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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

For the fiscal year ended December 31, 2002

OR

For the transition period from                      to

Commission file number: 0-19395

One Sybase Drive, Dublin, California 94568
(Address of principal executive offices and Zip Code)

Registrant’s telephone number, including area code: (925) 236-5000

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Preferred Share Purchase Rights

     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 [X] NO [ ]

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

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [X] NO [ ]

     The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter was $1.03 billion. As of March 24, 2003, the Registrant had 95,150,464 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

FORWARD LOOKING STATEMENTS

This annual report contains forward looking statements that involve risk and uncertainties that could cause the actual results of Sybase, Inc. and its consolidated subsidiaries (“Sybase”, the “Company,” “we” or “us”) to differ materially from those expressed or implied by such forward looking statements. These risks include continued weakness in the U.S. and global economies; global political unrest, including acts of terrorism and the war in the Middle East; sales productivity, particularly in North America; possible disruptive effects of organizational changes; shifts in customer or market demand for our products and services; public perception of Sybase, our technology vision and future prospects; rapid technological changes; competitive factors; delays in scheduled product availability dates (which could result from various occurrences including development or testing difficulties, software errors, shortages in appropriately skilled software engineers and project management problems); interoperability of our products with other software products, risks inherent in completing the acquisition of other companies, the ability to integrate acquired companies into our business, and other risks detailed from time to time in our Securities and Exchange Commission filings.

Expectations, forecasts, and projections that may be contained in this report are by nature forward looking statements, and future results cannot be guaranteed. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” and similar expressions in this document, as they relate to our business and management, may identify forward looking statements. Such statements reflect the current views of our management with respect to future events and are subject to risks, uncertainties and assumptions. Forward looking statements that were true at the time made may ultimately prove to be incorrect or false, or may vary materially from those described as anticipated, believed, estimated, intended or expected. We do not intend to update these forward looking statements.

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PART I

ITEM 1. BUSINESS

Sybase is the enterprise infrastructure company that integrates heterogeneous applications and infrastructure technologies. We are one of the largest independent software companies in the world with an industry-leading Enterprise Portal, mobile and embedded solutions, essential integration products, high performance database management systems, and solutions in such vertical markets as financial services, telecommunications, healthcare and the public sector. Sybase was founded and incorporated in California on November 15, 1984, and was re-incorporated in Delaware on July 1, 1991.

During 2002, our business was organized into the following five principal operating divisions, two of which are majority owned subsidiaries. Below is a brief description of the business of each of these divisions:

     •      Enterprise Solutions Division (ESD) products and solutions let enterprises integrate, move and manage very large amounts of data and applications across diverse computing environments. ESD also provides technical support and professional services required by businesses to develop and maintain operational systems, including e-Business infrastructures.

     •      e-Business Division (eBD) integrates our core technology with emerging solutions to offer advanced e-Business technology. Its products include Sybase’s flagship Enterprise Portal product, tools for personalization, globalization, integration, and high security, plus Sybase’s historical infrastructure expertise. eBD focuses on certain products from our former Internet Applications Division (IAD) and certain products formerly within ESD and New Era of Networks, Inc. (NEN) which we acquired in April 2001.

     •      iAnywhere Solutions, Inc. (iAS) mobile and embedded products and solutions empower businesses with always-available access to enterprise information. More than 10,000 customers worldwide, including 78 of the Fortune 100, rely on iAnywhere Solutions industry leading mobile, embedded and workgroup databases, mobile middleware and m-Business solutions. iAS is a majority owned subsidiary that continues the business of our former mobile and embedded computing (MEC) division.

     •      Business Intelligence Division (BID) products and solutions let businesses consolidate and analyze large amounts of information from data warehouses and data marts to facilitate better decision making and gain a competitive edge in sales and marketing, customer satisfaction, trend and risk analysis, and other mission-critical areas. BID products are portal-ready and make portals scalable for business intelligence.

     •      Financial Fusion, Inc. (FFI) provides banking, payment, and trade messaging solutions to more than 200 of the world’s leading financial institutions. FFI solutions enable banks to provide account access and payment initiation on behalf of their consumer, small business and corporate clients. For financial market customers, FFI messaging and integration solutions enable straight-through processing (STP) of trading transactions. FFI is a majority owned subsidiary created to extend the business of Home Financial Network, Inc. (HFN), which was acquired in January 2000, and to develop certain products formerly within NEN.

A summary of financial results for these divisions and subsidiaries is found in Note Ten to the Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.

CUSTOMERS

Our customers are primarily Fortune 1000 companies in North America and their equivalents in other geographic regions. Our primary markets include financial services, insurance, telecommunications, healthcare, defense and government agencies. No single customer accounted for more than 10% of total revenues during 2002, 2001 or 2000. Our customers during 2002 included:

     •      A leading telecom provider in China using Adaptive Server® Enterprise for all billing and provisioning applications throughout all its regions.

     •      A leading securities firm in the United States using Replication Server® as the foundation for its data integration and movement infrastructure.

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     •      A leading provider of television ratings measurement using Adaptive Server® IQ Multiplex as the cornerstone of its decision support system for its audience data warehouse.

     •     The FBI using SQL Anywhere® Studio and PowerBuilder® to update its mainframe and paper-based Violent Criminal Apprehension database application to make it affordable and portable enough to be distributed to and managed by law enforcement agencies across the country.

     •      A super-regional Midwest U.S. Bank using Financial Fusion® Consumer Banking Solution to create an online branch that is integrated with customer service and voice recognition channels allowing consumers to view their bank accounts, pay bills and perform daily banking activities with greater efficiency.

Our products are available on hardware platforms manufactured by Hewlett-Packard, IBM, Sun Microsystems and others. We also make products that connect these platforms to other hardware platforms with large installed bases. Our products are also available for a wide range of operating systems including various UNIX environments, Windows, Windows NT, and Linux. A description of our principal products follows:

eBusiness (eBD)

Sybase® Enterprise Portal (EP) is an extensible portal environment that meets next-generation e-Business requirements, with powerful capabilities for extending the enterprise to trading partners and expanding its reach to mobile workers. During 2002, Enterprise Portal 5.0 became generally available, incorporating innovative portlet technology we obtained through our acquisition of OnePage, Inc. earlier in the year

Sybase® EAServer is a highly scalable, robust application server for e-portal and Internet business solutions. It provides best-of-class transaction and security management and high availability, enabling customers to support highly trafficked Web sites.

e-Biz Integrator™ is a suite of high-powered, e-Business integration software designed to connect core operational systems and Web-interfacing applications for seamless, effective integration.

New Era of Networks® Process Server is an XML-based business process design tool and execution server. It helps companies integrate new and existing IT systems into a cohesive business process flow that speeds response times, improves efficiency and reduces operational costs.

PowerDesigner® is the industry’s first design tool with an enterprise-class repository that simplifies UML object modeling and data modeling, including Java and XML.

Enterprise Solutions (ESD)

Adaptive Server® Enterprise (ASE) is a high-performance, mission critical, and web-services enabled information management system designed to support the most demanding requirements of businesses today. It enables organizations to lower their total cost of ownership though technologies that minimize both human intervention and hardware requirements. ASE offers a unique blend of advanced developer features and an efficient, robust computing environment for all forms of mission-critical transaction processing on numerous platforms including Sun, IBM, HP, SGI, Windows, and Linux. Among its many enterprise-class features is advanced support for XML, clusters for highly-available computing, extensive dynamic tuning, and advanced security systems such as row-based access control and SSL-based communications.

Replication Server® and Replication Agent™ allow remote sites to share data from a primary data site, and to automatically receive updated data from the primary site. Replication Server uses “store-and-forward asynchronous replication” that monitors and copies changes made at the primary data site, then automatically forwards those changes to all replicated sites. Sybase replication technology offers an innovative practical architecture for building cost-effective, high-performance, robust distributed systems,

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and supplies a flexible approach to information delivery that can rapidly adapt to changing business needs.

PowerBuilder® is a high productivity application development tool targeted for the client/server and Web application markets.

EnterpriseConnect ™, DirectConnect ™ and Open Server™ are among Sybase’s core data access and integration products. These products allow users to use a single language to access varied types of data and applications (e.g., real-time data feeds, stored data) from multiple sources as if they were contained in a single database.

iAnywhere Solutions (iAS)

SQL Anywhere® Studio is the industry-leading mobile and embedded database for use on workgroup servers, laptops and handheld devices, and supports applications used by single or multiple users. The UltraLite deployment option minimizes memory and system requirements for applications found in devices such as smart phones and intelligent appliances. SQL Anywhere Studio technology allows scalable bi-directional synchronization of business information between enterprise systems and remote devices. This means that remote or mobile users can send and receive critical data ensuring that up-to-date information is always available at their fingertips and at the head office.

Manage Anywhere Studio™ provides secure, centralized management of applications and hardware for PCs, laptops and mobile devices. Architected to handle remote and mobile environments, Manage Anywhere Studio controls the cost of deploying applications to large numbers of users in multiple locations. Self-healing and configuration enforcement features reduce downtime and ensure the security of hardware and applications, while remote control capabilities increase the effectiveness of help desk support. Manage Anywhere Studio also provides comprehensive hardware and software inventories to simplify asset management.

m-Business Studio is a comprehensive integrated software package for extending the reach of e-Business applications, enterprise data, and Internet connections to mobile and wireless devices, including smart phones, PDAs and laptops.

Mail Anywhere Studio™ is an out-of-the-box solution that provides simple, remote access to enterprise e-mail, calendar, and contact and task information from Lotus Notes and Microsoft Exchange, allowing users to receive and immediately respond to e-mail anywhere, anytime.

Business Intelligence (BID)

Adaptive Server® IQ presents a new generation of capabilities for business intelligence and Web enabled data warehousing, allowing data access, query performance and data loading 10 to 100 times faster than traditional relational databases. Multiplexing capabilities allow this product to maintain high performance levels even with dramatic increases in the number of users and the volume of data. Adaptive Server IQ Multiplex can compress even terabytes of data without the need for continuous, laborious tuning and maintenance.

Industry Warehouse Studios ™ (IWS) are prepackaged solutions that can be customized for a variety of industries such as retail banking, capital markets, insurance, healthcare and telecommunications to create a strategic, end-to-end business intelligence infrastructure that encompasses data acquisition, data modeling, metadata management, data analysis, data storage and analytic applications. IWS provides the basic framework to enable an organization to analyze customer behavior and trends and their impact on the business.

Financial Fusion, Inc. (FFI)

Financial Fusion Banking Solutions enable financial institutions to offer multiple-delivery channel support to their consumer, small business, and large corporate clients. Features include account access, banking, cash management services, imaging, bill payment and presentment, customer care, and wireless application support. Solutions are supported on an integrated platform driven by Financial Fusion Server, using advanced Java technology and industry protocols.

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Financial Fusion Financial Markets Solutions are designed to meet the STP connectivity and integration requirements of the trading industry. FFI solutions provide processing for transaction-intensive trading organizations such as securities and investment firms, ECNs and network providers. Out-of-the-box protocol support includes FIX, FIXML, FpML, EMX, SWIFT, VMUs, and proprietary protocols.

WORLDWIDE SERVICES

Technical Support. Our Customer Service and Support organization offers technical support for our entire family of products. We currently maintain regional support centers in North America, Europe, and Asia Pacific that can provide 24 x 7 technical services (i.e., 24 hours a day, seven days a week) in all time zones around the world. Our end users and partners have access to technical information sources and newsgroups on our support Web site, including a problem-solving library, a “solved cases” database, and certain software fixes that can be downloaded. Customers generally can choose technical support programs that best suit their business needs. All of the following support programs are priced on a per-product basis and include updates and new version releases that become available during the support period:

     •      Basic Support is generally geared toward smaller local enterprises, and includes 24 x 7 support coverage for up to two customer support contacts.

     •      Extended Support is the minimum support level recommended for Sybase database products, and includes 24 x 7 coverage for up to four customer support contacts.

     •      Enterprise Support offers personalized high-availability support for companies with mission-critical projects. Services include designated enterprise support team, account management and other specialized options.

In addition to the above support offerings, we also offer several options geared toward developers for designated workplace level and tools products. These programs are priced on a flat-fee annual price basis with updates and new version releases available for purchase separately.

Each of our divisions and subsidiaries also offer a variety of support services to their partners, including value added resellers (VARs), systems integrators (SIs), original equipment manufacturers (OEMs) and independent software developers (ISVs).

Consulting. The Sybase Professional Services (SPS) organization offers customers comprehensive consulting, education and integration services designed to optimize their business solutions using both Sybase and non-Sybase products. Service offerings include assistance with data and system migration, custom application design and development, implementation, performance improvement, knowledge transfer and system administration. SPS also provides extensive SQL and Sybase product education.

Education. We provide a broad education curriculum allowing customers and partners to increase their proficiency in our products. Basic and advanced courses are offered at Sybase education centers throughout North America, South America, Europe and Asia Pacific (including Australia and New Zealand). Specially tailored customer classes and self-paced training are also available. A number of our distributors and authorized education providers also provide training in our products.

SALES AND DISTRIBUTION

Licensing Model. Consistent with software industry practice, we do not sell or transfer title to our software products to our customers. Instead, customers generally purchase non-exclusive, nontransferable perpetual licenses in exchange for a fee that varies depending on the mix of products and services, the number and type of users, the number of servers, and the type of operating system. License fees range from several hundred dollars for single user desktop products to several million dollars for solutions that can support hundreds or thousands of users. We also license many of our products for use

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in connection with customer applications on the Internet. Our products and services are offered in a wide variety of configurations depending on each customer’s needs and hardware environment.

Distribution Method. All Sybase products and services generally are sold through our direct sales organization and our indirect sales channels. “Indirect channels” include VARs, SIs, OEMs, international distributors and other resellers.

International Business. In 2002, 40% of the Company’s total revenues were from operations outside North America, with European operations accounting for 26% of total revenues, and intercontinental operations (principally Asia Pacific (including Japan) and South America) accounting for 14% of total revenues. Most of our international sales are made by foreign subsidiaries. However, certain sales are made in international markets from the United States. We also license our products through distributors and other resellers in those regions. A summary of our geographical revenues is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) – Geographical Revenues”, Part II, Item 7, and Note Ten to the Consolidated Financial Statements, Part II, Item 8, incorporated here by reference. For a discussion of the risks associated with our foreign operations, see “MD&A – Future Operating Results – International Operations,” Part II, Item 7, incorporated here by reference.

INTELLECTUAL PROPERTY RIGHTS

We rely on a combination of trade secret, copyright, patent and trademark laws, as well as contractual terms, to protect our intellectual property rights. As of March 24, 2003, we had 67 issued patents that expire in approximately 17 years from the date they are issued. These patents cover various aspects of our technology. We believe that our patents and other intellectual property rights have value, but no single patent is essential to Sybase as a whole. Additionally, any of our proprietary rights could be challenged, invalidated or circumvented, or may not provide significant competitive advantage. For a discussion of additional risks associated with our intellectual property, see “MD&A – Future Operating Results – Intellectual Property,” Part II, Item 7, incorporated here by reference.

RESEARCH AND DEVELOPMENT

Since inception, we have made substantial investments in research and product development. We believe that timely development of new products and enhancements to our existing products is essential to maintaining a strong position in our market. During 2002, we invested $117.8 million, or 14% of our total revenue in research and development. We intend to continue to invest heavily in these areas. However, future operations could be affected if we fail to timely enhance existing products or introduce new products to meet customer demands. For a further discussion of the risks associated with product development, see “MD&A – Future Operating Results – Product Development,” Part II, Item 7, incorporated here by reference. As is common in the software industry, our backlog is typically small and is not material to an understanding of our business.

COMPETITION

The market for our products and services is fast-paced, extremely competitive, and is marked by dynamic customer demands, short product life cycles, and the rapid emergence of the Internet marketplace. For a discussion of the risks associated with competition, see “MD&A – Future Operating Results – Competition,” Part II, Item 7, incorporated here by reference.

EMPLOYEES

As of March 24, 2003, Sybase and its subsidiaries had 3,917 employees. For information regarding our executive officers, see “Directors and Executive Officers of the Registrant,” Part III, Item 10 below.

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ITEM 2. PROPERTIES

On January 28, 2000, we entered into a 15-year non-cancelable lease of our new corporate headquarters facility in Dublin, California. The property consists of approximately 406,000 square feet of administrative and product development facilities. We moved to Dublin from our offices in Emeryville, California beginning in January 2002. We have the option to renew our Dublin lease for up to two five-year periods, generally at then-fair market value, subject to certain conditions.

In September 1999, the Company sold its facility in Concord, Massachusetts and simultaneously entered into a sale-leaseback agreement on two other buildings in Concord, which expires in June 2006. Under the terms of the sale-leaseback agreement, the Company entered into a seven-year operating lease, which was amended in June 1, 2001 to extend the lease term an additional six years. The termination date of this lease is October 31, 2012. For a further discussion of our Dublin lease and our facilities in Concord, see Note Six to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.

We continue to maintain an engineering center in Milpitas, California, where we will lease approximately 10,350 square feet of office space through 2003. We also maintain engineering centers in Boulder, Colorado; Paris, France; Waterloo, Canada; Beijing, China; and Singapore. The North American engineering centers focus on product development, and the Singapore and Beijing facilities focus primarily on product localization and development relating to our Asian markets.

As of December 31, 2002, our field operations, professional service organizations and subsidiaries occupied leased facilities in approximately 95 locations throughout North America, South America, Europe and Asia (including Australia and New Zealand), aggregating approximately 2.2 million square feet. In 1999, we sold a building in Concord, Massachusetts consisting of approximately 44,600 square feet. In 1999, we sold a building consisting of approximately 10,500 square feet located in Maidenhead, England. We continue to lease additional premises in various locations.

ITEM 3. LEGAL PROCEEDINGS

No proceedings required to be disclosed under this item were terminated during the fourth quarter of 2002. See also Note Twelve to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a stockholder vote in the quarter ended December 31, 2002.

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PART II

ITEM 5.      MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Sybase, Inc. Common Stock, par value $.001, began trading on the New York Stock Exchange on May 22, 2001, under the symbol “SY.” Prior to that, our stock traded on the NASDAQ National Market System under the symbol “SYBS.” Following is the range of low and high closing prices for our stock as reported on the New York Stock Exchange and NASDAQ for the quarters indicated.

We have never paid cash dividends on our capital stock, and we do not anticipate doing so in the foreseeable future. The closing sale price of our stock on the New York Stock Exchange on March 24, 2003 was $14.00. The number of stockholders of record on that date was 1,614, according to American Stock Transfer & Trust, the Company's transfer agent.

The information required by this item regarding our securities authorized for issuance under equity compensation plans is incorporated by reference to “Security Ownership of Certain Beneficial Owners and Management,” Part III, Item 12, incorporated here by reference.

In April 2001, we acquired all of the issued and outstanding common stock of NEN in exchange for approximately 14,289,957 shares of our Common Stock. For further discussion of this acquisition, see Note Eleven to the Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.

On January 20, 2000, we issued 7,817,471 shares of our Common Stock to the former shareholders of HFN in exchange for all of the outstanding common stock of HFN. The resale of our Common Stock issued in connection with this merger transaction was registered under the Act. For further discussion of this acquisition, see Note Eleven to the Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial information is not necessarily indicative of the results of future operations. This data should be read in conjunction the MD&A, Part II, Item 7, as well as the Consolidated Financial Statements and related Notes included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Report on Form 10-K.

Consolidated Statements of Operations Data (1)

(1)  Certain reclassifications have been made to prior fiscal year balances in order to conform to the current fiscal year presentation for the reimbursement of out-of-pocket expenses.

(2)  We implemented Statement of Financial Accounting Standards (SFAS) No. 142 on January 1, 2002, which states that goodwill (including assembled workforce) can no longer be amortized, but must be tested for impairment on at least an annual basis. For a further discussion of SFAS 142, see Note One to the Consolidated Financial Statements, ‘‘Goodwill and Other Purchased Intangible Assets,’’ Part II, Item 8, incorporated here by reference.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We reported net income of $37.8 million for 2002, before consideration of a $132.5 million charge for the cumulative effect of an accounting change, compared to a net loss of ($25.5) million for 2001. See “Cumulative Effect of an Accounting Change to Adopt SFAS 142,” below for a discussion of this accounting change.

During 2002 our overall revenues decreased by 11%, but this decrease was more than fully offset by a 18% decrease in our overall costs and expenses. Approximately 24% of the overall decrease was attributable to adoption of Statement of Financial Accounting Standards No. 142 (SFAS 142) which ceased the amortization of goodwill and defined the rules for recording impairment of goodwill, effective January 1, 2002. The remaining reduction in our operating expenses was largely the result of our restructuring activities, as more fully described in Note Thirteen to the Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.

Our financial position remains strong. During 2002 we generated net cash from operating activities of $164.3 million and had $387.2 million in cash, cash equivalents and cash investments at year end. Days sales outstanding in accounts receivable was 72 days for the quarter ended December 31, 2002 compared to 71 days for the quarter ended December 31, 2001.

During 2002, we were organized into five separate business segments, including two majority owned subsidiaries, each of which focused on one of five key market segments – Enterprise Solutions Division (ESD), e-Business Division (eBD), Business Intelligence Division (BID), iAnywhere Solutions, Inc. (iAS) and Financial Fusion, Inc. (FFI). For a discussion of each of these segments, see “Business,” Part I, Item I, and Note Ten to the Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.

Critical Accounting Policies and Estimates

We prepare our financial statements in conformity with U.S. generally accepted accounting principles (GAAP). These accounting principals require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of our financial statements. We are also required to make certain judgments that affect the reported amounts of revenues and expenses during each reporting period. We periodically evaluate our estimates including those relating to revenue recognition, impairment of goodwill and intangible assets, the allowance for doubtful accounts, capitalized software, restructuring, income taxes, and contingencies and litigation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable based on specific circumstances. Our management has reviewed the development, selection, and disclosure of these estimates with the Audit Committee of our Board of Directors. These estimates and assumptions form the basis for our judgments about the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. See also “Future Operating Results — Financial Accounting Related Matters,” below.

We believe the following critical accounting policies impact the most significant judgments and estimates used in the preparation of our consolidated financial statements:

	•		Revenue Recognition
			Revenue recognition rules for software companies are very complex. We follow very specific and detailed guidance in measuring revenue. Certain judgments, however, affect the application of our revenue policy.
			We recognize revenue in accordance with Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, and in certain instances in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.”

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			We license software under non-cancelable license agreements. License fees revenues are recognized when a non-cancelable license agreement is in force, the product has been shipped, the license fee is fixed or determinable, and collection is reasonably assured. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer.
			Residual Method Accounting. In software arrangements that include multiple elements (such as license rights and technical support services), we allocate the total arrangement fee among each of the elements using the “residual” method of accounting. Under this method, revenue allocated to undelivered elements is based on vendor-specific objective evidence of fair value of such undelivered elements, and the residual revenue is allocated to the delivered elements.
			Percentage of Completion Accounting. Fees from licenses sold together with consulting services are generally recognized upon shipment, provided (i) the above criteria are met, (ii) payment of the license fees are not dependent upon the performance of the services, and (iii) the consulting services are not essential to the functionality of the licensed software. If the services are essential to the functionality of the software, or payment of license fees is dependent on performance of services, both the software license and consulting fees are recognized under the “percentage of completion” method of contract accounting. Under this method, management is required to estimate the number of total hours needed to complete a particular project, and revenues and profits are recognized based on the percentage of total contract hours completed. As a result, recognized revenues and profits are subject to revisions as the contract phases are actually completed.
			Sublicense Revenues. We recognize sublicense fees as reported to us by our licensees. License fees revenue for certain application development and data access tools are recognized upon direct shipment to the end user or direct shipment to the reseller for resale to the end user. If collection is not reasonably assured in advance, revenue is recognized only when the fee is actually collected.
			Technical Support Revenues. Technical support revenues are recognized ratably over the term of the related agreements, which in most cases is one year. Revenues from consulting services under time and materials contracts and for education are recognized as services are performed. Revenues from other contract services are generally recognized under the “percentage of completion” method of contract accounting described above.
	•		Impairment of Goodwill and Intangible Assets
			Goodwill and intangible assets have generally resulted from our business combinations accounted for as purchases. Prior to 2002, these assets were generally recorded at amortized cost. The carrying values of these intangible assets were reviewed on a periodic basis, under the accounting rules then in effect, and our testing indicated no impairment of the assets’ carrying value.
			Beginning in 2002, new accounting rules issued by the Financial Accounting Standards Board (FASB) provided that goodwill could no longer be amortized, and had to be tested for impairment at least annually. These rules further changed the method of evaluating goodwill from a recoverability test based upon undiscounted cash flows to a fair value approach. The application of these new rules resulted in a cumulative effect of an accounting change of $132.5 million in the first quarter of 2002 and a goodwill impairment of $12.3 million in the fourth quarter of 2002. See Note One to the Consolidated Financial Statements, “Goodwill and Other Purchased Intangibles,” Part II, Item 8, incorporated here by reference.
			As of December 31, 2002, we had recorded $136.8 million of goodwill. The review of goodwill for potential impairment is highly subjective and requires us to make numerous estimates to determine both the fair values and the carrying values of our reporting units to which goodwill is assigned. For these purposes, our reporting units equate to our reported segments (see Note

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			Ten to the Consolidated Financial Statements, Part II, Item 8, incorporated here by reference). If the estimated fair value of a reporting unit is determined to be less than its carrying value, we are required to perform an analysis similar to a purchase price allocation for an acquired business in order to determine the amount of goodwill impairment, if any. This analysis requires a valuation of certain other intangible assets including in-process research and development, and developed technology.
			Changes in our internal business structure, changes in our future revenue and expense forecasts, and certain other factors that directly impact the valuation of our reporting units could result in a future goodwill impairment.
			We continue to review our other intangible assets (purchased technology and customer lists) for indications of impairment whenever events or changes in circumstances indicate the carrying amount of such an asset may not be recoverable. For these purposes, recoverability of these assets is measured by comparing their carrying values to the future undiscounted cash flows that the assets are expected to generate. This methodology requires us to estimate future cash flows associated with certain assets or groups of assets. Changes in these estimates could result in impairment losses associated with other intangible assets.
	•		Allowance for Doubtful Accounts
			We maintain an allowance for doubtful accounts to reflect the expected non-collection of accounts receivable based on past collection history and specific risks identified in our portfolio of receivables. Additional allowances might be required if deteriorating economic conditions affect our customers’ ability to make timely payments.
	•		Capitalized Software
			We capitalize certain software development costs after a product becomes technologically feasible and before its general release to customers. Subjective judgment is required in determining when a product becomes technologically feasible. Capitalized development costs are then amortized over the product’s estimated life beginning upon the general release. Periodically, we compare a product’s unamortized capitalized cost to the product’s net realizable value. To the extent unamortized capitalized cost exceeds net realizable value based on the product’s estimated future gross revenues, (reduced by the estimated future costs of completing and disposing of the product), the excess is written off. This analysis requires us to estimate future gross revenues associated with certain products, and the future costs of completing and disposing of certain products. If these estimates change, write-offs of capitalized software costs could result.
	•		Restructuring
			During 2002 and 2001, we recorded significant accruals in connection with various restructuring activities. These accruals included estimated net costs to settle certain lease obligations, based on the analysis of independent real estate consultants. During 2002 we recorded an additional restructuring charge relating to these lease obligations of $5.4 million due to deteriorating market conditions associated with certain properties originally identified as part of our 2001 restructuring plan. See Note Thirteen to the Consolidated Financial Statements, Part II, Item 8, incorporated here by reference. While we do not anticipate significant changes to these estimates in the future, the actual costs may differ from the estimates. If we are unable to negotiate affordable termination fees or if rental rates continue to decrease in the markets where the properties are located, or it takes us longer then expected to find suitable sublease tenants, the actual costs could exceed our estimates.

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	•		Income Taxes
			We use the asset and liability approach to account for income taxes. This methodology recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. We then record a valuation allowance to reduce deferred tax assets to an amount that likely will be realized. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. At December 31, 2002, our net deferred tax asset was $66.4 million, which included a valuation allowance of $48.5 million. See Note Eight to the Consolidated Financial Statements, Part II, Item 8, incorporated here by reference. If we determine during any period that we could realize a larger net deferred tax asset than the recorded amount, we would adjust the deferred tax asset to increase income for the period. Conversely, if we determine that we would be unable to realize a portion of our recorded deferred tax asset, we would adjust the deferred tax asset to record a charge to income for the period. Subjective judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact our financial position or results of operations.
	•		Contingencies and Litigation
			We are involved from time to time in various proceedings, lawsuits and claims involving our customers, products, intellectual property, stockholders and employees, among other things. When we reasonably determine that a liability has been or will be incurred, and can reasonably estimate the range of potential losses in these matters, then we are required to adequately provide for these loss contingencies. Even if we are not able to estimate the amount of potential loss in these matters, in the case of a potential material matter we are required to disclose the fact that there is a reasonable possibility that a loss has been incurred. Our financial position or results of operation could be adversely affected if we have grossly underestimated the scope of potential liability and/or the range of a potential loss in any matter.

Results of Operations

Revenues
(Dollars in millions)

Total revenues for 2002 decreased 11 percent from total revenues in 2001 (which had decreased 4 percent from 2000). The decrease in 2002 is primarily due to a 16 percent decline in license fees revenues as a result of a generally weak global economy, and a tenuous IT market in which customers continued to delay infrastructure investments requiring significant dollars and resources. The decrease in total revenues was also due to a 31 percent decline in our professional services revenues and education revenues. The declines in these areas were partially attributable to the economic factors discussed above, and partially due to our restructuring activities in 2002 and 2001 that significantly reduced our professional services headcount. We reduced our professional services headcount in order to de-emphasize building future capacity, and to focus instead on current profitable engagements. These decreases were offset somewhat by a 7% increase in technical support revenues resulting from an overall increase in our installed base. Our installed based increased, in part, when we acquired NEN and its customer base in 2001.

License fees revenues in 2002 decreased 16 percent from 2001 license fees revenues (which had decreased 17 percent from 2000). The decrease in 2002 was primarily due to a decline in license revenues from enterprise database and mobile database products. Demand for these products continued

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to be affected by sluggish economic growth and a significant decrease in overall IT spending, especially for larger enterprise systems. We also experienced significantly less demand from the expansion of our existing customers’ internally deployed applications. This decrease was partially offset by an increase in license fees revenues of certain enterprise application products. From a segment standpoint, enterprise database revenues were primarily reflected as part of ESD revenues, mobile databases revenues were primarily reflected as part of iAS revenues, and enterprise application revenues were primarily reflected as part of eBD revenues.

The decrease in 2001 was largely due to decreased sales of our enterprise database and enterprise application products. This resulted from a significant slowdown in IT spending, primarily triggered by the weakened economy.

Services revenues (derived from technical support, education and professional services) declined 6 percent in 2002 from 2001 (which had increased 9 percent from 2000). The decrease in 2002 was due to a 31 percent decrease in education and professional services revenues as a result of the economic factors discussed above. The decrease was partially offset by a 7 percent increase in technical support revenues. The 2001 increase was primarily due to a 19 percent increase in technical support revenues resulting largely from our acquisition of NEN and its customer base. Partially offsetting this increase was a 5 percent decrease in education and professional services revenues for 2001 compared to 2000.

For further discussion of our services, see “Business – Worldwide Services,” Part I, Item 1, incorporated here by reference. As a percentage of total revenues, our services revenues increased to 61 percent in 2002 from 58 percent in 2001 and 51 percent in 2000.

Geographical Revenues
(Dollars in millions)

North America revenues (United States, Canada and Mexico) decreased 8 percent in 2002 from 2001 (which had decreased 9 percent from 2000), due to a 13 percent decline in license fees revenues and a 25 percent decline in education and professional services revenues, that were partially offset by a 4 percent increase in technical support revenues. The decrease in North America revenues in 2001 was due to a 26 percent decline in license fees revenues and a 13 percent decline in education and professional services revenue, partially offset by a 21 percent increase in technical support revenues. The decrease in both 2002 and 2001 North America license revenues was attributable to a decrease in enterprise database and mobile database products revenues, as discussed under “Revenues,” above. Total international revenues decreased 14 percent in 2002 from 2001 (which had increased 4 percent from 2000), primarily due to a 20 percent decrease in license fees revenues, and a 39 percent decrease in education and professional services revenues. These declines were partially offset by a 14 percent increase in technical support revenues. The decrease in license fees revenues were largely attributable to decreases in enterprise database product revenues.

European revenues declined 15 percent in 2002 (which had increased 2 percent in 2001) primarily due to a 22 percent decrease in license fees revenues and a 38 percent decrease in education and professional services revenues, partially offset by a 16 percent increase in technical support revenues. The decrease in

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European license fees revenues primarily resulted from lower enterprise database product revenue, and was largely attributable to the economic factors discussed under “Revenues,” above.

Intercontinental revenues (principally Asia Pacific and South America) decreased 12 percent in 2002 due to a 17 percent decrease in license fees revenues primarily relating to our enterprise database products and a 43 percent decrease in education and services revenues. These reductions were partially offset by an 11 percent increase in technical support revenues. The decrease in Intercontinental revenues was largely the result of the economic factors discussed under “Revenues,” above. In 2001, Intercontinental revenues increased 9 percent due to a 6 percent increase in license fees revenues, primarily associated with our enterprise application and mobile database products, and a combined increase of 13 percent in services revenues.

In Europe and the Intercontinental region, most revenues and expenses are denominated in local currencies. The effect of foreign currency exchange rate changes on revenues and expenses was not material in 2002, 2001, or 2000.

Although we take into account changes in exchange rates over time in our pricing strategy, our business and results of operations could be materially and adversely affected by fluctuations in foreign currency exchange rates. Changes in foreign currency exchange rates, the strength of local economies, and the general volatility of software markets may result in a higher or lower proportion of international revenues as a percentage of total revenues in the future. For additional risks associated with currency fluctuation, see “Financial Risk Management – Foreign Exchange Risk” and “Future Operating Results – Euro Currency,” below.

Cost and Expenses
(Dollars in millions)

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Cost of license fees

Cost of license fees consists primarily of product costs (media and documentation), amortization of capitalized software development costs and purchased technology, and third party royalty costs. The cost of license fees expense increased 12 percent in 2002 over 2001. In 2001, these costs increased 1 percent from 2000. The 2002 increase was primarily due to an increase in amortization of capitalized software development costs and the amortization of purchased technology acquired in the NEN transaction, partially offset by a decrease in third party royalties. The 2001 increase was primarily due to the amortization of purchased technology acquired in the NEN transaction, partially offset by decreases in amortization of capitalized software costs and third party royalties. Cost of license fees was 16 percent of license fees revenues in 2002, 12 percent in 2001, and 10 percent in 2000.

Amortization of capitalized software costs was $24.0 million in 2002, $17.8 million in 2001, and $22.4 million in 2000. In 2002, the increase in amortization of capitalized software costs was primarily due to certain eBD and ESD products that began amortization in 2002. In 2001, the decrease in amortization of capitalized software costs was primarily due to certain eBD and ESD products that became fully amortized at the end of 2000. Amortization of purchased technology acquired was $14.9 million in 2002, $12.1 million in 2001 and $4.4 million in 2000.

Cost of services

Cost of services consists primarily of the cost to provide technical support, consulting and education services and, to a lesser degree, services-related product costs (media and documentation). These costs decreased 21 percent in 2002 compared to 2001, and decreased 3 percent in 2001 compared to 2000. These costs decreased as a percentage of services revenues to 38 percent in 2002, compared to 45 percent in 2001, and were 50 percent of services revenues in 2000. The decrease in cost of services in absolute dollars in 2002 over 2001 was primarily due to a reduction in consulting personnel as a result our restructuring activities , and a decrease in costs associated with third party consultants. The decrease in cost of services as a percentage of services revenues in 2002 over 2001 primarily results from a larger percentage of service revenues being comprised of technical support revenues compared to revenues from consulting and education services. Our operating margin on technical support revenue is generally much higher than our operating margin on consulting and education revenue.

The decrease, in absolute dollars and as a percentage of services revenues in 2001 over 2000, was primarily due to a reduction in consulting personnel resulting from our 2001 restructuring activities. This decrease was partially offset by an increase in the costs associated with third party consultants, and consultants acquired in the NEN transaction.

Sales and marketing

Sales and marketing expense decreased 18 percent during 2002 compared to 2001 (which had decreased 4 percent from 2000). Sales and marketing expenses were 33 percent of total revenues in 2002 and remained consistent at 36 percent of total revenues in 2001 and 2000. The decrease in sales and marketing expenses in absolute dollars and as a percentage of total revenues in 2002 compared to 2001 was primarily due to a reduction in sales commissions (principally due to lower license fees revenues), a reduction in discretionary spending on marketing programs and a decrease in sales and marketing personnel as a result of our 2002 and 2001 restructuring activities. This decrease was partially offset by an increase in certain allocated common costs. The decrease in absolute dollars from 2000 to 2001 was primarily due to a decrease in sales commissions (principally due to lower license fees revenues) and a decrease in certain allocated common costs. Partially offsetting these decreases were sales and marketing expenses associated with NEN. We allocate various common costs, primarily certain telecommunications and facilities related expenses, to sales and marketing, product development and engineering, and general and administrative expenses.

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Product development and engineering

Product development and engineering expenses (net of capitalized software development costs) decreased 6 percent in 2002 from 2001 (which had decreased 1 percent from 2000). These expenses remained consistent at 14 percent of total revenues in 2002 and 2001, and were 13 percent of total revenues in 2000. The decrease in absolute dollars in 2002 over 2001 was primarily due to a reduction in product development and engineering personnel through the further integration of NEN and in connection with our 2002 and 2001 restructuring actions. This decrease was partially offset by an increase in allocated common costs. The decrease in absolute dollars in 2001 as compared to 2000 was primarily due to an increase in capitalized software development costs, a decrease in certain research and development (R&D) expenses due to a greater percentage of R&D personnel employed in lower cost facilities, and a decrease in allocated common costs, partially offset by costs attributable to NEN’s product development and engineering efforts.

We capitalize product development and engineering costs during the period between achievement of technological feasibility and general availability of a product. Capitalized amounts totaled approximately $32.7 million in 2002, $35.8 million in 2001, and $20.2 million in 2000. The significant increase in amounts capitalized in 2001 compared to 2000 was primarily attributable to capitalized costs associated with the development of products acquired in the NEN transaction, and other products captured within eBD.

In 2002, capitalized software costs included costs incurred for the development of the Adaptive Server® Enterprise 15.0, Business Process Integrator 3.9, Connectivity 15.0, CeBS 1.0 and 1.5, Enterprise Application Server 4.1, PowerBuilder® 9.0, and PowerDesigner® 9.5. In 2001, capitalized software costs included costs incurred for the development of the Enterprise Portal 3.0, Adaptive Server Enterprise 12.5 and 14.0, Adaptive Server IQ 12.4.3, PowerBuilder 8.0, DirectConnect™ 12.5 and 14.0, MainframeConnect™ 12.5 and 14.0, Replication Server® 12.5, certain NEN adapters, and SQL Anywhere® 8.0. In 2000, capitalized software costs included costs incurred for the development of the Sybase Enterprise Portal 1.0, Sybase Enterprise Portal 2.0, Adaptive Server Enterprise 12.5, Adaptive Server IQ 12.4.2 and 12.5, DirectConnect 12.0 and 12.5, Enterprise Application Server, and MainframeConnect 12.0 and 12.5.

We believe that product development and engineering expenditures are essential to technology and product leadership and expect product development and engineering expenditures to continue to be significant, both in absolute dollars and as a percentage of total revenues.

General and administrative

General and administrative expenses increased 10 percent in 2002 compared to 2001 (which increased 14 percent from 2000). General and administrative expenses represented 10 percent of total revenues in 2002 compared to 8 percent 2001, and 7 percent in 2000. The increase in absolute dollars and as a percentage of total revenues in 2002 compared to 2001 was primarily due to the increase in finance personnel resulting from the establishment of various regional shared services centers that centralized finance functions within specific geographic regions, an increase in executive personnel, and an increase in allocated common costs associated, in part, with our move to new corporate headquarters facilities in early 2002. The increase in absolute dollars and as a percentage of total revenues in 2001 compared to 2000 was primarily due to the added costs associated with the acquisition of NEN.

Amortization of goodwill

We adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, (SFAS 142) effective January 1, 2002. Under SFAS 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests. With the adoption of SFAS 142, we ceased amortization of goodwill as of January 1, 2002. See “New Accounting Pronouncements”, below, incorporated here by reference. Amortization of goodwill increased 79 percent during 2001 compared to 2000. These costs were 6 percent of total revenues in 2001 compared to 3

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percent in 2000. The increase in absolute dollars and as a percentage of total revenues in 2001 compared to 2000 was primarily due to the amortization of goodwill arising from the NEN acquisition.

Amortization of other purchased intangibles

In 2002 and 2001, amortization of other purchased intangibles primarily reflects the amortization of the established customer list associated with the acquisition in 2000 of HFN (now FFI) . The amortization of purchased technology associated with the HFN and NEN acquisitions is contained in cost of license fees. In 2000, amortization of other purchased intangibles consists of the amortization of customer lists associated with the HFN acquisition and the amortization of certain covenants not to compete.

Goodwill impairment

After the adoption of SFAS 142 in the first quarter of 2002, we are required to test goodwill annually or earlier if certain events or circumstances were present. Prior to the fourth quarter of 2002, there were no indications of impairment for our reporting units with goodwill, as they substantially achieved their targeted results and there were no other prescribed events or circumstances indicating an impairment. We conducted our annual impairment testing required by SFAS 142 as of December 31, 2002 using an independent third party appraiser to determine the fair value of our various reporting units. The first step of this analysis required us to compare the fair values of our various reporting units to their carrying values.

In order to determine the carrying values of our identified reporting units, we assigned our assets and liabilities, including existing goodwill and other intangible assets, between the various reporting units. The fair values of our reporting units were determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, tax deductions, and proceeds from disposition. Value indications are developed by discounting expected future cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the particular investment. Based on this analysis we determined that there was a potential impairment of the goodwill associated with the FFI reporting unit.

In the second step of this analysis, we allocated FFI’s fair value to its various assets and then compared the implied fair value of its goodwill to the goodwill’s carrying value. Based on this comparison, we determined that the carrying value of FFI’s goodwill exceeded its implied value by $12.3 million. This impairment loss was recognized during the quarter ended December 31, 2002.

The fair value of the FFI reporting unit as of December 31, 2002, was lower than the fair value we had determined for this reporting unit in the first quarter of 2002 (for purposes of the implementation of SFAS 142) primarily due to a reduction in our estimated compound growth rates for FFI’s future revenues and expenses. Based on our analysis of market conditions and our expectations for long term growth within the FFI reporting unit as of December 31, 2002, we reduced the compound annual growth rates in revenues and expenses.

In-process research and development

NEN

In connection with our acquisition of NEN in the quarter ended June 30, 2001, we allocated $18.5 million of the $339.3 million purchase price to in-process research and development. These amounts were written off during the quarter ended June 30, 2001. In analyzing this acquisition, the decision was made to acquire technology, including in-process technology, rather than to develop it internally. This decision was based on factors such as the amount of internal expertise, time and cost it would take to bring the technology to market.

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NEN technologies enable e-Business and operational applications to share critical information. NEN’s software solutions support integration of Internet and core business packaged applications, application server platforms, industry standard protocols, and proprietary systems. As of February 20, 2001 (the acquisition date) NEN was undergoing development efforts to release the next version of e-Biz Integrator™, Process Server, adapters, and emerging products (such as Open Business Interchange(SM)). These development efforts were all proprietary, internal projects. At the acquisition date, the in-process research and development projects had not yet reached technological feasibility, and had no alternative future uses.

In assessing the qualification of NEN’s various ongoing research and development projects, each project was examined to determine whether technological feasibility had been established as of the acquisition date. Our assessment was based on extensive interviews and a detailed analysis of research and development plans. If a project required additional planning, designing, coding or testing activities to determine whether the associated product could be produced to meet its design specifications, we determined that technological feasibility had not been achieved.

Due to the complexity and specialized features of the acquired research and development, the technologies under development could only be used for specific and intended purposes in the e-Business integration industry and no alternative value could be realized if these projects failed in that context. Accordingly, the value allocated to projects that had not achieved technological feasibility as of the acquisition date was immediately expensed.

We estimated the fair value of in-process research and development using an income approach. This involved estimating the fair value of the in-process research and development using risk-adjusted discount rates. The selection of the discount rate was based on a weighted average cost of capital, adjusted to reflect risks associated with the useful life of each technology, profitability levels of each technology, the uncertainty of technology advances known at the time, and each technologies’ degree of completion. Projected future net cash flow attributable to NEN’s in-process research and development, assuming successful development, were discounted to net present value using a discount rate of 25 percent. We believe our estimated in-process research and development amount represented fair value and does not exceed the amount another third party would pay for the projects.

Revenue estimates in this context were based on relevant market size and growth factors, expected industry trends, individual product sales cycles and the estimated life of each product’s underlying technology. This analysis included the revenues projected to result from the expected evolution of the technology over time.

Operating expenses used in our analysis included selling, general and administrative and research and development. These expenses were based on an overall analysis of the business enterprise. Total research and development was divided into the costs to complete the in-process research and development projects and costs for developed products that had already been introduced to the market. The allocation was based on an analysis of resources relating to the development of research and development.

Costs to complete in-process projects were estimated by management, and allocated based on anticipated completion efforts and expected completion dates. Costs to complete were further allocated between in-process and future revenues based on an analysis of how the technologies would evolve.

NEN expected to achieve a target margin of approximately 37 percent from its in-process products. Profitability was expected to be significantly lower in the first years of the products’ lifecycle due to anticipated higher levels of sales and marketing expense in the earlier years as a percentage of revenue. The financial forecasts included only results that were expected to be generated by NEN on a standalone basis, and did not take into consideration synergies resulting from our acquisition.

To properly analyze the research and development efforts that had been accomplished as of the acquisition date, and to exclude the completion of development efforts underway, it was necessary to

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adjust the overall forecasts associated with the research and development projects to reflect only those accomplishments completed as of the acquisition date. The relative contribution made by the completed research and development efforts was assessed based on a variety of factors including absolute development time, costs incurred to date, management estimates, a detailed analysis of each of the primary tasks completed compared to the tasks required to complete the efforts, and the associated risks. NEN’s in-process research and development projects were estimated to be between 30 percent and 55 percent complete as of the acquisition date depending on the project.

Development of the majority of the in-process technologies began in early 2000 and was substantially completed in the fall of 2001. At the acquisition date, approximately 278 engineers were engaged in the development of NEN’s in-process technologies. Completion of these projects was expected to require significant efforts involving continued software development, as well as the testing and re-qualification efforts required to turn the technologies into a set of bug-free, commercial-ready products. These remaining tasks involved substantial risk due to the complex nature of the activities involved.

HFN

In connection with the acquisition of HFN (now FFI) in 2000, we allocated $8.0 million of the $167.6 million purchase price to in-process research and development. As part of the process of analyzing this acquisition, the decision was made to buy technology that had not yet been commercialized rather than to develop the technology internally. This decision was based on factors such as the amount of time and costs it would take to bring the technology to market.

HFN had been involved in the development of technologies that enable financial institutions to deliver their services to customers via the Internet. On the date we acquired HFN (January 20, 2000), HFN was conducting development and qualification activities related to a suite of products encompassing bill presentment, small business functions, alternate service delivery methods and related underlying software technology. At that time, the in-process research and development projects had not yet reached technological feasibility and had no alternative future uses. Accordingly, the value allocated to these projects was immediately expensed at the date of acquisition.

We estimated the fair value of in-process research and development using an income approach. This involved estimating the fair value of the in-process research and development by determining the present value of the estimated after-tax cash flows expected to be generated by the purchased in-process research and development, using risk adjusted discount rates. The selection of the discount rate was based on a weighted average cost of capital, adjusted to reflect risks associated with the useful life of each technology, profitability levels of each technology, the uncertainty of technology advances known at the time, and each technologies’ degree of completion. Projected future net cash flows attributable to HFN’s in-process research and development, assuming successful development, were discounted to net present value using a discount rate of 20 percent. We believe that the estimated in-process research and development amount so determined represents fair value and does not exceed the amount another third party would pay for the projects.

Revenue estimates were based on relevant market size and growth factors, expected industry trends, individual product sales cycles and the estimated life of each product’s underlying technology. The analysis of the in-process technology was determined by incorporating the revenue related to the expected evolution of the technology over time. Once developed, the estimated lifecycle of the product suite was estimated to be approximately 5 to 7 years. As a whole, HFN was expected to exhibit compound annual growth of approximately 38 percent in the period from 2000 through 2007.

It was projected that the suite of products resulting from the in-process research and development efforts would begin generating revenue in 2000 and positive cash flow in 2001. Operating expenses included selling, general and administrative expenses, and research and development expenses. Total research and development was divided into: (i) the costs to complete the in-process research and development

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projects and (ii) costs for developed products that had already been introduced to the market, including product technical support. Costs to complete in-process projects were estimated by management. These costs were allocated based on an analysis of expected project completion dates.

The resultant target margin that HFN expected to achieve from the in-process products was approximately 37 percent. Profitability was expected to be significantly lower in the first several years of the product suite’s lifecycle compared to the latter years due to a higher level of sales and marketing expenses as a percentage of revenue in the earlier years. The financial forecasts only included results we expected HFN to generate on a standalone basis, and did not take into consideration synergies resulting from our acquisition.

To properly analyze the research and development efforts that had been accomplished to date and exclude the effort to be completed on the development efforts underway, it was necessary to adjust the overall forecasts associated with the research and development projects to reflect only the accomplishments made as of the date of the acquisition towards the ultimate completion of the in-process R&D projects. The relative contribution made on the research and development efforts was assessed based on a variety of factors including absolute development time (costs) incurred to date, management estimates, and a detailed analysis of each of the primary tasks completed compared to the tasks required to complete the efforts and the associated risks. Overall, HFN’s in-process research and development projects were estimated to be approximately 75 percent complete. HFN estimated that the projects would be completed in March 2000, after which time it expected to begin generating economic benefits from the completed projects. As of the valuation date, approximately 86 man months totaling $650,000 had been expended on the in-process research and development projects. In total, costs to complete HFN’s in-process research and development were expected to be approximately $150,000 and require 23 man months of work. Completion of these projects was expected to require significant efforts involving continued software development as well as the testing and re-qualification efforts required to turn a “new-to-the-world” software suite into a set of bug-free, commercial-ready products. These remaining tasks involved substantial risk due to the complex nature of the activities involved. Historically, many of HFN’s in-process research and development projects have required rework and additional expenditures in comparable stages of development.

Stock compensation expense

Stock compensation expense reflects non-cash compensation expense associated with restricted stock granted to certain individuals in the second quarter of 2001, and the amortization of the value assigned to certain unvested stock options assumed in the acquisition of NEN.

Cost (reversal) of restructuring

2002 Restructuring Activities

Entering 2002, we expected our revenues to increase during the second half of the year as the U.S. economy shook off recessionary conditions and customers resumed their investment in enterprise software projects. As we completed our second quarter, however, it became apparent that general economic conditions were not improving as anticipated, and that our revenues therefore were likely to lag below expectations. Faced with this realization, we embarked on certain restructuring activities during the third and fourth quarters (the 2002 Plan) aimed at reducing our annual payroll and facilities-related expenses by approximately $24 million. These activities included the termination of approximately 400 employees worldwide, the closure or consolidation of approximately 18 facilities worldwide, and the planned liquidation of approximately 9 foreign subsidiaries.

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The amounts included in the 2002 Plan were as follows:

As of December 31, 2002, all affected employees had been notified of their termination benefits and severance compensation of $7.5 million had been paid to approximately 355 of these employees. Substantially all remaining severance payments are expected to be made by the second quarter of 2003.

During the year ended December 31, 2002, a total of $1.8 million in lease cancellations and other related expenses was paid in connection with facilities identified for consolidation or closure as part of the 2002 Plan. Our payments toward the accruals relating to lease cancellations and commitments are dependent upon market conditions and our ability to negotiate acceptable lease buy-outs or locate suitable subtenants. These payments will be made over a period not to exceed 7.5 years.

2001 Restructuring Activities

In connection with our acquisition of NEN and after announcement that first quarter and 2001 revenues would be below expectations, we began to implement a restructuring plan designed to eliminate certain personnel, assets and facilities, and align our cost structure with anticipated revenues (2001 Plan). We recorded a restructuring charge of $48.8 million during 2001 to reflect these activities. The 2001 Plan called for the termination of approximately 880 employees worldwide, as well as the consolidation or closure of approximately 30 facilities worldwide and the write-off of certain assets abandoned as a result of the office closures. Additionally, based on deterioration of real estate market conditions, our inability to sublease certain properties previously included in the 2001 Plan resulted in additional restructuring accruals of $5.4 million in the fourth quarter of 2002 that were established for properties located in Colorado, Michigan and the United Kingdom.

The amounts included in the 2001 Plan were as follows:

As of December 31, 2002, all employees affected by the 2001 Plan had been terminated and $17.7 million in related severance payments and costs had been paid as of that date. During 2002, we reversed $0.7 million of the termination payment accrual (and made a corresponding credit to restructuring

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expense) primarily due to a labor tribunal ruling that we were required to pay less in severance benefits that originally anticipated to certain non-US employees.

As of December 31, 2002, we had paid a total of $11.1 million relating to properties identified as part of the 2001 Plan. During 2002, we reversed $0.6 million of the restructuring accrual relating to lease cancellations (and made a corresponding credit to restructuring expense) primarily because we were required to pay less than expected to terminate our lease obligations on facilities in Switzerland The remaining payments relating to lease cancellations and commitments, which will be made over a period not to exceed 8 years, are dependent upon market conditions and our ability to negotiate acceptable lease buy-outs or locate suitable sublease tenants.

Operating income/(loss)
(Dollars in millions)

Operating income in 2002 was $57.2 million compared to an operating loss of $16.5 million in 2001 and operating income of $90.5 million in 2000. Operating income in 2002 includes $40.4 million in restructuring charges, while operating loss in 2001includes $48.8 million in restructuring charges. In 2000, operating income included a reversal to restructuring charges of $0.8 million.

In 2002, the increase in operating income was primarily due to a $171.8 million decrease in operating expenses resulting principally from the effects of our restructuring activities in 2002 and 2001, and the elimination of goodwill amortization upon the adoption of SFAS 142. This increase was partially offset by a decline in total revenues of $98.1 million in 2002 from 2001. In 2001, the decrease in operating income was primarily due to decreased license fees revenues an the increase in certain operating expenses. These included expenses associated with the amortization of goodwill and other purchased intangibles, the $18.5 million write-off of in-process research and development relating to the acquisition of NEN and our 2001 restructuring charges. These decreases were partially offset by an increase in services revenues.

Other income (expense), net
(Dollars in millions)

In 2002, interest income decreased 31 percent from 2001 (which had decreased 5 percent from 2000). Interest income consists primarily of interest earned on our investments. The decrease in interest income from 2000 to 2001, and from 2001 to 2002 is largely due to the decline in interest rate yields on the cash balances invested.

Interest expense and other, net was $2.4 million in 2002, $0.6 million in 2001, and $(0.8) million in 2000. Interest expense and other, net, includes gains from the disposition of certain real estate and investments; net gains and losses resulting from foreign currency transactions and the related hedging activities; the

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cost of hedging foreign currency exposures; interest expense from capital lease obligations incurred in prior years; and bank fees. In 2002, the increase in interest expense and other, net as compared to 2001 was primarily due to a gain of approximately $2.5 million that we realized on the sale of certain NEN Swiss subsidiaries that were primarily engaged in providing SAP consulting services. The increase in interest expense and other, net during 2001 compared to 2000 was primarily realized from gains on hedging activities that mitigated the losses resulting from certain foreign currency transactions.

Provision for income taxes
(Dollars in millions)

In 2002, we recorded a provision for taxes equal to approximately 47 percent on pre-tax income before the cumulative effect of an accounting change. Our 2002 effective tax rate differs from the statutory federal rate of 35 percent primarily due to non-deductible charges associated with the impairment loss on certain goodwill and the impact of state taxes.

In 2001, we recorded a $26.5 million provision for taxes on pre-tax income of $1.0 million resulting largely from taxes on earnings generated in certain international jurisdictions. In 2001, we had significant pre-tax earnings in foreign jurisdictions and a significant pre-tax loss in the U.S. The 2001 U.S. pre-tax book loss primarily resulted from the non-deductible amortization or write-off of intangibles acquired in various acquisitions and our 2001 restructuring activities. The significant amount of the expenses not deductible for tax purposes, primarily the amortization or write off of intangibles acquired in the NEN acquisition, made our effective tax rate meaningless in 2001.

In 2000, taxes were recorded at a rate of 33 percent on pre-tax income. The effective rate was below the statutory rate primarily due to a reversal of valuation allowances, and the benefit of certain earnings from operations in lower-tax jurisdictions throughout the world for which no U.S. taxes were provided because such earnings were to be reinvested indefinitely outside the U.S. These benefits were partially offset by non-deductible charges for the amortization of goodwill and in-process research and development primarily associated with our acquisition of HFN.

The 2000 reversal of $9.7 million in a previously recorded valuation allowance was related to the deferred tax asset associated with certain research and development tax credits that we believe will generate a tax benefit in future periods given their carryforward periods. The reversal of the valuation allowance was a non-recurring benefit, and will not impact our provision for income taxes in future years.

We had a net deferred tax asset of $66.4 million at December 31, 2002, which included a valuation allowance of $48.5 million. As of December 31, 2002, the gross deferred tax asset included research and development tax credits of $15.0 million, foreign tax credits of $8.5 million and an asset for certain net operating losses of $39.9 million. The research and development tax credits expire in years from 2005 through 2022, the foreign tax credits expire in years from 2003 through 2005 and the net operating losses expire in years from 2006 and 2021. In order to realize our net deferred tax assets, we must generate sufficient taxable income in future years in appropriate tax jurisdictions to obtain a benefit from the reversal of temporary differences (i.e., between book basis and tax basis), and from tax credit carryforwards. Specifically, realization of these assets is dependent on our ability to generate approximately $164.0 million of future taxable income largely in the U.S. We believe that sufficient income will be earned in the future to realize these assets. The amount of the deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are reduced. Any such adjustments to the deferred tax assets would be charged to income in the period such adjustment is made.

The valuation allowance primarily relates to the deferred tax assets associated with net operating losses and foreign tax credits. Approximately $38.5 million of the valuation allowance relates to deferred tax assets associated with net operating losses acquired in the NEN acquisition. If the associated deferred tax assets are realized, the associated benefit will reduce goodwill arising from the NEN acquisition, rather than future income tax expense.

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Our overall valuation allowance decreased by $5.9 million in 2002 primarily due to our utilization of certain net operating losses acquired in the acquisition of NEN and HFN, and the utilization of certain foreign tax credits.

Cumulative effect of an accounting change to adopt SFAS 142
(Dollars in millions)

In accordance with SFAS 142, we performed the required two-step impairment tests of goodwill and indefinite-lived intangible assets as of January 1, 2002 using an independent third party appraiser. In performing the first step of the analysis, we first assigned our assets and liabilities, including existing goodwill and other intangible assets, to our identified reporting units to determine their carrying value. For this purpose, the reporting units were determined to be our five business segments described in Note Ten to the Consolidated Financial Statements, Part II, Item 8. The estimated fair value of each reporting unit was then determined utilizing the income approach. Upon comparing the carrying value of each reporting unit to its fair value, we determined that goodwill attributable to the FFI and eBD reporting units was impaired. The second step of comparing the implied fair values of the reporting units’ goodwill to their respective carrying values, we recognized an impairment loss of $132.5 million in the first quarter of 2002. Of this impairment loss, $39.0 million related to FFI and $93.5 million related to eBD. These losses were recognized as a cumulative effect of an accounting change. The impairment loss had no income tax effect.

Our calculation of the fair value of eBD assumed compound annual growth rates in revenues and expenses of approximately 21 percent and 17 percent, respectively, as determined by management and an analysis of our industry’s long-term growth expectations. Our calculation of the fair value of FFI assumed compound annual growth rates in revenues and expenses of approximately 24 percent and 19 percent, respectively. For both calculations, a discount rate of 21 percent was utilized.

In future periods, a reduction of our estimated fair values associated with certain reporting units could result in a further impairment loss associated with various intangible assets.

As required by SFAS 142, intangible assets that did not meet the criteria for recognition apart from goodwill were reclassified. We transferred $7.9 million of net assembled workforce to goodwill as of January 1, 2002. This amount was partially offset by the reclassification of $3.2 million for an associated deferred tax liability.

Net income (loss) per share
(Dollars and shares in millions)

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Our net loss in 2002 increased by 271 percent over 2001. This increase was primarily related to the $132.5 million goodwill impairment recognized as a cumulative effect of an accounting change in the first quarter of 2002, as well as the factors discussed above. The basic and diluted net loss per share was $0.98 and $0.95 per share, respectively in 2002. The basic and diluted net loss per share was $0.27 in 2001. The basic and diluted net income per share in 2000 was $0.82 and $0.78 per share, respectively. Shares used in computing basic net income (loss) per share increased 2 percent in 2002 from 2001, and increased 8 percent in 2001 from 2000. Shares used in computing diluted net income (loss) per share increased 5 percent in 2002 from 2001, and increased 3 percent in 2001 from 2000. The share increases in all cases was attributable to the ongoing exercise of employee stock options, as partially offset by share repurchases under our Stock Repurchase Program (see discussion under “Liquidity and Capital Resources,” below), and to the effect of our shares issued in 2001 in connection with our acquisition of NEN.

Liquidity and capital resources
(Dollars in millions)

Net cash provided by operating activities increased 76 percent between 2001 and 2002, and was used primarily to fund our Stock Repurchase Program (see discussion below), and to make additional long-term cash investments. Net cash provided by operating activities primarily resulted from lower operating expenses incurred in 2002 due to the effects of the 2002 and 2001 restructuring activities; the timing of payments made against other accrued liabilities largely attributable to restructuring charges; and, an increase in deferred revenue.

The decrease in net cash provided by operating activities between 2001 and 2000 is primarily due to a decrease in net income, deferred revenue and accrued liabilities partially offset a reduction in accounts receivable and an increase in non-cash expenses relating to amortization, depreciation and the write-off of in-process research and development.

Net cash used for investing activities increased 381 percent between 2001 and 2002. The increase in net cash used for investing activities was primarily due to $34.0 million of cash investment net purchases during 2002 compared to net dispositions of cash investments of $29.5 million in 2001. In addition, there was net cash gained from business combinations, primarily from the NEN acquisition, of approximately $27.2 million during 2001, compared to $2.0 million net cash used for acquisitions during 2002. Net cash used for investing activities decreased 81 percent between 2000 and 2001. The decrease in cash used by investing activities was primarily due to net cash gained from the NEN acquisition, compared to net cash used in business combinations, primarily in connection with the HFN acquisition, for the same period in 2000.

Beginning in 1998, the Board of Directors authorized Sybase to repurchase its outstanding Common Stock in open market and other transactions from time to time, subject to price and other conditions (Stock Repurchase Program). Through December 31 2002, aggregate amounts authorized under the Stock Repurchase Program totaled $400.0 million. Under this program, we repurchased 6.7 million of our shares in 2002 at a cost if $89.8 million, 6.4 million shares in 2001 at a cost of $106.9 million, and 3.9 million shares in 2000 at a cost of $89.1 million.

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Net cash used for financing activities decreased 12 percent between 2001 and 2002. The decrease in cash used for financing activities was primarily the result of a decrease in the cash used to repurchase stock under our Stock Repurchase Program during 2002, compared to the cash used for a similar purpose during 2001. Net cash used for financing activities increased 32 percent between 2000 and 2001. The increases in cash used for financing activities was primarily the result of an increase in the cash used to repurchase our Common Stock during 2001, compared to the cash used for a similar purpose during 2000.

We had no significant commitments for capital expenditures at December 31, 2002. We expect to fund expenditures for future capital requirements, liquidity and strategic operating programs from a combination of available cash balances and internally generated funds. We have no outside debt, and do not have any plans to enter into borrowing arrangements.