or $5.4 million, to $33.5 million from $38.9 million for the same period of 2002. This decrease for both periods is primarily due to a 25% reduction in sales and marketing headcount between June 30, 2002 and June 30, 2003 and a reduction of travel costs and certain overhead costs. Although headcount was reduced from the previous year, our focus was also to realign headcount to those regions with more revenue growth potential and to improve the 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 opportunities that we may experience.

Research and development expenses. Research and development expenses consist primarily of salaries, project consulting and related overhead costs for development of our products. Research and development expenses for the three months ended June 30, 2003 decreased 18%, or $1.2 million, to $5.5 million from $6.7 million for the same three months in 2002. Research and development expenses for the six months ended June 30, 2003 decreased 17%, or $2.2 million, to $10.9 million from $13.1 million for the same six months in 2002. This is a result of the elimination of research and development activities associated with the content management product line that totaled $1.1 million in costs in the second quarter of 2002 and $2.9 million in costs in the first six months of 2002. During the first quarter of 2002, we were seeking a buyer for this technology and, until the product line was terminated at the end of the second quarter of 2002, we continued to incur costs in order to maintain the technical personnel base associated with the product line. This decline in costs in the six month period was partially offset by increased salaries and related costs resulting from an 11% increase in headcount from March 31, 2002 to March 31, 2003, related principally to the acquisition of Vality in April of 2002. These additional resources are dedicated to development activities surrounding enterprise data integration products. We currently plan to continue to focus our development efforts on enterprise data integration products and expect a slight increase in research and development expenses in the remainder of 2003, barring unforeseen circumstances.

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 three months ended June 30, 2003 general and administrative expenses declined $0.1 million when compared to the same period of the prior year. This net decrease is attributable to several factors. Personnel and related costs declined $0.9 million as a result of headcount reductions and reduced use of subcontractors and temporary staff and overhead, and miscellaneous costs decreased $0.2 million as a result of consolidation of offices and cost reduction efforts. Additionally, bad debt expense decreased $0.9 million as a result of significant improvement in the collection rate of accounts receivable balances and continued sales to our Fortune 500 customer base. Days sales outstanding, 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, declined to 58 days in the second quarter of 2003 from 88 days in the same period of the prior year. These declines in expense were offset by a $1.9 million increase to legal costs consisting of $1.1 million in litigation settlement costs and a $0.8 million increase in outside attorney’s fees for legal defense activities and general corporate matters. The Company reduces accounts receivable, and corresponding deferred revenue, for unpaid customer balances on certain service agreements billed during the quarter but attributable to future periods.

During the six months ended June 30, 2003 general and administrative expenses decreased 25%, or $3.8 million, to $11.7 million from $15.5 million for the same six months in 2002. Bad debt expense decreased $2.1 million as a result of significant improvement in the collectibility of accounts receivable balances. Personnel and related costs declined $1.7 million as a result of headcount reductions and reduced use of subcontractors and temporary staff. Facilities, infrastructure and other miscellaneous costs declined $1.2 million as a result of the closure of locations and cost cutting efforts. Audit and tax professional service fees declined $0.7 million after the completion of the integration of west coast and east coast finance departments following the IBM Transaction. These declines were offset by $1.9 million increase to legal costs as described above.

Merger, realignment and other charges. During the three months ended June 30, 2002, we recorded $6.9 million of realignment costs, partially offset by the reversal of $0.4 million of previously recorded severance reserves, resulting in a net charge of $6.5 million for the three months ended June 30, 2002. The $6.9 million charge includes $2.8 million of costs associated with the termination of the content management product line including $1.4 million of severance costs to terminate 44 employees, $0.8 million in impairment charges for computer equipment, $0.4 million of professional fees incurred in an attempt to sell the product line and $0.2 million of other costs. The remaining $4.1 million in realignment costs primarily relates to the integration of Vality with our existing operations. This $4.1 million charge consists of $4.0 million of severance and related costs associated with the termination of 91 Ascential employees and $0.1 million in other exit costs. In addition to the realignment costs in the three months ended June 30, 2002, we also recorded $0.3 million in realignment costs during the three

months ended March 31, 2002 related to the consolidation of our European offices. The costs include severance and office closure costs. There were no merger, realignment or other charges in the three and six months ended June 30, 2003.

Write-off of acquired in-process research and development. In connection with the Vality acquisition in April 2002, we recorded a charge of $1.2 million, or approximately 1% of the $96.0 million in total consideration and liabilities assumed, for in-process research and development costs (“IPRD”). The value allocated to the projects 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. 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. With the exception of the AUTO project, the projects identified as IPRD were completed as scheduled during 2002. The AUTO project is expected to be complete in the fourth quarter of 2003, barring unforeseen circumstances.

Informix Software — Costs and Expenses

General and administrative expenses. During the three months ended June 30, 2003 general and administrative costs for Informix Software were $0.5 million and were comprised principally of dispute resolution and legal defense costs for the settlement of disputes associated with the historical database operations. In the six months ended June 30, 2003 general and administrative costs for Informix Software totaled $1.7 million. These costs consist principally of $1.4 million in dispute resolution and legal defense costs for the settlement of disputes associated with the historical database operations and $0.3 million of administrative and liquidation costs associated with the closure of subsidiaries and transitioning personnel.

During the three months ended June 30, 2002, we incurred $1.4 million of general and administrative costs associated with Informix Software. These costs were comprised of $2.7 million of administrative costs related to the maintenance and closure of idle entities and $1.5 million for legal defense and settlement costs related to the settlement of disputes associated with the historical database operations. These costs were offset by the reversal of a $2.8 million accrual for litigation, due to a favorable resolution during the second quarter. During the six months ended June 30, 2002, we incurred $7.8 million of costs associated with Informix Software. These costs were comprised of $7.1 million of administrative costs related to the maintenance and closure of its idle entities and other costs, including retention bonuses paid to terminated employees, related to closing the operations of the general and administrative groups located in our prior corporate headquarters that were relocated to Westborough, Massachusetts and $3.5 million for legal defense and settlement costs related to the settlement of disputes associated with Informix Software. The costs incurred during the six months were also offset by the above mentioned reversal of a $2.8 million accrual for litigation. Barring unforeseen circumstances, these transitional costs are expected to continue declining during 2003 to a relatively insignificant amount.

Merger, realignment and other charges. Realignment charges totaling $0.4 million in the three and six months ended June 30, 2003 consist entirely of adjustments to facility reserves to reflect updated estimates of remaining obligations on vacated facilities, net of sublease income.

During the three months ended June 30, 2002, we recorded $0.8 million of realignment costs associated with the termination of the database business, which was offset by a $0.3 million reversal of reserves previously recorded for costs associated with exiting facilities resulting in a net charge of $0.5 million. The $0.8 million charge is comprised of $0.3 million of severance related costs, $0.4 million of costs to exit facilities, and $0.1 million of other costs. In addition to the realignment charges recorded in the three months ended June 30, 2002, we recorded realignment costs totaling $4.4 million in the quarter ended March 31, 2002 consisting of $3.0 million in adjustments to facility reserves to reflect the then current estimate of remaining obligations on vacated facilities, net of sublease income, $1.3 million of severance costs and $0.1 million of other exit costs.

III. Other Income (Expense) — Ascential Software Corporation


	Three Months Ended				Six Months Ended
	June 30,				June 30,

	2003		2002		2003		2002

	(in millions)				(in millions)
Interest income, net	$	2.9	$	5.2	$	6.2	$	11.5
Gain on sale of database business		—		—		—		7.6
Other income, net		0.1		2.1		0.1		1.0

Interest income. Interest income for the three and six months ended June 30, 2003 decreased by $2.3 million, or 44%, and $5.3 million, or 46%, respectively, to $2.9 million for the three months ended June 30, 2003 and $6.2 million for the six months ended June 30, 2003. This decrease is principally attributable to two factors. First, the second quarter and first six months of 2002 included $1.5 million and $3.0 million, respectively, of interest on the IBM Holdback (see Note F of the Notes to Unaudited Condensed Consolidated Financial Statements). The IBM Holdback was paid in full in January 2003, therefore the related interest income, which accrued at a rate of 6% ceased accordingly. Second, the composite rate of return on cash and investments has declined by approximately 40 basis points as a result of the general economic environment and prevailing interest rates.

Adjustment to gain on sale of database business. During the quarter ended September 30, 2001, we completed the sale of the assets of our database business to IBM. In connection with this sale, a gain of $865.7 million was recorded during the year ended December 31, 2001. During the six months ended June 30, 2002, the final audit of the working capital transferred to IBM was completed and we received the final working capital settlement from IBM (See Note F of the Notes to Unaudited Condensed Consolidated Financial Statements). This resulted in an increase to the gain of $7.3 million. We also recorded an additional gain of $0.3 million primarily due to a decrease in the amount of long-term assets sold to IBM. There were no such adjustments to the gain during the three or six months ended June 30, 2003.

Other income, net. Other income, net, for the three months ended June 30, 2003 consists of approximately $0.6 million of realized gains on investments, offset by $0.5 million of foreign currency losses principally related to the revaluation of forward foreign currency contracts. Other income, net, for the three months ended June 30, 2002 consisted of income of $2.1 million resulting from $3.0 million of income related to the proceeds received in connection with the favorable settlement of litigation during the quarter. This amount was offset by $0.9 million in net foreign currency losses related to the revaluation of the balance sheets of foreign subsidiaries, primarily Argentina, Brazil and Mexico, whose functional currencies are the U. S. Dollar due to the hyperinflationary nature of the currency of those countries.

Other income, net, for the six months ended June 30, 2003 consists of $0.7 million in gains realized on investments offset by $0.6 million in foreign exchange losses. Other income, net, for the six months ended June 30, 2002 is comprised of the $3.0 in litigation settlement income discussed above offset by $2.0 million of foreign currency losses. We have substantially reduced our operations in Latin America since the second quarter of 2002. We continue to liquidate various subsidiaries that were active prior to the IBM Transaction but that are no longer required for our ongoing operations. As these subsidiaries become substantially liquidated, the translation adjustment that has accumulated on our balance sheet in connection with the historical monthly revaluation of their assets and liabilities will be recorded as other income or expense.

IV. Income Taxes — Ascential Software Corporation


	Three Months Ended						Six Months Ended
	June 30,						June 30,

	2003			2002			2003			2002

	(in millions)						(in millions)
Income (loss) before income taxes	$	1.0		$	(24.3	)	$	0.2		$	(46.3	)
Income tax expense (benefit)		0.3			(3.7	)		0.1			(9.2	)
Effective tax rate		30	%		(15	)%		30	%		(20	)%

The effective tax rate for the three and six months ended June 30, 2003 of 30% is lower than the U.S. statutory rate of approximately 40% due to the impact of utilization of credits and carryforwards. The effective tax rate for the three and six months ended June 30, 2002 is lower than the statutory rate due to the impact of the U.S. alternative minimum tax and the impact of income taxes and withholding taxes owed in foreign jurisdictions.

V. Other Items

The following information is presented pursuant to a proposal instituted by the American Electronics Association for technology companies to voluntarily expand disclosures relating to stock compensation.

Option Program Description

Our stock option program is a broad-based, long-term retention program that is intended to attract and retain talented employees and align stockholder and employee interests. We consider our option program critical to our operation and productivity; essentially all of our employees are eligible to participate. Employees other than executive officers received options to purchase Common Stock representing 62% of the total amount granted in 2002.

Option Plans

In February 1989, we adopted the 1989 Outside Directors Stock Option Plan (the “1989 Plan”). Pursuant to the 1989 Plan, non-employee directors are automatically granted options to purchase 20,000 shares upon election to the Board of Directors and options to purchase 15,000 shares annually thereafter. One-third of the options vest and become exercisable in each full year of the outside director’s continuous service as a director.

In March 1994, we adopted the 1994 Stock Option and Award Plan (the “1994 Plan”). Incentive stock options, nonqualified stock options, restricted stock awards, or a combination thereof, can be granted to employees at not less than the fair market value on the date of grant and generally vest over four years. The Compensation Committee of our Board of Directors may grant awards, provided that, during any fiscal year, no participant shall receive stock options exercisable for more than 500,000 shares of Common Stock. In addition, no more than 20% of the maximum number of shares authorized for issuance under the 1994 Plan may be issued pursuant to restricted stock awards. However, the compensation committee may grant options exercisable for up to 1,000,000 shares of Common Stock during any fiscal year in which the individual first becomes an employee and/or is promoted from a position as a non-executive officer employee to a position as an executive officer.

In July 1997, we adopted the 1997 Non-Statutory Stock Option Plan, authorizing the grant of non-statutory stock options to employees and consultants. Terms of each option are determined by the Board of Directors or a committee delegated such duties by the Board of Directors.

In July 1998, we adopted the 1998 Non-Statutory Stock Option and Award Plan (the “1998 Plan”). Options and restricted stock awards can be granted to employees and consultants with terms designated by the Board of Directors or a committee delegated such duties by the Board of Directors. No more than 20% of the maximum number of shares authorized for issuance under the 1998 Plan may be issued pursuant to restricted stock awards.

As a result of our acquisition of Torrent in November 2001, we assumed all unvested stock options of Torrent that were outstanding at the time of the acquisition. Each Torrent stock option so assumed is subject to the same terms and conditions as the original grant and generally vests over four or five years, expiring ten years from the date of grant. In connection with the acquisition, each option became exercisable for 0.3069835 shares of Common Stock for each share of Torrent common stock, and the exercise price was adjusted by dividing the original exercise price by 0.3069835.

As a result of our acquisition of Ardent Software, Inc. (“Ardent”) in March 2000, we assumed all stock options of Ardent that were outstanding at the time of the acquisition. Each Ardent stock option so assumed is subject to the same terms and conditions as the original grant and generally vests over four years, expiring ten years from the date of grant. In connection with the acquisition, each option became exercisable for 3.5 shares of Common Stock for each share of Ardent common stock, and the exercise price was adjusted by dividing the original exercise price by 3.5.

Distribution and Dilutive Effect of Options to Executive Officers

The following table summarizes employee and executive stock option grants as of and for the six months ended June 30, 2003, as of and for the year ended December 31, 2002, and as of December 31, 2001, respectively


	June 30, 2003			December 31, 2002			December 31, 2001

New grants during the period as a % of outstanding shares		0.7	%		4.1	%		2.9	%
Grants to executive officers during the period as a % of total options granted		0.0	%		37.4	%		28.6	%
Grants to executive officers during the period as a % of outstanding shares		0.0	%		1.5	%		.8	%
Cumulative options held by executive officers as a % of total options outstanding		34.0	%		34.3	%		15.0	%

General Stock Option Information

Following is a summary of activity for all stock option plans for the year ended December 31, 2002 and the six months ended June 30, 2003:


				Number of
	Shares Available			Shares Underlying			Weighted-Average
	for Options			Outstanding Options			Exercise Price

December 31, 2001		1,522,962			10,532,038		$	22.64
Options granted		(2,392,498	)		2,392,498			11.08
Options exercised		—			(147,670	)		8.40
Options canceled		4,776,043			(5,576,872	)		24.72
Additional Shares Reserved		1,250,000			—			—

December 31, 2002		5,156,507			7,199,994			17.48
Options granted		(394,625	)		394,625			10.31
Options exercised		—			(132,159	)		8.87
Options canceled		154,808			(188,527	)		20.88
Additional Shares Reserved		5,500,000			—			—

June 30, 2003		10,416,690			7,273,933		$	17.15

In-the-Money and Out-of–the-Money Option Information as of June 30, 2003


	Exercisable				Unexercisable				Total

			Weighted Avg.				Weighted Avg.				Weighted Avg.
As of June 30, 2003	Shares		Exercise Price		Shares		Exercise Price		Shares		Exercise Price

In-the-Money (1)		1,553,549	$	11.55		2,506,893	$	10.91		4,060,442	$	11.15
Out-of-the-Money (1)		2,418,803	$	25.67		794,688	$	21.85		3,213,491	$	24.72
Total Options Outstanding		3,972,352	$	20.15		3,301,581	$	13.54		7,273,933	$	17.15

(1)

For purposes of this table, In-the-Money options are those options with an exercise price less than the closing price of $16.43 on June 30, 2003. Out-of-the-Money options are those options with an exercise price equal to or above the closing price of $16.43 as of June 30, 2003.

Option Grants to Executive Officers During the Six Months Ended June 30, 2003

We did not grant any options to our executive officers during the six months ended June 30, 2003.

Aggregated Option Exercises by Executive Officers during the Six Months Ended June 30, 2003 and Option Values as of June 30, 2003

The following table sets forth certain information regarding the exercise of stock options by our executive officers during the six months ended June 30, 2003 and stock options held as of June 30, 2003 by our executive officers.


					Number of Securities Underlying				Value of Unexercised
					Unexercised Options at				In-the-Money Options at
					June 30, 2003				June 30, 2003 (1)

	Shares
	Acquired		Value
Name	on Exercise		Realized		Exercisable		Unexercisable		Exercisable		Unexercisable

Peter Gyenes		—		—		793,217		724,819	$	1,769,336	$	3,224,324
Peter Fiore		—		—		322,290		305,731	$	411,489	$	1,029,594
Robert C. McBride		—		—		51,041		136,459	$	118,572	$	580,553
Scott N. Semel		—		—		24,609		112,891	$	98,131	$	637,307

(1) Based on the closing sales price of $16.43 of the underlying securities as of June 30, 2003, as reported on the NASDAQ National Market, minus the exercise price.

Equity Compensation Plan Information

The following table provides information about Common Stock authorized for issuance under our equity compensation plans as of June 30, 2003:

(a)

(b)

(c)

Number of

securities

remaining available

Number of

for future issuance

securities to be

under equity

issued upon

Weighted-average

compensation plans

exercise of

exercise price of

(excluding

outstanding

securities

options, warrants

reflected in column

Plan Category

and rights(1)

and rights

(a))(2)

Equity compensation plans approved by security holders

3,193,817

19.96

5,033,742

(3)

Equity compensation plans not approved by security holders

2,613,886

14.03

5,816,102

Total

5,807,703

17.29

10,849,844

(1)		This table excludes an aggregate of 1,466,230 shares issuable upon exercise of outstanding options that were assumed in connection with various acquisition transactions. The weighted-average exercise price of the excluded options is $16.59.

(2)		In addition to being available for future issuance upon exercise of options that may be granted after June 30, 2003, 1,650,000 shares under the 1994 Plan and 1,625,000 under the 1998 Plan may be used for the award of restricted stock.

(3)		Includes 433,154 shares issuable under our 1997 Employee Stock Purchase Plan as of June 30, 2003.

Liquidity and Capital Resources

Our cash and cash equivalents (“Cash”) and short-term investments totaled $624.6 million at June 30, 2003 and consisted of $352.4 million in Cash and $272.2 million of short-term investments. At December 31, 2002, Cash and short-term investments totaled $504.7 million and consisted of $216.5 million in Cash and $288.2 million of short-term investments. The $119.9 million increase in Cash and short-term investments for the six months ended June 30, 2003 was primarily due to the receipt of $109.3 million from IBM, related to the IBM Transaction. As part of the 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 $109.3 million consisted of a $100.0 million for the Holdback plus $9.3 million of interest on the Holdback (see Note F of the Notes to Unaudited Condensed Consolidated Financial Statements). Additionally, $10.9 million of cash was provided by operating activities.

We plan to continue to invest in research and development activities as well as sales and marketing and product support. Our investment in property and equipment is expected to continue, barring unforeseen circumstances, as we purchase computer systems for research and development, sales and marketing, and support and administrative staff. During the six months ended June 30, 2003, we incurred capital expenditures of $1.9 million, and capitalized software development costs totaled $3.7 million.

As of June 30, 2003, we did not have any significant long-term debt or significant commitments for capital expenditures. We believe that our current Cash and short-term investments balances will be sufficient to meet our working capital requirements for at least the next twelve months. We also believe that we will have sufficient resources to fund our contemplated acquisition of Mercator and related expenses, the cash component of which is expected to total approximately $136.0 million, barring unforeseen circumstances. We also believe we have enough Cash and short-term investments to continue to fund any repurchases of our common stock under the previously announced $350 million stock repurchase program, and to fund the costs of current and future facilities, severance and other obligations associated with the IBM Transaction in addition to current and future restructuring initiatives if any.

Factors That May Affect Future Results

If we do not make effective use of the proceeds of our substantial cash resources, our financial results could suffer and the value of our common stock could decline.

Our ability to increase stockholder value is dependent, in part, on our effective use of the cash proceeds from the sale of our database business assets to IBM, including the $100 million Holdback, plus interest, released to us in January 2003. At June 30, 2003, as a result of the IBM Transaction and our continuing operations, we held approximately $624.6 million in cash, cash equivalents and short-term investments. We intend to use the proceeds to continue to operate our business, repurchase shares of our common stock and to finance any strategic acquisitions, including the proposed acquisition of Mercator Software, Inc. and related expenses totaling approximately $136.0 million. We cannot ensure that these measures will improve our financial results or increase stockholder value.

If we are unable to increase revenue from, and expand the market share of, our products, our financial results will be materially adversely affected.

If we do not increase sales of our enterprise data integration products, our financial results will be materially adversely affected. Our revenue is currently derived almost entirely from our Enterprise Data Integration Suite. In order to increase revenues and grow our business, we must be able to increase sales of these products and our share of the enterprise data integration market. We cannot ensure that our current customers will continue to purchase our data integration product offerings and related services and that new customers will choose our solutions over our competitors’ product offerings.

If the enterprise data integration market declines or does not grow, we may sell fewer products and services and our business may be unable to sustain its current level of operations.

If the growth rates for the enterprise data integration market decline for any reason, there will be a decrease in demand for our products and services, which would have a material adverse effect on our financial results. We have invested substantial resources in developing data integration products and services to compete in this market. The market for these products and services is evolving, and its growth depends upon an increasing need to store and manage complex data and upon broader market acceptance of our products as a solution for this need. Declining demand for our products and services could threaten our ability to sustain our present level of operations and meet our expectations for future growth.

Intense competition could adversely affect our ability to sell our products and services.

We may not be able to compete successfully against current and future competitors which could impair our ability to sell our products. The market for our products and services is highly competitive, diverse and subject to rapid change. In particular, we expect that the technology underlying our products and services will continue to change rapidly. It is possible that our products and solutions will be rendered obsolete by technological advances achieved by our competitors.

We currently face intense competition from a number of sources, including several large vendors that develop and market applications, development tools, decision support products, consulting services and/or complete database-driven solutions for the Internet. Our principal competitors in the enterprise data integration business include in-house customer programming for extracting and delivering data and vendors of ETL products that address that part of the data integration problem, such as Embarcadero, ETI, Hummingbird, Informatica, Sagent and SAS. Principal data profiling competitors include Avellino and Evoke. Principal data quality competitors include Firstlogic, Group One, Innovative Systemsand Trillium. These competitors may be able to respond more quickly than we can to new or emerging technologies, evolving markets and changes in customer requirements. In addition, market consolidations could create more formidable competitors.

Competition may affect the pricing of our products or services and changes in product mix may occur, either of which may reduce our profit margins.

Existing and future competition or changes in our product or service offerings or pricing could result in an immediate reduction in the prices of our products or services. In addition, a significant change in the mix of software products and services that we sell, including the mix between higher margin software and maintenance products and lower margin consulting and training, could materially adversely affect our

operating results for future periods. In addition, the pricing strategies of competitors in the software industry have historically been characterized by aggressive price discounting to encourage volume purchasing by customers. We may not be able to compete effectively against competitors who continue to aggressively discount the prices of their products.

Our current strategy contemplates possible future acquisitions, which will require us to incur substantial costs for which we may never realize the anticipated benefits.

On November 28, 2001, we completed the acquisition of Torrent, and on April 3, 2002 we completed the acquisition of Vality. We consummated each transaction with the expectation that it would result in mutual benefits including, among other things, expanded and complementary product offerings, increased market opportunity, new technology and the addition of strategic personnel. Our business strategy contemplates the possibility of future acquisitions of complementary companies or technologies. Any potential acquisition may result in significant transaction expenses, increased interest and amortization expense, increased depreciation expense and increased operating expense, any of which could have a material adverse effect on our operating results. In addition, if we were to make a cash acquisition of substantial scale, it could reduce our cash reserves and affect our liquidity and capital resources.

Achieving the benefits of any acquisition will depend in part on our ability to integrate an acquired business with our business in a timely and efficient manner. Our consolidation of operations following any acquisition may require significant attention from our management. The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on our ability to achieve expected net sales, operating expenses and operating results for any acquired business. We cannot ensure that we will realize any of the anticipated benefits of any acquisition, and if we fail to realize these anticipated benefits, our operating performance could suffer.

On August 8, 2003, we commenced a cash tender offer through a wholly-owned subsidiary to acquire all of the issued and outstanding capital stock of Mercator Software, Inc. (“Mercator”). If less than 51% of the shares of Mercator, calculated on a fully diluted basis, are tendered, then we are not obligated to close the tender offer. We are also not obligated to purchase any tendered shares under certain other circumstances, including if we have not received applicable regulatory approvals or if there has been, or is reasonably likely to be, a material adverse effect on Mercator. If we do not complete the tender offer, any expenses we incur in connection with the transaction will negatively impact our financial results. If we complete the tender offer, we intend to merge Mercator into a wholly-owned subsidiary of Ascential. If, following the tender offer, we own at least 90% of the outstanding stock of Mercator, then the merger will occur promptly after the tender offer closes. However, if, after the tender offer closes, we own less than 90% of the outstanding stock of Mercator, Mercator will be required to solicit proxies from its stockholders at a special meeting of stockholders to approve the merger, which will delay the merger and require the incurrence of additional expenses. During the period of any such delay, we would own a majority of the outstanding capital stock of Mercator, but Mercator would continue to operate as a public company. In addition, in the event we successfully complete the acquisition of Mercator, we cannot assure you that we will realize the expected benefits of the type described above, such as expanded and complementary product offerings, increased market opportunity, new technology and the addition of strategic personnel.

Our financial results are subject to fluctuations caused by many factors that could result in our failing to achieve anticipated financial results.

Our quarterly and annual financial results have varied significantly in the past and are likely to continue to vary in the future due to a number of factors, many of which are beyond our control. In particular, if a large number of the orders that are typically booked at the end of a quarter are not booked, our net income for that quarter could be substantially below expectations. In addition, the failure to meet market expectations could cause a sharp drop in our stock price. These and any one or more of the factors listed below or other factors could cause us not to achieve our revenue or profitability expectations. These factors include:

• Changes in demand for our products and services, including changes in growth rates in the software industry as a whole and in the enterprise data integration market,

• The size, timing and contractual terms of large orders for our software products and services,

• Possible delays in or inability to recognize revenue as the result of revenue recognition rules,

• The budgeting cycles of our customers and potential customers,

• Any downturn in our customers’ businesses, in the domestic economy or in international economies where our customers do

substantial business,

• Changes in our pricing policies resulting from competitive pressures, such as aggressive price discounting by our competitors, or other factors,

• Our ability to develop and introduce on a timely basis new or enhanced versions of our products and services,

• Unexpected needs for capital expenditures or other unanticipated expenses,

• Changes in the mix of revenues attributable to domestic and international sales, and

• Seasonal fluctuations in buying patterns.

Our recognition of deferred revenue is subject to future performance obligations and may not be representative of revenues for succeeding periods.

Our deferred revenue was $23.2 million as of June 30, 2003. The timing and ultimate recognition of our deferred revenue depends on our performance of various service obligations. Because of the possibility of customer changes in development schedules, delays in implementation and development efforts and the need to satisfactorily perform product support services, deferred revenue at any particular date may not be representative of actual revenue for any succeeding period.

Our common stock has been and likely will continue to be subject to substantial price and volume fluctuations that may prevent stockholders from reselling their shares at or above the prices at which they purchased their shares.

Fluctuations in the price and trading volume of our common stock may prevent stockholders from selling their shares at or above the prices at which they purchased their shares. Stock prices and trading volumes for many software companies fluctuate widely for a number of reasons, including some reasons that may be unrelated to the companies’ businesses or financial results. This market volatility, as well as general domestic or international economic, market and political conditions, including threats of terrorism, could materially adversely affect the market price of our common stock without regard to our operating performance. In addition, our operating results may be below the expectations of public market analysts and investors, which could cause a drop in the market price of our common stock. The market price of our common stock has fluctuated significantly in the past and may continue to fluctuate significantly for a number of reasons, including:

• Market uncertainty about our business prospects or the prospects for the enterprise data integration market,

• Revenues or results of operations that do not meet or exceed analysts’ and investors’ expectations,

• The introduction of new products or product enhancements by us or our competitors,

• Any challenges integrating people, operations or products associated with recent acquisitions,

• General business conditions in the software industry, the technology sector, or in the domestic or international economies, and

• Uncertainty and economic instability resulting from terrorist acts and other acts of violence or war.

Our financial success depends upon our ability to maintain and leverage relationships with strategic partners.

We may not be able to maintain our strategic relationships or attract sufficient additional strategic partners who are able to market our products and services effectively. Our ability to increase the sales of our products and our future success depends in part upon maintaining and increasing relationships with strategic partners. In addition to our direct sales force, we rely on relationships with a variety of strategic partners, including systems integrators, resellers and distributors in the United States and abroad. Further, we have become more reliant upon resellers in international areas in which we do not have a direct sales team. Our strategic partners may offer products of several different companies, including, in some cases, products that compete with our products. In addition, our strategic partners may acquire businesses or product lines that compete with our products. We have limited control, if any, as to whether these strategic partners devote adequate resources to promoting, selling and implementing our products. If our strategic partners do not devote adequate resources for implementation of our products and services, we will incur substantial additional costs associated with hiring and training additional qualified technical personnel to implement solutions for our customers. In addition, our relationships with our strategic partners may not generate enough revenue to offset the significant resources used to develop and support these relationships.

We may not be able to retain our key personnel and attract and retain the new personnel necessary to grow our businesses, which could materially adversely affect our ability to develop and sell our products, support our business operations and grow our business.

The competition for experienced, well-qualified personnel in the software industry is intense. Our future success depends on retaining the services of key personnel in all functional areas of our company, including engineering, sales, marketing, consulting and corporate services. For instance, we may be unable to continue to develop and support technologically advanced products and services if we fail to retain and attract highly qualified engineers, and to market and sell those products and services if we fail to retain and attract well-qualified marketing and sales professionals. We may be unable to retain key employees in all of these areas and we may not succeed in attracting new employees. In addition, from time to time we may acquire other companies. We have initiated a tender offer to purchase the outstanding shares of stock of Mercator Software, Inc. In order to achieve the anticipated benefits of any acquisition, including the proposed acquisition of Mercator, we may need transitional or permanent assistance from key employees of the acquired company. If we fail to retain, attract and motivate key employees, including those of companies that we acquire, we may be unable to develop, market and sell new products and services, which could materially adversely affect our operating and financial results.

Fluctuations in the value of foreign currencies could result in currency transaction losses.

Despite efforts to manage foreign exchange risk, our hedging activities may not adequately protect us against the risks associated with foreign currency fluctuations, particularly in hyper-inflationary countries where hedging is not available or practical. As a consequence, we may incur losses in connection with fluctuations in foreign currency exchange rates. Most of our international revenue and expenses are denominated in local currencies. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations on our future operating results. Although we take into account changes in exchange rates in our pricing strategy, there would be a time lapse between any sudden or significant exchange rate movements and our implementation of a revised pricing structure.

Accordingly, we may have substantial pricing exposure as a result of foreign exchange volatility during the period between pricing reviews. In addition, as noted previously, the sales cycles for our products are relatively long. Foreign currency fluctuations could, therefore, result in substantial changes in the financial impact of a specific transaction between the time of initial customer contact and revenue recognition. We have a foreign exchange hedging program that is intended to hedge the value of inter-company accounts receivable or inter-company accounts payable denominated in foreign currencies against fluctuations in exchange rates until such receivables are collected or payables are disbursed.

If we do not respond adequately to our industry’s evolving technology standards or do not continue to meet the sophisticated needs of our customers, sales of our products and solutions may decline.

Our future success will depend on our ability to address the increasingly sophisticated needs of our customers by supporting existing and emerging hardware, software, database and networking platforms. We will have to develop and introduce commercially viable enhancements to our existing products and services on a timely basis to keep pace with technological developments, evolving industry standards and changing customer requirements. If we do not enhance our products and services to meet these evolving needs, we will not sell as many products and services and our position in existing, emerging or potential markets could be eroded rapidly by other product advances. In addition, commercial acceptance of our products and services also could be adversely affected by critical or negative statements or reports by brokerage firms, industry and financial analysts and the media about us or our products or business, or by the advertising or marketing efforts of competitors, or by other factors that could adversely affect consumer perception.

Our product development efforts will continue to require substantial financial and operational investment. We may not be able to internally develop new products and services quickly enough to respond to market forces. As a result, we may have to acquire technology or access to products or services through mergers and acquisitions, investments and partnering arrangements, any of which may require us to use significant financial resources. Alternatively, we may not be able to forge partnering arrangements or strategic alliances on satisfactory terms, or at all, with the companies of our choice.

Our future revenue and our ability to make investments in developing our products is substantially dependent upon our installed customer base continuing to license our products and renew our service agreements.

We depend on our installed customer base for future revenue from services and licenses of additional products. If our customers fail to renew their maintenance agreements, our revenue will decline. Our maintenance agreements are generally renewable annually at the option of the customers and there are no minimum payment obligations or obligations to license additional software. Therefore, current customers may not necessarily generate significant maintenance revenue in future periods. In addition, customers may not necessarily purchase additional products or services. Our services revenue and maintenance revenue also depends upon the continued use of these services by our installed customer base. Any downturn in software license revenue could result in lower services revenue in current or future quarters.

Seasonal trends in sales of our software products could adversely affect our quarterly operating results, and our lengthy sales cycles for products makes our revenues susceptible to fluctuations.

Our sales of software products and services have been affected by seasonal purchasing trends that materially affect our quarter-to-quarter operating results. We expect these seasonal trends to continue in the future. Revenue and operating results in our first quarter are typically lower relative to other quarters because many customers make purchase decisions for the fourth quarter based on their calendar year-end budgeting requirements, and as a new year begins start planning for, but not implementing, new information technology spending until later in the year. In addition, revenue and operating results in our third quarter may be adversely affected by scheduling conflicts due to vacations and holidays, particularly abroad.

Our sales cycles typically take many months to complete and vary depending on the product or service that is being sold. The length of the sales cycle may vary depending on a number of factors over which we have little or no control, including the size of a potential transaction and the level of competition that we encounter in our selling activities. The sales cycle can be further extended for sales made through resellers and third-party distributors.

The success of our international operations is dependent upon many factors that could adversely affect our ability to sell our products internationally and could affect our profitability.

International sales represent approximately 45% of our total revenue. Our international operations are, and any expanded international operations will be, subject to a variety of risks associated with conducting business internationally that could adversely affect our ability to sell our products internationally and, therefore, our profitability, including the following:

• Difficulties in staffing and managing international operations,

• Problems in collecting accounts receivable,

• Longer payment cycles,

• Fluctuations in currency exchange rates,

• Seasonal reductions in business activity during the summer months in Europe and certain other parts of the world,

• Uncertainties relative to regional, political and economic circumstances,

• Recessionary environments in domestic or foreign economies and

• Increases in tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers imposed by countries, and other changes in applicable foreign laws.

If we fail to protect our intellectual property rights, competitors may be able to use our technology or trademarks which would weaken our competitive position, reduce our revenue and increase costs.

Our business success will continue to be heavily dependent upon proprietary technology. We rely primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. These means of protecting proprietary rights may not be adequate, and the inability to protect intellectual property rights may adversely affect our business and/or financial condition. We currently hold a number of United States patents and pending applications. There can be no assurance that any other patents covering our inventions will be issued or that any patent, if issued, will provide sufficiently broad protection or will prove enforceable in actions against alleged infringements. Our ability to sell our products and services and to prevent competitors from misappropriating our proprietary technology and trade names is dependent upon protecting our intellectual property. Our products are generally licensed to end users on a “right-to-use” basis under a license that restricts the use of the products for the customer’s internal business purposes.

Despite such precautions, it may be possible for unauthorized third parties to copy aspects of our current or future products or to obtain and use information that we regard as proprietary. In addition, we have licensed the source code of our products to certain customers under certain circumstances and for restricted uses. We also have entered into source code escrow agreements with a number of our customers that generally require release of our source code to the customer in the event of 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. We may also be unable to protect our technology because:

• Competitors may independently develop similar or superior technology,

• Policing unauthorized use of software is difficult,

• The laws of some foreign countries do not protect proprietary rights in software to the same extent as do the laws of the United States,

• “Shrink-wrap” and/or “click-wrap” licenses may be wholly or partially unenforceable under the laws of certain jurisdictions, and

• Litigation to enforce intellectual property rights, to protect trade secrets, or to determine the validity and scope of the proprietary rights of others could result in substantial costs and diversion of resources.

Our software may have defects and errors, which may lead to a loss of revenue or product liability claims.

Software products are internally complex and occasionally contain defects or errors, especially when first introduced or when new versions or enhancements are released. Despite extensive testing, we may not detect errors in our new products, platforms or product enhancements until after we have commenced commercial shipments. If defects and errors are discovered in our products, platforms or product enhancements after commercial release then potential customers may delay or forego purchases; our reputation in the marketplace may be damaged; we may incur additional service and warranty costs; and we may have to divert additional development resources to correct the defects and errors. If any or all of the foregoing occur, we may lose revenues or incur higher operating expenses and lose market share, any of which could severely harm our financial condition and operating results.

In the future, third parties could, for competitive or other reasons, assert that our products infringe their intellectual property rights.

In the future, third parties could, for competitive or other reasons, assert that our products infringe their intellectual property rights. Any such claims could be time consuming to defend, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or license agreements may not be available on acceptable terms or at all. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the software industry segment grows and the functionality of products in different industry segments overlaps.

The loss of our rights to use software licensed to us by third parties could harm our business.

In order to provide a complete product suite, we occasionally license software from third parties, and sub-license this software to our customers. In addition, we license software programs from third parties and incorporate these programs into our own software products. By utilizing third party software in our business, we incur risks that are not associated with developing software in-house. For example, these third party providers may discontinue or alter their operations, terminate their relationship with us, or generally become unable to fulfill their obligations to us. If any of these circumstances were to occur, we may be forced to seek alternative technology that may not be available on commercially reasonable terms. In the future, we may be forced to obtain additional third party software licenses to enhance our product offerings and compete more effectively. We may not be able to obtain and maintain licensing rights to needed technology on commercially reasonable terms, which would harm our business and operating results.

We have substantial real estate lease commitments for unoccupied space and restoration obligations, and if we are unable to sublet this space on acceptable terms our operating results and financial condition could be adversely affected.

We are party to real estate leases for approximately 223,268 square feet that we actively utilize, and approximately 221,194 square feet that is currently unoccupied or sublet to a third party. At June 30, 2003, we have a restructuring reserve of $10.1 million comprised of $8.7 million for lease obligations and $0.9 million for restoration costs related to the disposition of this space as of June 30, 2003. In establishing this reserve, we have assumed that we will be able to sublet the available space and receive approximately $7.5 million of sublease income relating to this space, $2.5 million for properties already sublet and $5.0 million from properties where a sublet is anticipated. We may not be able to sublet this space on the assumed terms and restoration costs may exceed our estimates. If we are unable to sublet this space on the assumed terms, or if restoration costs exceed our estimates, there may be an adverse effect on our operating results of up to $4.7 million resulting from additional restructuring costs.

Our inability in the past to rely on the statutory “safe harbor” as a result of the settlement of the Securities and Exchange Commission investigation could harm our business.

Effective January 11, 2000, we entered into a settlement with the SEC as a result of an investigation against us. Pursuant to the settlement, we 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 (“Exchange Act”), Making Findings, and Imposing a Cease and Desist Order. Pursuant to the order, we neither admitted nor denied the findings, except as to jurisdiction, contained in the order.

The order prohibits us from violating and causing any violation of the anti-fraud provisions of the federal securities laws, for example by making materially false and misleading statements concerning our financial performance. The order also prohibits us from violating or causing any violation of the provisions of the federal securities laws requiring us to: (1) file accurate quarterly and annual reports with the SEC;

(2) maintain accurate accounting books and records; and (3) maintain adequate internal accounting controls. Pursuant to the order, we are also required to cooperate in the SEC’s continuing investigation of other entities and persons. In the event that we violate the order, we could be subject to substantial monetary penalties.

As a consequence of the issuance of the January 2000 order, we were not, for the three year period that expired January 11, 2003, able to rely on the “safe harbor” for forward-looking statements contained in the federal securities laws. The “safe harbor,” among other things, limits potential legal actions against us in the event a forward-looking statement concerning our anticipated performance turns out to be inaccurate, unless it can be proved that, at the time the statement was made, we actually knew that the statement was false. If we become a defendant in any private securities litigation brought under the federal securities laws pertaining to that three year period, our legal position in the litigation could be materially adversely affected by our inability to rely on the “safe harbor” provisions for forward-looking statements.

Provisions in our charter documents may discourage potential acquisition bids and prevent changes in our management that our stockholders may favor. This could adversely affect the market price for our common stock.

Provisions in our charter documents could discourage potential acquisition proposals and could delay or prevent a change in control transaction that our stockholders may favor. The provisions include:

• Elimination of the right of stockholders to act without holding a meeting,

• Certain procedures for nominating directors and submitting proposals for consideration at stockholder meetings and

• A board of directors divided into three classes, with each class standing for election once every three years.

These provisions are intended to enhance the likelihood of continuity and stability in the composition of the board of directors and in the policies formulated by the board of directors and to discourage certain types of transactions involving an actual or threatened change of control. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal and, accordingly, could discourage potential acquisition proposals and could delay or prevent a change in control. Such provisions are also intended to discourage certain tactics that may be used in proxy fights but could, however, have the effect of discouraging others from making tender offers for shares of our common stock, and consequently, may also inhibit fluctuations in the market price of our common stock that could result from actual or rumored takeover attempts. These provisions may also have the effect of preventing changes in our management.

In addition, we have adopted a rights agreement, commonly referred to as a “poison pill,” that grants holders of our common stock preferential rights in the event of an unsolicited takeover attempt. These rights are denied to any stockholder involved in the takeover attempt which has the effect of requiring cooperation with our board of directors. This may also prevent an increase in the market price of our common stock resulting from actual or rumored takeover attempts. The rights agreement could also discourage potential acquirers from making unsolicited acquisition bids.

Provisions in our charter documents with respect to undesignated preferred stock may discourage potential acquisition bids.

Our board of directors is authorized to issue up to approximately four million shares of undesignated preferred stock in one or more series. Our board of directors can fix the price, rights, preferences, privileges and restrictions of such preferred stock without any further vote or action by our stockholders. However, the issuance of shares of preferred stock may delay or prevent a change in control transaction without further action by our stockholders. As a result, the market price of our common stock and the voting and other rights of the holders of our common stock may be adversely affected. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of our common stock, including the loss of voting controls to others.

Delaware law may inhibit potential acquisition bids, which may adversely affect the market price for our common stock and prevent changes in our management that our stockholders may favor.

We are incorporated in Delaware and are subject to the anti-takeover provisions of the Delaware General Corporation Law, which regulates corporate acquisitions. Delaware law prevents certain Delaware corporations, including us, whose securities are listed for trading on the NASDAQ National Market, from engaging, under certain circumstances, in a “business combination” with any “interested stockholder” for three years following the date that the stockholder became an interested stockholder. For purposes of Delaware law, a “business combination” would include, among other things, a merger or consolidation involving us and an interested stockholder and the sale of more than 10% of our assets. In general, Delaware law defines an “interested stockholder” as any entity or person beneficially owning 15% or more of the outstanding voting stock of a corporation and any entity or person affiliated with or controlling or controlled by such entity or person. Under Delaware law, a Delaware corporation may “opt out” of the anti-takeover provisions. We have not and do not intend to “opt out” of these anti-takeover provisions of Delaware law.

Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war, may affect the markets in which we operate, our operations and our profitability.

Terrorist attacks may negatively disrupt and negatively impact our operations. We are unable to predict whether there will be future terrorist attacks against the United States or United States businesses, or against other countries or businesses located in those countries. These attacks may directly impact our physical facilities and those of our suppliers or customers. Furthermore, these attacks may make the travel of our employees more difficult and expensive and ultimately may affect our sales.

Also, as a result of terrorism or for other reasons, the United States may enter into an armed conflict that could have a further impact on our sales and our ability to deliver products to our customers. Political and economic instability in some regions of the world may also negatively impact our business generated in those regions. The consequences of any of these armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

For quantitative and qualitative disclosures about market risk affecting the Company, see item 7A “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for our fiscal year ended December 31, 2002. Our exposure to market risks has not changed materially since December 31, 2002.

Item 4. Controls and Procedures.

The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2003. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of June 30, 2003, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

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 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.

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.

Item 4. Submission of Matters to a Vote of Security Holders.

On June 17, 2003, the Company held its 2003 annual meeting of stockholders. At the meeting, the votes cast for and against the matters presented to the Company’s stockholders, as well as the number of abstentions and broker non-votes, were as follows:

2. Authorization of the Board of Directors, in its discretion, to amend the Company’s Restated Certificate of Incorporation to effect a 1-for-4 reverse stock split (the “Reverse Split”) of the Company’s issued and outstanding shares of Common Stock at any time prior to the next annual meeting of stockholders.


Votes For	Votes Withheld		Votes Abstaining		Broker Non-Votes

198,119,731		10,878,473		0	0


Votes For	Votes Against		Votes Abstaining		Broker Non-Votes

189,462,150		19,114,670		421,384	0

3. Approval of an amendment to the Company“s 1997 Employee Stock Purchase Plan (the “ESPP”) increasing the number of shares of Common Stock authorized for issuance under the ESPP from 8,000,000 to 9,000,000 (without giving effect to the proposed Reverse Split).


Votes For	Votes Against		Votes Abstaining		Broker Non-Votes

192,803,376		15,677,733		517,095	0

4. Approval of an amendment to the Company’s 1994 Stock Option and Award Plan (the “1994 Plan”) (i) prohibiting repricing of options issued under the 1994 Plan, (ii) increasing the number of shares of Common Stock authorized for issuance under the 1994 Plan from 24,000,000 to 33,000,000 (without giving effect to the proposed Reverse Split), and (iii) providing for the issuance of restricted stock in lieu of performance shares.


Votes For	Votes Against		Votes Abstaining		Broker Non-Votes

149,467,145		58,957,225		573,834	0

5. Approval of an amendment to the Company’s 1989 Outside Directors Stock Option Plan (the “Director Plan”) increasing the number of shares of Common Stock authorized for issuance under the Director Plan from 1,600,000 to 2,600,000 (without giving effect to the proposed Reverse Split).


Votes For	Votes Against		Votes Abstaining		Broker Non-Votes

171,437,003		37,004,809		556,392	0

6. Ratification of the selection of PricewaterhouseCoopers LLP as independent auditors for the fiscal year ended December 31,2003.


Votes For	Votes Against		Votes Abstaining		Broker Non-Votes

203,427,828		4,997,293		573,083	0

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits


Exhibit Number		Exhibit

2.1(1)		Agreement and Plan of Merger, dated as of August 2, 2003, by and among Ascential Software Corporation, Greek Acquisition Corporation and Mercator Software, Inc.

3.1		Restated Certificate of Incorporation, as amended

10.1		Amended and Restated 1994 Stock Option and Award Plan

10.2		Amended and Restated 1989 Outside Directors Stock Option Plan

10.3		Amended and Restated 1997 Employee Stock Purchase Plan

10.4		Amended and Restated 1998 Non-Statutory Stock Option and Award Plan

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

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

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

99.1(1)		Stock Tender Agreement, dated as of August 2, 2003, by and among Ascential Software Corporation, Greek Acquisition Corporation and certain directors and executive and other officers of Mercator Software, Inc. set forth therein

99.2(1)		Common Stock Option Agreement, dated as of August 2, 2003, by and among Ascential Software Corporation, Greek Acquisition Corporation and Mercator Software, Inc.

(1) Incorporated by reference to exhibits filed with the Registrant’s current report on Form 8-K filed with the Commission on August 5, 2003 (File No. 000-15325)

(b) Reports on Form 8-K

On April 3, 2003, the Company filed a Current Report on Form 8-K dated March 31, 2003 reporting under “Item 4. Changes in Registrant’s Certifying Accountant” that the Audit Committee of the Company’s Board of Directors approved the dismissal of KPMG LLP as the Company’s independent accountants. In addition, the Company reported that the Audit Committee of the Company’s Board of Directors approved the engagement of PricewaterhouseCoopers LLP as the Company’s independent accountants for the fiscal year ending December 31, 2003.

On April 17, 2003, the Company filed a Current Report on Form 8-K dated April 16, 2003 reporting under “Item 4. Changes in Registrant’s Certifying Accountant” that the Audit Committee of the Company’s Board of Directors approved the engagement of PricewaterhouseCoopers LLP as the Company’s independent accountants for the fiscal year ending December 31, 2003.

On April 21, 2003, the Company furnished a Current Report on Form 8-K dated April 21, 2003 announcing the Company’s financial results for the quarter ended March 31, 2003 under “Item 9. Regulation FD Disclosure” (Information furnished pursuant to Item 12. “Disclosure of Results of Operations and Financial Condition”). The full text of the press release issued in connection with the announcement, including financial statements, was attached as Exhibit 99.1 to this Current Report on Form 8-K.

On June 13, 2003, the Company furnished a Current Report on Form 8-K dated June 13, 2003 announcing under “Item 9. Regulation FD Disclosure” that a proposal to effect a one-for-four reverse split of the Company’s common stock would be submitted to the Company’s stockholders at the 2003 annual meeting of stockholders of the Company.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	ASCENTIAL SOFTWARE CORPORATION

Dated: August 14, 2003	By:	/s/ Robert C. McBride

		Robert C. McBride
		Vice President and Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer);
		Duly Authorized Officer

INDEX TO EXHIBITS


Exhibit Number		Exhibit

2.1(1)		Agreement and Plan of Merger, dated as of August 2, 2003, by and among Ascential Software Corporation, Greek Acquisition Corporation and Mercator Software, Inc.

3.1		Restated Certificate of Incorporation, as amended

10.1		Amended and Restated 1994 Stock Option and Award Plan

10.2		Amended and Restated 1989 Outside Directors Stock Option Plan

10.3		Amended and Restated 1997 Employee Stock Purchase Plan

10.4		Amended and Restated 1998 Non-Statutory Stock Option and Award Plan

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

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

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

99.1(1)		Stock Tender Agreement, dated as of August 2, 2003, by and among Ascential Software Corporation, Greek Acquisition Corporation and certain directors and executive and other officers of Mercator Software, Inc. set forth therein

99.2(1)		Common Stock Option Agreement, dated as of August 2, 2003, by and among Ascential Software Corporation, Greek Acquisition Corporation and Mercator Software, Inc.

[X]		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		for the Quarterly Period Ended June 30, 2003.

[ ]		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		for the Transition Period from to

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

I.		Revenue — Ascential Software Corporation

	•		Changes in demand for our products and services, including changes in growth rates in the software industry as a whole and in the enterprise data integration market,

	•		The size, timing and contractual terms of large orders for our software products and services,

	•		Possible delays in or inability to recognize revenue as the result of revenue recognition rules,

	•		The budgeting cycles of our customers and potential customers,

	•		Any downturn in our customers’ businesses, in the domestic economy or in international economies where our customers do

			substantial business,

	•		Changes in our pricing policies resulting from competitive pressures, such as aggressive price discounting by our competitors, or other factors,

	•		Our ability to develop and introduce on a timely basis new or enhanced versions of our products and services,

	•		Unexpected needs for capital expenditures or other unanticipated expenses,

	•		Changes in the mix of revenues attributable to domestic and international sales, and

	•		Seasonal fluctuations in buying patterns.

	•		Market uncertainty about our business prospects or the prospects for the enterprise data integration market,

	•		Revenues or results of operations that do not meet or exceed analysts’ and investors’ expectations,

	•		The introduction of new products or product enhancements by us or our competitors,

	•		Any challenges integrating people, operations or products associated with recent acquisitions,

	•		General business conditions in the software industry, the technology sector, or in the domestic or international economies, and

	•		Uncertainty and economic instability resulting from terrorist acts and other acts of violence or war.

	•		Difficulties in staffing and managing international operations,

	•		Problems in collecting accounts receivable,

	•		Longer payment cycles,

	•		Fluctuations in currency exchange rates,

	•		Seasonal reductions in business activity during the summer months in Europe and certain other parts of the world,

	•		Uncertainties relative to regional, political and economic circumstances,

	•		Recessionary environments in domestic or foreign economies and

	•		Increases in tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers imposed by countries, and other changes in applicable foreign laws.

	•		Competitors may independently develop similar or superior technology,

	•		Policing unauthorized use of software is difficult,

	•		The laws of some foreign countries do not protect proprietary rights in software to the same extent as do the laws of the United States,

	•		“Shrink-wrap” and/or “click-wrap” licenses may be wholly or partially unenforceable under the laws of certain jurisdictions, and

	•		Litigation to enforce intellectual property rights, to protect trade secrets, or to determine the validity and scope of the proprietary rights of others could result in substantial costs and diversion of resources.

	•		Elimination of the right of stockholders to act without holding a meeting,

	•		Certain procedures for nominating directors and submitting proposals for consideration at stockholder meetings and

	•		A board of directors divided into three classes, with each class standing for election once every three years.