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United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

For the fiscal year ended December 31, 2002

OR

For the transition period from             to            

Commission File Number 0-24720

BUSINESS OBJECTS S.A.

(Exact name of registrant as specified in its charter)

157-159 Rue Anatole France, 92300 Levallois-Perret, France

(Address of principal executive offices)

(408) 953-6000

(Registrant’s telephone number, including area code)

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

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

* Ordinary Shares are not traded in the United States, rather they are deposited with The Bank of New York, as Depositary. Each American depositary share represents one Ordinary Share.

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

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. x  Yes    ¨  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 Securities Exchange Act of 1934).     x  Yes    ¨  No

As of June 28, 2002, the last business day of our most recently completed second fiscal quarter, there were 63,054,461 Ordinary Shares of €0.10 nominal value (including 21,841,468 American depositary shares each corresponding to one Ordinary Share and 817,675 treasury shares). The aggregate market value of our common equity held by non-affiliates, based upon the closing sale price of our American depositary shares on June 28, 2002 as reported on the Nasdaq National Market, was approximately $1,742,297,198. Ordinary Shares and American depositary shares held by each of our officers and directors and by each person owning, to our knowledge, 5% or more of our common stock are excluded because such persons may be deemed to be affiliates of Business Objects. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

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As of February 28, 2003, the number of outstanding shares of our common stock was 63,557,033 Ordinary Shares of €0.10 nominal value (including 26,867,289 American depositary shares each corresponding to one Ordinary Share and 1,067,675 treasury shares).

Documents Incorporated by Reference

We have incorporated by reference into Part III of this Form 10-K portions of our Proxy Statement for our Annual Meeting of Shareholders. References in this Form 10-K to the “Company,” “Business Objects,” “we,” “our,” and “us” refer to Business Objects S.A. and our consolidated subsidiaries.

Trademarks

BUSINESSOBJECTS, the Business Objects logo, BUSINESSQUERY, RAPID MARTS, SET ANALYZER, BUSINESSOBJECTS BROADCAST AGENT, BUSINESSOBJECTS PERSONAL TRAINER, RAPID DEPLOYMENT TEMPLATES, Set Analyzer, Semantically Dynamic, Smart Space, Universe Repository, Microcube, and WEBINTELLIGENCE are trademarks or registered trademarks of Business Objects S.A. in the U.S. and /or other countries. All other trademarks or trade names referenced in this Form 10-K may be the property of their respective owners.

Reporting Currency

All financial information contained in this document is expressed in United States dollars, unless otherwise stated.

American Depositary Shares

We have sponsored a program that provides for the trading of our Ordinary Shares in the United States in the form of American depositary shares (“ADSs”). Each ADS represents one Ordinary Share placed on deposit with The Bank of New York, as depositary (the “Depositary”) and is issued and delivered by the Depositary through its principal office in New York City at 101 Barclay Street, New York, New York, 10286. Under the terms of the Deposit Agreement (the “Deposit Agreement”) dated September 22, 1994, as amended and restated on May 8, 1996 and December 30, 1998, Ordinary Shares may be deposited with the Paris office of BNP Paribas, as custodian (the “Custodian”), or any successor or successors to such Custodian. The Depositary provides a variety of services to our investors. The form of the Deposit Agreement is incorporated by reference as an exhibit to this Form 10-K.

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This discussion contains forward-looking statements based on our expectations, assumptions, estimates and projections about Business Objects and our industry as of the filing date of this Form 10-K. These statements include, but are not limited to, statements concerning: the Company’s business strategy; the Company’s intention to capitalize on the opportunity to lead the market in enterprise standardization; the Company’s intention to continue to integrate Extraction, Transformation and Loading (ETL) software into its overall offering; the Company’s intention to continue to develop analytic applications functionality; the Company’s belief that it is well-positioned to take advantage of the interest in Enterprise Performance Management (EPM) applications and the Company’s belief that the likelihood that certain litigation will not be material. These forward-looking statements involve risks and uncertainties. Business Objects’ actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described in the “Risk Factors” section and elsewhere in this Form 10-K. Business Objects undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Item 1. Description of Business

Our Company

Business Objects S.A. is a leading worldwide provider of business intelligence (BI) solutions. We develop, market and distribute software that enables organizations to track, understand and manage enterprise performance within and beyond the enterprise to make better, more informed business decisions. Users can view and interact with key performance indicators in a dashboard, create new queries or reports, access catalogs of reports and do simple or complex analysis of the data. Instead of struggling with complex and technical database terminology, users interact with data using business representations of information, or “business objects”, with which they are familiar. This patented technology is commonly referred to as our “semantic layer”. Our products are designed to be easy to use and architected to be secure, scalable and extensible.

We were incorporated in France in 1990. Our principal executive offices are located at 157-159, rue Anatole France, Levallois-Perret, France and 3030 Orchard Parkway, San Jose, California. Our web site is www.businessobjects.com.

Business Strategy

Our business strategy is focused on four key areas:

Lead the market in enterprise standardization. Companies are beginning the phase of selecting a business intelligence solution for enterprise standardization and this is a significant business opportunity for us. As enterprises realize the benefits of deploying business intelligence software, they look to standardize on a single enterprise-wide solution that can maximize their return on investment. To capitalize on this opportunity, we intend to ensure that our software can be used throughout the enterprise by the maximum number of users.

Offer a best-of-breed, end-to-end, business intelligence stack. We believe that corporations are increasingly looking to source all the components necessary for their business intelligence deployment from a single supplier. In 2002, Business Objects acquired Acta Technology Inc., a privately held data integration software vendor. Data integration software, often referred to as Extraction, Transformation and Loading (ETL) software, is used to extract data from corporate databases and enterprise applications. The software then transforms the data into the desired format and loads it into a data warehouse or data marts for reporting and analysis by business intelligence software. We intend to continue to integrate this software into our overall offering to provide a tightly integrated solution for customers looking to meet all their business intelligence requirements from a single supplier – from data integration to business intelligence platform to analytic applications.

Expand the analytic applications strategy. We believe that corporate IT departments are providing their users with packaged solutions to their business intelligence needs through both the purchase of off-the-shelf analytic applications and the development of applications in-house. Business Objects meets this dual need for “build and buy” by providing an analytic applications framework consisting of BUSINESSOBJECTS APPLICATION FOUNDATION, a software tool for building packaged applications and a

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set of thirteen pre-packaged application modules built using Application Foundation and grouped into the five domains of: Customer Intelligence; Product and Service Intelligence; Supply Chain Intelligence; Human Resources Intelligence and Financial Intelligence.

Exploit the wave of Enterprise Performance Management (EPM). One significant application of BI technology is EPM. EPM is the combination of BI, metrics and methodologies to improve enterprise performance. EPM has become a significant force in the market due to a number of factors. First, the economic downturn is driving the focus on operational dashboards to help companies more closely monitor their performance. Second, there is a general increase in demand for financial transparency and control. Third, there is pressure for companies to show a real return on their investments in Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) systems. Lastly, while the concepts of EPM are not new, the ability for companies to implement EPM applications is finally possible. Today, the enabling infrastructure of data warehouses and ERP/CRM systems are in place to make EPM meaningful. We believe that Business Objects is well-positioned to take advantage of the interest in EPM applications.

Products

Business Objects offers a complete suite of business intelligence software, which includes data integration, query, reporting, online analytical processing, information broadcasting, business alerts for end users, analytic application framework and pre-packaged analytic applications. It also includes administration tools that enable information technology professionals to set up and deploy our products across the enterprise. To provide greater flexibility to our customers, our software can be deployed in web, Windows or mobile environments. The Business Objects product line is divided into three families of products: data integration, BI platform and enterprise analytic applications.

Data Integration

Data Integration includes both the core data integration tool and pre-packaged data integration solutions.

Business Intelligence Platform

BUSINESSOBJECTS 2000 is a strategic business intelligence platform and integrated BI toolset that enables users to access, analyze and share information within and beyond the enterprise. It has been designed to be easy to use and has been architected to be secure, scalable and extensible. BUSINESSOBJECTS 2000 consists of query, reporting and analysis; portal and broadcasting and administration products.

Query, Reporting and Analysis. BUSINESSOBJECTS 2000 provides query, reporting and analysis tools to meet the needs of all users with both Windows and web-based interfaces.

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Portal and Broadcasting. BUSINESSOBJECTS 2000 meets information delivery requirements through the combination of a BI portal and powerful broadcast capabilities.

Administration. BUSINESSOBJECTS 2000 provides a full set of administrative tools to set up and manage an enterprise BI deployment.

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Enterprise Analytic Applications

BUSINESSOBJECTS APPLICATION FOUNDATION. APPLICATION FOUNDATION is a complete framework for the rapid deployment of powerful analytic applications and management dashboards. It offers five analytic engines: sets for segmentation of business data, metrics to track and measure Key Performance Indicators (KPIs) over time, business rules and alerts for automatic notification of change, predictive analysis for insight into future events and statistical process control to support quality control processes.

BUSINESSOBJECTS ANALYTICS. BUSINESSOBJECTS ANALYTICS is a suite of integrated enterprise analytic applications built on Application Foundation and BusinessObjects 2000 to solve specific business problems and offer a single view of the business across multiple systems and departments. These applications provide expertise in analysis and presentation of information within specific business domains or functions and deliver the most relevant process support and best-practice analytics to end-users within one consolidated, enterprise view.

Services

Post-Sales Customer Support and Software Maintenance. Our five customer support centers (Americas—San Jose and Atlanta, USA; Europe—Maidenhead, United Kingdom; and Asia/Pacific—Tokyo, Japan and Sydney, Australia) are staffed by highly trained support engineers who answer customer inquiries by telephone and email. All customer support centers use a common global case tracking, knowledge base and problem reporting system designed to enable engineers to share their knowledge and experience, improve the quality of our responses to customers, and reduce our response time for customer inquiries. Our value-added resellers, systems integrators, consulting partners and distributors, whom we support with our regional support centers, may also provide technical support.

We offer two levels of customer support programs, Standard and Premium Support, to better meet customers’ needs. All registered support customers who are current on our maintenance plan have access 24 hours a day, 7 days a week to our online customer support website. This website provides customers with access to up-to-date technical information and helps customers independently resolve inquiries. Customers can query the multiple technical repositories we have available to find a solution to their inquiries, participate in an online forum to discuss their business intelligence strategies or issues with other users, download service packs and documentation or log a case directly from the site to their local support center. Premium customers are assigned a specific team of customer advocates who focus on the customer’s individual deployment and provide extended service hours.

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Software maintenance releases and post-sales technical support are provided to customers for an annual maintenance fee, which is charged in addition to the initial product license fee.

Customer Education and Training. We offer a comprehensive education and training program to customers and third-party consultants who support our products. Courses range from entry-level sessions for users to more advanced courses for information technology professionals. Every student is provided a complete hands-on experience to help reinforce learning with practical exercises.

We offer training classes through in-house facilities at more than a dozen locations worldwide. These facilities are complemented by a network of independent certified training centers in our principal markets throughout the world. Courses can also be delivered onsite at a customer’s location upon request.

To cater to varying business needs and learning styles, we offer a variety of training options. In addition to traditional classroom training, we offer virtual training courses for users who are scattered across multiple locations. We also offer computer-based training for large numbers of users. Our standard computer-based training product, BUSINESSOBJECTS PERSONAL TRAINER, is ideal for new users as it provides an introduction to basic techniques for BUSINESSOBJECTS and WEBINTELLIGENCE. Our customized computer-based training service, BUSINESSOBJECTS ENTERPRISE DESKTOP EDUCATION, is fully customized to meet the specific training requirements of the enterprise. Customers can choose the curriculum based on their users’ needs and skill level, use their own data and select the desired level of interactivity.

Consulting Services. Our consulting services provide expertise in the design, development and deployment of enterprise BI systems that meet the technical and business requirements of our customers. Consulting resources are located in major countries around the world, supplemented by third-party certified consulting partners. With in-depth knowledge of enterprise BI systems, analytic application deployment and data integration, our consultants ensure that customers can quickly benefit from the business value that our BI systems provide.

Our worldwide consulting organization has developed three main consulting practices to support the deployment of our product line—our enterprise business intelligence practice, analytic applications practice and data integration practice. Each practice area shares a common consulting methodology and best practices to allow delivery of an end-to-end BI solution that is scalable, reliable and delivers measurable business value. Our consultants have implemented BI systems into multiple vertical markets. Consulting services are generally charged to a customer on a per consultant per day basis.

Sales and Marketing

We market and sell our products and services directly through our direct sales organizations and indirectly through sales channels, such as value-added resellers, system integrators, consulting partners and distributors. Our sales and marketing organization is comprised of sales teams, each consisting of employees engaged in field sales, field technical support and field marketing. Each sales and marketing organization is responsible for the coordination of both direct and indirect sales in its assigned territory. We believe that focusing our direct sales efforts on identified customers while supporting our indirect sales channels to service our channel partners’ customers maximizes the utilization of our direct sales personnel.

Our sales cycle varies from customer to customer, typically requiring several months from the time of initial contact until closing a sale. For large customers or larger deals, the sales cycle can be over a year.

To support our sales efforts, we conduct marketing programs, including advertising, direct mail, public relations, web-based and face-to-face seminars and demonstrations at customer sites and at our offices, appearances at trade shows and ongoing customer communications programs and events.

Product Development

We believe that innovation, timeliness of product releases and high product quality are essential to maintain our competitive position. Consequently, we dedicate considerable resources to development efforts to enhance our existing products and to develop new products. To date, we have relied primarily on internal development of our products, but have in the past and may in

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the future continue to license or acquire technology or products from third parties. The product development group is responsible for the design, development and release of product enhancements, upgrades and new products and is based primarily in Levallois-Perret, France, with a significant team in San Jose, California, and smaller groups located in Canada, the U.K. and India. Our Company sponsored research and development expenses were $75.0 million in 2002, $55.2 million in 2001 and $40.7 million in 2000.

Customers

As of December 31, 2002, we have sold to more than 17,000 customers in over 80 countries. Our customers represent a wide, cross-industry spectrum of corporations and major governmental and educational institutions. During each of the last three fiscal years, no customer accounted for 10% or more of our consolidated revenues. A partial list of customers, by industry segment, who have made purchases of our software licenses in excess of $100,000 in 2002 include:

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Competition

The market for our software is highly competitive, rapidly evolving and subject to rapidly changing technology. We compete principally with providers of business intelligence software, analytic applications, query and reporting software, ETL software and data warehousing software. Our direct competitors for our business intelligence suite include Actuate Corporation, Brio Software, Inc., Cognos Incorporated, Crystal Decisions, MicroStrategy, Inc. and Oracle Corporation. We also indirectly compete with suppliers of enterprise application software encompassing both enterprise resource planning and customer relationship management, including Microsoft Corporation, Siebel Systems, Inc., PeopleSoft, Inc., SAP AG and Oracle Corporation. Competitors for our analytic applications include: Cognos Incorporated, Informatica Corporation, E.piphany, Inc., Hyperion Solutions Corporation, SAS Institute and SAP AG. Competitors for our ETL products include Informatica Corporation, Ascential Software Corporation and Sagent. A number of our competitors and potential competitors have significantly greater financial and other resources than we have, which may enable them to more effectively address more effectively new competitive opportunities. In addition, some of our competitors, particularly companies that offer relational database management software systems and enterprise resource planning software systems, have well-established relations with some of our existing and targeted customers.

We believe that the principal competitive factors that impact the market we serve include: price, performance, scalability, ease of use, functionality, product architecture, product quality and reliability, scope of distribution, customer support and name recognition. We believe that we are successfully addressing each of these competitive factors. Nonetheless, we expect to face increasing competitive pressures from both current and future competitors in the markets we serve.

Manufacturing

We rely upon third-party suppliers in France and the United States to perform our CD duplication, print our user manuals, package our products, manufacture related materials incorporated into our products and deliver our product via electronic software download. To date, we have not experienced any material difficulties or delays in manufacturing or electronic delivery.

Patents and Intellectual Property Protection

We believe that we own or have licensed all proprietary rights relating to our software products. Our success depends in part on our ability to protect our property rights in our intellectual property. To protect our proprietary information, we use a combination of protections provided by patent, copyright and trademark laws, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements, including confidentiality provisions.

We currently have two patents issued in the United States, numbers 5,555,403 and 6,247,008, both relating to a “Relational Database Access System Using Semantically Dynamic Objects.” We also have obtained a registered trademark in the United States, France and other countries for our name, together with our logo, as well as for certain other product names. Despite our efforts, we may not successfully protect our proprietary rights from misappropriation. While our competitive position may be affected by our ability to protect our proprietary information, we believe that factors such as the technical expertise and innovation skills of our personnel, our name recognition and ongoing product support and enhancement may be more significant in maintaining our competitive position.

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Litigation may be necessary to protect and defend our proprietary rights. For example, in 1999 and May 2002 we settled litigation in our favor asserting that our competitors, Brio Software, Inc., Cognos Inc. and Cognos Corporation were infringing upon our rights under our patent. We also filed a lawsuit against another competitor, MicroStrategy Incorporated, in October 2001, alleging patent infringement under U.S. patent number 5,555,403. On July 15, 2002, Informatica Corporation (“Informatica”) filed an action for alleged patent infringement in the United States District Court for the Northern District of California against Acta Technology, Inc. (“Acta”). We acquired Acta in August 2002. The complaint alleges that the Acta software products infringe Informatica’s United States Patent No. 6,014,670 and 6,339,775 both entitled “Apparatus and Method for Performing Data Transformations in Data Warehousing” and United States Patent No. 6,208,990 entitled “Method and Architecture for Automated Optimization of ETL throughput in Data Warehousing Applications”. On July 17, 2002, Informatica filed an amended complaint alleging that the Acta software products also infringe United States Patent No. 6,044,374 entitled “Method and Apparatus for Sharing Metadata Between Multiple Data Marts Through Object References” (see Item 3. Legal Proceedings). Litigating claims relating to our intellectual property can be very expensive in terms of management time and resources.

Our software products are generally licensed to end users pursuant to a perpetual license. Occasionally, we license a portion of our technology in object code to third parties. We also license certain software programs from third parties and incorporate these programs into our software products, including an object request broker that allows messaging between software components from Borland Software Corporation and Visual Basic Application functionality from Microsoft Corporation. In addition, we may sub-license third-party software products, such as BUSINESS OBJECTS PERSONAL TRAINER, directly to our customers as a stand-alone add-on product.

Employees

As of December 31, 2002, we had 2,162 full-time employees, including:

Our employees in France are represented by the CFDT Union—Confédération Francaise Démocratique du Travail —since October 2002 and by the CGT Union—Confédération Générale du Travail—since November 2002. Our employees in France represent 34% of our labor force at December 31, 2002. The Union collective bargaining agreements are renewed annually. We have never experienced any work stoppage.

Under French law, management is required to hold monthly meetings with a delegation of elected employee representatives called the comité d’entreprise, to discuss employment matters and our economic condition and to provide appropriate information and documents relating to these matters. As required under French law, two employee representatives are entitled to be present at meetings of our Board of Directors, but do not have any voting rights.

Our newly hired employees may complete an orientation course ranging from one to three weeks in length presented by Business Objects University, our in-house education program. Generally, most employees complete at least a one week orientation course at our local facilities. Our engineers and other technical staff generally complete a two week training course, in addition to the one week orientation. Our extended training program consists of lectures, problem sets and independent and group projects relating to programmability and deployment of our products. We believe this emphasis on training yields highly qualified employees and promotes camaraderie among all of the Business Objects staff.

Foreign and Domestic Operations and Export Sales

This information is set forth in Note 12 “Segment and Geographic Information” in Notes to Consolidated Financial Statements in Item 8 of this Form 10-K and is incorporated herein by this reference.

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Web Site Postings

We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports, available free of charge through our website, www.businessobjects.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission.

Seasonality

Our strongest quarter each year is typically our fourth quarter, as our customers often wait for the end of their annual budget cycle before deciding whether to purchase new software. Consequently, our revenues are generally lower in our first quarter. In addition, our third quarter is a relatively slow quarter due to lower economic activity throughout Europe during the summer months.

Item 2. Description of Property

Our corporate headquarters are in Levallois-Perret, France, a suburb of Paris, and consist of approximately 163,000 square feet of office space under lease through 2009, with an option to cancel in 2006 without penalty. We are subleasing approximately 38,000 square feet of this facility.

Our U.S. headquarters are in San Jose, California, and consist of approximately 126,000 square feet of office space under lease through 2011, with a right to extend the lease term for one additional six-year period. As of December 31, 2002, approximately 25,000 square feet is considered excess capacity and we are actively trying to sublease the space. We also lease approximately 61,000 square feet of office space in Mountain View, California under a lease expiring in 2007. This office space was used as Acta Technology, Inc.’s headquarters prior to our acquisition of Acta in August 2002. All Acta employees were relocated to our San Jose facility in September 2002 and the remaining lease payments are accrued net of anticipated sublease income as of December 31, 2002 as part of Acta’s facility shutdown accrual.

We lease a facility in Maidenhead, England, measuring approximately 56,000 square feet, under a lease expiring in 2021. We have additional smaller leased field sales and software development offices in the Americas, Europe, Japan and Asia Pacific regions.

We believe that our existing facilities are adequate to meet current requirements and that additional space will be available as needed to accommodate any future expansion of the corporate locations and for any sales and software development offices.

Item 3. Legal Proceedings

The material set forth in Note 6 “Commitments and Contingencies—Legal Matters” of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K is incorporated herein by reference.

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

None.

PART II

Item 5. Market For Registrant’s Common Equity and Related Stockholder Matters

U.S. Market Information

We sponsor a program that provides for the trading of our ordinary shares in the United States in the form of American depositary shares. Each American depositary share represents one ordinary share placed on deposit with The Bank of New York, as depositary and is issued and delivered by the depositary through its principal office in New York City at 101 Barclay Street, New York, New York, 10286. Under the terms of our deposit agreement with the depositary, ordinary shares may also be deposited with the Paris office of BNP Paribas, as custodian. Our American depositary shares have been quoted on the Nasdaq National Market since September 1994 under the symbol BOBJ.

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French Market Information

Our ordinary shares have been listed on the Premier Marché of Euronext Paris since November 1999 under the Euroclear code 12074. The Premier Marché is a regulated market managed and operated by Euronext Paris, the organization that manages and operates the following three markets: Premier Marché, Second Marché and Nouveau Marché. The securities of most large public companies are listed on the Premier Marché, with the Second Marché available for small and medium-sized companies. Trading on the Nouveau Marché was introduced in 1996 to allow companies seeking development capital to access the stock market. In addition, securities of certain other companies are traded on a non-regulated over-the-counter market, the Marché Libre OTC.

The Premier Marché of Euronext Paris

Admission to the Premier Marché is subject to certain capital adequacy and liquidity requirements determined by Euronext Paris. In addition, companies applying for listing on the Premier Marché are required to publish comprehensive information regularly and to keep the public informed of events likely to affect the market price of the securities.

Official trading of listed securities on Euronext Paris is transacted through authorized financial institutions that are members of Euronext Paris. Trading on the Premier Marché takes place continuously on each business day from 9:00 a.m. through 5:25 p.m. (Paris, France time), with a pre-opening session from 7:15 a.m. through 9:00 a.m. (Paris, France time) and a pre-closing session from 5:25 p.m. to 5:30 p.m. during which transactions are recorded but not executed and a closing auction at 5:30 p.m. Any trade that occurs after the close of a stock exchange session is recorded on the next business day at the previous session’s closing price for that security.

Euronext Paris has introduced continuous electronic trading during trading hours for most actively listed securities. Euronext Paris publishes a daily official price list that includes, among other things, price information on listed securities.

Euronext Paris places securities listed on the Premier Marché in one of three categories depending on their trading volume. Our shares are placed in the category known as Continu, which includes the most actively traded securities. To be placed in the category Continu, Euronext Paris requires that a company already listed on a regulated market of Euronext Paris be the object of a minimum of 2,500 trades per year.

Since September 25, 2000, all trading on the Premier Marché of Euronext Paris is performed on a cash settlement basis on the third day following the trade. However, a Deferred Settlement Service (Service à Règlement Différé or SRD) allows investors who elect this service to benefit from leverage and other special features of the previous monthly settlement market. The service is only available for trades in securities that either are SBF 120 components or have both a total market capitalization of at least euro 1 billion and represent a minimum daily average trading volume of euro 1 million on Euronext Paris and that are cited in a list published by Euronext Paris. Investors in shares eligible for SRD can elect on the determination date (date de liquidation), which is, at the latest, the fifth trading day before the end of the month, either to settle the trade by the last trading day of the month or to pay an additional fee and postpone the settlement decision to the determination date of the following month. Our shares are eligible for the SRD.

Ownership of equity securities traded on a deferred settlement basis is considered to have been transferred only after they have been registered in the purchaser’s account. In accordance with French securities regulations, any sale of securities executed on a deferred settlement basis during the month of a dividend is deemed to occur after payment of the dividend. The account of the purchaser having purchased the securities prior to the date of the dividend payment, but during the month of a dividend payment date, is credited with an amount equal to the dividend paid and the seller’s account is debited by the same amount.

Prior to any transfer of securities held in registered form on the Premier Marché, the securities must be converted into bearer form and accordingly inscribed in an account maintained by an accredited intermediary with Euroclear France SA, a registered clearing agency. Transactions in securities are initiated by the owner giving instruction (through an agent, if appropriate) to the relevant accredited intermediary. Trades of securities listed on the Premier Marché are cleared and settled

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through Euroclear France SA using a continuous net settlement system. A fee or commission is payable to the broker-dealer or other agent involved in the transaction.

Trading in securities listed on the Premier Marché may be suspended by Euronext Paris if quoted prices exceed certain price limits defined by the regulations of Euronext Paris. In particular, if the quoted price of a Continu security varies by more than 10% from the previous day’s closing price, Euronext Paris may suspend trading for up to 4 minutes. Further suspensions for up to 4 minutes are also possible if the price again varies by more than 10% from the threshold at which the suspension was initiated. During the continuous trading session, Euronext Paris may also suspend trading for a 4 minute period if the price varies by more than 2% from the last traded price. Euronext Paris may also suspend trading of a security listed on the Premier Marché in certain other limited circumstances, including for example, the occurrence of unusual trading activity in the security. In addition, in exceptional cases, the Conseil des Marchés Financiers (the self-regulatory authority over French stock exchanges) and the Commission des opérations de bourse (the French securities and exchange commission) may also suspend trading.

High and Low Price Range

The following table sets forth the range of quarterly high and low closing prices in U.S. dollars for our American depositary shares (“ADSs”) on the Nasdaq National Market and in Euros for our ordinary shares on the Premier Marché for each full quarterly period within the two most recent fiscal years. All prices have been adjusted retroactively to reflect the three-for-two stock split effected on March 12, 2001 and the two-for-one stock split effected on January 20, 2000.

As of December 31, 2002, there were 63,463,234 ordinary shares outstanding (including 23,139,876 ordinary shares underlying the outstanding American depositary shares held by 47 shareholders of record and 1,067,675 treasury shares). All American depositary shares and ordinary share data has been adjusted retroactively to reflect the three-for-two stock split effected on March 12, 2001 and the two-for-one stock split effected on January 20, 2000. The Company has never declared or paid any cash dividends on its ordinary shares. We currently intend to retain our earnings to finance future growth and, therefore, do not anticipate paying any cash dividends on our ordinary shares in the foreseeable future.

The information required by this item regarding equity compensation plans is set forth in Item 12 of this Form 10-K and is incorporated herein by reference.

Item 6. Selected Financial Data

The following selected financial data should be read in conjunction with the Consolidated Financial Statements and related Notes thereto appearing elsewhere in this Form 10-K. The selected statement of operations data for each of the five years in the period ended December 31, 2002 and the balance sheet data at December 31, 2002, 2001, 2000, 1999 and 1998 respectively have been derived from the Consolidated Financial Statements of the Company, which have been prepared in accordance with accounting

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principles generally accepted in the United States and adjusted to reflect the three-for-two stock split effected March 12, 2001 and the two-for-one stock split effected January 20, 2000. The Company has never declared or paid any cash dividend on its ordinary shares. Effective with our adoption of Statement of Financial Accounting Standard 142, “Goodwill and Other Intangible Assets” (“FAS 142”) on January 1, 2002 the Company no longer amortizes goodwill.

See Note 4 to the Consolidated Financial Statements in Item 8 of this Form 10-K for a reconciliation of reported net income and net income adjusted for the adoption of FAS 142 for the years ending December 31, 2002, 2001 and 2000.

As the Company is listed on both the Premier Marché Euronext in France and the Nasdaq National Market in the United States, it is required to separately report consolidated financial statements prepared in accordance with accounting principles generally accepted in France (“French GAAP”) and in accordance with accounting principles generally accepted in the United States (“US GAAP”). Prior to 2002, there have not been significant differences between the operating results presented under French GAAP and US GAAP. Effective 2002, there is a significant difference in results of operations and financial position due to the adoption of FAS 142 under U.S. GAAP, but not French GAAP. In accordance with FAS 142, the Company no longer amortizes goodwill and other indefinite lived intangible assets, but reviews them annually for impairment, or more frequently if impairment indicators arise. As French GAAP does not have a rule similar to FAS 142, the Company continues to amortize goodwill on a straight-line basis over its estimated five year useful life for French GAAP reporting.

The following table sets forth the reconciliation of net income under US and French GAAP (in thousands):

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read together with our Consolidated Financial Statements and the Notes to those statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about Business Objects and our industry. These forward-looking statements involve risks and uncertainties. Business Objects’ actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described in the “Risk Factors” section and elsewhere in this Form 10-K. Business Objects undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Overview

General

Business Objects S.A. is a leading worldwide provider of business intelligence (BI) solutions. We develop, market and distribute software that enables organizations to track, understand and manage enterprise performance within and beyond the enterprise to make better, more informed business decisions. Users can view and interact with key performance indicators in a dashboard, create new queries or reports, access catalogs of reports and do simple or complex analysis of the data. Instead of struggling with complex and technical database terminology, users interact with data using business representations of information, or “business objects,” with which they are familiar. This patented technology is commonly referred to as our “semantic layer”. Our products are designed to be easy to use and architected to be secure, scalable and extensible.

Critical accounting policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements:

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures with our Audit Committee. See Notes to Consolidated Financial Statements in Item 8 of this Form 10-K, which contain additional information regarding our accounting policies and other disclosures required by GAAP.

Revenue Recognition

Our revenue recognition policy, as described below, is significant because revenue is a key component of our results from operations. In addition, revenue recognition determines the timing of certain expenses, such as incentive compensation. We follow very specific and detailed guidelines in measuring revenue; however, certain judgments and estimates affect the

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application of the revenue policy. Revenue results are difficult to predict and any shortfall in revenue or delay in recognizing revenue could cause operating results to vary significantly from quarter to quarter and could result in future operating losses.

We enter into arrangements for the sale of 1) licenses of software products and related maintenance contracts; 2) bundled license, maintenance and services and 3) services on a time and material basis. In instances where maintenance is bundled with a license of software products, such maintenance terms are typically one year.

For each arrangement, we determine whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met. In software arrangements that include rights to multiple software products and/or services, we use the residual method, under which revenue is allocated to the undelivered elements based on vendor specific objective evidence of fair value of such undelivered elements and the residual amount of revenue is allocated to the delivered elements.

For those contracts that consist solely of license and maintenance we recognize license revenues based upon the residual method after all licensed software product has been delivered as prescribed by the Statement of Position 98-9 “Modification of SOP No. 97-2 with Respect to Certain Transactions.” We recognize maintenance revenues over the term of the maintenance contract. The maintenance rates for both license agreements with and without stated renewal rates are based upon our price list. Vendor specific objective evidence of the fair value of maintenance for license agreements that do not include stated renewal rates is determined by reference to the price paid by our customers when maintenance is sold separately (that is, the renewal rate). Past history has shown that the rate we charge for maintenance on license agreements with a stated renewal rate is similar to the rate we charge for maintenance on license agreements without a stated renewal rate. There is no right of return or price protection for sales to domestic and international distributors or value-added resellers (collectively, “resellers”). We do not accept orders from resellers when we are aware that a reseller does not have a purchase order from an end-user.

Services can consist of maintenance, training and/or consulting services. In all cases, we assess whether the service element of the arrangement is essential to the functionality of the other elements of the arrangement. When software services are considered essential or the arrangement involves customization or modification of the software, both the license and service revenue under the arrangement are recognized under the percentage of completion method of contract accounting based on input measures of hours. For those arrangements for which we have concluded that the service element is not essential to the other elements of the arrangement we determine whether the services are available from other vendors, do not involve a significant degree of risk or unique acceptance criteria and whether we have sufficient experience in providing the service to be able to separately account for the service. When the service qualifies for separate accounting, we use vendor specific objective evidence of fair value for the services and the maintenance to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Revenue allocable to services is recognized as the services are performed.

Vendor-specific objective evidence of fair value of consulting services is based upon hourly rates. As previously noted, we enter into contracts for services alone and such contracts are based upon time and material basis. Such hourly rates are used to assess the vendor specific objective evidence of fair value in multiple element arrangements.

Allowances for Doubtful Accounts

We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable. In determining these percentages, we analyze our historical collection experience and current economic trends. If the historical data we use to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected.

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Contingencies and Litigation

We evaluate contingent liabilities including threatened or pending litigation in accordance with SFAS No. 5, Accounting for Contingencies. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position. See Note 6 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for a description of our material legal proceedings.

Business Combinations

We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, as well as in-process research and development (“IPR&D”), based on their estimated fair values. For our acquisition of Acta Technology, Inc., we engaged an appraisal firm to assist us in determining the fair values of assets acquired and liabilities assumed. Such a valuation requires management to make significant estimates and assumptions, especially with respect to intangible assets. The significant purchased intangible assets included developed and core technology and maintenance contracts. The fair values assigned to the identified intangible assets are discussed in detail in Note 5 to the Consolidated Financial Statements in Item 8 of this Form 10-K.

Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer contracts, customer lists, distribution agreements and acquired developed technologies; expected costs to develop IPR&D into commercially viable products and estimating cash flows from projects when completed and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed, as more fully discussed in Note 5 to the Consolidated Financial Statements in Item 8 of this Form 10-K. In addition, the Acta Technology acquisition-related restructuring accrual for the shutdown of excess facilities is subject to change as management executes the approved plan. For a description of valuation assumptions and estimates relating to the Acta Technology acquisition and certain other acquisitions, see Notes 5 and 13 to the Consolidated Financial Statements in Item 8 of this Form 10-K.

Impairment of Long-Lived Assets

We evaluate our identifiable intangible assets, goodwill and other long-lived assets for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. Future impairment evaluations could result in impairment charges, which would result in a reduction in the carrying value of these assets.

Deferred Income Tax Assets

We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. We have considered future taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event that we determine that we would not be able to realize all or part of our net deferred tax assets, an adjustment to the deferred tax assets would be charged to earnings in the period such determination is made. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, then the previously provided valuation allowance would be reversed. Our current valuation allowance covers the estimated tax benefit from the exercise of employee stock options. When these tax benefits are realized, the valuation allowance will be reversed and credited to additional paid in capital.

Recent Acquisition

On August 23, 2002, we acquired all the outstanding shares of Acta Technology, Inc. (“Acta”), a privately held data integration software vendor. The results of Acta’s operations have been included in the consolidated financial statements since

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that date. The acquisition provides Business Objects with a comprehensive enterprise analytic platform for the delivery of custom-developed and pre-packaged analytic applications. Management believes that the combination of Acta’s technology with Business Objects’ technology will help to create a strong best-of-breed analytical application software and it is the investment value of this synergy related to future product offerings that principally contributed to a purchase price that resulted in the recognition of goodwill. Due to the relatively short remaining useful life of the developed product technology and in-process research and development, no significant value was allocated to the identified intangible assets. As a result, the majority of the value of the intangible assets is represented by revenues from sales of future products and from services contracts attached to the sales of future products, such as maintenance.

The aggregate purchase price was $65,465,000 in cash, including $700,000 of transactions costs. Of the purchase price, $9,310,000 has been placed in a stockholder escrow account. In addition, another $944,000 has been placed in an employee escrow account, representing withholdings from payments due to Acta Technology management pursuant to change of control clauses and other employees’ future bonuses. Both funds are security for the indemnification obligations set forth in the merger agreement and will be available for release in February 2004, subject to claims for indemnification. We have accounted for the escrow funds on our consolidated balance sheet as long-term restricted cash and we have recorded a related long-term liability for $9,310,000 due to former Acta Technology stockholders in February 2004 and $418,000 due to employees over the next 3 years. The Acta Technology acquisition has been accounted for under the purchase method of accounting. See Note 14 to the Consolidated Financial Statements in Item 8 of this Form 10-K for a summary of the outstanding balances of notes payable and restricted cash related to this acquisition.

We performed a due diligence review to determine whether all tangible assets and liabilities were recorded in Acta’s general ledger in accordance with GAAP. We estimated that the net book value approximated fair value pursuant to the guidance within SFAS 141, par. 37. With the assistance of an appraisal firm, we estimated the fair value of all intangible assets that meet the recognition criteria in SFAS 141, par. 39, regardless of whether they had been recorded in Acta’s financial statements. In conducting the study, detailed discussions were held with Acta Technology financial, operational, marketing and engineering personnel concerning the nature of the assets acquired. Research was also conducted as to the existence and materiality of possible intangible assets such as assembled workforce, patents, trademarks and trade names, customer relationships, non-compete agreements, developed product technology and in-process research and development. We also performed analysis of audited and un-audited historical and forecast financial statements and other financial and operational data concerning Acta Technology and developed fair value estimates for the identified intangible assets under the assumption that they remained a part of a separate and stand-alone on going entity.

The approach to the estimation of the fair value of Acta’s intangible assets involved the following steps:

The purchase price allocation to the asset acquired was made on a Fair Value basis, in accordance with the guidelines established in Statements of Financial Accounting Standards (“SFAS”) No. 2, No. 86 and No. 141 and FASB Interpretations (“FIN”) No. 4 and No. 6. The residual value remaining after allocation to the net liabilities assumed and the total fair value of identified intangibles assets was assigned to goodwill.

A portion of the purchase price was allocated to existing technology and acquired in-process research and development (IPR&D). Each was identified and valued using the income approach through analysis of data provided by Acta Technology concerning developmental products, their stage of development, the time and resources needed to complete them, their expected future revenue cash flow and associated risks. The discount rates used were 16% for existing technology and 21% for in-process research and development.

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The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

No stock options were assumed. Deferred tax assets totaled approximately $20,300,000, against which a valuation allowance of $20,300,000 was applied. The Company’s ability to utilize the Acta Technology NOL carryforwards may be subject to limitation under the Section 382 change of ownership rules and will be credited to goodwill when and if used.

The IPR&D represented projects that had not reached technological feasibility and had no future alternative uses. These were classified as IPR&D and expensed in the third quarter of 2002 at the time of acquisition in accordance with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method. The majority of the costs allocated to IPR&D relates to the development of the K2 version of the ActaWorks Engine, which will allow for improved scalability, reliability and security, allowing for more complex data requests. Efforts required to develop the IPR&D into commercially viable products included the completion of all planning designing, prototyping, verification and testing activities necessary to establish that the products meet their design specifications, including functions, features and technical performance requirements. All projects have been completed as of December 31, 2002.

The IPR&D was written off to the acquired in-process technology line on the Statement of Income at the date of acquisition in accordance with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method. Other intangible assets, which include developed technology of $4,500,000 and maintenance contracts of $2,700,000, will be amortized straight-line over their 5-year estimated useful lives.

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the tangible and intangible net assets acquired. In accordance with FAS 142, goodwill is no longer amortized but is to be reviewed annually for impairment, or more frequently if impairment indicators arise. In the event that management determines that the value of goodwill has become impaired, the Company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made. The Company is still evaluating how much, if any, of the goodwill is expected to be deductible for tax purposes.

The facilities shutdown accrual represents the total future minimum lease payments of $12,114,000 that expire through 2007 for duplicate facilities in the United States and Europe, net of projected sublease income of $4,188,000. If the amount that is ultimately paid for abandoning the leasehold properties is materially different than what has been accrued, the purchase price allocation may be adjusted in future periods. See Note 5 to the Consolidated Financial Statements in Item 8 of this Form 10-K.

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Results of Operations

The following table sets forth selected items from our consolidated statements of income expressed as a percentage of total revenues for the periods indicated:

Fiscal Years Ended December 31, 2002, 2001 and 2000.

Impact of Foreign Exchange Fluctuations on Results of Operations

Because we conduct a significant portion of our business in currencies other than the U.S. dollar, primarily the euro, pound sterling and yen, the translated U.S. dollar value of our revenues and operating expenses are impacted by changes in foreign currency exchange rates. However, the impact of fluctuations in foreign currency exchange rates on our net operating income has been minimized as the level of our foreign denominated expenses tends to be substantially offset by the level of our foreign denominated revenues. The following table summarizes the fluctuations on percent changes in operating results, assuming for 2002 results that foreign exchange rates in 2002 had remained constant with 2001 rates and for 2001 results that foreign exchange rates in 2001 had remained constant with 2000 rates:

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There can be no assurance that the mix of future foreign denominated net revenues and expenses will continue to minimize the impact of changes in foreign currency exchange rates on our results from operations.

Revenues

The following table sets forth information regarding the composition of our revenues and period-to-period changes:

Total revenues increased to $454.8 million in 2002, up from $415.8 million in 2001 and $348.9 million in 2000, representing increases of 9% from 2001 to 2002 and 19% from 2000 to 2001. The growth in total revenues in 2002 compared to 2001 was driven by a 27% increase in service revenues while net license fees decreased 2%. If the growth rate of our service revenues continues to exceed the growth rate of our net license revenues, we could experience a decline in our gross margins because service revenues have a lower gross margin than license revenues. The growth in total revenues in 2001 compared to 2000 was due to a 30% increase in service revenues and a 13% increase in net license fees revenues.

•    Net License Fees. Revenues from net license fees decreased $5.6 million or 2% in 2002 compared to 2001. The decrease is primarily attributable to weak IT spending environments outside the United States in 2002. While net license fees grew 27% in the Americas they decreased by 21% in Europe. Net license fees from Business Intelligence Platform decreased by $22.4 million in 2002 compared to 2001 but were offset partially by a $12.9 million increase in Enterprise Analytic Applications and a $3.9 million increase in Data Integration software. See Note 12 to the Consolidated Financial Statements in Item 8 of this Form 10-K for a breakdown of net license fees revenues by product line. In the current economic and political environment we expect IT spending worldwide to remain weak at least through the quarter ending March 31, 2003. Revenues from net license fees increased by approximately $28.7 million or 13% during 2001 compared to 2000. The increase in net license fees in 2001 compared to 2000 was driven by increases in customer spending on Business Intelligence Platform, specifically that used to access, analyze and share information stored within and beyond the enterprise, and by increases in sales of Enterprise Analytic Applications. We had an increase in revenues in all geographic regions in 2001 as compared to 2000.

•    Services. Our services revenues were comprised of revenues from maintenance, consulting and training activities. Revenues from services increased by approximately $44.6 million or 27% in 2002 compared to 2001. This compares to an increase of approximately $38.1 million or 30% in 2001 compared to 2000. Services increased in all geographic regions in 2002 and 2001. The increase in revenues from services for each period was primarily due to increases in maintenance resulting from the expansion of our installed customer base and our focus on the renewal of existing support contracts which increased the percentage of our installed base paying for maintenance. If the rate of growth in our net license revenue declines further or flattens, our installed customer base may not grow at the same rates as achieved in the past or if the percentage of the installed base paying for maintenance decreases, the rate of maintenance revenue growth could slow which could negatively impact our results of operations. Training revenues, which decreased in 2002 compared to 2001 due to reduced customer spending and travel in response to the general economic slowdown, were partially offset by a $2.2 million increase in consulting revenues as customers continued to utilize our consulting services to aid in the design, development and deployment of BI systems.

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Cost of Revenues

The following table sets forth information regarding our cost of revenues and period-to-period changes:

•    Cost of Net License Fees. Cost of net license fees consists primarily of materials, packaging, freight, third-party royalties and amortization of developed technology. Cost of net license fees remained constant at approximately 1% of net license fee revenues for 2002, 2001 and 2000. The increase in cost of net license fees in absolute dollars was primarily due to charges from the amortization of developed technology related to the Acta Technology and Blue Edge acquisitions. Cost of net license fees is expected to increase in absolute dollars on a year over year basis as developed technology is amortized to cost of net license fees. Amortized developed technology expense totaled $1.1 million for 2002 and zero for 2001 and 2000 and is estimated to be $1.9 million per year for 2003 through 2006 and $570,000 in 2007.

•    Cost of Services. Cost of services, which consists of the cost of providing maintenance, consulting and training increased by approximately $8.0 million or 13% in 2002 compared to 2001. This compares to an increase of $10.4 million or 20% in 2001 over the level experienced in 2000. In 2002, cost of services decreased as a percentage of service revenues to 34% as compared to 38% in 2001 and 41% in 2000. The trend of decreasing cost of services as a percentage of service revenues for all periods presented was primarily due to improved productivity in providing maintenance support and a change in the mix of services sold whereby maintenance revenues, which have a lower cost than the cost of consulting and training, represented an increasing percentage of total services revenues.

The decrease in cost of services as a percentage of services revenues in 2002 as compared to 2001 was partially offset by a $3.3 million increase in the cost of providing consulting services and a $0.6 million increase in the cost of providing training services as the cost of providing consulting and training revenue grew at a faster rate than the growth in the underlying related services revenues. If the growth in the cost of providing consulting and training continues to outpace the underlying service revenue, we could experience a decline in service gross margins, which could negatively impact our results of operations.

The increase in costs in absolute dollars in 2002 as compared to 2001 resulted primarily from an increase in average salaries due to hiring more senior people for our customer support group, increases in third party consulting fees to support our consulting group and unfavorable changes in foreign exchange rates. To a lesser extent, 2002 costs were higher compared to 2001 due to increased facilities costs related to the relocation to our new facility in San Jose in April 2001. The increase in costs in absolute dollars in 2001 from 2000 resulted primarily from an increase in the number of employees supporting our growing customer base and to a lesser extent an increase in average salaries and facilities costs.

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Operating Expenses

The following table sets forth information regarding the composition of our operating expenses and period-to-period changes:

•    Sales and Marketing. Sales and marketing expenses were $222.2 million, or 49% of total revenues in 2002 as compared to $203.7 million, or 49% of total revenues in 2001 and $167.5 million, or 48% of total revenues in 2000. Sales and marketing expenses consist primarily of salaries and commissions, together with amounts paid for advertising, product promotion activities and related facilities costs.

The increase in absolute dollars in 2002 compared to 2001 was primarily due to increases in the average cost per employee as we attracted more experienced sales people and unfavorable changes in foreign exchange rates. Also contributing to a lesser extent were increased travel and entertainment expenses, sales training expenses, higher facilities expenses, severance costs in Europe and expenses for advertising and transitional employees directly related to the Acta Technology purchase in the third quarter of 2002. The overall increase in expenses was partially offset by a $6.3 million net reduction in advertising, tradeshow, user conference and other marketing program expenses. Sales and marketing expenses are expected to continue to increase in absolute dollars but may vary as a percentage of revenues in the future.

The increase in absolute dollars in 2001 compared to 2000 was primarily due to increased headcount to support the expansion of our sales and marketing organization and increased facilities expenses related to new facilities in France, the U.S. and the U.K.

•    Research and Development. Research and development expenses were $75.0 million or 17% of total revenues in 2002 as compared to $55.2 million or 13% of total revenues in 2001 and $40.7 million, or 12% of total revenues in 2000. Research and development expenses consist primarily of salaries, related benefits, retention bonuses due to employees who joined the Company as a result of the Acta Technology acquisition, third party consultant fees, related facilities expenses and amortization of intangible assets allocated to employment contingencies. The increase in research and development expenses in 2002, both as a percentage of total revenues and in absolute dollars, was primarily due to increased costs associated with the acquisition and integration of Acta Technology for ongoing salaries, retention plan bonuses, the hiring of additional software engineers to support our development of future products and enhancement of existing products. To a lesser extent the increase was due to increases in facilities costs and unfavorable changes in foreign exchange rates as the majority of our research and development expenses is incurred in euros.

The increase in research and development expenses in 2001 as compared to 2000, both as a percentage of total revenues and in absolute dollars, was primarily due to increased staffing and associated support for software engineers as part of our ongoing operations and expansion into the analytic applications market as well as increased facilities expenses related to new facilities in France, the U.S. and the U.K.

The Company capitalizes eligible software development costs upon achievement of technological feasibility subject to net realizable value considerations. Based on the Company’s development process, technological feasibility is generally established upon completion of a working model. Research and development costs prior to the establishment of technological feasibility are expensed as incurred. Because the period between achievement of technological feasibility and the general release of the

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Company’s products has been of relatively short duration, costs qualifying for capitalization were insignificant during the years ended December 31, 2002, 2001 and 2000. Accordingly, there were no capitalized software development costs at December 31, 2002 and 2001.

•    General and Administrative. General and administrative expenses were $29.4 million, or 6% of total revenues in 2002 as compared to $24.3 million, or 6% of total revenues in 2001 and $21.7 million, or 6% of total revenues in 2000. General and administrative expenses consist primarily of salaries, related benefits, insurance costs, fees for professional services including legal and accounting services and allowances for doubtful accounts. The increase in general and administrative expenses in absolute dollars in 2002 compared to 2001 was primarily due to higher legal expenses related to patent and other litigation, increases in salary expenses due to increased staffing to support our growth and to a lesser extent unfavorable changes in foreign exchange rates. Partially offsetting this was a reversal of $1.1 million of bad debt expense from a change in estimate resulting from the application of our formula for calculating the allowance for doubtful accounts, which is based on a specific review of all significant outstanding invoices and the age of our receivables. Bad debt expense could increase in the future if the aging of our accounts receivable deteriorates.

General and administrative expenses increased in absolute dollars in 2001 compared to 2000 due to increased staffing to support our growth and increased facilities expenses related to new facilities in France, the U.S. and the U.K., partially offset by reduced bad debt expense of $0.8 million in 2001 as compared to $2.4 million in 2000. General and administrative expenses are expected to continue to increase in absolute dollars but may vary as a percentage of revenues in the future.

•    Acquired In-Process Technology. On August 23, 2002, we acquired all the outstanding shares of Acta Technology, Inc., a privately held data integration software vendor, in exchange for $65.5 million in cash, including $700,000 of transaction costs. Based on a valuation of the intangible assets, $2.0 million was allocated to acquired in-process technology (“IPR&D”), which was expensed at the date of acquisition in accordance with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method. The IPR&D represented projects that had not reached technological feasibility and had no future alternative uses. The majority of the costs allocated to IPR&D relate to the development of the K2 version of the ActaWorks Engine, which will provide improved scalability, reliability and security, allowing for more complex data requests. Efforts required to develop the IPR&D into commercially viable products included the completion of all planning, designing, prototyping, verification and testing activities necessary to establish that the products meet their design specifications, including functions, features and technical performance requirements. All projects have been completed as of December 31, 2002. See Note 5 in the Notes to the Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion.

•    Business Restructuring Charge. During the quarter ended June 30, 2002, we implemented a restructuring plan to eliminate 50 positions in our European field operations in order to better align our revenues and costs structure in Europe in response to the region’s overall weak IT spending environment. In addition, we eliminated excess office space in France, Italy, Spain and Switzerland. Implementation of the plan resulted in restructuring charges to earnings totaling $3.8 million for severance and other employee termination benefits and costs associated with exiting facilities, representing the excess of lease costs over anticipated sublease income, if any.

During the quarter ended December 31, 2002, we substantially completed our restructuring plan, at which time we reversed $0.6 million of previously accrued expenses. The reversal was primarily due to savings from planned termination costs resulting from normal employee attrition for 3 of the 50 positions that were to be eliminated, lower-than-planned severance costs per employee and utilization of certain facilities originally scheduled for abandonment.

During the quarter ended December 31, 2002, we adopted an additional restructuring plan to eliminate 4 more positions as part of our ongoing measures to better align operating expenses with revenues. Implementation of this plan resulted in restructuring charges to earnings totaling $0.7 million for severance and other employee termination benefits.

We have substantially completed the implementation of both restructuring plans as of December 31, 2002. We expect to complete our workforce reduction by the end of the second quarter of 2003. Lease related expenses due to the exit from excess office space will be paid over the respective lease terms through 2003. We estimate that we saved approximately $0.7 million in the third quarter and $1.0 million in the fourth quarter of 2002, primarily due to reduced sales and marketing employee costs and facilities expenses, resulting from the implementation of the restructuring plans. We anticipate future savings of approximately $1.0 million per quarter during the four quarters of 2003.

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The following table summarizes our accrued restructuring costs at December 31, 2002 (in thousands):

•    Amortization of Goodwill. Goodwill amortization expense was zero in 2002 as compared to $4.5 million in 2001 and $4.3 million in 2000. The decrease in goodwill amortization in 2002 from 2001 and 2000 was due to our adoption of FAS 142 on January 1, 2002. Under FAS 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment, or more frequently if impairment indicators arise.

Goodwill amortization expense was approximately 1% of total revenues for 2001 and 2000. Goodwill amortization expense increased in 2001 over 2000 due to the purchase of OLAP@Work, Inc. in April 2000 and the purchase of a division of Executive Computing Group, the Company’s Australian distributor, in August 2000. During 2001 and 2000, goodwill was amortized over its estimated useful life of five years.

Interest and Other Income, Net

The following table sets forth information regarding our interest and other income, net:

Interest and other income, net primarily represents net interest income, net gains and losses resulting from foreign currency exchange rate changes and other income net of litigation expenses related to the settlement of patent infringement actions.

The increase in Interest and Other Income, Net was primarily due to the settlement of our patent infringement lawsuit against Cognos, Inc. and Cognos Corporation (collectively Cognos) during May 2002. Under the terms of the agreement, Cognos licensed the rights to our technology under patent number 5,555,403 in exchange for payments totaling $24.0 million. The license covers both past and future use of our technology. A $10.0 million first installment representing past use was received during June 2002 and classified as Other Income in the Consolidated Statements of Income for the quarter ending June 30, 2002, net of $3.1 million of related legal expense. The remaining balance represents Cognos’ future use of our patented technology and is due in eight quarterly installments of $1.75 million commencing the quarter ended September 30, 2002. Due to inherent uncertainties regarding performance on the part of Cognos in making the future payments over the

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next two years, consistent with the cost recovery method and with other literature on extended payment terms including SOP 97-2, we will recognize the remaining settlement as other income once the amounts become due. For the year ended December 31, 2002, we recognized net other income of $10.4 million related to the Cognos settlement, comprised of the $6.9 million net of the June 2002 payment plus two quarterly installments of $1.75 million received in July and October 2002.

Payments related to the settlement of our patent infringement lawsuit against Brio Software Inc. (Brio) in September 1999 are included above in Other Income, Net. As part of the settlement, we dismissed our pending lawsuit against Brio involving our U.S. patent number 5,555,403 and Brio dismissed its pending lawsuit against us involving patent number 5,915,257 and agreed to pay us $10.0 million payable quarterly in $1.0 million payments beginning September 30, 1999. We received and recognized in Other Income, Net $1.5 million from Brio under the settlement during the year ended December 31, 2002 compared to $2.5 million in 2001 and $4.0 million in 2000. As of December 31, 2002, the settlement has been paid in full.

Net interest income decreased in 2002 compared to 2001 due to a decrease in average interest rates compared to 2001, partially offset by an increase in invested cash. The increase in net interest income in 2001 compared to 2000 resulted from higher levels of invested cash due to increased cash provided by operations, partially offset by a decrease in average interest rates.

Income Taxes

The following table sets forth information regarding our income taxes:

Income taxes totaled $26.1 million in 2002, $28.1 million in 2001 and $28.3 million in 2000. This represented an effective income tax rate of 39% in 2002, 38% in 2001 and 40% in 2000. Our effective tax rate increased in 2002 from 2001 primarily due to the impact of charges for acquired in-process technology related to the Acta Technology acquisition that were not deductible for income taxes, partially offset by a decrease in the French statutory rate of 35.43% in 2002 from 36.38% in 2001. Our effective tax rate declined in 2001 as compared to our effective tax rate in 2000 due to a decrease in the French statutory rate of 36.38% in 2001 from 37.77% in 2000.

Liquidity and Capital Resources

As of December 31, 2002, we had cash, cash equivalents and short-term investments of $280.6 million, an increase of $40.2 million from December 31, 2001. Cash generated from operations totaled $67.2 million for the year ended December 31, 2002, as compared to $80.9 million for 2001. Net cash provided by operating activities for the year ended December 31, 2002 was generated primarily by net income plus non cash charges for depreciation and amortization, tax benefits from employee stock plans and the write-off of acquired in-process technology; increases in accrued payroll and related expenses and

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deferred revenue and a decrease in current and other assets; partially offset by decreases in income taxes payable, other current liabilities and accounts payable and an increase in deferred tax assets.

Accounts receivable net of allowances for doubtful accounts increased to $98.6 million at December 31, 2002 from $87.5 million at December 31, 2001 resulting primarily from an increase in revenue and a strengthening of the euro versus the U.S. dollar at December 31, 2002. Although accounts receivable increased, the allowance for doubtful accounts decreased because of a decrease in the percentage of accounts receivable past due at December 31, 2002 compared to December 31, 2001.

Deferred revenue represents the balance of maintenance billed but not yet recognized, as we generally invoice first year and renewal maintenance services in advance for the 12 month maintenance period. Because a high percentage of our customers renew maintenance each year, the increase in the balance of deferred revenue is primarily due to a growing cumulative customer base and a corresponding increase in maintenance services billed but not yet recognized. In addition, because a high percentage of our deferred revenue is foreign currency denominated, the balance is subject to fluctuations from changes in the value of the U.S. dollar in relation to other foreign currencies, principally the euro and British pound sterling and this also contributed to a lesser extent to the increase in deferred revenue as of December 31, 2002. Because a significant portion of our services revenues is recognized from maintenance revenues, a decline in the rate at which we renew maintenance contracts could negatively impact our results of operations.

Investing activities for the year ended December 31, 2002 consisted of the purchase of Acta Technology, Inc., including transaction costs, for $62.5 million of cash ($65.5 million in cash, including transaction costs net of $3.0 million of cash acquired), the purchase of $45.2 million of short-term investments and the purchase of $10.4 million of property and equipment. Investing activities for the year ended December 31, 2001 consisted of $6.7 million for the acquisition of Blue Edge, $1.3 million for an investment in which our ownership interest is less than 10% and the purchase of $26.3 million of property and equipment, principally leasehold improvements for our facilities in the U.S. and U.K.

Financing activities for the year ended December 31, 2002 generated $15.5 million from the issuance of ordinary shares under employee stock plans and $9.7 million from an increase in escrow payable due to shareholders and employees related to the Acta Technology acquisition, partially offset by the net transfer of $9.1 million into restricted cash accounts pursuant to acquisition agreements, $4.1 million for the purchase of 250,000 treasury shares at a weighted-average price of 16.34 euros per share and $2.6 million for the payment of notes payable. Financing activities in 2001 generated $10.1 million from the issuance of shares under employee stock option and purchase plans and directors warrants, $3.0 million from the transfer of cash from escrow and other restricted accounts and $1.8 million from the issuance of notes payable for the acquisition of Blue Edge, partially offset by the repayment of $5.6 million of notes payable and the repurchase of 243,175 shares of the Company’s stock at a weighted-average price of 19.99 euros per share for $4.4 million. This repurchase was made pursuant to an October 2002 Board of Director authorization that allows for the repurchase of up to $40.0 million of the Company’s stock over the next year, representing 2,000,000 shares. This plan supersedes any previously announced stock repurchase plan.

The following table summarizes our outstanding cash commitments as of December 31, 2002. We are not aware of any provisions that would accelerate our commitments. In addition, we have outstanding standby letters of credit totaling $7.5 million as security for our San Jose and Mountain View, California facilities. The letters of credit are fully secured by restricted cash deposits.