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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

OR

For the transition period from              to             

Commission File No. 0-24607

Actuate Corporation

(Exact name of Registrant as specified in its charter)

701 Gateway Boulevard

South San Francisco, California 94080

(650) 837-2000

(Address, including zip code, and telephone number,

including area code, of Registrant’s principal executive offices)

Former name, former address and former fiscal year, if changed since last report: 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.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.    Yes  x    No  ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

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Actuate Corporation

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Part I. Financial Information

Item 1. Financial Statements

ACTUATE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ACTUATE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ACTUATE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ACTUATE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements of Actuate Corporation (“Actuate”, the “Company”, “We” or “Our”) are unaudited and include all normal recurring adjustments and non-recurring adjustments which we believe to be necessary for the fair presentation of the financial position, results of operations, and changes in cash flows for the periods presented. The preparation of the financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Despite our best effort to establish good faith estimates and assumptions, actual results may differ.

The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on March 16, 2005 and as amended in our Form 10-K/A which was filed on May 2, 2005. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Interim results of operations for the three months ended March 31, 2005 are not necessarily indicative of operating results for any other future interim period or the full fiscal year.

Revenue Recognition

We generate revenues from sales of software licenses and related services. We receive software license revenues from licensing our products directly to end-users and indirectly through resellers, system integrators and original equipment manufacturers (“OEMs”). We receive service revenues from maintenance contracts, consulting services and training that we perform for customers.

We recognize revenues in accordance with AICPA Statement of Position (“SOP”) 97-2 (“SOP 97-2”), “Software Revenue Recognition,” as amended and modified by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.” For sales to end-user customers, we recognize license revenues when a license agreement has been signed by both parties or a definitive purchase order has been received from the customer, the product has been shipped, there are no unusual uncertainties surrounding the product acceptance, the fees are fixed or determinable, collectibility is probable and vendor-specific objective evidence of fair value exists to allocate the fee to the undelivered elements of the arrangement. Vendor-specific objective evidence is based on the price charged when an element is sold separately. We have not established vendor specific objective evidence of fair value for license fees. Therefore, we recognize revenues from arrangements with multiple elements involving software licenses under the residual method. In some cases the license agreement may contain payment terms that would indicate that the fee is not fixed or determinable, such as payment terms extending beyond one year from the purchase date. In such cases, revenues are recognized as the payments become due and payable, assuming that all other revenue recognition criteria are met.

We enter into reseller and distributor arrangements that typically give such distributors and resellers the right to distribute our products to end-users headquartered in specified territories. We

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recognize license revenues from arrangements with U.S. resellers and distributors when there is persuasive evidence of an arrangement with the reseller or distributor, the product has been shipped, the fees are fixed or determinable and collectiblity is probable. We recognize license fee revenues from arrangements with international resellers and distributors upon receipt of evidence of sell-through and when all other revenue recognition criteria have been met. If it is not practical to obtain evidence of sell-through, we defer revenues until the end-user has been identified and cash has been received. In some instances there is a timing difference between when our reseller completes its sale to the end-user and the period in which we receive the documentation required for revenue recognition. Because we delay revenue recognition until the required documentation is obtained, we may recognize revenue in a period subsequent to the period in which the reseller completes the sale to its end-user.

We also enter into OEM arrangements that provide for license fees based on the bundling or embedding of our products with the OEMs’ products. These arrangements generally provide for fixed, irrevocable royalty payments. We recognize license fee revenues from the U.S. OEM arrangements when a license agreement has been signed by both parties, the product has been shipped, there are no unusual uncertainties surrounding the product acceptance, the fees are fixed or determinable, collectibility is probable and vendor-specific objective evidence of fair value exists to allocate the fee to the undelivered elements of the arrangement. For sales through international OEMs, we defer revenue until we receive a royalty report from such OEM assuming all other revenue recognition criteria have been met. As discussed above, there may be a timing difference between the period in which our OEM completes the sale to its end-user, and the period in which we recognize the revenue.

Credit-worthiness and collectibility for end-users are assessed based on payment history and current credit profile. When a customer is not deemed credit-worthy, revenues are deferred and recognized upon cash receipt.

We recognize maintenance revenues, which consist of fees for ongoing support and unspecified product updates, ratably over the term of the contract, which is typically one year. Consulting revenues are primarily related to implementation and configuration. Training revenues are generated from classes offered at our headquarters and customer locations. Revenues from consulting and training services are recognized as the services are performed. When a contract includes both license and service elements, the license fee is recognized on delivery of the software and when all other revenue recognition criteria are met, provided services do not include significant customization or modification of the product and are not otherwise essential to the functionality of the software.

Stock-Based Compensation

We have not adopted the recognition provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), “Accounting for Stock-Based Compensation” as amended by SFAS 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” and continue to account for employee stock-based compensation under the intrinsic value method of Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related Interpretations. Accordingly, no compensation expense is recognized for stock options issued to employees since the strike price equals the market price on the date of grant for all options issued. Stock option grants to non-employees are accounted for using the fair value method under SFAS 123.

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The fair value of the options granted under our Stock Option Plans and stock issued under our Employee Stock Purchase Plan in all periods was estimated using the Black-Scholes method, with the following weighted-average assumptions:

The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

The pro forma amounts disclosed above may not be representative of the effects on pro forma results in future years as options vest over several years, additional awards may be granted and awards may be cancelled in subsequent years.

Net Income (Loss) Per Share

Basic net income (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the shares issuable upon the exercise of stock options (using the treasury stock method).

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The table below reconciles the weighted common shares used to calculate basic net income (loss) per share with the weighted-average common shares used to calculate diluted net income (loss) per share (in thousands):

All outstanding stock options have been excluded from the calculation of diluted net loss per share in the three months ended March 31, 2004, because all such stock options are anti-dilutive. The weighted-average number of common shares excluded from the calculation of diluted net loss per share was 19,764,000 in the three months ended March 31, 2004. Such stock options, had they been dilutive, would have been included in the computation of diluted net loss per share using the treasury stock method. In the first quarter of fiscal year 2005, the Company excluded 9,299,000 stock options from its calculation of weighted-average common shares used in computing dilutive net income per share as they were anti-dilutive for the net income per share calculation. These anti-dilutive options could be dilutive in the future.

The weighted average exercise price of excluded stock options was $4.24 and $2.86 for the quarter ended March 31, 2005 and 2004, respectively.

Comprehensive Loss

Comprehensive loss includes foreign currency translation adjustments and other unrealized losses on short-term investments that are excluded from net income (loss) and are reflected as changes in equity. A summary of comprehensive loss is summarized as follows (in thousands):

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Reclassifications

We have reclassified a portion of our deferred revenue as of December 31, 2004 to long-term liabilities. This reclassification had no impact on the results of operations or stockholders’ equity for the periods presented.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) enacted Statement of Financial Accounting Standards 123—revised 2004 (“SFAS 123R”), “Share-Based Payment”, which replaces Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” SFAS 123R requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the consolidated statements of operations. The accounting provisions of SFAS 123R are effective for annual periods beginning after June 15, 2005.

We are required to adopt SFAS 123R in the first quarter of fiscal year 2006. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition of the expense. See Note 1 in the Notes to Consolidated Financial Statements for the pro forma net income and net income per share amounts, for the first quarter of fiscal year 2005 and first quarter of fiscal year 2004, as if we had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock incentive awards. Although we have not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, management is evaluating the requirements under SFAS 123R and expects the adoption to have a significant adverse impact on our consolidated statements of operations and net income per share.

2. Restructuring Charges

In response to the deteriorating global economic conditions, we committed to a facility exit plan in the third quarter of fiscal year 2002. The primary goal of this restructuring plan was to reduce costs and improve operating efficiencies in order to adjust to then existing business and economic environment. Specifically, it was our decision, under this plan, to eliminate excess facility capacity in light of our revised facility requirements. As a result of this restructuring plan, we recorded an initial charge of $27.1 million (consisting of a $24.8 million idle facility charge and a $2.3 million workforce reduction charge) during fiscal year 2002.

The facility exit charge was calculated using management’s best estimates and included $21.5 million of estimated future obligations for non-cancelable lease payments (net of $10.2 million of estimated sublease income) and estimated costs associated with subleasing the property (e.g., leasing commissions). The facility had been idle since the leasing term began in May 2001 and we formally made a decision to exit this facility during the third quarter of fiscal year 2002. As of March 31, 2005, $14.6 million of lease exit costs, net of anticipated sublease income, remain accrued and will be fully utilized by fiscal year 2011. In calculating the facility exit charge, certain assumptions were made. Actual future cash requirements may differ materially from the accrual at March 31, 2005, particularly if the actual sublease income is significantly different from current estimates or if we are unsuccessful in our efforts to sublease the facility for the term of the lease (through fiscal year 2011).

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In the first quarter of 2004 we recognized $586,000 in severance, benefits and related legal costs when we initiated a restructuring of our French operations to size the operation to meet the expected business and economic environment for our products in France. This restructuring resulted in a workforce reduction of five total personnel. In the fourth quarter of 2004, we implemented a second restructuring program. This was to further align our cost structure with future revenue expectations. We estimate that the restructuring plan will have eliminated approximately $10.0 million in operating costs annually. Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The total amount of these costs expensed during the fourth quarter of 2004 and the first quarter of 2005 were $1.4 million and $569,000, respectively. The restructuring expense recognized in the first quarter of fiscal year 2005 was entirely related to the restructuring of our French operation and was primarily comprised of facility related costs. Our French facility was fully vacated during the first quarter of fiscal year 2005. We also incurred some employee related charges that were recognized during the quarter.

The following table summarizes the analysis of the restructuring accrual activity during the three months ended March 31, 2005 (in thousands):

3. Deferred Revenue

Total deferred revenue including the long-term portion consists of the following (in thousands):

Maintenance and support primarily consists of first year maintenance and support services associated with the initial purchase of our software, and the renewal of annual maintenance and support services from customers who purchased our software in prior periods. The maintenance and support period is generally 12 months. Accordingly, maintenance and support revenues are recognized on a straight-line basis over the term of the maintenance and support period.

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Other consists of deferred license, training and consulting fees generated from arrangements, which did not meet some or all of the revenue recognition criteria of SOP 97-2, and are deferred until all revenue recognition criteria have been met.

4. Income Taxes

The income tax provision for the three months ended March 31, 2004 and March 31, 2005 is $0 and $193,000, respectively, resulting in effective tax rates of 0% and 44%, respectively. The tax provision for March 31, 2005 relates to taxes accrued in foreign jurisdictions where net operating losses are not available to offset the net income.

On October 22, 2004, the American Jobs Creation Act of 2004 (“Jobs Act”) was enacted. Among other provisions, the Jobs Act provides for a deduction for income from qualified domestic production activities phased in from 2005 to 2010, and a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad. Actuate does not plan to repatriate foreign earnings under the Jobs Act and has determined the impact of the deduction for domestic production activities will have an immaterial impact on the provision for income taxes for 2005.

In December 2004, FASB Staff Position No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP FAS 109-2”) was issued, providing guidance under SFAS 109, “Accounting for Income Taxes” for recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004, enacted on October 22, 2004. FSP FAS 109-2 allows time beyond the financial reporting period of enactment to evaluate the effects of the Jobs Act before applying the requirements of FSP FAS 109-2. Accordingly, we have evaluated the potential effects of the Jobs Act and have determined that it is not necessary to adjust our tax expense or deferred tax liability at this time.

5. Geographic Information

Our primary operations are located in the United States. Revenues from international sources relate to export sales, primarily to Europe and Asia. Our revenues by geographic area were as follows (in thousands):

As of March 31, 2005, we operated in one segment, which is the development, marketing and support of the Actuate Enterprise Reporting Application Platform. There were no customers that accounted for more than 10% of the Company’s total revenue for the three months ended March 31, 2005 or March 31, 2004.

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6. Goodwill and Other Purchased Intangible Assets

Goodwill and intangible assets with indefinite lives consist of goodwill, net of accumulated amortization totaling $20.8 and other purchased intangibles, net of accumulated amortization totaling $2.4 million. In accordance with SFAS No. 142, we ceased to amortize goodwill as of January 1, 2002.

Other intangible assets consist of the following (in thousands):

For the first quarter of fiscal 2005 and 2004, approximately $383,000 and $384,000 was associated with the amortization of purchased technologies, respectively. The amortization of these costs was classified as cost of license fees in the consolidated statements of operations. Amortization of all the intangibles (excluding purchased technologies) was classified as amortization of other intangibles in the consolidated statement of operations.

The following table presents the estimated future amortization of intangible assets (in thousands).

7. Contingencies

Litigation

We are engaged in certain legal actions arising in the ordinary course of business. Although there can be no assurance as to the outcome of such litigation, we believe we have adequate legal defenses and we believe that the ultimate outcome of any of these actions will not have a material effect on our financial position or results of operations.

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Commitments & Contingencies

Our license agreements include an indemnification for the infringement of third party intellectual property rights and also include certain warranties. No amounts have been accrued relating to those indemnities and warranties. As of March 31, 2005, letters of credit issued on our behalf to secure our lease obligations relating to our leased facilities totaled $2.1 million. We do not have any other guarantees. Aggregate minimum lease commitments under all operating leases are as follows (in thousands):

8. Subsequent Events

In April 2005, our Board of Directors approved an on-going extension of the Company’s stock repurchase program. Each quarter, we are authorized to repurchase Actuate common stock in an amount not to exceed cash flow from operations during the prior quarter, with the actual amount to be approved in advanced by the Board. From the end of the first quarter of 2005 through May 9, 2005, we have repurchased a total of 241,079 shares under this stock repurchase plan.

In April 2005, a minority shareholder of Actuate Japan notified us that it wishes to exercise its right to sell back to the Company its equity interest in Actuate Japan. This event is expected to result in an exercise of approximately 280 shares at an estimated value of $400,000. It is anticipated that the exercise will occur in the third quarter of this fiscal year.

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

The following information should be read in conjunction with the historical financial information and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on March 16, 2005, as amended by our Form 10-K/A filed with the Securities and Exchange Commission on May 2, 2005.

The statements contained in this Form 10-Q that are not purely historical are forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including statements regarding Actuate’s expectations, beliefs, hopes, intentions, plans or strategies regarding the future. All forward-looking statements in this Form 10-Q are based upon information available to Actuate as of the date hereof, and Actuate assumes no obligation to update any such forward-looking statements. Actual results could differ materially from Actuate’s current expectations. Factors that could cause or contribute to such differences include, but are not limited to, the risks discussed in the section titled “Business Risk Factors” in this Form 10-Q and in other filings made by the Company with the Securities and Exchange Commission.

Overview

We are a leading provider of an Enterprise Reporting Application Platform, a unified software platform that enables large organizations and packaged application software vendors to develop and deploy self-service, customer and employee-facing Enterprise Reporting Applications. Enterprise Reporting Applications are intuitive, Web portal-like reporting applications that empower 100% of users with decision-making information. Our Actuate 8 product line provides a platform upon which Global 9000 organizations (companies with annual revenues greater than $1 billion) and packaged application software vendors develop and deploy mission-critical Enterprise Reporting Applications. These applications retrieve business information from corporate databases and deliver it as interactive Web pages, Excel spreadsheets, and analytic cubes to customers, partners and employees around the globe. Our products and services are used by our customers to develop and deploy Enterprise Reporting Applications across a range of business functions including financial management, sales management, account management, and customer self-service.

We began shipping our first product in January 1996. We sell software products through two primary means: (i) directly to end-user customers through our direct sales force and (ii) through indirect channel partners such as OEMs, resellers and system integrators. OEMs generally integrate our products with their applications and either provide hosting services or resell them with their products. Our other indirect channel partners resell our software products to end-user customers. Our total revenues are derived from license fees for software products and fees for services relating to such products, including software maintenance and support, consulting and training.

Our total revenues for the first quarter of fiscal 2005 were $24.6 million, a 4% decrease over the first fiscal quarter of 2004. The decrease in revenues was the result of lower than expected license sales, which decreased by $2.5 million, from the same period in the prior year. This decrease was due to several factors including continued slowness in Information Technology spending by our customers, and poor sales execution across several business units. Services revenue grew by 10%, or $1.5 million versus the same period last year, primarily due to an increase in maintenance and support revenues in North America. For the first quarter of fiscal 2005, net income was $245,000 or $.00 per share, compared with a net loss of $377,000 or $.01 per share in the first fiscal quarter of 2004. The increase

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in net income in the first quarter of 2005 was primarily due to reductions in operating expenses as a result of cost savings and restructuring plans that were implemented during the first and fourth quarters of fiscal year 2004.

North America total revenues decreased from $19.5 million in the first quarter of fiscal 2004 to $18.4 million in the first quarter of fiscal 2005, while revenues from international regions grew modestly from $6.1 million in the first quarter of fiscal 2004 to $6.2 million in the first quarter of fiscal 2005. During the first quarter of fiscal year 2005, we derived 25% of our total revenues from sales outside of North America while 24% of our total revenues were derived from sales outside North America in the first quarter of fiscal year 2004. We anticipate that international sales will continue to be a significant percentage of our total sales and will grow modestly in the near term.

During fiscal year 2004 and the first quarter of fiscal year 2005, three trends emerged that had a significant impact on our results of operations. First, as an enterprise software vendor, we are impacted by the corporate spending environment for information technology (“IT”). We currently believe that corporate IT budgets will grow only modestly in 2005. Second, we continue to witness corporations consolidating their business intelligence software purchases into fewer suppliers. Corporations were reluctant to buy software from new vendors. This impacted our ability to acquire as many new customers as planned. If this trend continues it will impact our business in 2005. Finally, several of our competitors recently released products that are marketed to be directly competitive with our Enterprise Reporting Application Platform. The existence of these competitive products required additional sales and marketing efforts to differentiate our products, which resulted in extended sales cycles. We believe that competition in the enterprise reporting market will be vigorous in 2005.

We remain focused on four strategic sales initiatives that were announced during fiscal year 2004 and continue to be pursued during the first quarter of fiscal year 2005. These initiatives are as follows:

Selling to IT Management – We are re-focusing our sales efforts on selling our products to IT managers who we believe generally recognize the technical advantages of our products. We hope this initiative will result in increased license revenue in the short term.

Solution Selling to Line-of-Business Management – We are creating software solutions to market to-line-of-business managers. These solutions will initially be related to financial management and reporting. We hope this initiative will result in increased license revenue over the medium-to-long term. During the first quarter of fiscal year 2005, we have seen a modest increase in the number of our total orders derived from our financial performance management and in customer self service solutions, from 40% of total orders in the fourth quarter of fiscal year 2004, to 45% in the first quarter of fiscal year 2005.

Investing in the Business Intelligence Reporting Tool (“BIRT”) – We are continuing to make a significant investment in creating a new open source code reporting tool, known as BIRT. We hope that BIRT will eventually become widely adopted by Java developers and will create demand for our other commercially available products. The adoption of BIRT will allow developers the ease of adding reporting to JAVA applications, accessibility to enterprise data and presentation of information in useful formats. The BIRT project continues to be a long-term initiative for our Company. During the first quarter of this year, we published complete preview versions at EclipseCom, and are scheduled to launch Release 1.0 in June of this fiscal year. During the first quarter of fiscal year 2005, we experienced over 5,000 downloads of the BIRT preview release.

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Selling to Global 9000 Corporations in the Financial Services Sector - We intend to continue focusing on selling our products to Global 9000 financial services companies in an effort to increase our substantive market share in this sector.

In March 2004, we introduced a new price list with added focus on licensing our server products based on the number of named users as opposed to the number of CPUs. This change was made to allow for a lower entry price point for new customers as well as to address the increases in the performance of individual CPU’s and the scalability of our software. Under our new licensing model, our server products can either be licensed on a CPU basis or on a named user basis. These named user licenses are sold in predefined “user blocks”. In conjunction with the introduction of named user pricing, we also significantly increased the list price for our CPU-based licenses. As maintenance and support is often priced as a percentage of software list price, in such cases, our pricing for maintenance has also increased accordingly.

During 2004, we implemented new requirements under the Sarbanes-Oxley Act of 2002 and recently enacted rules of the SEC and Nasdaq. These efforts caused us to incur significant increased costs in the latter half of fiscal year 2004 and the first quarter of fiscal year 2005. In particular, the rules governing the standards that must be met for management to assess our internal controls over financial reporting under Section 404 are complex, and require significant resources to administer. This ongoing process of reviewing, documenting and testing our internal controls over financial reporting has resulted in, and will likely continue to result in, a significant strain on our management, information systems and resources. Furthermore, achieving and maintaining compliance with the Sarbanes-Oxley Act of 2002 and other new rules and regulations has required us to hire additional personnel and has and may continue to require us to use additional outside legal, accounting and advisory services.

We have a limited ability to forecast future revenues and expenses, thus the prediction of future operating results is difficult and unreliable. In addition, historical growth rates in our revenues and earnings should not be considered indicative of future revenue or earnings growth rates or operating results. There can be no assurance that any of our business strategies will be successful or that we will be able to achieve and maintain profitability on a quarterly or annual basis. It is likely that in some future quarter our operating results will be below the expectations of public market analysts and investors, and in such event the price of our common stock could decline.

Actuate was incorporated in November 1993 in the State of California and reincorporated in the State of Delaware in July 1998. Actuate’s principal executive offices are located at 701 Gateway Boulevard, South San Francisco, California. Actuate’s telephone number is 650-837-2000. Actuate maintains a Web site at www.actuate.com.

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Results of Operations

The following table sets forth certain consolidated statement of operations data as a percentage of total revenues for the periods indicated.

Revenues

Our revenues are derived from license fees and services, which include software maintenance and support, consulting and training. Total revenues decreased 4% from $25.7 million for the quarter ended March 31, 2004 to $24.6 million for the quarter ended March 31, 2005. Sales outside of North America were $6.2 million or 25% of total revenues for the first quarter of fiscal year 2005, compared to $6.1 million, or 24% of total revenues for the first quarter of fiscal year 2004. No single customer accounted for more than 10% of our revenues for any of the periods presented.

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License fees. Revenues from license fees decreased by 22% from $11.5 million for the first quarter of fiscal year 2004 to $8.9 million for the first quarter of fiscal year 2005. As a percentage of total revenues, license fee revenues decreased from 45% in the first quarter of fiscal year 2004 to 36% in the first quarter of fiscal year 2005. The decrease in license fees was primarily due to a weak corporate spending environment for enterprise reporting applications and a more competitive environment in our market niche. We have seen customers engage in vendor consolidation and our competitors have recently released competing products. These factors have had an adverse impact on the demand for our products in domestic and international markets.

Services. Service revenues increased by 10% from $14.2 million for the first quarter of fiscal year 2004 to $15.7 million for the first quarter of fiscal year 2005. As a percentage of total revenues, service revenues increased from 55% in the first quarter of fiscal year 2004 to 64% in the first quarter of fiscal year 2005. The increase in service revenues from fiscal year 2004 to fiscal year 2005 was primarily due to an increase in the worldwide installed base of customers receiving ongoing maintenance and support.

Operating Expenses

Cost of license fees

Cost of license fees consists primarily of product packaging, documentation, production costs and the amortization of purchased technology. Cost of license fees decreased from $1.1 million, or 10% of revenues from license fees, for the first quarter of fiscal year 2004 to $737,000 or 8% of revenues from license fees, for the first quarter of fiscal year 2005. The decrease in costs of license fees was primarily due to reduced third party royalties of approximately $300,000 resulting from lower sales of our analytics product and a decrease of approximately $65,000 in packaging printing and localization costs. We expect our cost of license fees as a percentage of revenues from license fees to be between 7% and 10% of revenues from license fees for the remainder of fiscal year 2005.

Cost of services

Cost of services consists primarily of personnel and related costs, facilities costs incurred in providing software maintenance and support, training and consulting services, as well as third-party

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costs incurred in providing training and consulting services. Cost of services decreased from $6.1 million, or 43% of service revenues, for the first quarter of fiscal year 2004 to $5.8 million, or 37% of service revenues, for the first quarter of fiscal year 2005. The decrease was primarily due to reduced certified training and external contracting costs of approximately $150,000, salary and related employee compensation costs of $76,000 and reduced travel and entertainment totaling $30,000. We expect our cost of services, as a percentage of services revenues, will be in approximately the same range for the remainder of fiscal year 2005.

Sales and marketing

Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, promotional expenses, travel, entertainment and facility costs. Sales and marketing expenses decreased from $10.3 million or 40% of total revenues for the first quarter of fiscal year 2004 to $8.4 million, or 35% of total revenues for the first quarter of fiscal year 2005. The decreases in sales and marketing expenses in both absolute dollars and as a percentage of total revenues for the three months ended March 31, 2005, were primarily due to reductions in salaries, commissions and related compensation expenses of approximately $1.5 million. This decrease was primarily due to a 21% reduction in headcount from 190 employees in the first quarter of fiscal year 2004 to 150 employees in the first quarter of fiscal year 2005. Other significant reductions include marketing and promotional costs of $355,000, facility and related expenses of approximately $300,000, offset by an increase in employee training and related costs $170,000. We currently expect our sales and marketing expenses as a percentage of total revenues to be in the range of 30% to 35% of total revenues for the remainder of fiscal year 2005.

Research and development

Research and development expenses are expensed as incurred and consist primarily of personnel and related costs associated with the development of new products, the enhancement of existing products, quality assurance and testing. Research and development expenses decreased from $5.2 million, or 20% of total revenues for the first quarter of fiscal year 2004 to $4.2 million, or 17% of total revenues for the first quarter of fiscal year 2005. The decrease in research and development expenses in both absolute dollars and as a percentage of total revenues for the three months ended March 31, 2005, were primarily due to an 8% headcount reduction from the first quarter of fiscal year 2004 to the first quarter of fiscal year 2005 resulting in reduced compensation and related expenses of approximately $560,000 and facility and equipment related costs of approximately $379,000. Most of the cost reductions were due to the closure of our facility in Seattle, Washington which occurred during the

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fourth quarter of fiscal year 2004. We believe that continued investments in technology and product development are essential for us to remain competitive in the markets we serve, and expect our research and development expenses as a percentage of total revenues to be in the range of 17% to 20% of total revenues for the remainder of fiscal year 2005.

General and administrative

General and administrative expenses consist primarily of personnel and related costs for finance, human resources, information systems and general management, as well as legal, bad debts and accounting expenses. General and administrative expenses increased from $2.7 million, or 11% of total revenues for the first quarter of fiscal year 2004 to $4.5 million, or 18% of total revenues for the first quarter of fiscal year 2005. The increase in general and administrative expenses in both absolute dollars and as a percentage of total revenues for the three months ended March 31, 2005, were primarily due to increased professional consulting fees of approximately $1.2 million related to the Company’s compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and associated internal staff expenses of $180,000. We also incurred legal fees of approximately $230,000 and an increase in bad debt expense of $179,000. We expect our general and administrative expenses will decrease in absolute dollars in future periods as costs associated with compliance under the Sarbanes-Oxley Act should stabilize or decrease in the coming year.

Amortization of other intangibles

For the three months ended March 31, 2005, we recorded a charge of $276,000 for the amortization of other intangibles, or 1% of total revenues, as compared to $282,000 or 1% of total revenues for the same period of fiscal quarter 2004. The estimated amortizable lives of other purchased intangible assets range between 2 to 5 years and the total balance will be fully amortized by the end of fiscal year 2008 assuming no further acquisitions.

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The following table presents the estimated future amortization of intangible assets (in thousands).

Restructuring charges

During fiscal year 2004, the Company underwent two restructurings. The first occurred in the first quarter of fiscal year 2004 when we initiated a restructuring of our French operation. We undertook this restructuring in order to size the operation to meet the expected business and economic environment for our products in France and to shift our sales strategy in France from one based primarily on direct sales to a strategy more focused on indirect sales channels. This restructuring consisted primarily of a workforce reduction and associated legal expenses, which resulted in a headcount reduction of five people and associated severance, benefit and related legal costs of $586,000 during the first quarter of 2004.

In early October 2004, we implemented an additional restructuring. This company-wide restructuring was undertaken to align our cost structure with future revenue expectations. The costs associated with this restructuring totaled $1.4 million in the fourth quarter of 2004 and were primarily comprised of severance and related costs. During the first quarter of fiscal year 2005, we incurred an additional expenditure of approximately $569,000 related to this restructuring. These additional charges are primarily related to idle facility costs of our French facility. According to Financial Accounting Standards statement No. 146 (SFAS 146) “Accounting for Costs Associated with Exit or Disposal Activities”, in order to record the costs related to an idle facility, we must first cease use of the facility. We ceased use of our French facility in the first quarter of fiscal year 2005.

Interest and Other Income, Net

Interest and other income, net, is comprised primarily of interest income earned by the Company on cash and short-term investments. Interest and other income, net, for the three months ended March 31, 2005 was $384,000 as compared with $170,000 for the three months ended March 31, 2004. The increase was primarily due to improved returns on our cash and investments totaling $96,000 and

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currency exchange gains of approximately $19,000 during the first quarter of fiscal year 2005 compared to a loss of approximately $160,000 during the same period last year, offset by a decrease of $61,000 in other income.

Provision for Income Taxes

The income tax provision for the three months ended March 31, 2005 is $193,000 resulting in an effective tax rate of 44%. We did not record an income tax provision for the quarter ended March 31, 2004 as the Company was in a consolidated net loss position.

Liquidity and Capital Resources

As of March 31, 2005, we had cash, cash equivalents and short-term investments of $49.7 million, an increase of approximately $2.4 million from $47.3 million at December 31, 2004. We also had $29.9 million in net working capital as of March 31, 2005, representing an increase of approximately $400,000 from $29.5 million at December 31, 2004.

Cash from operating activities. Net cash provided from operating activities was $2.8 million during the three months ended March 31, 2005, compared to $230,000 during the three months ended March 31, 2004, an increase of approximately $2.6 million. Cash provided by operations is directly related to the generation of revenues and subsequent collection of invoices. For the three-month period ended March 31, 2005, net cash provided by operating activities was generated by the net income adjusted by non-cash items of depreciation and amortization, and increased collections of accounts receivable, that were offset by decreases in deferred revenue, accounts payable and accrued compensation. For the three-month period ended March 31, 2004, net cash provided by operating activities was generated by the net loss adjusted by non-cash items of restructuring charges, depreciation and amortization, increased collections of accounts receivable and increase in income tax payable, that were offset by decreases in deferred revenue and accrued compensation.

Cash from investing activities. Net cash provided by investing activities was $1.9 million during the three months ended March 31, 2005, compared to net cash provided by investing activities of $15.8 million during the three months ended March 31, 2004, a net decrease of $13.9 million. For the three months ended March 31, 2005, net cash provided by investing activities was primarily due to the proceeds received from the maturity of short-term investments that were offset by the purchases of short-term investments, and net changes in purchases of property and equipment and other assets. For the three months ended March 31, 2004, net cash used in investing activities was primarily due to purchases of short-term investments, and purchases of property and equipment, that were offset by the proceeds received from the maturity of short-term investments.