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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

(Mark One)

Commission file number: 0-19395

SYBASE, INC.
(Exact name of registrant as Specified in its Charter)

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. [X]

     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 $1.3 billion. As of March 1, 2004, the Registrant had 97,270,355 shares of Common Stock outstanding.

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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 a continued slow economic recovery in the U.S.; global political unrest including acts of terrorism and the continued hostilities in the Middle East; sales productivity; the continued possible disruptive effects of further organizational changes and changes in Company management; shifts in our business strategy, or market demand for our products and services; public perception of Sybase, our technology vision or future prospects; rapid technological changes; competitive factors; interoperability of our products with other software products, risks inherent in acquiring other companies, the ability to integrate acquired companies into our business and culture, and other risks detailed from time to time in our Securities and Exchange Commission filings, including those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) – Overview, and “MD&A – Future Operating Results,” Part II, Item 7 of this Annual Report on Form 10-K.

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 Sybase and our 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 enables the Unwired Enterprise through enterprise and mobile software solutions for information management, development and data integration in commerce, communications, finance, government and healthcare. Sybase solutions integrate platforms, databases, and applications, and extend those applications to mobile workers through mobile and Wi-Fi technologies. Sybase information management solutions are widely recognized for ultra-reliability, security and dedication to openness, allowing easy and effective development in heterogenous environments. Sybase was founded and incorporated in California on November 15, 1984, and was re-incorporated in Delaware on July 1, 1991.

During 2003, our business was organized into three principal operating divisions, two of which were conducted primarily through two majority owned subsidiaries. Below is a brief description of the business of each division:

     •     Infrastructure Platform Group (IPG) is focused principally on enterprise class database servers for mission-critical transactions, data warehousing and business analytics, complemented by high-availability replication, data movement, data integration, and development products. IPG products help enterprises improve response time, lower cost and reduce the complexity of managing their information environment. They also increase developer productivity by providing dramatically easier-to-use tools that cut time and project complexity while improving collaboration. Beginning in 2003, IPG combined under a single umbrella the businesses of three former divisions: Enterprise Solutions Division (ESD), Business Intelligence Division (BID), and e-Business Division (eBD). eBD focused primarily on certain products of New Era of Networks, Inc. (NEN), which we acquired in April 2001. During 2003, the principal products of IPG accounted for approximately 77 percent of our license revenue.

     •     iAnywhere Solutions, Inc. (iAS) provides software and services that enable the delivery of enterprise information anywhere, at anytime. More than 12,000 customers and 1,000 partners worldwide rely on our industry leading SQL Anywhere® database and mobile enterprise solutions. In addition, iAS’s AvantGo® mobile Internet service has more than ten million registered subscribers. We acquired AvantGo, Inc. in February 2003. The principal products of iAS accounted for approximately 21 percent of our license revenue in 2003.

     •     Financial Fusion, Inc. (FFI) provides banking, payment, and trade messaging solutions to more than 200 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 was created to extend the business of Home Financial Network, Inc. (HFN), which we acquired in January 2000, and to develop certain products formerly within NEN. The principal products of FFI accounted for approximately 2 percent of our license revenue in 2003.

A summary of financial results for these divisions 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 around the globe. Our primary markets include financial services, commerce, communications, healthcare, and government agencies. No single customer accounted for more than 10 percent of total revenues during 2003, 2002 or 2001. Our customers during 2003 included the following:

     •     A major content manager vendor that entered into an OEM relationship with IPG to embed in its application Sybase® Content Capture, a lightweight content integration engine, and Sybase Mach Desktop™, a lightweight user experience

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server, to give users personalized views of real-time information quickly and easily, and the ability to efficiently manage content integration.

     •     One of the world’s largest charter airlines leveraged SQL Anywhere® Studio, Manage Anywhere Studio™ and Pylon Anywhere™ technologies as a part of an innovative mobile employee information system providing more than 2,300 airline employees with access to crew rosters, passenger information, air traffic control notices, safety notices, updated destination details and duty free sales information using a Wi-Fi network in the airport crew rooms. As a result of this mobile deployment, the airline can save $700,000 per year by automating more than fifty paper-based workflow processes.

     •     One of the top 100 banks in the U.S. added Financial Fusion® Corporate Banking Solution to its existing suite of FFI solutions to create a single technology platform to serve all of its online banking customers. The bank previously implemented FFI’s Consumer Banking Solution and Small Business Banking Solution for other functions including bill payment and presentment, alerts, check imaging, and bill payment and transfer warehouse.

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:

Infrastructure Platform Group (IPG)

Enterprise Solutions Products

Sybase Adaptive Server® Enterprise (ASE) is a high-performance, self-managing, web services-enabled information management system designed to support the demanding requirements of businesses today at an efficient cost of ownership. 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 hardware and software platforms. Among its many enterprise-class features is advanced support for XML, highly available computing, extensive dynamic tuning, and advanced security systems such as row-based access control and SSL-based communications.

Replication Server® allows 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 and 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, and supplies a flexible approach to information delivery that can rapidly adapt to changing business needs.

Sybase PowerBuilder® is a 4GL rapid application development (RAD) tool that increases developer productivity through a tight integration of design, modeling, development and management. Developers can build rich-client applications for web-services, n-tier and client server and then quickly deploy their applications into heterogeneous environment such as Microsoft.Net and J2EE.

Sybase Pocket PowerBuilder™ is a highly productive 4GL integrated development environment (IDE) for mobile application development. This product is designed to simplify and accelerate the creation of mobile and wireless enterprise applications targeting Windows CE-based environments, so that mobile applications can be developed with almost codeless ease. Pocket PowerBuilder also simplifies the creation of database-powered applications through close integration with SQL Anywhere®, the leading mobile database from iAS.

Sybase RepConnect, Open Server™, Open Client™ and OpenSwitch are among our core data access and integration products. These products allow users to use a single language to access varied

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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.

e-Business Products

Sybase Enterprise Portal (EP) is an extensible portal environment capable of extending an enterprise to trading partners and expanding its reach to mobile workers. We also offer two embeddable portal technologies, Sybase Content Capture and Sybase Mach Desktop through our OEM channel.

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 websites.

Sybase Integration Orchestrator allows users to harness mission-critical data from multiple applications into flexible, automated, re-useable and easily configurable end-to-end processes.

Sybase PowerDesigner® an all-one collaborative modeling solution that enables business analysts, architects, developers and database administrators to collaboratively design and build applications without worrying about different skill sets, platforms or languages. PowerDesigner supports the latest editions of most leading application frameworks, including EAServer using J2EE and EJB, Apache Tomcat, BEA WebLogic, and IBM WebSphere.

Sybase HIPAA Accelerator, Sybase EDI Server and Sybase e-Biz Impact™ are integration products aimed at the healthcare industry. The HIPAA solution is a tool designed to help customers manage their compliance and reporting obligations under the Health Insurance Portability and Accountability Act of 1996. Sybase EDI Server is an integration product for organizations using electronic data interchange (EDI) to exchange business information with trading partners. Sybase e-Biz Impact is a proven integration solution for managing complex information routing, particularly in the healthcare industry.

Business Intelligence Products

Sybase Adaptive Server® IQ presents customers with a wide range 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.

Sybase Industry Warehouse Studios™ (IWS) are prepackaged solutions that can be customized for a variety of industries including 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.

iAnywhere Solutions (iAS)

SQL Anywhere® Studio is a market-leading data management and enterprise data synchronization solution that enables the rapid development and deployment of database-powered applications for mobile, remote and small to medium sized business environments.

m-Business Anywhere is a highly scalable platform for delivering web-based applications and content to mobile devices with no recoding required. It enables “always available” computing, providing both secure wireless and offline access to information, allowing users to access the information they need, when and where they need it.

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Manage Anywhere Studio™ is an all-in-one solution that provides central control of software distribution and updates, system configuration, and device inventory for desktops, laptops, servers and hand-held devices. It is designed to reduce costs of software distribution, help desk support, inventory maintenance and lost productivity.

Pylon™ is a set of flexible, feature-rich, secure solutions that can extend a company’s existing Lotus Notes and Microsoft Exchange infrastructure to hand-held devices. Pylon products enable organizations to mobilize corporate email, calendar, contacts, task lists, expenses and custom Notes applications, easily – with no programming required.

Mobile Sales is a customizable software package that helps organizations accelerate the adoption and return on investment of existing customer relationship management (CRM) solutions, by enabling sales professionals to access these systems from mobile devices, anywhere, at anytime. Mobile Sales offers adaptors for Siebel and salesforce.com applications, and Mobile Pharma addresses the mobile CRM needs of the pharmaceutical industry.

AvantGo® Mobile Internet Service is a free service that delivers rich, personalized mobile websites to PDAs and smartphones. Today, more than 2,500 major brands, including American Airlines, CNET, GM, Rolling Stone and The New York Times, leverage AvantGo to target more than ten million registered subscribers. AvantGo offers the convenience of anywhere, anytime access, seamlessly supporting both wireless and “sync and go” connectivity. To learn more about AvantGo visit www.avantgo.com.

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.

Financial Fusion® Financial Markets Solutions are designed to meet the straight-through processing connectivity and integration requirements of the trading industry. FFI solutions provide processing for transaction intensive trading organizations such as securities and investment firms, electronic communications networks and network providers. FFI solutions support a variety of electronic messaging protocols including FIX, FIXML, FpML, EMX, SWIFT, VMUs, and certain 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 in all time zones around the world. Our end users and partners have access to technical information sources and newsgroups on our support website, including a problem-solving library, a “solved cases” database, and 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 our enterprise database products such as ASE 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.

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In addition to the above support offerings, we also offer several support services 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 principal business divisions also offer a variety of support services to their partners and resellers.

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 training providers also provide education 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 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 licensed through our direct sales organization and our indirect sales channels. “Indirect sales channels” include value added resellers (VARs), systems integrators (SIs), original equipment manufacturers (OEMs) and international distributors and resellers.

International Business. In 2003, 41 percent of the Company’s total revenues were from operations outside North America, with operations in EMEA (Europe, Middle East and Africa) accounting for 27 percent, and operations in our Intercontinental region (Asia Pacific and Latin America) accounting for 14 percent. Most of our international sales are made by our foreign subsidiaries. However, certain sales are made in international markets from the United States. We also license our products through distributors and other resellers throughout the world. A summary of our geographical revenues is set forth in “MD&A — Geographical Revenues”, Part II, Item 7, and Note Ten to 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 1, 2004, we had 75 issued patents (73 U.S. and 2 non-U.S.) that expire in approximately 20 years from the date they are filed. 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 critical to Sybase as a whole. However, any of our proprietary rights could be challenged, invalidated or circumvented, or may not provide us with 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.

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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 2003, we invested $116.9 million, or 15 percent 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.

COMPETITION

The market for our products and services is extremely competitive due to various factors including a maturing enterprise infrastructure software market, changes in customer IT spending habits, and the trend toward consolidation of companies within the software industry. For a discussion of certain risks associated with competition, see “MD&A – Future Operating Results – Competition,” Part II, Item 7, incorporated here by reference.

EMPLOYEES

As of March 1, 2004, Sybase and its subsidiaries had approximately 3,660 regular employees. For information regarding our executive officers, see “Directors and Executive Officers of the Registrant,” Part III, Item 10 below, incorporated here by reference.

ITEM 2. PROPERTIES

As of December 31, 2003, our field operations, professional service organizations and subsidiaries occupied leased facilities in approximately 95 locations throughout North America, Latin America, Europe and the Asia Pacific region (including Australia and New Zealand), aggregating approximately 1.6 million square feet.

In May 2003, we entered into a 15-year non-cancelable lease pursuant to which a 105,000 square foot building will be constructed to house administrative, R&D and other facilities of our subsidiaries in Waterloo, Canada. The lease is scheduled to commence in the third quarter of 2004 and will expire in 2019. We have the option to renew the lease for one 10-year term at the end of the initial term generally at then-fair market value, subject to certain conditions. The operations and personnel that will relocate to the new space currently occupy approximately 60,190 square feet elsewhere in Waterloo. The lease for the current space has been extended on a month-to-month basis until the move is completed.

On January 28, 2000, we entered into a 15-year non-cancelable lease of our 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 leases in Dublin, Concord, and Waterloo, see Note Six to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.

We continue to lease space at other locations around the world that serve a variety of functions, including professional services, sales, engineering, technical support, and general administration. These include approximately 31,935 square feet in Maidenhead, England leased through May 2009 with an option to renew, and approximately 96,360 square feet in Boulder, Colorado leased through September 2010. We also maintain engineering centers in Englewood, Colorado; Paris, France; Waterloo, Canada; and Singapore.

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ITEM 3. LEGAL PROCEEDINGS

No proceedings required to be disclosed under this item were pending or terminated during the fourth quarter of 2003. See 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, 2003.

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 (NYSE) 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 NYSE 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 Common Stock on the NYSE on March 1, 2004 was $21.75. The number of stockholders of record on that date was 1,464, according to American Stock Transfer and Trust, our 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, which incorporates information to be disclosed in our 2004 Proxy Statement.

In April 2001, we acquired all of the issued and outstanding common stock of New Era of Networks, Inc. (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.

In July 2003, we issued approximately 0.7 million shares of our Common Stock in a private transaction under an agreement pursuant to which we will be provided with certain specified marketing services over a period of 42 months. For further discussion of this transaction, see Note Seven to Consolidated Financial Statements – Issuance of Company Stock for Certain Services, Part I, Item 1, incorporated here by reference.

Issuer Purchases of Equity Securities

We did not repurchase any of our Common Stock during the fourth quarter of 2003.

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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, of this Report on Form 10-K.

Consolidated Statements of Operations Data

(1)

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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Consolidated Balance Sheet Data (In thousands)

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

Overview

•

Our Business

In 2003, our business was organized into three business segments: IPG, which principally focuses on enterprise class database servers, integration and development products; iAS, which provides mobile database and mobile enterprise solutions; and FFI, which delivers integrated banking, payment and trade messaging solutions to large financial institutions. During 2003, approximately 55 percent of our revenues were generated from the U.S. with the balance generated from our non-U.S. operations. For further discussion of our business segments and principal products, see “Business,” Part I, Item 1, incorporated here by reference.

•

Our Results

We reported net income of $87.3 million for 2003, compared to net income of $37.8 million in 2002 (before the cumulative effect of an accounting change), and a net loss of $ 25.5 million in 2001. Total revenues were $778.1 million for 2003, compared to $829.9 million for 2002, and $927.9 million for 2001. The decline in total revenues from 2003 to 2002 was primarily due to lower license, consulting and education revenues. However, these declines were more than fully offset by a decrease in our overall costs and expenses, and an increase in our technical support revenues.

In 2003, our revenues from technical support services increased 4.1 percent compared to 2002 (which increased 7.6 percent compared to 2001). Furthermore, our 2003 operating margin doubled from 6.8 percent in 2002 to 13.4 percent in 2003 due to our continued management of operating expenses and the benefits realized from our restructuring activities.

Our overall financial position remains strong. During 2003 we generated net cash from operating activities of $202.1 million, and had $573.8 million in cash, cash equivalents and cash investments at December 31, 2003 — the highest in our history. We have no long-term debt. Our days sales outstanding in accounts receivable improved to 60 days for the quarter ended December 31, 2003 compared to 72 days for the quarter ended December 31, 2002.

Looking ahead, we believe we are well positioned to realize the objectives of our Unwired Enterprise initiative and to lead the expansion of enterprise software to the mobile and wireless business environment. We continue to win praise for our market-leading mobile and wireless solutions, and our core database products that enable data liquidity. For example, the latest version of SQL Anywhere Studio was recently honored with a “Best of 2003” award by the editors of PC Magazine.

For a discussion of factors that may impact our business, see “Future Operating Results,” below.

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•

Business Trends

The market for new sales of enterprise infrastructure software continued to be challenging in 2003 due to various factors including a maturing enterprise infrastructure software market, changing patterns in IT spending, and mixed signs of economic recovery in the U.S.

The majority of our license fees revenues came from sales to our existing customers in 2003, and fewer of those clients undertook large-scale infrastructure investments requiring significant investment in our core enterprise database products and related services (this also contributed to a decline in our consulting and education revenues). We believe this is partly due to market saturation in some of our target markets (including financial services, insurance and telecommunications) where large enterprises have invested heavily in their core database infrastructures during the past 15 years.

Despite these trends, 2003 revenues attributable to ASE, our core enterprise database product, grew 6 percent from 2002 levels. Further, the recent release of ASE powered by Intel’s Itanium® 2 processor on Unix and Linux has been well received both by customers and industry analysts.

In 2003, we observed some notable changes in IT spending patterns. Specifically, we began to see an overall increase in our transaction volume for license revenues, but an overall decrease in the average dollar value of these deals. This pattern supports the view that fiscally cautious customers are purchasing products and services based more on present need and less on fulfilling anticipated future needs.

Global market conditions generally improved in 2003 compared to 2002. However, mixed signs of a strong U.S. economic recovery make it difficult to project whether the overall market for enterprise infrastructure software will materially improve.

Moving forward, we will continue to manage our operating expenses as we aggressively pursue our business initiatives and strategic alliances with our key partners including HP, Intel, and others.

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, stock-based compensation 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.

•		Revenue Recognition
		Revenue recognition rules for software companies are very complex, and 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.”
		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.

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		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 of the licenses, 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 revision as 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.
		Service 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 Other 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, but 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

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•		of $132.5 million in the first quarter of 2002 and a goodwill impairment of $12.3 million in the fourth quarter of 2002.
		As of December 31, 2003, our goodwill balance totaled $140.9 million. 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 Ten to Consolidated Financial Statements, Part II, Item 1, 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.
		We performed the annual impairment analysis as of December 31, 2003 for each of our reporting units. This analysis indicated that the estimated fair value of each reporting unit exceeded its carrying value. Therefore, we were not required to recognize an impairment loss in 2003.
		However, 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 charge. Since a goodwill impairment charge is based on the value of a reporting unit at the testing date, reporting units that previously reported an impairment charge, such as FFI in 2002, are particularly prone to additional impairment charges if future revenue and expense forecasts or market conditions worsen after the testing date.
		We continue to review our other intangible assets (purchased technology, trade names 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 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. See Note One to Consolidated Financial Statements — Goodwill and other Purchased Intangible Assets, Part II, Item 8, incorporated here by reference.
•		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 or other factors 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 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 (and 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. Changes in these estimates could result in write-offs of capitalized software costs.
•		Restructuring
		We have recorded significant accruals in connection with various restructuring activities. These accruals include estimated net costs to settle certain lease obligations, based on the analysis of

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		independent real estate consultants. While we do not anticipate significant changes to these estimates in the future, the actual costs may differ from the estimates. For example, if we are able to negotiate more affordable termination fees, if rental rates increase in the markets where the properties are located, or if we are able to locate suitable sublease tenants more quickly than expected, the actual costs could be lower than our estimates. In that case, we would reduce our restructuring accrual with a corresponding credit to cost of restructuring. Alternatively, if we are unable to negotiate affordable termination fees, if rental rates continue to decrease in the markets where the properties are located, or if it takes us longer then expected to find suitable sublease tenants, the actual costs could exceed our estimates. See Note Thirteen to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.
•		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. 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. See Note Eight to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.
•		Stock-Based Compensation
		SFAS 123, “Accounting for Stock-Based Compensation,” encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. We have chosen to continue to account for stock-based employee compensation using the intrinsic value method. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the quoted market price of the Company stock at the date of the grant over the amount an employee must pay to acquire the stock. See also Note One to Consolidated Financial Statements-Stock-Based Compensation, Part II, Item 1, incorporated here by reference.
•		Contingencies and Liabilities
		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, 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 that there is a reasonable possibility that a loss has been incurred. Our financial position or results of operations could be materially and adversely affected if we have underestimated the potential liability in any matter.

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Results of Operations

Revenues (Dollars in millions)

Total revenues for 2003 decreased 6 percent from total revenues in 2002 (which had decreased 11 percent from 2001). The decline in 2003 was primarily attributable to a 16 percent drop in license fees revenues, and a 12 percent decline in consulting and education revenues (which was partially offset by a 4 percent increase in technical support revenues). The major factors contributing to the decline in our license fees and services revenues overall are discussed in “Overview,” above, and “Future Operating Results,” below.

In 2003, license fees revenues accounted for approximately 35 percent of our total revenues. The most significant decline in license fees revenues resulted from lower than expected sales of certain IPG e-Business products partially due a major shift in the business of one of our largest North American resellers that significantly lowered the reseller’s need to use our technology as part of its offering.

The 2002 decrease in license fees revenues (which accounted for about 39 percent of our total revenues that year) was primarily attributable to a decline in license fees revenues from our enterprise database and mobile database products (partially offset by an increase in license fees revenues of certain e-Business products). We believe the events of 9/11 triggered a downturn in the global economy in 2002 that contributed to the cancellation or delay of many of large-scale IT infrastructure investments.

Despite declining license fees revenues, our 2003 services revenues, which accounted for approximately 65 percent of total revenues, remained relatively flat from 2002 levels (which had declined 6 percent from 2001 levels). Our 2003 technical support revenues (which accounted for 77 percent of total services revenues), were driven primarily by a steady level of support renewals by existing customers. Meanwhile, revenues from education services (which are highly dependent on sales of new products), and revenues from consulting services (which are driven by the implementation of large enterprise systems) declined in 2003 for the reasons discussed in “Overview,” above). The decrease in 2002 services revenues was due to a 31 percent decrease in consulting and education revenues (partially offset by a 7 percent increase in technical support revenues) as a result of the economic factors discussed above.

For a description of our technical support, consulting and education services, see “Business – Worldwide Services,” Part II, Item 1, incorporated here by reference.

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Geographical Revenues
(Dollars in millions)

In 2003, the decline in our total revenues was most significant in North America (United States, Canada and Mexico) due to the decline in e-Business license revenues. As discussed in “Revenues,” above, we believe a major shift in the business of one of our largest North American resellers resulting in significantly lower sales of our technology contributed to this decline. In 2002, the decline in North America revenues was primarily due to a decline in enterprise database license fees and consulting and education revenues.

Total international revenues decreased 3 percent in 2003 from 2002 due to a 7 percent decrease in license fees revenues and a 25 percent decrease in consulting and education revenues (offset by an 8 percent decrease in technical support revenues). The slight decline in EMEA (Europe, Middle East and Africa) 2003 revenues was attributable to lower revenues from e-Business products, largely offset by an increase in revenues from our enterprise database products. The 9 percent decrease in 2003 Intercontinental (Asia Pacific and Latin America) revenues was due a drop in license fees and services revenues from our enterprise database products. In 2002, total international revenues decreased 14 percent from 2001 levels due to declines in license revenues in both EMEA and the Intercontinental regions. EMEA revenues declined by 15 percent in 2002 due to a 22 percent decline in license fees revenues, primarily from our enterprise database products, and a 38 percent decrease in consulting and education revenues. In 2002, the decline in Intercontinental revenues was due to a 17 percent decrease in license fees revenues primarily from our enterprise database products, and a 43 percent decrease in professional services revenues (partially offset by an 11 percent increase in technical support revenues).

In EMEA and the Intercontinental region, most revenues and expenses are denominated in local currencies. The cumulative impact of changes in foreign currency exchange rates from 2002 to 2003 resulted in a 5 percent increase in our revenues and a 3 percent increase in our operating expenses. This change was primarily due to the weakness of the U.S. dollar against certain European currencies. The effect of foreign currency exchange rate changes on revenues and expenses was not material in 2002.

Our business and results of operations could be materially and adversely affected by fluctuations in foreign currency exchange rates, even though we take into account changes in exchange rates over time in our pricing strategy. Additionally, changes in foreign currency exchange rates, the strength of local economies, and the general volatility of worldwide 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,” below.

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Cost and Expenses
(Dollars in millions)

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 18 percent in 2003 over 2002, and increased 12 percent in 2002 from 2001. The 2003 increase was primarily due to an increase in amortization of capitalized software development costs. 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).

Amortization of capitalized software costs was $31.1 million in 2003, $24.0 million in 2002, and $17.8 million in 2001. In 2003, the increase in amortization of capitalized software costs was primarily due to certain enterprise database products that we began amortizing in 2003 and certain enterprise application products that we began amortizing in 2003 and in the second half of 2002. In 2002, the increase in amortization of capitalized software costs was primarily due to certain enterprise application and enterprise database products that we began to amortize in 2002. Amortization of purchased technology acquired was $15.3 million in 2003, $14.9 million in 2002 and $12.1 million in 2001. See Note One to the Consolidated Financial Statements – Capitalized Software, Part II, Item 8, incorporated here by reference.

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Cost of services

Cost of services consists primarily of our cost to provide technical support, education and professional services and, to a lesser degree, services-related product costs (media and documentation). These costs decreased 14 percent in 2003 compared to 2002,primarily due to a reduction in consulting and technical support personnel as a result of our restructuring activities in the second half of 2002 and 2003, and a decrease in costs associated with third-party consultants. Our average headcount reflected in this expense category decreased approximately 19 percent in 2003 from 2002. The decrease in cost of services in 2002 over 2001 was primarily due to a reduction in consulting personnel as a result of our 2002 and 2001 restructuring activities, and a decrease in costs associated with third party consultants. For further discussion of the effect of our restructuring activities on our cost of service, see Note Thirteen to Consolidated Financial Statements, Part I, Item 8, incorporated here by reference.

Sales and marketing

Sales and marketing expense decreased 12 percent in 2003 compared to 2002 (which had decreased 18 percent from 2001), primarily due to a substantial decrease in spending on marketing programs, a decrease in sales and marketing personnel as a result of our 2003 and 2002 restructuring activities, and a reduction in sales commissions (principally due to lower license fees revenues), and a decrease in certain allocated common costs. We allocate certain common costs (primarily certain telecommunications, IT infrastructure, and facilities-related expenses) to sales and marketing, product development and engineering, and general and administrative expenses.

The decrease in sales and marketing expense 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. For further discussion of the effect of our restructuring activities, see Note Thirteen to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.

Product development and engineering

Product development and engineering expenses (net of capitalized software development costs – see discussion below) decreased slightly in 2003 from 2002 (which had decreased 6 percent from 2001), primarily due to a decrease in allocated common cost, partially offset by the addition of product development and engineering personnel resulting from our acquisition of AvantGo, Inc. in February 2003.

The decrease in product development and engineering expenses in 2002 over 2001 was primarily due to a reduction in R&D personnel resulting from the further integration of NEN, and in connection with our 2002 and 2001 restructuring activities. See Note Thirteen to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.

We capitalize product development and engineering costs during the period between achievement of technological feasibility and general availability of a product. In 2003, our capitalized software costs of $28.0 million included costs incurred for the development of Corporate Banking 2.1, EA Server 5.0, Sybase Enterprise Portal 6.0, Integration Orchestrator 4.3, and PowerDesigner 10.0. 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, EA Server 4.1, PowerBuilder 9.0, and PowerDesigner 9.5. In 2001, capitalized software costs included costs incurred for the development of Sybase 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. Capitalized amounts were approximately $32.7 million in 2002 and $35.8 million in 2001.

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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 decreased slightly in 2003 compared to 2002 (which increased 10 percent from 2001), primarily due to decreases in allocated common costs and a 5 percent decrease in the average number of G & A personnel resulting from our 2003 restructuring activities (see Note Thirteen to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference). The increase in 2002 compared to 2001 was primarily due to the following factors: (i) an increase in finance personnel resulting from the establishment of various regional shared services centers that centralized finance functions within specific geographic regions; (ii) , an increase in executive and corporate development personnel, and (iii) an increase in allocated common costs associated, in part, with our move to new corporate headquarters facilities in Dublin, California in early 2002.

Amortization of goodwill

We adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, (SFAS 142) effective January 1, 2002, which provided that goodwill and certain other intangible assets could no longer be amortized, but had to be tested for impairment at least annually. SFAS 142 further changed the method of evaluating goodwill from a recoverability test based upon undiscounted cash flows to a fair value approach. See Note One to Consolidated Financial Statements — Goodwill and Other Purchased Intangible Assets, Part I, Item 8, incorporated here by reference.

Amortization of other purchased intangibles

Amortization of other purchased intangibles reflects our amortization of the established customer list of Home Financial Network, Inc. (now FFI), which we acquired in 2000. The amortization of purchased technology associated with our acquisition of Home Financial Network, NEN and AvantGo is included in cost of license fees. See Note One to Consolidated Financial Statements — Goodwill and Other Purchased Intangibles, Part II, Item 8, incorporated here by reference.

Goodwill impairment

Following our adoption of SFAS 142 in the first quarter of 2002, we conducted annual impairment testing required by SFAS 142 as of December 31, 2003 and December 31, 2002. See Note One to Consolidated Financial Statements - Goodwill and Other Purchased Intangible Assets, Part I, Item 8, incorporated here by reference. 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. Our 2003 analysis of goodwill impairment did not indicate an impairment loss for any of the Company’s reporting units. See “Overview,” above, and “Future Operating Results – Impairment of Goodwill and Other Intangible Assets,” below, incorporated here by reference.

In-process research and development

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 NEN’s in-process research and development. These amounts were written off during the quarter ended June 30, 2001. A detailed discussion of the process undertaken to determine the amount of this write-off is set forth in our Annual Report on Form 10-K for the year ended December 31, 2002, “MD&A – Cost and Expenses,” Part I, Item 7, incorporated here by reference.

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Stock compensation expense

Stock compensation expense reflects non-cash compensation expense associated with restricted stock purchase rights granted to certain Sybase executives in the second quarter of 2001 and in the first quarter of 2003 (see Note Seven to Consolidated Financial Statements — Restricted Stock Grants, Part II, Item 8, incorporated here by reference), and the amortization of the value assigned to certain unvested stock options assumed in the acquisition of NEN in 2001.

Cost (reversal) of restructuring

2003 Restructuring Activities

During the first quarter of 2003, Sybase’s license fees revenues were below our expectations. Given this lower than expected revenue, we reduced our projections regarding revenues for the remainder of the year and began to identify means of reducing our cost structure to produce earnings in line with revised plan amounts. After this review, and in order to reduce our fixed quarterly cost structure, we embarked on a restructuring plan (2003 Plan) aimed at reducing our annual payroll and facilities-related expenses by approximately $16.0 million. These activities included the planned termination of approximately 240 employees worldwide and the planned closure or consolidation of approximately 9 facilities worldwide. It is anticipated that the total costs, once the restructuring activities prescribed under the 2003 Plan are fully completed, will be $10.8 million. In general, these expenses will be incurred over a 12-month period although certain expenses may extend beyond this twelve-month time frame depending upon when the costs associated with the sublease of certain facilities are incurred. We believe the 2003 Plan has been successful as the targeted expenses have been reduced to achieve annualized cost reduction of approximately $18.0 million.

2002 and 2001 Restructuring Activities

We also undertook restructuring activities in 2002 and 2001 as a means of managing our operating expenses. For further discussion regarding the 2003 Plan and our restructuring activities in 2002 and 2001, see Note Thirteen to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.

Operating income in 2003 was $104.3 million compared to operating income of $57.2 million in 2002, and an operating loss of $16.5 million in 2001. Operating income in 2003 included $7.4 million in restructuring charges, and operating income in 2002 included $40.4 million in restructuring charges. In 2001, our operating loss included restructuring charges of $48.8 million.

Our restructuring efforts were largely intended to reduce our operating expenses to offset our reduced revenue forecasts. We believe these efforts have been successful and have allowed us to offset decreases in revenue with corresponding decreases in our core operating expenses (defined for purposes of this explanation as cost of license fees, cost of services, sales and marketing, product development and engineering, and general and administrative).

In 2003, the decrease in our core operating expenses from 2002 was approximately 8 percent (principally offset by a 6 percent decline in our total revenues from 2002 to 2003). The improved operating income from 2002 to 2003 was primarily attributable to a $33.0 million decrease in restructuring expense and the absence of the $12.3 million charge relating to goodwill impairment.

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In 2002, the decrease in our core operating expenses from 2001 was approximately 13 percent ((principally offset by an 11 percent decrease in our total revenues from 2001 to 2002). The improved operating income from 2001 to 2002 was primarily attributable to an $8.3 million reduction in restructuring expense and the absence in 2002 of both the $53.8 million in goodwill amortization (upon the adoption of SFAS 142) and an $18.5 million charge for the write-off of in-process research and development.

In 2003, interest income decreased 4 percent from 2002 (which had decreased 31 percent from 2001). Interest income consists primarily of interest earned on our investments. The decrease in interest income from 2001 to 2002, and from 2002 to 2003 is largely due to the decline in interest rate yields on our cash balances invested.

Interest expense and other, net, primarily includes: net gains and losses resulting from foreign currency transactions and the related hedging activities; the cost of hedging foreign currency exposures; bank fees; and gains from the disposition of certain real estate and investments. Other income (expense), net for 2003 included a gain of approximately $3.2 million from cash collected on a note receivable previously reserved in connection with our sale of certain NEN Swiss subsidiaries. Other income (expense), net for 2002 included a gain of approximately $2.5 million that we realized on the initial sale of these Swiss subsidiaries.

In 2003, a provision for income taxes was recorded at a rate of approximately 26 percent on operating income. Our effective tax rate differs from the statutory federal rate of 35 percent primarily due to three factors: the utilization of certain foreign tax credit carryover not previously recognized; the release of certain deferred tax liabilities which were made unnecessary when restructured certain earnings of a foreign subsidiary to allow for their repatriation free from withholding taxes which had been provided for with the deferred tax liability; and, the release of certain tax accruals upon the completion of various tax audits. Without the release of the deferred tax liability and the tax accruals, our effective tax rate for the year would have been approximately 32 percent.

In 2002, a provision for income taxes was recorded at a rate of approximately 47 percent on operating income before the cumulative effect of an accounting change. Our 2002 effective tax rate exceeded 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, income taxes of $26.5 million were recorded on pre-tax income of $1.0 million resulting largely from taxes on our international earnings. 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

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primarily resulted from the non-deductible amortization or write-off of intangibles acquired in various acquisitions and our 2001 restructuring activity. The significant amount of non-tax deductible expenses (primarily the amortization or write off of intangibles acquired in the NEN acquisition) made our effective tax rate meaningless in 2001. See Note Eight to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.

For a discussion of the cumulative effect of an accounting change to adopt SFAS 142, see Note One to Consolidated Financial Statements – Goodwill and Other Purchased Intangibles, Part II, Item 8, incorporated here by reference.

In 2003, the increase in our net income was primarily related to the absence of any goodwill impairment loss as compared to the $132.5 million impairment loss recognized in 2002 as a cumulative effect of an accounting change (see Note One to Consolidated Financial Statements - Goodwill and Other Purchased Intangibles, Part II, Item 8, incorporated here by reference), and the factors discussed in “Operating Income,” above. The same impairment loss conversely contributed to the increase in our net loss from 2001 to 2002.

In 2003, the decrease in shares used for computing basic and diluted net income per share was primarily from shares we repurchased under our Stock Repurchase Program (described in “Liquidity and Capital Resources,” below). The decrease was partially offset by the exercise of employee stock options and the issuance of approximately 0.7 million shares of our Common Stock during the third quarter of 2003 to an unrelated third party in connection with an agreement for marketing services (see Note Seven to Consolidated Financial Statements – Issuance of Company Stock for Certain Services, Part II, Item 8, incorporated here by reference). In 2002, the share increases in all cases were attributable to the ongoing exercise of employee stock options and the effect of our shares issued in 2001 in connection with our acquisition of NEN (partially offset by our share repurchases).

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Net cash provided by operating activities increased 23 percent between 2002 and 2003. primarily due to a $40.7 million increase in net income before consideration of depreciation, amortization and an impairment loss. The increase also resulted from increased cash of $24.5 million associated with our improved collections within EMEA (offset somewhat by a reduction of accrued liabilities principally relating to certain restructuring related facilities obligations).

The increase from 2001 to 2002 in this category resulted primarily from lower operating expenses incurred in 2002 due to our 2002 and 2001 restructuring activities; the timing of payments made against other accrued restructuring related liabilities; and an increase in deferred revenues. Net cash used for investing activities increased 62 percent between 2002 and 2003 primarily due to net purchases of cash investments of $102.9 million in 2003 compared to $34.0 million in 2002. For further discussion of our investment portfolio, see “Interest Rate Risk,” below. The increase from 2001 to 2002 in this category was primarily due to $34.0 million of cash investment net purchases in 2002 compared to net dispositions of cash investments of $29.5 million in 2001. In addition, we gained net cash from business combinations (primarily NEN) of approximately $27.2 million during 2001 compared to $2.0 million of net cash used for acquisitions in 2002.

Beginning in 1998, our Board of Directors authorized the repurchase of our outstanding Common Stock from time to time, subject to price and other conditions (Stock Repurchase Program). Through December 31, 2003, aggregate amounts authorized under the Stock Repurchase Program totaled $400.0 million. During 2003, we repurchased 2.3 million shares at a cost of $30.9 million. In 2002, we repurchased 6.7 million shares at a cost of $89.8 million, and in 2001 we repurchased 6.4 million shares at a cost of $106.9 million. Approximately $19.2 million remained in the Stock Repurchase Program at December 31, 2003. For additional information regarding the Stock Repurchase Program, see Note Fifteen to Consolidated Financial Statements, Part II, Item 8.

Substantially all our financing activities from 2001 through 2003 related to purchases under the Stock Repurchase Program and the utilization of treasury stock issued upon exercise of stock options under certain of our employee stock plans. Net cash provided by financing activities was $25.0 million in 2003 compared to net cash used of $66.2 million during 2002. The decrease was primarily due to the fact that we repurchased fewer shares under the Stock Repurchase Program in 2003 compared to 2002. The average price of the shares repurchased under the Stock Repurchase Program during 2003 was $13.24, compared to $13.42 in 2002. Net cash used for financing activities decreased 12 percent between 2001 and 2002 primarily because less cash was used in the Stock Repurchase Program in 2002 compared to 2001. While more shares were repurchased in 2002 than in 2001, the average price of the shares repurchased under the Stock Repurchase Program during 2001 was $16.77.

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We had no significant commitments for capital expenditures at December 31, 2003. 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 currently have no outside debt.

We engage in global business operations and are therefore exposed to foreign currency fluctuations that can affect the overall value of the assets (including cash) and liabilities reflected on our balance sheet. For a further discussion of the effect of foreign currency fluctuations on our financial condition, see “Financial Risk Management – Foreign Exchange Risk,” below

Contractual Obligations

Our contractual obligations at December 31, 2003, are summarized as follows: