<PAGE>

================================================================================
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                               -----------------
                                   FORM 10-K

 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                  ACT OF 1934
                  For the fiscal year ended December 31, 2001
                                      OR
    [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                             EXCHANGE ACT OF 1934
                        Commission file number 0-24607

                              Actuate Corporation
            (Exact name of registrant as specified in its charter)

                      Delaware                 94-3193197
                   (State or other          (I.R.S. Employer
                   jurisdiction of       Identification Number)
                  incorporation or
                    organization)

                             701 Gateway Boulevard
                     South San Francisco, California 94080
                   (Address of principal executive offices)
                               -----------------
                                (650) 837-2000
             (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:
                         Common Stock, $.001 par value
                             (Title of each class)
                               -----------------
   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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.
<TABLE>
<S>                       <C>                       <C>                       <C>                       <C>
                      (1)                       Yes [X]                                              No [_]
                      (2)                       Yes [X]                                              No [_]
</TABLE>
   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.   [_]
   Based on the closing price as reported on the Nasdaq Stock Market as of
February 28, 2002, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $203,699,000. Shares of
common stock held by each executive officer and director and by each person who
is known by the registrant to own 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. Share
ownership information of certain persons known by the Company to own greater
than 5% of the outstanding common stock for purposes of the preceding
calculation is based solely on information on Schedule 13G filed with the
Commission. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
   As of February 28, 2002 there were 60,451,465 shares of the Registrant's
common stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III is incorporated by reference to
specified portions of the registrant's definitive Proxy Statement to be issued
in conjunction with the Registrant's 2002 Annual Meeting of Stockholders, which
is expected to be filed not later than 120 days after the Registrant's fiscal
year ended December 31, 2001.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<PAGE>

                              ACTUATE CORPORATION

    Annual Report on Form 10-K for the fiscal year ended December 31, 2001

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                       Page
                                                                                                       ----
<C>      <S>                                                                                           <C>
PART I................................................................................................   3
         Item 1.  Business............................................................................   3
         Item 2.  Properties..........................................................................  12
         Item 3.  Legal Proceedings...................................................................  12
         Item 4.  Submission of Matters to a Vote of the Security Holders.............................  12
PART II...............................................................................................  13
         Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters...............  13
         Item 6.  Selected Consolidated Financial Data................................................  14
         Item 7.  Management's Discussion and Analysis of Financial Condition and
                  Results of Operations...............................................................  15
         Item 7a. Quantitative and Qualitative Disclosures About Market Risk..........................  32
         Item 8.  Consolidated Financial Statements and Supplementary Data............................  32
         Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  33
PART III..............................................................................................  33
         Item 10. Directors and Executive Officers of the Registrant..................................  33
         Item 11. Executive Compensation..............................................................  33
         Item 12. Security Ownership of Certain Beneficial Owners and Management......................  33
         Item 13. Certain Relationships and Related Transactions......................................  33
PART IV...............................................................................................  34
         Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................  34
SIGNATURES............................................................................................  36
</TABLE>

<PAGE>

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

   Some of the statements in this report on Form 10-K under "Business,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Risk Factors That May Affect Future Results," and elsewhere
constitute forward-looking statements within the meaning of Section 21E of the
Securities and Exchange Act of 1934. Forward-looking statements include
statements regarding Actuate's expectations, beliefs, hopes, intentions or
strategies regarding the future. These statements involve known and unknown
risks, uncertainties, and other factors that may cause our actual results,
levels of activity, performance, or achievement to be materially different from
any future results, levels of activity, performance, or achievements expressed
or implied by such forward-looking statements. Such factors include, among
other things, those listed under "Risk Factors That May Affect Future Results"
and elsewhere in this Report on Form 10-K. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance, or
achievements. Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of such statements. We are under no duty to
update any of the forward-looking statements contained in the "Letter to
Stockholders" in the Annual Report or in this Report on Form 10-K after the
date hereof or to conform such statements to actual results. Readers are
cautioned not to place undue reliance on forward-looking statements and should
carefully review the risk factors described in other documents Actuate files
from time to time with the Securities and Exchange Commission, including
Quarterly Reports on Form 10-Q to be filed by Actuate during 2002.

                                    PART I

ITEM 1.  BUSINESS

Overview

   Actuate Corporation is a leading provider of Information Delivery software
products and services. Information Delivery, along with Databases, Content
Management and Application Servers, is a critical technology component of an
organization's e.Business platform. Our Actuate e.Reporting Suite 5 (Actuate 5)
product line provides a platform for retrieving business information from
corporate databases and delivering it as interactive Web pages and Excel
spreadsheets in the form of reports to customers, partners and employees.
Actuate 5 allows companies to create, manage and deliver secure formatted
content, using business information from multiple data sources, and to make
that high-value business content available on their Web sites. Our products and
services are used by our customers to deliver reports such as transaction
histories, service level information, performance summaries, manufacturing and
distribution status and customer account information. Actuate 5 is a scalable,
dynamic platform that can be seamlessly integrated into any Web site and its
server-centric architecture provides the building blocks for an Information
Delivery environment of any size. Actuate 5's open environment allows
developers to create content from virtually any data source and present it in
virtually any format required by our customers. Our products have been adopted
in a wide variety of industries, including financial services, manufacturing,
utilities, pharmaceuticals, telecommunications, high technology, retail, health
care and others and by a wide variety of organizations including Global 2000
companies and software application vendors. We sell our products in North
America primarily through our direct sales force and our e.Business Application
Partners, who integrate and resell Actuate software to their customers. Outside
North America, we sell our products through our direct sales force in the
countries in which we have an office and through distributors.

   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. The information posted on the Web site is not
incorporated into this Annual Report.

                                      3

<PAGE>

Industry Background

   The emergence and acceptance of the Internet and the World Wide Web has
fundamentally changed the way that consumers and businesses communicate, obtain
information, purchase goods and transact business. As the Internet has become
more accessible, functional and widely used, it has emerged as a primary
business channel for many organizations. Businesses are increasingly using the
Internet as both a marketing tool and distribution channel to communicate,
conduct business and strengthen relationships with customers, partners and
employees.

   The growth in the number of Internet users, as well as the open and
interactive nature of the Internet, has led many businesses to seek new ways to
take advantage of this global platform. To conduct business online,
organizations are developing and deploying e.Business platforms. These
platforms typically consist of four primary technology components. First, is
the Database to organize data so that its contents can easily be accessed,
managed and updated. Second, is the Content Management, which allows a company
to manage and publish unstructured content, such as electronic catalogs and
marketing materials. Third, to deploy online applications, such as the ability
to conduct complex transactions, manage supply chains and interact with
customers, the e.Business platform should include an Application Server.

   The fourth technology component of an e.Business platform is Information
Delivery. By rapidly deploying large numbers of online applications, companies
are capturing a vast amount of information about their relationships with
customers and partners as well as information about their internal operations.
It is imperative that a company be able to deliver this information in a
personalized manner to its customers, partners and employees via the Web. An
Information Delivery solution must also seamlessly integrate into the Web site
and must be robust and scalable to support hundreds of thousands of users.

The Actuate Solution

   Actuate e.Reporting Suite 5 is an Information Delivery platform that allows
companies to create, manage and deliver secure formatted content, on their Web
sites for use by customers, partners and employees. Actuate 5 can provide any
type of personalized report such as:

  .   Transaction histories
  .   Service level information
  .   Performance summaries
  .   Manufacturing and distribution status
  .   Customer account information
  .   Financial statements

   Actuate 5 allows an organization to provide its customers, partners and
employees access, via the Web, to high value business content, which allows
those customers, partners and employees to make better decisions while also
allowing the organization to increase revenue, reduce costs and improve
customer service.

   Actuate 5 contains the following attributes:

  .   Create compelling content rapidly.  Our open environment, including our
      Java and Spreadsheet development environments, allows developers to
      create any type of content from nearly any data source, in any format
      using any calculation. Support for DHTML allows developers to design rich
      interactive content without the need for a plug-in. Actuate 5 is based on
      an object-oriented architecture that is designed to give developers a
      complete visual environment for structuring, compiling, viewing and
      debugging sophisticated reports. Our component-based architecture enables
      developers to build e.Reports by dragging and dropping standard
      components that can be customized and stored in libraries for reuse.

                                      4

<PAGE>

  .   Integrate with any Web site.  Architected specifically to leverage the
      functionality of the Internet, our Information Delivery solution is
      designed to be seamlessly integrated into an organization's Web site.
      Critical business information becomes accessible to a company's
      customers, suppliers and employees without any need for training.

  .   Scale to hundreds of thousands of users.  Our e.Reporting and
      e.Spreadsheet servers are highly scalable and can deliver content to
      hundreds of thousands of users. Our solution is designed to meet the
      Information Delivery needs of an organization as the amount of content
      published on its Web site and the populations of users accessing that
      information grows rapidly.

  .   Snap into Web/IT infrastructure.  Our products support widely used
      operating systems, Web servers, databases and Internet standards. Our
      Open Server permits the management of content developed with our
      e.Spreadsheet and Java development products and many types of existing
      non-Actuate reports. Our products also incorporate advanced technologies,
      critical for Internet applications, such as page level security, LDAP
      integration and XML.

Strategy

   Our strategy is to be the leading provider of Information Delivery
solutions. Key elements of our strategy include:

   Expand Market Leadership Position through Strategic Relationships.  We
believe that we have established a leading position in the emerging market for
Information Delivery. To accelerate the adoption of Actuate 5 as the standard
Information Delivery platform for Web sites, we have established strategic
relationships with leading software application vendors, systems integrators,
consulting firms and development partners. We intend to further develop our
existing strategic relationships and enter into new partnerships to expand our
market presence and leadership.

   Extend Technology Leadership.  Since inception, we have focused our research
and development efforts on developing core technologies that address the
requirements of Information Delivery. Through business combinations we have
also acquired complementary technologies to expand our Information Delivery
offerings. Our products integrate a number of advanced technologies, including
a patent pending method of providing page level security in a report, LDAP
integration, advanced viewing technology incorporating Java, PDF, DHTML and
XML, a patented method of storing report objects, a multi-tier architecture,
Web access and delivery technology and spreadsheet technology. In addition, we
have in the past rapidly incorporated new technology into our product
offerings. We believe that we are a leader in Information Delivery technology
and we intend to extend this leadership position by continuing to devote
significant resources to research and development efforts, and by acquiring and
integrating complementary technologies.

   Broaden Distribution Channels.  To date, our products have been sold
worldwide by our direct sales force and through our e.Business Application
Partners, distributors and systems integrators. In the future, we intend to
expand our direct sales forces and telesales capability. In addition, we intend
to continue to leverage and grow our existing network of e.Business Application
Partners, systems integrators and distributors and expand our indirect
distribution channel worldwide.

   Leverage e.Services Capabilities.  We have established successful
relationships with our clients by serving as an advisor in developing and
deploying Information Delivery applications. We are extending our direct
e.Services capabilities to provide an expanded set of services to address such
areas as Web-based Information Delivery strategy, project management, security
integration and application design. In addition, we offer similar high-quality
professional services capabilities through third-party alliances and are
currently focused on the development of relationships with Global/National
systems integrators. By offering our clients a full range of e.Services on a
global basis, we believe we can broaden market awareness about the advantages
of our Information Delivery solutions and create opportunities to sell new or
additional products to clients.

                                      5

<PAGE>

   Increase International Presence.  We plan to increase our international
operations. Outside North America, we have established subsidiaries in a number
of countries and have distributor relationships throughout Europe,
Asia/Pacific, South America and Africa. We have localized versions of our
products in French, German, Spanish and Japanese and support Chinese, Korean,
and right-to-left reporting. We intend to expand our international operations
by increasing our international sales force, expanding our distribution
channels worldwide and by continuing the localization of our products in
selected markets and increasing our internationalization capabilities by
providing support for Unicode data.

Products and Technology

   Actuate e.Reporting Suite 5 is a fully integrated, Web-based Information
Delivery suite of software products that provide the most effective platform
for retrieving business information from corporate databases and delivering it
as interactive Web pages and spreadsheets in the form of reports to customers,
partners and employees. In the case of direct sales to end-user customers, our
server products are typically priced on a per CPU basis and our development
products are typically priced on a per user basis. Indirect sales are usually
either fixed price, unlimited usage arrangements or arrangements where
royalties are paid to us based on sell through to end-users.

   The following table sets forth the primary products that comprise Actuate 5:

<TABLE>
<CAPTION>
Actuate Products                                            Product Description
----------------                                            -------------------
<C>                            <S>

Actuate e.Reporting Server     Server that provides sophisticated distribution and management
(standard, advanced,           infrastructure, scalability, security, and snap-in integration. Also provides
e.Spreadsheet and Java         the foundation for users to efficiently deploy personalized, structured
versions)                      content to a Web site.

Actuate e.Spreadsheet Engine   Server factory that allows the generation and management of content
                               developed with our e.Spreadsheet Designer development product.

Actuate e.Analysis Option      Server option that delivers to users, browser-based, interactive analysis of
                               report data without requiring any configuration or warehousing of
                               application data.

Actuate Java Engine            Server factory that allows the generation and management of content
                               developed with our e.Report Designer--Java Edition development
                               product.

Actuate e.Report Designer      Provides a comprehensive, object-oriented environment for developers to
Professional                   create content rapidly and maintain that content easily using fewer
                               resources. Allows for streamlined e.Report development and
                               maintenance and provides smooth integration into Web sites.

Actuate e.Report Designer      Wizard driven development tool utilized by power users to rapidly design
                               e.Reports.

Actuate e.Spreadsheet Designer Java based development tool utilized to construct of Excel-compatible
                               spreadsheet reports by supplying a visual development environment that
                               resembles most commercial desktop spreadsheet applications.

Actuate e.Report Designer--    100% pure Java content creation tool utilized by Java developers to
Java Edition                   rapidly design content.
</TABLE>

                                      6

<PAGE>

Sales

   We sell our 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 e.Business Application Partners, distributors and
systems integrators. Our products are used by customers in a wide variety of
industries, including financial services, manufacturing, utilities,
pharmaceuticals, telecommunications, high technology, retail, and health care
and by a wide variety of organizations including Global 2000 companies.

   The direct sales process to end-user customers involves the generation of
sales leads through Web-based marketing, direct mail, seminars and
telemarketing. Our field sales force typically conducts demonstrations and
presentations of our products to developers and management at customer sites as
part of the direct sales effort. Our telesales force conducts demonstrations
via the Web and sells our products over the phone. We also have a business
development group that focuses on establishing and maintaining relationships
with systems integrators. Systems integrators typically re-market our products
to their customer base as part of an application being built for a customer.
They are offered discounts on our products and sell a full use license of the
product. Our systems integrators do not provide post-sales support. We also
have a separate sales force that addresses the software application vendor
market. These vendors integrate our products with their applications and either
resell or provide them in hosted environment to their customers. The e.Business
Application Partner's end-user customer is licensed to use our products solely
in conjunction with the vendor's application with which the Actuate Information
Delivery solution is integrated. We offer an upgrade license to such end-user
customers, which permits them to create content or reports outside the scope of
the particular vendor application. e.Business Application Partners provide the
first level of post-sales support to their customers. Our ability to achieve
revenue growth in the future will depend in large part on our success in
expanding our direct sales force and in further establishing and maintaining
relationships with e.Business Application Partners and systems integrators.

International Operations

   We also sell our products outside North America directly through
subsidiaries located worldwide and through distributors located in Europe,
Asia/Pacific, South America and Africa. International sales accounted for 23%,
15% and 14% of our revenues in fiscal years 2001, 2000 and 1999, respectively.
Our international subsidiaries and distributors perform some or all of the
following functions: sales and marketing, systems integration, software
development, and ongoing consulting, training and customer support. In exchange
for providing such services, we offer our distributors discounts on products
and services. Our ability to achieve revenue growth in the future will depend
in large part on our success in increasing revenues from international sales.
We intend to continue to invest significant resources to expand our sales and
support operations outside North America and to enter additional international
markets. In order to expand international sales, we must establish additional
foreign operations, expand our international channel management and support
organizations, hire additional personnel, recruit additional international
distributors and increase the productivity of existing international
distributors.

e.Services

   Our e.Services organization provides high value "implementation solutions"
consulting services to customers developing and deploying Information Delivery
solutions with our products. These services include methodology, security
integration, limited application integration and performance evaluation. We
also actively recruit and train third party consulting firms to provide
implementation services for our products. Due to the critical nature of
Information Delivery, we believe that our e.Services group and relationships
with our consulting partners play a key role in facilitating initial license
sales and enabling customers to successfully develop and deploy Actuate-based
solutions. In addition, we offer, directly and through our network of certified
training partners, classes and training programs for our products.

                                      7

<PAGE>

Marketing

   Our marketing organization is focused on generating leads, building market
awareness and acceptance of our company and our products as well as on
developing strategic marketing, technology and other relationships. We have a
comprehensive marketing strategy with several key components: image and
awareness building, direct marketing to both prospective and existing
customers, a strong Web presence, as well as broad-scale marketing programs in
conjunction with key partners. Our corporate marketing strategy includes print
advertising, public relations activities, trade shows and user group meetings,
as well as programs to work closely with industry analysts and other
influential third parties. Our direct marketing activities include extensive
Web-based marketing campaigns, participation in selected trade shows and
conferences and targeted ongoing direct mail and email efforts to existing and
prospective customers. We also offer seminars, both in-person and over the Web,
to educate prospective customers about our Information Delivery solution.
Finally, we have invested in building a partner and channel marketing function
to conduct cooperative marketing programs with our technology partners.

Customer Service

   We believe that providing superior customer service is critical to the
successful sale and marketing of our products. Maintenance and support
contracts, which are typically for 12 months, are offered with the initial
license of software and may be renewed annually. Maintenance fees are typically
set at a percentage of the total license fees paid by a customer. Substantially
all of our direct sales to customers have maintenance and support contracts
that entitle the customer to software patches, updates and enhancements at no
additional cost and technical support during normal business hours. Customers
purchasing maintenance are able to access Actuate's support centers located in
the United States, Australia, France, Germany, Japan and the United Kingdom via
email and telephone during normal business hours. We supplement our telephone
support with Web-based support services, including access to cases,
resolutions, online Web forums and a software patch download area. We also
offer extended and enterprise maintenance plans that give our customers access
to 24x7 support and additional support services. To improve access to our
explanatory materials, we provide online documentation with all of our products.

Research and Development

   Our research and development organization is divided into groups consisting
of product managers, development engineers, quality assurance engineers,
technical writers and developer communications personnel. Our development
process begins with requirement specification, proceeds to functional design,
followed by technical design and concludes with implementation. Requirements
are based on the needs of customers and prospects, as well as competitive,
technology and industry factors. Our development group uses detailed processes
and frequent milestones during the functional and technical design phases.
During implementation, the product is built and tested daily and our quality
assurance group verifies that functionality, quality and performance criteria
are met.

   Research and development expenses were $19.0 million, $14.9 million and $9.3
million in fiscal years 2001, 2000 and 1999, respectively. We intend to
continue to make substantial investments in research and development and
related activities to maintain and enhance our product lines. We believe that
our future success will depend on our ability to create products that directly
address our customers' needs, leverage the latest technology innovations, are
of high quality, and support current and future releases of popular operating
systems platforms, development languages, databases, Internet standards, and
e.Business software applications. We intend to maintain and improve our current
product line and to timely develop or acquire new products that achieve market
acceptance. Any failure by us to do so would have a material adverse effect on
our business, operating results and financial condition.

                                      8

<PAGE>

Competition

   Our market is intensely competitive and characterized by rapidly changing
technology and evolving standards. Our competition comes in five principal
forms:

  .   direct competition from current or future software vendors such as
      Business Objects S.A., Crystal Decisions and Brio Technology, Inc.;

  .   indirect competition from vendors of Business Intelligence tools such as
      Cognos, Inc., MicroStrategy Incorporated and Microsoft that integrate
      reporting functionality with such tools;

  .   indirect competition from e.Business software vendors such as SAP and
      Oracle, to the extent they include Information Delivery functionality in
      their applications;

  .   competition from other e.Business software vendors and Internet
      development tool vendors; and

  .   competition from the information technology departments of current or
      potential customers that may develop Information Delivery solutions
      internally which may be cheaper and more customized than our products.

   Many of our current and potential competitors have significantly greater
financial, technical, marketing and other resources than us. These competitors
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements or devote greater resources to the development,
promotion and sales of their products than we may. Also, most current and
potential competitors, including companies such as Oracle and Microsoft, have
greater name recognition and the ability to a leverage significant installed
customer base. These companies could integrate competing Information Delivery
software with their products, resulting in a loss of market share for us. We
expect additional competition as other established and emerging companies enter
the Information Delivery software market and new products and technologies are
introduced. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins, longer sales cycles and loss of market
share, any of which would harm our business, operating results and financial
condition.

   Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the Information Delivery needs of
our prospective customers. Also our current or future channel partners may have
established in the past, or may in the future, establish cooperative
relationships with our current or potential competitors, thereby limiting our
ability to sell our products through particular distribution channels. It is
possible that new competitors or alliances among current and new competitors
may emerge and rapidly gain significant market share. Such competition could
harm our ability to obtain revenues from license fees from new or existing
customers and service revenues from new or existing customers on terms
favorable to us. If we are unable to compete successfully against current and
future competitors our business, operating results and financial condition
would be harmed.

Intellectual Property Rights

   We have two issued and two pending U.S. patents and we rely primarily on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect our proprietary technology.
For example, we license our software pursuant to shrink-wrap or signed license
agreements, which impose certain restrictions on licensees' ability to utilize
the software. In addition, we seek to avoid disclosure of our intellectual
property, including requiring those persons with access to our proprietary
information to execute confidentiality agreements with us and restricting
access to our source code. We seek to protect our software, documentation and
other written materials under trade secret and copyright laws, which afford
only limited protection.

   Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our

                                      9

<PAGE>

products is difficult, and while we are unable to determine the extent to which
piracy of our software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of many countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
If our means of protecting our proprietary rights is not adequate or our
competitors independently develop similar technology, our business could be
seriously harmed.

   We expect Information Delivery software product developers will increasingly
be subject to infringement claims as the number of products and competitors in
our industry segment grows and the functionality of products in different
industry segments overlaps. Any such claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert management's
attention and resources, cause product shipment delays or require us to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all. A
successful claim of product infringement against us and our failure or
inability to license the infringed or similar technology could harm our
business, operating results and financial condition.

Employees

   As of December 31, 2001, we had 579 full-time employees, including 256 in
sales and marketing, 126 in research and development, 133 in services and
support, and 64 in general and administrative functions. None of our employees
are represented by a collective bargaining agreement, nor have we experienced a
work stoppage. We believe our employee relations are good. We also believe that
our future success will depend in large part upon our continuing ability to
attract and retain highly skilled managerial, sales, marketing, customer
support and research and development personnel and, in particular, executive
officers.

Actuate Executive Officers

   Actuate's executive officers as of February 28, 2002 are as follows:

              Name                               Offices
              ----                               -------
              Nicolas C. Nierenberg.... Chairman of the Board and
                                        Chief Architect
              Peter I. Cittadini....... Director, President and
                                        Chief Executive Officer
              Daniel A. Gaudreau....... Senior Vice President,
                                        Finance and
                                          Administration and
                                        Chief Financial Officer
              Hamid R. Bahadori........ Senior Vice President,
                                        Engineering
              Olivier J. Gachot........ Senior Vice President,
                                        International Operations
              Thomas P. Ryan........... Senior Vice President,
                                        Worldwide Customer
                                          Service and Chief
                                        Information Officer
              Ilene M. Vogt............ Senior Vice President,
                                        North American
                                          Operations
              N. Nobby Akiha........... Vice President, Marketing
              John Bow................. Vice President,
                                        e.Business Application
                                        Partners

   Nicolas C. Nierenberg, 45, has been Chairman of the Board of Directors since
he co-founded Actuate in November 1993 and became our Chief Architect in August
2000. Mr. Nierenberg was also Chief Executive Officer of Actuate from November
1993 until August 2000 and President from November 1993 until October 1998.
Prior to founding Actuate, from April 1993 to November 1993, Mr. Nierenberg
worked as a consultant for Accel Partners, a venture capital firm, evaluating
investment opportunities in the enterprise software market. Mr. Nierenberg
co-founded Unify Corporation, which develops and markets relational database
development tools. Mr. Nierenberg held a number of positions at Unify
including, Chairman of the Board of Directors, Chief Executive Officer,
President, Vice President, Engineering and Chief Technical Officer. Mr.
Nierenberg is currently a director for Vastera Inc., a publicly held e.Business
solutions company, and privately held software companies Internetivity Inc. and
Rapt Inc.

                                      10

<PAGE>

   Peter I. Cittadini, 46, has been Chief Executive Officer of Actuate since
August 2000 and has been the President of Actuate since October 1998. Mr.
Cittadini was also Actuate's Chief Operating Officer from October 1998 until
August 2000 and served as Actuate's Executive Vice President from January 1995
to October 1998. From 1992 to January 1995, Mr. Cittadini held a number of
positions at Interleaf, Inc., an enterprise software publishing company,
including Senior Vice President of Worldwide Operations responsible for
worldwide sales, marketing, customer support and services. From 1985 to 1991,
Mr. Cittadini held a number of positions at Oracle Corporation, including Vice
President, Northeast Division. Mr. Cittadini currently serves as a director of
Syncata, a privately held software consulting firm.

   Daniel A. Gaudreau, 54, has been Senior Vice President, Finance and
Administration and Chief Financial Officer since January 1999 and served as
Vice President, Finance and Administration and Chief Financial Officer from
February 1997 to January 1999. From January 1994 to February 1997, Mr. Gaudreau
served as Vice President, Finance and Chief Financial Officer of Plantronics,
Inc., a publicly traded telephone headset manufacturing company, where he was
responsible for all financial and administrative operations. From January 1990
to January 1994, Mr. Gaudreau was Vice President, Finance and Chief Financial
Officer at Ready Systems, an operating systems software company. Prior to that,
Mr. Gaudreau spent two years at Apple Computer as the Controller of Fremont
Manufacturing Operations, prior to which he spent 18 years at General Electric
where he held various financial management positions. Mr. Gaudreau currently
serves as director for privately held companies e.Remedy, Axis Systems, and Bit
Micro.

   Hamid R. Bahadori, 48, has been Senior Vice President, Engineering since
January 1999 and served as Vice President, Engineering from May 1998 to January
1999. From June 1996 to March 1998, Mr. Bahadori served as Vice President,
Engineering for Envive Corp., a privately held applications software company.
Prior to that, Mr. Bahadori was a Senior Director of Software Products
Development for Oracle from 1989 to 1996.

   Olivier J. Gachot, 37, has been Senior Vice President of International
Operations since January 2002 and served as Vice President of International
Operations from June 1998 to December 2001. From January 1997 to May 1998, Mr.
Gachot was Chief Executive Officer of CosmosBay Corporation, a privately held
software company specializing in online financial solutions. From January 1994
to December 1996, Mr. Gachot was President and Chief Operating Officer at
Decalog Incorporated, a privately held financial processing company. Prior to
that, Mr. Gachot held various management and sales positions with Interleaf and
Sybase.

   Thomas P. Ryan, 41, has been Senior Vice President, Worldwide Customer
Service and Chief Information Officer since January 2002 and served as Vice
President and Director, Customer Service from August 1997 to December 2001.
From June 1996 to July 1997, Mr. Ryan was a senior manager in the advanced
support group at Informix. Prior to that, Mr. Ryan held various management
positions at Illustra, Oracle Corporation and Amdahl.

   Ilene M. Vogt, 43, has been Senior Vice President, North American Operations
since January 2001 and served as Vice President, North American Operations and
Director, Western Region Sales from March 1995 to December 2000. From July 1991
to February 1995, Ms. Vogt was a Sales Manager for Interleaf, Inc.

   N. Nobby Akiha, 44, has been Vice President, Marketing since August 2000.
From August 1994 to July 2000, Mr. Akiha was Vice President, Marketing and
Business Development at Inference Corporation. From October 1993 to July 1994,
Mr. Akiha was a Senior Consultant at Regis McKenna, Inc. Prior to that, Mr.
Akiha was Director of Marketing Communications at Interactive Development
Environments and a Group Product Manager at Oracle Corporation.

   John Bow, 45, has been Vice President, e.Business Application Partners since
October 2001. From February 1998 to September 2001, Mr. Bow was Group Director
of Global Alliances at Informatica. From June 1992 to January 1998, Mr. Bow was
a director in the Global Alliance group at Oracle Corporation. Prior to that,
Mr. Bow held various sales and sales management roles at Tandem, Digital
Equipment and Datapoint.

                                      11

<PAGE>

ITEM 2.  PROPERTIES

   Actuate's properties consist of leased facilities for sales and marketing,
research and development, services and support and administrative personnel.
Actuate's headquarters facilities consist of approximately 115,000 square feet
in South San Francisco, California. Actuate also leases office facilities in
various locations in the United States and abroad.

   We believe that our existing facilities are adequate for our current needs
and that additional space sufficient to meet our needs for the foreseeable
future will be available on reasonable terms. As a result of our California
facilities being located near major earthquake fault lines, in the event of an
earthquake our business, financial condition and operating results could be
seriously harmed. In addition, California has experienced energy power
shortages. If such power shortages result in numerous or prolonged brownouts or
blackouts, our business, financial condition and operating results could be
seriously harmed.

ITEM 3.  LEGAL PROCEEDINGS

   In August, 2001, a lawsuit was filed in the Virginia Circuit Court for
Fairfax County against us and two of our employees by MicroStrategy, Inc. The
lawsuit alleges that these employees, who previously worked for MicroStrategy,
breached their fiduciary and contractual obligations to Microstrategy by, among
other things, misappropriating trade secrets and confidential information and
soliciting MicroStrategy employees. The complaint seeks injunctive relief and
damages. Actuate believes the lawsuit is without merit and intends to defend
this case vigorously.

   We are also 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.

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

   We did not submit any matters to a vote of our security holders during the
fourth quarter of the fiscal year ended December 31, 2001.

                                      12

<PAGE>

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
          MATTERS

   Our common stock is traded on the Nasdaq National Market under the symbol
"ACTU" and has been traded on Nasdaq since Actuate's initial public offering in
1998. The following table sets forth the high and low closing sales prices of
our common stock during the last two years. All share prices have been adjusted
to reflect Actuate's two stock splits, which occurred on December 3, 1999 and
August 15, 2000.

<TABLE>
<CAPTION>
                                                 High   Low
                                                ------ ------
                  <S>                           <C>    <C>

                  First Quarter of Fiscal 2000. $35.47 $17.34
                  Second Quarter of Fiscal 2000 $26.69 $10.00
                  Third Quarter of Fiscal 2000. $34.55 $21.00
                  Fourth Quarter of Fiscal 2000 $36.00 $14.81
                  First Quarter of Fiscal 2001. $24.00 $ 8.19
                  Second Quarter of Fiscal 2001 $15.09 $ 5.25
                  Third Quarter of Fiscal 2001. $10.65 $ 3.56
                  Fourth Quarter of Fiscal 2001 $ 6.95 $ 3.75
</TABLE>

   According to the records of Actuate's transfer agent, as of January 31,
2002, Actuate had 176 stockholders of record (which number does not include the
number of stockholders whose shares are held by a brokerage house or clearing
agency, but does include such brokerage house or clearing agency as one record
holder). We believe we had approximately 7,800 beneficial owners of our common
stock. On February 28, 2002, the closing price of our common stock was $5.01
per share.

   We have never paid a cash dividend on our common stock and do not intend to
pay cash dividends on our common stock in the foreseeable future.

                                      13

<PAGE>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated financial data should be read in
conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations, and with the Consolidated Financial Statements and
Notes thereto which are included elsewhere in this Form 10-K. The consolidated
statements of operations data for the years ended December 31, 2001, 2000 and
1999 and the consolidated balance sheets data at December 31, 2001 and 2000 are
derived from the audited consolidated financial statements included elsewhere
in this Form 10-K. The consolidated statements of operations data for the year
ended December 31, 1998 and 1997 and the consolidated balance sheets data as of
December 31, 1999, 1998 and 1997 are derived from audited consolidated
financial statements that are not included in this Form 10-K. Historical
results are not necessarily indicative of results to be anticipated in the
future.

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                                  -------------------------------------------
                                                    2001      2000    1999    1998     1997
                                                  --------  -------- ------- -------  -------
                                                     (in thousands, except per share data)
<S>                                               <C>       <C>      <C>     <C>      <C>
Consolidated Statement of Operations Data:
Revenues:
   License fees.................................. $ 79,106  $ 72,286 $35,014 $17,750  $ 7,542
   Services......................................   45,922    34,978  11,767   4,122    1,976
                                                  --------  -------- ------- -------  -------
       Total revenues............................  125,028   107,264  46,781  21,872    9,518
                                                  --------  -------- ------- -------  -------
Costs and expenses:
   License fees..................................    2,305     1,959     896   1,012      647
   Services......................................   27,524    20,975   6,021   3,171    1,263
   Sales and marketing...........................   58,859    48,133  22,384  11,658    7,366
   Research and development......................   19,011    14,938   9,289   7,373    6,213
   General and administrative....................   10,853     7,015   3,478   2,563    1,317
   Amortization of goodwill and other purchased
     intangibles.................................   10,704     7,147   1,590      --       --
   Restructuring.................................      859        --      --      --       --
                                                  --------  -------- ------- -------  -------
       Total costs and expenses..................  130,115   100,167  43,658  25,777   16,806
                                                  --------  -------- ------- -------  -------
Income (loss) from operations....................   (5,087)    7,097   3,123  (3,905)  (7,288)
Interest and other income, net...................    1,148       891   1,313     739       46
                                                  --------  -------- ------- -------  -------
Income (loss) before income taxes................   (3,939)    7,988   4,436  (3,166)  (7,242)
Provision for income taxes.......................    2,478     2,589     550      --       --
                                                  --------  -------- ------- -------  -------
Net income (loss)................................ $ (6,417) $  5,399 $ 3,886 $(3,166) $(7,242)
                                                  ========  ======== ======= =======  =======
Basic net income (loss) per share (1)............ $  (0.11) $   0.10 $  0.07 $ (0.10) $ (0.62)
                                                  ========  ======== ======= =======  =======
Shares used in basic per share calculation (1)...   59,299    56,114  53,926  31,020   11,680
                                                  ========  ======== ======= =======  =======
Diluted net income (loss) per share (1).......... $  (0.11) $   0.08 $  0.06 $ (0.10) $ (0.62)
                                                  ========  ======== ======= =======  =======
Shares used in diluted per share calculation (1).   59,299    64,483  59,900  31,020   11,680
                                                  ========  ======== ======= =======  =======

                                                                  December 31,
                                                  -------------------------------------------
                                                    2001      2000    1999    1998     1997
                                                  --------  -------- ------- -------  -------
                                                                 (in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 39,807  $ 26,928 $24,153 $32,730  $ 3,191
Working capital (deficit)........................   28,143    23,237  20,744  24,416   (3,318)
Total assets.....................................  117,391    98,322  53,381  39,798    7,587
Long-term liabilities, less current portion......    1,529     2,033      --      --      124
Stockholders' equity (deficit)...................   71,077    56,977  31,636  26,034   (2,202)
</TABLE>
--------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
    of the method used to determine the number of shares used in computing net
    income (loss) per share.

                                      14

<PAGE>

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

   The statements contained in this Report on Form 10-K that are not purely
historical statements are forward-looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, including statements
regarding our expectations, beliefs, hopes, intentions or strategies regarding
the future. These forward-looking statements involve risks and uncertainties.
Actual results may differ materially from those indicated in such
forward-looking statements. See "Risk Factors that May Affect Future Results"
and "Special Note Regarding Forward-Looking Statements" in this Report on Form
10-K and the risks discussed in other reports filed by us from time to time
with the Securities and Exchange Commission.

Overview

   We are a provider of Information Delivery software products and services for
e.Business. 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 e.Business Application Partners, distributors and system integrators.
e.Business Application Partners 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 revenues are derived from license fees for software
products and, to a lesser extent, fees for services relating to such products,
including software maintenance and support, consulting and training.

   License fee revenues from sales of software products directly to end-user
customers are recognized as revenues after execution of a non-cancelable signed
license agreement or receipt of a definitive purchase order and shipment of the
product, provided that fees are fixed or determinable, no vendor obligations
remain and collection of the resulting receivables is deemed probable.
Probability of collection is based upon the assessment of the customer's
financial condition through the review of their current financial statements or
credit reports. For follow-on sales to existing customers, prior payment
history is also used to evaluate probability of collection. Our products do not
require significant customization. The majority of license fee revenues from
sales to end-user customers is from sales of specific individual products to
such customers and is recognized upon shipment of the applicable product.
Advance payments from end-user customers, in arrangements in which the end-user
customer has the right to future unspecified products, are deferred and
recognized as revenues ratably over the period, typically one year, during
which the end-user is entitled to receive the products. Such arrangements were
not a significant percentage of our revenues in fiscal 2001. License
arrangements with end-user customers generally give the customer a perpetual
license to use our software, are terminable by either party in the event of a
material breach of the license agreement by the other party if such breach is
not cured within a specified cure period, contain certain representations,
warranties and indemnities and provisions designed to limit the parties'
liability under the license agreement.

   License arrangements with e.Business Application Partners are for specified
duration and require that such vendors only license our products to their
customers for use with such vendor's application. Furthermore, license
arrangements with distributors give such distributors the right to distribute
our products to customers headquartered in specified territories. License
arrangements with indirect channel partners such as e.Business Application
Partners, system integrators and distributors generally take the form of
arrangements pursuant to which a license fee is paid to us, which we recognize
as revenues when no further obligations remain, provided that the fees are
fixed or determinable and collection of the resulting receivables is deemed
probable. We have also entered into certain fixed price arrangements in which
the contracting entity has the right to the unlimited usage, unspecified future
products, and resale of the licensed software for a specified term and pursuant
to which license fee revenues are deferred and recognized on a straight-line
basis over the term of the license agreement.

   In certain situations where customers have received payment terms outside of
our customary standard terms but within one year, we have recognized revenues
upon delivery, provided that we have collected all payments as due under
comparable arrangements, without providing concession, in the past.

                                      15

<PAGE>

   We have not established vendor specific objective evidence of fair value
("VSOE") for license sales and therefore we recognize revenues from
arrangements with multiple elements involving software licenses under the
residual method as outlined in Statement of Position No. 97.2 "Software Revenue
Recognition." To the extent that a discount exists on any of the elements, we
follow the residual method and attribute that discount entirely to the
delivered elements.

   Service revenues are primarily comprised of revenues from maintenance
agreements, consulting and training fees. Revenues from maintenance agreements
are deferred and recognized on a straight-line basis as service revenues over
the term of the related agreement, which is typically one year. Service
revenues from consulting and training services are recognized when performed.

   To date, we have sold our products internationally primarily through our
subsidiaries in Europe and Asia/Pacific. During fiscal years 2001, 2000 and
1999, we derived 23%, 15% and 14% of our total revenues, respectively, from
sales outside North America. Our ability to achieve revenue growth in the
future will depend in large part on our success in increasing revenues from
international sales. Although we intend to continue to invest significant
resources to expand our sales and support operations outside North America and
to enter additional international markets, we cannot assure you that such
efforts will be successful. In order to successfully expand international
sales, we must establish additional foreign operations, expand our
international channel management and support organizations, hire additional
personnel, recruit additional international distributors and increase the
productivity of existing international distributors. If we are not successful
in expanding international operations in a timely and cost-effective manner,
our business, operating results and financial condition could be materially
adversely affected.

   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.

   In June 1999, we acquired all of the outstanding shares of Actuate Holding,
B.V. ("BV"), the parent company of our distributors based in France, Germany
and the United Kingdom. The acquisition was accounted under the purchase method
of accounting. In connection with this acquisition, we recorded $9.6 million in
goodwill and identified intangible assets, which are being amortized over
periods not exceeding four years on a straight-line basis. The results of
operations of BV and the estimated fair value of assets acquired and
liabilities assumed are included in the consolidated financial statements from
the date of acquisition.

   In February 2000, we acquired all of the outstanding shares of Open Software
Technology LLC ("OST") for cash and shares of Actuate stock. The acquisition
was accounted under the purchase method of accounting. In connection with this
acquisition, we recorded $13.1 million in goodwill and identified intangible
assets, which are being amortized over periods not exceeding four years on a
straight-line basis. The results of operations of OST and the estimated fair
value of assets acquired and liabilities assumed are included in the
consolidated financial statements from the date of acquisition.

   In March 2000, we purchased all the assets and business of EnterpriseSoft.
In connection with this purchase, we recorded $8.7 million in goodwill and
identified intangible assets, which are being amortized over periods not
exceeding four years on a straight-line basis. The results of operations of
EnterpriseSoft and the estimated fair value of assets acquired are included in
the consolidated financial statements from the date of purchase.

   In April 2000, we purchased additional shares of our distributor in Japan
("Actuate Japan") from existing shareholders and became the majority
shareholder. We currently own 66.7% of Actuate Japan. In connection

                                      16

<PAGE>

with this purchase, we recorded $1.5 million in goodwill, which is being
amortized over four years on a straight-line basis. The results of operations
of Actuate Japan and the estimated fair value of assets acquired and
liabilities assumed are included in the consolidated financial statements from
the date we became the majority shareholder. The excess loss applicable to the
minority shareholders has been charged to us, as the minority shareholders are
not obligated to contribute their share of losses exceeding their equity
capital.

   In May 2001, we acquired all of the outstanding stock of Tidestone
Technologies, Inc. ("Tidestone"), a software technology company. In connection
with this purchase, we recorded $16.7 million in goodwill and identified
intangible assets, which are being amortized over periods not exceeding four
years on a straight-line basis. The results of operations of Tidestone and the
estimated fair value of assets acquired and liabilities assumed are included in
the consolidated financial statements from the date of acquisition.

Critical Accounting Policies and Estimates

   General.   Discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On a regular basis, we evaluate estimates, including those related
to bad debts, intangible assets, income taxes, restructuring, and litigation.
Estimates are based on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.

   We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

   Revenue Recognition.   Our revenue recognition policy is significant because
our revenues are a key component of our results of operations. We follow very
specific and detailed guidelines, discussed above, in measuring revenues;
however, certain judgments affect the application of our revenue policy. For
example, we are required to exercise judgment in evaluating risk of concession
when payments terms are beyond normal credit period of net 60 days. Further,
assessment of collectibility is particularly critical in determining whether or
not revenues should be recognized in the current market environment. We also
record a small provision for estimated sales returns on product and service
related sales in the same period as the related revenues are recorded. These
estimates are based on historical sales returns, analysis of credit memo data
and other known factors. If the historical data we use to calculate these
estimates does not properly reflect future returns, revenues could be
overstated.

   Goodwill and Intangible Assets.  We have significant intangible assets,
including goodwill. The determination of estimated useful lives and whether or
not these assets are impaired involves significant judgments. We periodically
evaluate acquired goodwill and intangible assets for potential impairment
indicators. Our judgments regarding the existence of impairment indicators are
based on market conditions and operational performances of the acquired assets.
In assessing the recoverability of these assets, we must make assumptions
regarding estimated future cash flows and other factors. If these estimates and
related assumptions change in the future, significant impairment charges may be
recorded in future periods.

   Allowance for Doubtful Accounts.  The allowance for doubtful accounts is
established through a charge to general and administrative expenses. This
allowance is for estimated losses resulting from the inability of our customers
to make required payments. It is a significant estimate and is regularly
evaluated by us for adequacy by taking into consideration factors such as past
experience, credit quality of the customer, age of the receivable balance,
individually and in the aggregate, and current economic conditions that may
affect a customer's ability

                                      17

<PAGE>

to pay. The use of different estimates or assumptions could produce different
allowance balances. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.

   Allowance for Deferred Tax Assets.  A valuation allowance is recorded to
reduce deferred tax assets to the amount that is more likely than not to be
realized. While we have considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation
allowance, in the event we were to determine that we would be able to realize
our deferred tax assets in the future in excess of our net recorded amount, an
adjustment to the deferred tax asset would increase income or reduce loss and
increase shareholder's equity in the period such determination was made.
Likewise, should we determine that we would not be able to realize all or part
of our net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was made.

   Contingencies.  We are engaged in legal actions arising in the ordinary
course of business. We are required to assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential ranges of probable
losses. A determination of the amount of reserves required, if any, for these
contingencies are made after careful analysis of each individual matter. The
required reserves, if any, may change in future due to new developments in each
matter or changes in approach, such as a change in settlement strategy for a
particular matter.

Results of Operations

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

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                             ----------------------
                                                              2001       2000  1999
                                                             ----       ----   ----
<S>                                                          <C>        <C>    <C>
Revenues:
   License fees.............................................  63%        67%    75%
   Services.................................................  37         33     25
                                                             ---        ---    ---
       Total revenues....................................... 100        100    100
                                                             ---        ---    ---
Costs and expenses:
   License fees.............................................   2          2      2
   Services.................................................  22         19     13
   Sales and marketing......................................  47         45     48
   Research and development.................................  15         14     20
   General and administrative...............................   9          7      7
   Amortization of goodwill and other purchased intangibles.   9          6      4
   Restructuring............................................   1         --     --
                                                             ---        ---    ---
       Total costs and expenses............................. 105         93     94
                                                             ---        ---    ---
Income (loss) from operations...............................  (5)         7      6
Interest and other income, net..............................   1          1      3
                                                             ---        ---    ---
Income (loss) before income taxes...........................  (4)         8      9
Provision for income taxes..................................   2          3      1
                                                             ---        ---    ---
Net income (loss)...........................................  (6)%        5%     8%
                                                             ===        ===    ===
</TABLE>

  Revenues

   Our revenues are derived from license fees and services, which include
software maintenance and support, consulting and training. Total revenues
increased by 129% from $46.8 million in fiscal 1999 to $107.3 million in

                                      18

<PAGE>

fiscal 2000 and by 17% to $125.0 million in fiscal 2001. No single customer
accounted for more than 10% of our revenues for any of the periods presented.

   License Fees.  Revenues from license fees increased by 106% from $35.0
million in fiscal 1999 to $72.3 million in fiscal 2000 and by 9% to $79.1
million in fiscal 2001. The increase in fiscal 2000 was due primarily to
increased sales to new customers and increased follow-on sales to existing
customers and, to a lesser extent, increase in average selling prices for our
products. The increase in fiscal 2001 was due primarily to increased sales to
new customers and increased follow-on sales to existing customers. Revenues
from license fees from our indirect channel partners, including e.Business
Application Partners, system integrators and distributors, accounted for 50%,
45% and 39% of total revenues from license fees for fiscal years 2001, 2000 and
1999, respectively.

   Services.  Revenues from services increased by 197% from $11.8 million in
fiscal 1999 to $35.0 million in fiscal 2000 and by 31% to $45.9 million in
fiscal 2001. The increase in fiscal 2000 was primarily due to increase in
demand for our professional services and an increase in the installed base of
customers receiving ongoing maintenance and support. The increase in fiscal
2001 was due primarily to an increase in the installed base of customers
receiving ongoing maintenance and support.

  Costs and Expenses

   Cost of License Fees.  Cost of license fees consists primarily of product
packaging, documentation and production costs, and localization of our software
for international distribution. Cost of license fees increased from $896,000,
or 3% of revenues from license fees, in fiscal 1999 to $2.0 million, or 3% of
revenues from license fees, in fiscal 2000 and increased to $2.3 million, or 3%
of revenues from license fees, in fiscal 2001. The increases in absolute
dollars were primarily due to packaging and production costs to support
increased sales.

   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 costs
incurred in providing training and consulting services. Cost of services
increased from $6.0 million, or 51% of services revenues, in fiscal 1999 to
$21.0 million, or 60% of services revenues, in fiscal 2000 and to $27.5
million, or 60% of services revenues, in fiscal 2001. The increase in both
absolute dollars and as a percentage of services revenues in fiscal 2000 was
primarily due to increases in consulting personnel obtained in the OST
acquisition and increased third-party costs to support the growing needs of our
customers. The increase in cost of services in absolute dollars in fiscal 2001
was primarily due to the expansion of our customer service organization to
support our increasing installed customer base. We expect that cost of services
will continue to grow in absolute dollars in the future as we continue to hire
additional customer service personnel and consultants to support our customers'
demand for our services.

   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 increased by 115% from $22.4 million, or 48% of total
revenues, in fiscal 1999 to $48.1 million, or 45% of total revenues, in fiscal
2000 and by 22% to $58.9 million, or 47% of total revenues, in fiscal 2001. The
increases in both absolute dollars and as a percentage of total revenues were
primarily due to the hiring of additional sales and marketing personnel, higher
sales commissions associated with increased revenues and increased marketing
program activities. We expect that sales and marketing expense will continue to
increase in absolute dollars in future periods as we continue to hire
additional sales and marketing personnel, establish additional sales offices,
expand international distribution channels and increase promotional activities.

   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

                                      19

<PAGE>

existing products, quality assurance and testing. Research and development
expenses increased by 61% from $9.3 million, or 20% of total revenues, in
fiscal 1999 to $14.9 million, or 14% of total revenues, in fiscal 2000 and by
27% to $19.0 million, or 15% of total revenues, in fiscal 2001. The increases
in absolute dollars were primarily due to increased personnel and related costs
associated with the development of new products, the enhancement of existing
products, quality assurance and testing, depreciation of capital expenditures
and facilities costs. We believe that a significant level of investment in
product development is essential to maintain product leadership and anticipate
research and development expenses to increase in absolute dollars in future
periods for developing new products and providing enhancements to current
products.

   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 and accounting
expenses. General and administrative expenses increased by 102% from $3.5
million, or 7% of total revenues, in fiscal 1999 to $7.0 million, or 7% of
total revenues, in fiscal 2000 and by 55% to $10.9 million, or 9% of total
revenues, in fiscal 2001. The increases in general and administrative expenses
in both absolute dollars and as a percentage of total revenues were primarily
due to increased personnel and related costs. Our expenses for fiscal 2001
included approximately $2.3 million in facility expenses for a building that is
currently unoccupied. We will continue to evaluate our future plans for this
building and other facilities. If we reach a decision to abandon any of these
facilities, we may have to accrue significant charges for the payments due
under the remaining non cancelable lease terms, net of anticipated sub-lease
income, and for the write-down in leasehold improvements and construction in
progress. Such charges may be material and may involve significant use of cash
if we choose to pay a settlement fee to exit any abandoned facility. We believe
that general and administrative expenses will continue to increase in absolute
dollars in future periods as we hire additional personnel to support expanded
operations.

   Amortization of Goodwill and Other Purchased Intangibles.  In connection
with the acquisition of BV in June 1999, we recognized $9.6 million in goodwill
and identified intangible assets. In addition, we recognized $13.1 million in
goodwill and identified intangible assets in our acquisition of OST in February
2000 and $8.7 million in goodwill and identified intangible assets in our
acquisition of EnterpriseSoft in March 2000. In April 2000, we purchased
additional shares of Actuate Japan and became the majority shareholder. We
recognized $1.5 million in goodwill as a result of consolidating Actuate
Japan's financial statements. In May 2001, we acquired all of the outstanding
stock of Tidestone and recognized $16.7 million of goodwill and other
intangible assets. All of these acquisitions were accounted for by the purchase
method of accounting. Goodwill and identified intangibles are being amortized
on a straight-line basis over periods not exceeding four years. In fiscal years
2001, 2000 and 1999, we recorded amortization expenses of $10.7 million, $7.1
million and $1.6 million, respectively. Approximately $30.5 million remains to
be amortized.

   In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS 142, "Goodwill and Other Intangible Assets", effective
for fiscal years beginning after December 15, 2001. SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interest is prohibited. SFAS 142
requires that goodwill and intangible assets deemed to have indefinite lives
will no longer be amortized but will be subject to annual impairment tests in
accordance with the new standards. Other intangible assets will continue to be
amortized over their useful lives.

   We will apply the new rules on accounting for goodwill and other intangible
assets beginning January 1, 2002. However, we are still assessing the financial
impact of the new standard. During the first six months of 2002, we will
perform the required transitional impairment tests of goodwill and
indefinite-lived intangible assets as of January 1, 2002 and have not yet
determined what the effect of these tests will be on our earnings and financial
position.

   Restructuring Costs.  During the second and third quarter of fiscal 2001, we
implemented restructuring actions that resulted in aggregate charges of
$859,000. The restructuring costs consisted entirely of severance

                                      20

<PAGE>

payments, payroll taxes and extended medical benefits. The restructuring plan
resulted in the elimination of approximately 15% of our worldwide workforce. As
of December 31, 2001, we had eliminated 114 positions across all levels and
functions. During the year, we paid $782,000 in cash and we expect that our
remaining accrual of $77,000 will be paid in the first calendar quarter of
fiscal 2002.

   Deferred Compensation.  Deferred compensation represents the difference
between the exercise price of certain stock option grants and the fair value of
our Common Stock at the time of such grants and also includes the unvested
intrinsic value of options assumed in business combinations. In fiscal years
2001, 2000 and 1999, we recorded amortization expense of approximately $56,000,
$61,000, and $91,000, respectively. All deferred compensation expense has been
included in general and administrative expenses. At December 31, 2001, we had
approximately $199,000 in deferred compensation remaining to be amortized. Upon
cancellation of the underlying stock options, the unamortized portion has been
offset against additional paid-in capital.

Interest and Other Income, Net

   Interest and other income, net, are comprised primarily of interest income
earned by us on our cash and short-term investments. Interest and other income,
net, decreased from $1.3 million in fiscal 1999 to $891,000 in fiscal 2000, and
increased to $1.1 million in fiscal 2001. The decrease in fiscal 2000 was due
to lower interest income on a lower average annual investment base as we used
cash to purchase OST, EnterpriseSoft and shares of Actuate Japan. The increase
in fiscal 2001 was due primarily to higher cash and investment balances from
which interest was earned.

Provision for Income Taxes

   The provision for income taxes of $2.5 million was based on pretax losses of
$3.9 million in fiscal 2001. The provision for income taxes of $2.6 million and
$550,000 was based on the pretax income of $8.0 million and $4.4 million in
fiscal years 2000 and 1999, respectively. The income tax expense in fiscal 2001
represents primarily federal and state alternative minimum taxes on pretax loss
as adjusted for the impact of non-deductible goodwill amortization and
temporary differences for which deferred tax assets cannot be recognized. The
tax expense in fiscal years 2000 and 1999 represented primarily federal and
state alternative minimum taxes on pretax income before non-deductible goodwill
amortization, offset by the utilization of net operating losses and tax
credits. The tax expense in fiscal 2001 decreased only slightly as compared to
that in fiscal 2000 even though we incurred a pretax loss in fiscal 2001 as
compared to pretax income in fiscal 2000. This is primarily due to the impact
of higher non-deductible goodwill amortization expenses related to the
acquisition of Tidestone, which occurred in fiscal 2001, and our inability to
recognize a deferred tax asset for the temporary differences. The tax expense
in fiscal 2000 as compared to fiscal 1999 increased primarily due to higher
income and non-deductible goodwill amortization.

   We believe that, based on a number of factors, there is sufficient
uncertainty regarding our ability to realize deferred tax assets and we have,
therefore, not recognized any net deferred tax assets at December 31, 2001.
These factors include consideration of past operating results, the competitive
nature of our market and predictability of future operating results. We will
continue to assess our ability to realize the tax benefits available to us
based on actual and forecasted operating results.

Liquidity and Capital Resources

   Since inception, we have funded our operations primarily through
approximately $14.3 million in net proceeds from the private sales of preferred
stock, $30.9 million in net proceeds from our initial public offering in July
1998, and cash from operations. At December 31, 2001, we had $39.8 million in
cash, cash equivalents and short-term investments, an increase of $12.9 million
from $26.9 million at December 31, 2000; and $28.1 million in net working
capital, an increase $4.9 million from $23.2 million at December 31, 2000. In
fiscal 1999,

                                      21

<PAGE>

we had $24.2 million in cash, cash equivalents and short-term investments and
$20.7 million in net working capital.

   Net Cash from Operating Activities.  During fiscal 2001, our operations
provided net cash of $12.9 million. Cash provided by operating activities was
primarily due to increases in amortization, depreciation, tax benefits from
exercise of stock options, deferred revenues and decrease in accounts
receivable, which were offset by net loss, and decreases in other current
assets and accounts payable. During fiscal 2000, net cash provided by operating
activities was $19.3 million, which was primarily due to increases in deferred
revenue, net income as adjusted for amortization and depreciation, tax benefits
from exercise of stock options, accrued compensation and other accrued
liabilities that were offset by increases in accounts receivable and other
current assets. During fiscal 1999, net cash provided by operating activities
was $1.8 million, which was primarily due to increases in deferred revenue, net
income as adjusted for amortization and depreciation and accrued compensation
that were offset by increases in accounts receivable and other current assets.

   Cash Used in Investing Activities.  Actuate's investing activities used net
cash of $11.8 million dollars in fiscal 2001, compared to $5.3 million in
fiscal 2000, an increase of $6.5 million. Approximately half of the cash used
in investing activities during fiscal 2001 was for the purchase of property and
equipment, including the furnishing of the additional office facility located
adjacent to our South San Francisco headquarters. The remainder of the cash
used in investing activities, net of proceeds from maturity of short-term
investments, was primarily for the purchase of short-term investments. By
comparison, in fiscal 2000, cash was used primarily to purchase property and
equipment for our newly relocated and expanded facilities in South San
Francisco, and for our acquisition of OST and EnterpriseSoft, which was offset
by proceeds from the maturity of short-term investments. In fiscal 1999, net
cash used in investing activities was $18.5 million. The cash was used
primarily in the acquisition of BV and purchase of short-term investments. In
connection with our acquisition of OST, we are obligated to pay $2.0 million in
March 2002.

   Cash from Financing Activities.  Cash flow from financing activities was
$7.1 million in fiscal 2001, compared to cash flow from financing activities of
$6.3 million in fiscal 2000, an increase of approximately $900,000. Net cash
provided from financing activities was $1.4 million in fiscal 1999. The
increase in fiscal 2001 was primarily attributable to the net proceeds from
exercise of options under our stock option plan and from employee purchases of
common stock under our stock purchase plan, offset by the open market
repurchases of our stock and by the repayment of bank loan assumed in
connection with the Tidestone acquisition. In fiscal 2000 and fiscal 1999, the
cash from financing activities primarily reflected the net proceeds from
exercise of options under our stock option plan and from employee purchases of
common stock under our stock purchase plan.

   We believe that our current cash balances and cash generated from operations
will be sufficient to meet our working capital and capital expenditures
requirements for at least the next twelve months. Thereafter, if cash generated
from operations is insufficient to satisfy our liquidity requirements, we may
find it necessary to sell additional equity or obtain credit facilities. The
sale of additional equity could result in additional dilution to our current
stockholders. A portion of our cash may be used to acquire or invest in
complementary businesses, including the acquisition of the minority interest in
our Japanese distributor, or complementary products or to obtain the right to
use complementary technologies.

   On September 19, 2001, our board of directors authorized a stock repurchase
program of up to $6.0 million of our common stock. As of December 31, 2001, we
have repurchased 430,000 shares or $1.8 million worth of common stock under
this program.

                                      22

<PAGE>

   Contractual Obligations and Commercial Commitments.  Our future contractual
obligations include minimum lease payments under operating leases at December
31, 2001, and are as follows (in thousands):

<TABLE>
<CAPTION>
                                          Payments
                                           Due by
                              Fiscal Year  Period
                              ----------- --------
                              <S>         <C>
                              2002....... $ 5,773
                              2003.......   5,552
                              2004.......   5,538
                              2005.......   5,663
                              2006.......   5,813
                              Thereafter.  18,336
                                          -------
                                          $46,675
                                          =======
</TABLE>

   In addition, our future contractual obligations also include a $2.0 million
payment to be made in fiscal 2002 in connection with our acquisition of OST.
Further, in conjunction with the signing of our office building leases, we have
provided the landlord with a letter of credit in the amount of $1.6 million as
security deposit.

Recently Issued Accounting Pronouncement

   In July 2001, the FASB issued SFAS 141, "Business Combinations" and SFAS
142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. SFAS 141 requires that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001. Use of the pooling-of-interest will be prohibited. SFAS 142 requires that
goodwill and intangible assets deemed to have indefinite lives will no longer
be amortized but will be subject to annual impairment tests in accordance with
the new standards. Other intangible assets will continue to be amortized over
their useful lives. We will apply the new rules on accounting for goodwill and
other intangible assets beginning January 1, 2002. However, we are still
assessing the financial impact of the new standard. During the first six months
of 2002, we will perform the required transitional impairment tests of goodwill
and indefinite-lived intangible assets as of January 1, 2002. We have not yet
determined what the effect of these tests will be on our earnings and financial
position.

   In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated retirement costs. We are in the process of assessing the effect
of adopting SFAS 143, which will be effective for our fiscal year ending
December 31, 2002.

   In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS 144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. However, SFAS
144 retains the fundamental provisions of SFAS 121 for: 1) recognition and
measurement of the impairment of long-lived assets to be held and used; and 2)
measurement of long-lived assets to be disposed of by sale. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. We do not expect
the adoption of SFAS 144 to have a material effect on our financial condition
or results of operations.

   In November 2001, the staff of the FASB issued an announcement on the topic
of "Income Statement Characterization of Reimbursements Received for Out of
Pocket Expenses Incurred." This announcement requires companies to characterize
reimbursements received for out-of-pocket expenses incurred as revenue in the
income statement. This announcement should be applied in financial reporting
periods beginning after December 15, 2001 and comparative financial statements
for prior periods should be reclassified to comply with the guidance in this
announcement. We will adopt the policies outlined in the announcement beginning
in 2002. We are in the process of assessing the effect of adopting this
statement, which will be effective for our fiscal year ending December 31, 2002.

                                      23

<PAGE>

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

   Investors should carefully consider the following risk factors and warnings
before making an investment decision. The risks described below are not the
only ones facing Actuate. Additional risks that we do not yet know of or that
we currently think are immaterial may also impair our business operations. If
any of the following risks actually occur, our business, operating results or
financial condition could be materially adversely affected. In such case, the
trading price of our common stock could decline and you may lose all or part of
your investment. Investors should also refer to the other information set forth
in this Report on Form 10-K, including the financial statements and the notes
thereto.

OUR OPERATING RESULTS MAY BE VOLATILE AND DIFFICULT TO PREDICT. IF WE FAIL TO
MEET OUR ESTIMATES OF QUARTERLY AND ANNUAL OPERATING RESULTS OR WE FAIL TO MEET
THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF
OUR STOCK MAY DECREASE SIGNIFICANTLY.

   The susceptibility of our operating results to significant fluctuations
makes any prediction, including our estimates, of future operating results
unreliable. In addition, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and you should not rely on
them as indications of our future performance. Our operating results have in
the past, and may in the future, vary significantly due to factors such as the
following:

  .   demand for our products;

  .   the size and timing of significant orders for our products;

  .   a slow down or a decrease in spending on information technology by our
      current and/or prospective customers;

  .   general domestic and international economic and political conditions;

  .   sales cycles and sales performance of our indirect channel partners;

  .   continued successful relationships and the establishment of new
      relationships with e.Business application vendors;

  .   the management and expansion of our international operations;

  .   changes in our level of operating expenses and our ability to control
      costs;

  .   ability to make new products commercially available in a timely manner;

  .   budgeting cycles of our customers;

  .   changes in pricing policies by us or our competitors;

  .   failure to successfully manage acquisitions made by us;

  .   defects in our products and other product quality problems; and

  .   failure to meet hiring needs and unexpected personnel changes.

   Because our software products are typically shipped shortly after orders are
received, total revenues in any quarter are substantially dependent on orders
booked and shipped throughout that quarter. Booking of orders in the third
quarter of 2001 was negatively impacted by the September 11/th terrorist
attacks and future terrorists acts or war-time conditions are likely to impact
the booking of orders in future periods. Furthermore, several factors may
require us, in accordance with accounting principles generally accepted in the
United States, to defer recognition of license fee revenue for a significant
period of time after entering into a license agreement, including: /

  .   whether the license agreement includes both software products that are
      then currently available and software products or other enhancements that
      are still under development;

                                      24

<PAGE>

  .   whether the license agreement relates entirely or partly to then
      currently undeliverable software products;

  .   whether the license agreement requires the performance of services that
      may preclude revenue recognition until successful completion of such
      services; and

  .   whether the license agreement includes acceptance criteria that may
      preclude revenue recognition prior to customer acceptance.

   In addition, we may in the future experience fluctuations in our gross and
operating margins due to changes in the mix of our domestic and international
revenues, changes in the mix of our direct sales and indirect sales and changes
in the mix of license revenues and service revenues, as well as changes in the
mix among the indirect channels through which our products are offered.

   A significant portion of our total revenues in any given quarter is derived
from existing customers. Our ability to achieve future revenue growth, if any,
will be substantially dependent upon our ability to increase revenues from
license fees and services from existing customers, to expand our sales force
and to increase the average size of our orders. To the extent that such
increases do not occur in a timely manner, our business, operating results and
financial condition would be harmed. Our expense levels and any plans for
expansion, including plans to increase our sales and marketing and research and
development efforts, are based in significant part on our expectations of
future revenues and are relatively fixed in the short-term. If revenues fall
below our expectations and we are unable to quickly reduce our spending in
response, our business, operating results and financial condition are likely to
be harmed.

   Based upon all of the factors described above, we have a limited ability to
forecast future revenues and expenses, and it is likely that in some future
quarter our operating results will be below our estimates or the expectations
of public market analysts and investors. In the event that operating results
are below our estimates or other expectations, the price of our common stock
could decline.

IF WE DO NOT SUCCESSFULLY EXPAND OUR DISTRIBUTION CHANNELS AND DEVELOP AND
MAINTAIN RELATIONSHIPS WITH SOFTWARE APPLICATION VENDORS, OUR BUSINESS WOULD BE
SERIOUSLY HARMED.

   To date, we have sold our products principally through our direct sales
force, as well as through indirect sales channels, such as our e.Business
Application Partners, distributors and systems integrators. Our revenues from
license fees resulting from sales through indirect channel partners were
approximately 50%, 45% and 39% in fiscal years 2001, 2000 and 1999,
respectively. Our ability to achieve significant revenue growth in the future
will depend in large part on the success of our sales force and in further
establishing and maintaining relationships with indirect channel partners. In
particular, a significant element of our strategy is to embed our technology in
products offered by software application vendors for resale or as a hosted
application to such vendors' customers and end-users. We intend to seek
additional distribution arrangements with other software application vendors to
embed our technology in their products and expect that these arrangements will
continue to account for a significant portion of our revenues in future
periods. Our future success will depend on the ability of our indirect channel
partners to sell and support our products. If the sales and implementation
cycles of our indirect channel partners are lengthy or variable or our
e.Business Application Partners experience difficulties embedding our
technology into their products or we fail to train the sales and customer
support personnel of such indirect channel partners in a timely fashion, our
business, operating results and financial condition would be harmed.

   Although we are currently investing, and plan to continue to invest,
significant resources to expand and develop relationships with e.Business
Application Partners, we have at times experienced and continue to experience
difficulty in establishing and maintaining these relationships. If we are
unable to successfully expand these distribution channels and secure license
agreements with additional e.Business Application Partners on commercially
reasonable terms, including significant up front payments of minimum license
fees, and extend existing license agreements with existing e.Business
Application Partners on commercially reasonable terms, our operating results
would be harmed. Any inability by us to maintain existing or establish new
relationships with

                                      25

<PAGE>

indirect channel partners, including systems integrators, or, if such efforts
are successful, a failure of our revenues to increase correspondingly with
expenses incurred in pursuing such relationships, would harm our business,
operating results and financial condition.

IF THE MARKET FOR INFORMATION DELIVERY SOFTWARE DOES NOT GROW AS WE EXPECT, OUR
BUSINESS WOULD BE SERIOUSLY HARMED.

   The market for Information Delivery software products is still emerging and
we cannot be certain that it will continue to grow or that, even if the market
does grow, businesses will purchase our products. If the market for Information
Delivery software products fails to grow or grows more slowly than we expect,
our business, operating results and financial condition would be harmed. To
date, all of our revenues have been derived from licenses for our e.Reporting
software and related products and services, and we expect this to continue for
the foreseeable future. We have spent, and intend to continue to spend,
considerable resources educating potential customers and indirect channel
partners about Information Delivery and our products. However, if such
expenditures do not enable our products to achieve any significant degree of
market acceptance, our business, operating results and financial condition
would be harmed.

BECAUSE THE SALES CYCLES OF OUR PRODUCTS ARE LENGTHY AND VARIABLE, OUR
QUARTERLY RESULTS MAY FLUCTUATE.

   The purchase of our products by our end-user customers for deployment within
the customer's organization typically involves a significant commitment of
capital and other resources, and is therefore subject to delays that are beyond
our control. These delays can arise from a customer's internal procedures to
approve large capital expenditures, budgetary constraints and the testing and
acceptance of new technologies that affect key operations as well as general
economic and political events. The sales cycle for an initial order of our
products is typically 3 to 6 months and the sales cycle associated with a
follow-on large scale deployment of our products typically extends for another
6 to 9 months or longer. We may experience longer sales cycles in the future.
Additionally, sales cycles for sales of our products to e.Business Application
Partners tend to be longer, ranging from 6 to 24 months or more and may involve
convincing the vendor's entire organization that our products are the
appropriate Information Delivery software for the vendor's application. This
time period does not include the sales and implementation cycles of such
vendor's own products, which are typically significantly longer than our sales
and implementation cycles. Certain of our customers have in the past, or may in
the future, experience difficulty completing the initial implementation of our
products. Any difficulties or delays in the initial implementation by our
end-user customers or our indirect channel partners could cause such customers
to reject our software or lead to the delay or non-receipt of future orders for
the large-scale deployment of our products.

IF WE FAIL TO EXPAND OUR INTERNATIONAL OPERATIONS OUR BUSINESS WOULD BE
SERIOUSLY HARMED.

   During fiscal years 2001, 2000 and 1999, we derived 23%, 15% and 14% of our
total revenues, respectively, from sales outside North America. Our ability to
achieve revenue growth in the future will depend in large part on our success
in increasing revenues from international sales. We intend to continue to
invest significant resources to expand our sales and support operations outside
North America and to enter additional international markets. In order to expand
international sales, we must establish additional foreign operations, expand
our international channel management and support organizations, hire additional
personnel, recruit additional international distributors and increase the
productivity of existing international distributors. If we are not successful
in expanding international operations in a timely and cost-effective manner,
our business, operating results and financial condition could be harmed.

WE MAY MAKE FUTURE ACQUISITIONS AND ACQUISITIONS INVOLVE NUMEROUS RISKS

   Our business is highly competitive, and as such, our growth is dependent
upon market growth and our ability to enhance our existing products, introduce
new products on a timely basis and expand our distribution

                                      26

<PAGE>

channels and professional services organization. One of the ways we have
addressed and will continue to address these issues is through acquisitions of
other companies. Acquisitions involve numerous risks, including the following:

  .   difficulties in integration of the operations, technologies, and products
      of the acquired companies;

  .   the risk of diverting management's attention from normal daily operations
      of the business;

  .   negative impact to our financial condition and results of operations
      resulting from combining the acquired company's financial condition and
      results of operations with our financial statements;

  .   risks of entering markets in which we have no or limited direct prior
      experience; and

  .   the potential loss of key employees of the acquired company.

   Mergers and acquisitions of high-technology companies are inherently risky,
and we cannot assure you that any acquisition will be successful and will not
materially adversely affect our business, operating results or financial
condition. Failure to successfully integrate acquired companies and
technologies with us could harm our business and operating results.

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.

   Our market is intensely competitive and characterized by rapidly changing
technology and evolving standards. Our competition comes in five principal
forms:

  .   direct competition from current or future software vendors such as
      Business Objects S.A., Crystal Decisions (a subsidiary of Seagate
      Technology, LLC.), and Brio Technology, Inc.;

  .   indirect competition from vendors of Business Intelligence tools such as
      Cognos, Inc., MicroStrategy Incorporated and Microsoft that integrate
      reporting functionality with such tools;

  .   indirect competition from e.Business software vendors such as SAP and
      Oracle, to the extent they include Information Delivery functionality in
      their applications;

  .   competition from other e.Business software vendors and Internet
      development tool vendors; and

  .   competition from the information technology departments of current or
      potential customers that may develop Information Delivery solutions
      internally which may be cheaper and more customized than our products.

   Many of our current and potential competitors have significantly greater
financial, technical, marketing and other resources than us. These competitors
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements or devote greater resources to the development,
promotion and sales of their products than we may. Also, most current and
potential competitors, including companies such as Oracle and Microsoft, have
greater name recognition and the ability to leverage a significant installed
customer base. These companies could integrate competing Information Delivery
software with their products, resulting in a loss of market share for us. We
expect additional competition as other established and emerging companies enter
the Information Delivery software market and new products and technologies are
introduced. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins, longer sales cycles and loss of market
share, any of which would harm our business, operating results and financial
condition.

   Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the Information Delivery needs of
our prospective customers. Also our current or future channel partners may have
established in the past, or may in the future, establish cooperative
relationships with our current or potential competitors, thereby limiting our
ability to sell our products through particular distribution channels. It is
possible that new competitors or alliances among current and new competitors
may emerge and rapidly gain significant market share. Such competition could
harm our ability to obtain revenues from license fees from new or existing
customers and service revenues from new or existing customers on terms
favorable to us. If we are unable to compete

                                      27

<PAGE>

successfully against current and future competitors our business, operating
results and financial condition would be harmed.

OUR LITIGATION WITH MICROSTRATEGY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION

   In August, 2001, a lawsuit was filed in the Virginia Circuit Court for
Fairfax County against us and two of our employees by MicroStrategy, Inc. The
lawsuit alleges that these employees, who previously worked for
MicroStrategy, breached their fiduciary and contractual obligations to
MicroStrategy by, among other things, misappropriating trade secrets and
confidential information and soliciting MicroStrategy employees. The complaint
seeks injunctive relief and damages. Although Actuate believes the lawsuit is
without merit and intends to defend this case vigorously the potential effects
on our business, operating results and financial condition may include the
following:

  .   we could be forced to stop selling our products;

  .   we will incur substantial litigation costs in defense of this lawsuit;

  .   we may be required to indemnify our customers;

  .   we may have to use significant engineering resources to redesign our
      products as a result of this lawsuit;

  .   we may be required to enter into a licensing agreement with MicroStrategy
      containing terms that are unfavorable to us;

  .   we will be forced to commit significant engineering and management
      resources to resolve this lawsuit.

IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS COULD BECOME
OBSOLETE AND OUR BUSINESS COULD BE SERIOUSLY HARMED.

   The market for our products is characterized by rapid technological changes,
frequent new product introductions and enhancements, changing customer demands
and evolving industry standards. Any of these factors can render existing
products obsolete and unmarketable. We believe that our future success will
depend in large part on our ability to support current and future releases of
popular operating systems and computer programming languages, databases and
e.Business software applications, to timely develop new products that achieve
market acceptance, and to meet an expanding range of customer requirements. If
the announcement or introduction of new products by us or our competitors or
any change in industry standards causes customers to defer or cancel purchases
of existing products, our business, operating results and financial condition
would be harmed. As a result of the complexities inherent in Information
Delivery, major new products and product enhancements can require long
development and testing periods. In addition, customers may delay their
purchasing decisions in anticipation of the general availability of new or
enhanced versions of our products. As a result, significant delays in the
general availability of such new releases or significant problems in the
installation or implementation of such new releases could harm our business,
operating results and financial condition. If we fail to successfully develop,
on a timely and cost effective basis, product enhancements or new products that
respond to technological change, evolving industry standards or customer
requirements or such new products and product enhancements fail to achieve
market acceptance, our business, operating results and financial condition may
be harmed.

IF WE DO NOT RELEASE NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS IN A
TIMELY MANNER OR IF SUCH NEW PRODUCTS AND ENHANCEMENTS FAIL TO ACHIEVE MARKET
ACCEPTANCE, OUR BUSINESS COULD BE SERIOUSLY HARMED.

   We believe that our future success will depend in large part on the success
of new products and enhancements to our products that we make generally
available. Prior to the release of any new products or enhancements, the
products must undergo a long development and testing period. To date, the
development and testing of new products and enhancements have taken longer than
expected. In the event the development and

                                      28

<PAGE>

testing of new products and enhancements continue to take longer than expected,
the release of new products and enhancements will be delayed. If we fail to
release new products and enhancements in a timely manner, our business,
operating results and financial condition may be harmed. In addition, if such
new products and enhancements do not achieve market acceptance our business,
operating results and financial condition may be harmed.

THERE ARE MANAGEMENT AND OPERATIONAL RISKS ASSOCIATED WITH OUR INTERNATIONAL
OPERATIONS THAT COULD SERIOUSLY HARM OUR BUSINESS.

   A substantial portion of Actuate's revenue is derived from international
sales. During fiscal years 2001, 2000 and 1999, sales outside North America
accounted for 23%, 15% and 14% of our total revenues, respectively.
International operations are subject to a number of risks, any of which could
harm our business, operating results and financial conditions. These risks
include the following:

  .   political and economic instability;

  .   difficulty in managing an organization spread across many countries;

  .   multiple and conflicting tax laws and regulations;

  .   costs of localizing products for foreign countries;

  .   difficulty in hiring employees in foreign countries;

  .   trade laws and business practices favoring local competition;

  .   dependence on local vendors;

  .   compliance with multiple, conflicting and changing government laws and
      regulations;

  .   longer sales and payment cycles;

  .   import and export restrictions and tariffs;

  .   difficulties in staffing and managing foreign operations;

  .   greater difficulty or delay in accounts receivable collection; and

  .   foreign currency exchange rate fluctuations.

   We believe that an increasing portion of our revenues and costs will be
denominated in foreign currencies. To the extent such denomination in foreign
currencies does occur, gains and losses on the conversion to U.S. dollars of
accounts receivable, accounts payable and other monetary assets and liabilities
arising from international operations may contribute to fluctuations in our
results of operations. Although we may from time to time undertake foreign
exchange hedging transactions to cover a portion of our foreign currency
transaction exposure, we currently do not attempt to cover any foreign currency
exposure. If we are not successful in any future foreign exchange hedging
transactions that we engage in, our business, operating results and financial
condition could be harmed.

TO MANAGE OUR GROWTH AND EXPANSION, WE NEED TO IMPROVE AND IMPLEMENT OUR
INTERNAL SYSTEMS, PROCEDURES AND CONTROLS. IF WE ARE UNABLE TO DO SO
SUCCESSFULLY, OUR BUSINESS WOULD BE SERIOUSLY HARMED.

   Our expansion in the number of employees and the scope of operations over
the past few years has placed and will continue to place a significant strain
on our management, information systems and resources. Any acquisitions made by
us will also put a significant strain on our management, information systems
and resources. In addition, we expect that an expansion of our international
operations will lead to increased financial and administrative demands
associated with managing our international operations and managing an
increasing number of relationships with foreign partners and customers and
expanded treasury functions to manage foreign currency risks. Our future
operating results will also depend on our ability to further develop indirect
channels

                                      29

<PAGE>

and expand our support organization to accommodate growth in our installed
base. If we fail to manage our expansion effectively, our business, operating
results and financial condition would be harmed.

OUR INABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL IN THE FUTURE
WOULD SERIOUSLY HARM OUR BUSINESS.

   Our success depends to a significant degree upon the efforts of certain key
management, sales, marketing, customer support and research and development
personnel. We believe that our future success will depend in large part upon
our continuing ability to attract and retain highly skilled managerial, sales,
marketing, customer support and research and development personnel. Like other
software companies, we face intense competition for such personnel, and we have
experienced and will continue to experience difficulty in recruiting and
retaining qualified personnel. This is particularly true in the San Francisco
Bay Area, where the employment market for qualified sales, marketing, customer
support and research and development personnel can be very competitive.

OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.

   Our future success depends upon the continued service of our executive
officers and other key engineering, sales, marketing and customer support
personnel. None of our officers or key employees is bound by an employment
agreement for any specific term. If we lose the service of one or more of our
key employees, or if one or more of our executive officers or key employees
decide to join a competitor or otherwise compete directly or indirectly with
us, this could have a significant adverse effect on our business.

THERE ARE RISKS ASSOCIATED WITH THE SOFTWARE INDUSTRY

   The software industry is experiencing a significant downturn in connection
with the decline in general economic conditions, which has resulted in a
decrease of the budgets of our customers and potential customers for
information technology. This change in economic conditions has resulted in a
slowdown of the purchase of Internet based software products and has affected
our operating results and financial condition. We expect this economic downturn
to continue and, thus, our operating results and financial condition may be
below our forecasts and investor expectations and may in the future reflect
substantial fluctuations from period to period as a consequence of buying
patterns and general economic conditions in the software industry.

IF OUR PRODUCT CONTAINS MATERIAL DEFECTS, OUR BUSINESS COULD BE SERIOUSLY
HARMED.

   Software products as complex as those offered by us often contain errors or
defects, particularly when first introduced, when new versions or enhancements
are released and when configured to individual customer computing systems. We
currently have known errors and defects in our products. Despite testing
conducted by us, if additional defects and errors are found in current
versions, new versions or enhancements of our products after commencement of
commercial shipment, this could result in the loss of revenues or a delay in
market acceptance. The occurrence of any of these events could seriously harm
our business, operating results and financial condition.

IF A SUCCESSFUL PRODUCT LIABILITY CLAIM IS MADE AGAINST US, OUR BUSINESS WOULD
BE SERIOUSLY HARMED.

   Although license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims, it is
possible that such limitation of liability provisions may not be effective as a
result of existing or future laws or unfavorable judicial decisions. The sale
and support of our products may

                                      30

<PAGE>

entail the risk of such claims, which are likely to be substantial in light of
the use of our products in business-critical applications. A product liability
claim brought against us could seriously harm our business, operating results
and financial condition.

IF THE PROTECTION OF OUR PROPRIETARY RIGHTS IS INADEQUATE, OUR BUSINESS COULD
BE SERIOUSLY HARMED.

   We have two issued and two pending U.S. patents and we rely primarily on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect our proprietary technology.
For example, we license our software pursuant to shrink-wrap or signed license
agreements, which impose certain restrictions on licensees' ability to utilize
the software. In addition, we seek to avoid disclosure of our intellectual
property, including requiring those persons with access to our proprietary
information to execute confidentiality agreements with us and by restricting
access to our source code. We seek to protect our software, documentation and
other written materials under trade secret and copyright laws, which afford
only limited protection.

   Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of many countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
If our means of protecting our proprietary rights is not adequate or our
competitors independently develop similar technology, our business could be
seriously harmed.

INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD RESULT IN THE
LOSS OF SIGNIFICANT RIGHTS.

   Third parties may claim that our current or future products infringe such
parties' intellectual property rights. We expect Information Delivery software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require us to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to us or at all. A successful claim of product infringement
against us and our failure or inability to license the infringed or similar
technology could harm our business, operating results and financial condition.

OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL
LOSSES FOR STOCKHOLDERS.

   The market price of shares of our common stock has been and is likely to
continue to be highly volatile and may be significantly affected by factors
such as the following:

  .   changes in the economic and political conditions in the United States and
      abroad;

  .   actual or anticipated fluctuations in our operating results;

  .   terrorist attacks or war-time conditions;

  .   announcements of technological innovations;

  .   new products or new contracts announced by us or our competitors;

  .   litigation;

  .   developments with respect to copyrights or proprietary rights;

                                      31

<PAGE>

  .   price and volume fluctuations in the stock market;

  .   conditions and trends in the software and other technology industries;

  .   changes in corporate purchasing of Information Delivery software;

  .   the announcement of mergers or acquisitions;

  .   adoption of new accounting standards affecting the software industry;

  .   changes in financial estimates by securities analysts; and

  .   the purchase or sale of our common stock by "day traders."

   In addition, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against such company. If we are involved in such litigation, it
could result in substantial costs and a diversion of management's attention and
resources and could harm our business, operating results and financial
condition.

CERTAIN OF OUR CHARTER PROVISIONS AND DELAWARE LAW, MAY PREVENT OR DETER A
CHANGE IN CONTROL OF ACTUATE.

   Actuate's Certificate of Incorporation, as amended and restated (the
"Certificate of Incorporation"), and Bylaws, as amended and restated
("Bylaws"), contain certain provisions that may have the effect of
discouraging, delaying or preventing a change in control of Actuate or
unsolicited acquisition proposals that a stockholder might consider favorable,
including provisions authorizing the issuance of "blank check" preferred stock
and eliminating the ability of stockholders to act by written consent. In
addition, certain provisions of Delaware law and our stock option plans may
also have the effect of discouraging, delaying or preventing a change in
control of Actuate or unsolicited acquisition proposals. The anti-takeover
effect of these provisions may also have an adverse effect on the public
trading price of our common stock.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   During fiscal years 2001, 2000 and 1999 we derived 23%, 15% and 14% of our
total revenues, respectively, from sales outside the United States.
Approximately 2% of the revenues from our U.S. operations are overseas sales
and are denominated in U.S. dollars. Our exposure to market risk on these
receivables with respect to fluctuations in the relative value of currencies is
limited. However, increases in the value of the U.S. dollar could increase the
price of our products so that they become relatively more expensive to
customers in the local currency of a particular country and may result in a
reduction in sales and profitability in that country. We are also exposed to
foreign exchange rate fluctuations as the financial results of foreign
subsidiaries are translated into U.S. dollars in consolidation. As exchange
rates vary, these results, when translated, may vary from expectations and
adversely impact overall expected profitability. The effect of foreign exchange
rate fluctuations in fiscal 2001 was not material.

   The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
To achieve this objective, we invest in highly liquid and high quality debt
securities. To minimize the exposure due to adverse shift in the general level
of U.S. interest rates we invest in short-term securities that have an average
maturity of one year or less. Due to the short-term nature of our investments,
we believe that there is no material risk exposure. Therefore, no quantitative
tabular disclosures are required.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The financial statements and supplementary data required by this Item 8 are
listed in Item 14(a)(1) and begin at page F-1 of this Report.

                                      32

<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

   Not applicable.

                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The information required by this Item regarding our directors and compliance
with Section 16(a) of the Securities and Exchange Act of 1934 is incorporated
herein by reference from the sections entitled "Election of Directors" and
"Compliance with Section 16(a) of the Exchange Act," respectively, contained in
our Proxy Statement to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 for our 2002 Annual Meeting of Stockholders to be held on
May 29, 2002 (the "Proxy Statement"). The information required by this Item
with respect to our executive officers is contained in Item 1 of Part I of this
Annual Report under the heading "Actuate Executive Officers."

ITEM 11.  EXECUTIVE COMPENSATION

   The information required by this Item regarding executive compensation is
incorporated herein by reference from the section entitled "Executive
Compensation and Related Information" of the Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The information required by this Item regarding security ownership of
certain beneficial owners and management is incorporated herein by reference
from the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The information required by this Item regarding certain relationships and
related transactions is incorporated herein by reference from the section
entitled "Certain Relationships and Related Transactions" of the Proxy
Statement.

                                      33

<PAGE>

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)  Financial Statements

   See Index on Page F-1.

(a)(2)  Financial Statement Schedules

   Schedules have been omitted because the information required to be set forth
therein is not applicable or is readily available in the financial statements
or notes thereto.

(a)(3)  Exhibits


<TABLE>
<CAPTION>
Exhibit
  No.                                             Description
  ---                                             -----------
<C>      <S>
 2.1(5)  Agreement and Plan of Merger and Reorganization among Actuate Corporation, TT Acquisition
         Corp., Tidestone Technologies, Inc. and Michael J. Gassman, as Stockholders' Representative
         dated May 1, 2001.

 3.1(3)  Form of Third Amended and Restated Certificate of Incorporation.

 3.2(1)  Form of Bylaws of the Registrant.

 4.1(1)  Reference is made to Exhibits 3.1 and 3.2.

 4.2(1)  Specimen Common Stock Certificate.

10.1(1)  Form of Indemnification Agreement.

10.2(1)  1994 Stock Option Plan, as amended.

10.3(1)  1998 Equity Incentive Plan.

10.4(1)  1998 Employee Stock Purchase Plan.

10.5(1)  1998 Non-Employee Directors Option Plan.

10.6(4)  2001 Supplemental Stock Option Plan.

10.7(1)  Offer Letter between the Company and Daniel A. Gaudreau dated May 7, 1997.

10.8(1)  Offer Letter between the Company and Hamid Bahadori dated May 20, 1998.

10.9(2)  Office Building Lease between the Actuate and HMS Gateway Office, L.P. dated August 18, 1999.

10.10(2) First Amendment to Office Building Lease between the Actuate and HMS Gateway Office, L.P.
         dated September 30, 1999.

10.11(4) Office Building Lease between the Actuate and HMS Gateway Office, L.P. dated December 21,
         2000.

21.1     Subsidiaries of Actuate Corporation.

23.1     Consent of Ernst & Young LLP, Independent Auditors .

24.1     Power of Attorney. (see the signature page to this Form 10-K).
</TABLE>
--------
(1) Incorporated by reference to our Registration Statement on Form S-1 (File
    No. 333-55741).
(2) Incorporated by reference to our Quarterly Report on Form 10-Q for the
    period ended September 30, 1999.
(3) Incorporated by reference to our Annual Report on Form 10-K for the period
    ended December 31, 1999.
(4) Incorporated by reference to our Annual Report on Form 10-K for the period
    ended December 31, 2000.
(5) Incorporated by reference to our Quarterly Report on Form 10-Q for the
    period ended June 30, 2001.

                                      34

<PAGE>

(b)  Reports on Form 8-K

   No reports on Form 8-K were filed by us during the fourth quarter of the
fiscal year ended December 31, 2001.

(c)  Exhibits

   See (a)(3) above.

(d)  Financial Statement Schedule

   See (a)(2) above.

                                      35

<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of the Securities Exchange Act of 1934, we have
duly caused this report to be signed on our behalf by the undersigned thereunto
duly authorized.

                                          ACTUATE CORPORATION
                                          (Registrant)

                                          By:       /s/  DANIEL A. GAUDREAU
                                             -----------------------------------
                                                     Daniel A. Gaudreau
                                             Senior Vice President, Finance and
                                                       Administration
                                                and Chief Financial Officer

Date: March 19, 2002

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Peter I. Cittadini and Daniel A.
Gaudreau, and each of them, his or her true and lawful attorneys-in-fact and
agents with full power of substitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Report on Form 10-K, and to file
the same, with exhibits thereto and other documents in connection therewith
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact, or his or her substitute or
substitutes may do or cause to be done by virtue hereof.

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

          Signature                       Title                  Date
          ---------                       -----                  ----
 /s/  NICOLAS C. NIERENBERG   Chairman of the Board and     March 19, 2002
-----------------------------   Chief Architect
      Nicolas C. Nierenberg

   /s/  PETER I. CITTADINI    Director, President and Chief March 19, 2002
-----------------------------   Executive Officer
       Peter I. Cittadini       (Principal Executive
                                Officer)

   /S/  DANIEL A. GAUDREAU    Senior Vice President,        March 19, 2002
-----------------------------   Finance and Administration
       Daniel A. Gaudreau       and Chief Financial Officer
                                (Principal Financial and
                                Accounting Officer)

   /s/  GEORGE B. BEITZEL     Director                      March 19, 2002
-----------------------------
       George B. Beitzel

  /s/  KENNETH E. MARSHALL    Director                      March 19, 2002
-----------------------------
       Kenneth E. Marshall

  /s/  ARTHUR C. PATTERSON    Director                      March 19, 2002
-----------------------------
       Arthur C. Patterson

   /s/  STEVEN D. WHITEMAN    Director                      March 19, 2002
-----------------------------
       Steven D. Whiteman

                                      36

<PAGE>

                              ACTUATE CORPORATION

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                               Page
                                                               ----
             <S>                                               <C>
             Report of Ernst & Young LLP, Independent Auditors F-2
             Consolidated Balance Sheets...................... F-3
             Consolidated Statements of Operations............ F-4
             Consolidated Statements of Stockholders' Equity.. F-5
             Consolidated Statements of Cash Flows............ F-6
             Notes to Consolidated Financial Statements....... F-7
</TABLE>

                                      F-1

<PAGE>

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors and Stockholders
  Actuate Corporation

   We have audited the accompanying consolidated balance sheets of Actuate
Corporation as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Actuate
Corporation at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

                                          /s/ ERNST & YOUNG LLP

Palo Alto, California
January 18, 2002

                                      F-2

<PAGE>

                              ACTUATE CORPORATION

                          CONSOLIDATED BALANCE SHEETS
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                   ------------------
                                                                     2001      2000
                                                                   --------  --------
<S>                                                                <C>       <C>
ASSETS
Current assets:
   Cash and cash equivalents...................................... $ 34,660  $ 26,928
   Short-term investments.........................................    5,147        --
   Accounts receivable, net of allowances of $6,205 at
     December 31, 2001 and $2,895 at December 31, 2000............   28,870    32,991
   Other current assets...........................................    4,251     2,630
                                                                   --------  --------
Total current assets..............................................   72,928    62,549
Property and equipment, net.......................................   12,387    10,190
Goodwill, net.....................................................   18,787    16,747
Other purchased intangibles, net..................................   11,701     7,446
Other assets......................................................    1,588     1,390
                                                                   --------  --------
                                                                   $117,391  $ 98,322
                                                                   ========  ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable............................................... $  3,621  $  4,254
   Accrued compensation...........................................    5,976     5,941
   Other accrued liabilities......................................   11,146     6,584
   Deferred revenue...............................................   23,978    22,108
   Income taxes payable...........................................       64       425
                                                                   --------  --------
Total current liabilities.........................................   44,785    39,312
                                                                   --------  --------
Long-term liabilities.............................................    1,529     2,033
Commitments and contingencies
Stockholders' equity:
   Preferred stock, $0.001 par value, issuable in series:
     5,000,000 shares authorized; none issued and outstanding
     at December 31, 2001 and 2000................................       --        --
   Common stock, $0.001 par value, 100,000,000 shares
     authorized; 60,074,024 and 57,893,282 shares issued and
     outstanding at December 31, 2001 and 2000, respectively......       60        58
   Additional paid-in capital.....................................   88,701    67,623
   Deferred stock compensation....................................     (199)      (81)
   Accumulated other comprehensive income (loss)..................     (214)      231
   Accumulated deficit............................................  (17,271)  (10,854)
                                                                   --------  --------
Total stockholders' equity........................................   71,077    56,977
                                                                   --------  --------
                                                                   $117,391  $ 98,322
                                                                   ========  ========
</TABLE>



                            See accompanying notes.

                                      F-3

<PAGE>

                              ACTUATE CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                  Year ended December 31,
                                                 --------------------------
                                                   2001      2000    1999
                                                 --------  -------- -------
    <S>                                          <C>       <C>      <C>
    Revenues:
       License fees............................. $ 79,106  $ 72,286 $35,014
       Services.................................   45,922    34,978  11,767
                                                 --------  -------- -------
    Total revenues..............................  125,028   107,264  46,781
                                                 --------  -------- -------
    Costs and expenses:
       Cost of license fees.....................    2,305     1,959     896
       Cost of services.........................   27,524    20,975   6,021
       Sales and marketing......................   58,859    48,133  22,384
       Research and development.................   19,011    14,938   9,289
       General and administrative...............   10,853     7,015   3,478
       Amortization of goodwill and other
         purchased intangibles..................   10,704     7,147   1,590
       Restructuring............................      859        --      --
                                                 --------  -------- -------
    Total costs and expenses....................  130,115   100,167  43,658
                                                 --------  -------- -------
    Income (loss) from operations...............   (5,087)    7,097   3,123
    Interest and other income, net..............    1,148       891   1,313
                                                 --------  -------- -------
    Income (loss) before income taxes...........   (3,939)    7,988   4,436
    Provision for income taxes..................    2,478     2,589     550
                                                 --------  -------- -------
    Net income (loss)........................... $ (6,417) $  5,399 $ 3,886
                                                 ========  ======== =======
    Basic net income (loss) per share........... $  (0.11) $   0.10 $  0.07
                                                 ========  ======== =======
    Shares used in basic per share calculation..   59,299    56,114  53,926
                                                 ========  ======== =======
    Diluted net income (loss) per share......... $  (0.11) $   0.08 $  0.06
                                                 ========  ======== =======
    Shares used in diluted per share calculation   59,299    64,483  59,900
                                                 ========  ======== =======
</TABLE>


                            See accompanying notes.

                                      F-4

<PAGE>

                              ACTUATE CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                     Note                  Accumulated
                                       Common Stock    Additional Receivable   Deferred       other                     Total
                                    ------------------  Paid-in      from       Stock     Comprehensive Accumulated Stockholders'
                                      Shares    Amount  Capital    Officer   Compensation Income (Loss)   Deficit      Equity
                                    ----------  ------ ---------- ---------- ------------ ------------- ----------- -------------
<S>                                 <C>         <C>    <C>        <C>        <C>          <C>           <C>         <C>
Balance at January 1, 1999......... 55,117,396   $56    $46,550      $(40)      $(393)        $  --      $(20,139)     $26,034
Comprehensive income
 Net income........................         --    --         --        --          --            --         3,886        3,886
 Currency translation..............         --    --         --        --          --           159            --          159
                                                                                                                       -------
   Total comprehensive income......                                                                                      4,045
Issuance of common stock upon
 exercise of stock options, net of
 repurchases.......................    (85,190)   --        244        --          --            --            --          244
Issuance of common stock under
 Employee Stock Purchase Plan......    444,400    --      1,123        --          --            --            --        1,123
Amortization of deferred
 compensation, net of
 cancellations.....................         --    --       (160)       --         251            --            --           91
Tax benefits from employee stock
 options...........................         --    --         59        --          --            --            --           59
Payment on note receivable.........         --    --         --        40          --            --            --           40
                                    ----------   ---    -------      ----       -----         -----      --------      -------
Balance at December 31, 1999....... 55,476,606    56     47,816        --        (142)          159       (16,253)      31,636
Comprehensive income
 Net income........................         --    --         --        --          --            --         5,399        5,399
 Currency translation..............         --    --         --        --          --            72            --           72
                                                                                                                       -------
  Total comprehensive income.......                                                                                      5,471
Issuance of common stock upon
 exercise of stock options, net of
 repurchases.......................  1,509,536     1      4,039        --          --            --            --        4,040
Issuance of common stock under
 Employee Stock Purchase Plan......    604,576     1      2,495        --          --            --            --        2,496
Amortization of deferred
 compensation......................         --    --         --        --          61            --            --           61
Issuance of common stock related
 to Open Software Technology
 acquisition.......................    102,564    --      3,245        --          --            --            --        3,245
Issuance of common stock related
 to EnterpriseSoft acquisition.....    200,000    --      6,257        --          --            --            --        6,257
Tax benefits from employee stock
 options...........................         --    --      3,771        --          --            --            --        3,771
                                    ----------   ---    -------      ----       -----         -----      --------      -------
Balance at December 31, 2000....... 57,893,282    58     67,623        --         (81)          231       (10,854)      56,977
Comprehensive income
 Net loss..........................         --    --         --        --          --            --        (6,417)      (6,417)
 Currency translation..............         --    --         --        --          --          (445)           --         (445)
                                                                                                                       -------
  Total comprehensive income.......                                                                                     (6,862)
Issuance of common stock upon
 exercise of stock options, net of
 repurchases.......................  1,293,297     1      5,171        --          --            --            --        5,172
Issuance of common stock under
 Employee Stock Purchase Plan......    449,851    --      4,477        --          --            --            --        4,477
Deferred compensation related to
 Tidestone Technologies
 acquisition.......................         --    --         --        --        (232)           --            --         (232)
Reversal of deferred
 compensation related to
 terminated Tidestone
 employees.........................         --    --         --        --          58            --            --           58
Amortization of deferred
 compensation......................         --    --         --        --          56            --            --           56
Issuance of common stock related
 to Tidestone Technologies
 acquisition.......................    857,594     1     10,634        --          --            --            --       10,635
Issuance of common stock related
 to charitable donation............     10,000    --         36                    --            --            --           36
Stock repurchase...................   (430,000)   --     (1,805)       --          --            --            --       (1,805)
Tax benefits from employee stock
 options...........................         --    --      2,565        --          --            --            --        2,565
                                    ----------   ---    -------      ----       -----         -----      --------      -------
Balance at December 31, 2001....... 60,074,024   $60    $88,701      $--        $(199)        $(214)     $(17,271)     $71,077
                                    ==========   ===    =======      ====       =====         =====      ========      =======
</TABLE>

                            See accompanying notes.

                                      F-5

<PAGE>

                              ACTUATE CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
               Increase (Decrease) in Cash and Cash Equivalents
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                           Year ended December 31,
                                                                                        ----------------------------
                                                                                          2001      2000      1999
                                                                                        --------  --------  --------
<S>                                                                                     <C>       <C>       <C>
Operating activities
   Net income (loss)................................................................... $ (6,417) $  5,399  $  3,886
   Adjustments to reconcile net income (loss) to net cash
    from operating activities:
     Amortization of deferred compensation.............................................       56        61        91
     Amortization of goodwill and other purchased intangibles..........................   10,704     7,147     1,590
     Depreciation......................................................................    4,114     2,778     1,048
     Amortization of deferred tax liability............................................     (260)       --        --
     Tax benefits from exercise of stock options.......................................    2,565     3,771        --
     Issuance of common stock related to charitable donation...........................       36        --        --
     Change in operating assets and liabilities, net of effects of acquisition:
      Accounts receivable..............................................................    4,584   (14,281)  (12,179)
      Other current assets.............................................................   (1,601)   (1,523)     (707)
      Accounts payable.................................................................   (2,470)      892       539
      Accrued compensation.............................................................      (82)    2,247     2,401
      Income taxes payable.............................................................     (361)       60       423
      Other accrued liabilities........................................................      115     2,815       376
      Deferred revenue.................................................................    1,870     9,940     4,300
                                                                                        --------  --------  --------
Net cash generated by operating activities.............................................   12,853    19,306     1,768
                                                                                        --------  --------  --------
Investing activities
   Purchase of property and equipment..................................................   (6,311)  (10,530)   (2,081)
   Purchase of short-term investments..................................................   (8,189)       --   (26,445)
   Proceeds from maturity of short-term investments....................................    3,042    17,549    19,818
   Acquisition of Actuate Holding, B.V., including payment of assumed net liabilities..       --        --    (9,614)
   Acquisition of Open Software Technology, net of cash assumed........................       --    (7,406)       --
   Acquisition of EnterpriseSoft business..............................................       --    (2,500)       --
   Acquisition of shares of Actuate Japan..............................................       --      (666)       --
   Acquisition of Tidestone Technologies, Inc..........................................     (164)       --        --
   Increase in other assets............................................................     (198)   (1,787)     (217)
                                                                                        --------  --------  --------
Net cash used in investing activities..................................................  (11,820)   (5,340)  (18,539)
                                                                                        --------  --------  --------
Financing activities
   Proceeds from issuance of stock, net of issuance costs and repurchases..............    9,649     6,536     1,368
   Stock repurchase....................................................................   (1,805)       --        --
   Payments of bank loan...............................................................     (700)     (250)       --
   Repayment of stockholder's note.....................................................       --        --        40
                                                                                        --------  --------  --------
Net cash provided by financing activities..............................................    7,144     6,286     1,408
                                                                                        --------  --------  --------
Net increase (decrease) in cash and cash equivalents...................................    8,177    20,252   (15,363)
Effect of exchange rate on cash........................................................     (445)       72       159
Cash and cash equivalents at beginning of year.........................................   26,928     6,604    21,808
                                                                                        --------  --------  --------
Cash and cash equivalents at end of year............................................... $ 34,660  $ 26,928  $  6,604
                                                                                        ========  ========  ========
Non cash financing activities:
Value of common stock and options issued in connection with acquisitions............... $ 10,635  $  9,502  $     --
                                                                                        ========  ========  ========
Supplemental disclosure of cash flow information
Interest paid.......................................................................... $      4  $      4  $     56
                                                                                        ========  ========  ========
Income taxes paid...................................................................... $    309  $    463  $    130
                                                                                        ========  ========  ========
</TABLE>

                            See accompanying notes.

                                      F-6

<PAGE>

                              ACTUATE CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  Summary of Significant Accounting Policies

  Description of Business

   Actuate Corporation (the "Company" or "Actuate") was incorporated on
November 16, 1993 in the State of California and reincorporated in the State of
Delaware on July 7, 1998. We are a provider of Information Delivery software
products and services for e.Business. Information Delivery along with
Databases, Content Management Systems and Application Servers, is a critical
technology component of an organization's e.Business platform. Our Actuate
e.Reporting Suite 5 (Actuate 5) product line allows companies to create, manage
and deliver secure formatted content, using operational data from multiple data
sources, and to make that business content available on their e.Business Web
sites for use by customers, partners and employees. Our products and services
are used by our customers to deliver content such as transaction histories,
service level information, performance summaries, manufacturing and
distribution status and customer account information. Actuate 5 is a scalable,
dynamic platform that can be seamlessly integrated into any e.Business Web site
and its server-centric architecture provides the building blocks for an
Information Delivery environment of any size. Actuate 5's open environment
allows developers to create content from virtually any data source and present
it in virtually any format required by our customers. Our products have been
adopted in a wide variety of industries, including financial services,
telecommunications, technology, health care and others and by a wide variety of
organizations including Global 2000 companies and e.Business application
vendors. We sell our products in North America primarily through our direct
sales force and our e.Business Application Partners, who integrate and resell
Actuate software to their customers. Outside North America, we sell our
products through our direct sales force in the countries in which we have an
office and through distributors.

  Basis of Presentation

   The consolidated financial statements include the accounts of Actuate and
its wholly-owned and majority-owned subsidiaries. All intercompany balances and
transactions have been eliminated.

   During fiscal 1999, we completed the acquisition of Actuate Holding, B.V.
("BV"). During fiscal 2000, we completed the acquisition of Open Software
Technology, LLC ("OST") and acquired all the assets and business of
EnterpriseSoft. Also during fiscal 2000, we purchased additional shares of
Actuate Japan Company Ltd. ("Actuate Japan"); our distributor located in Japan,
from its other shareholders and became the majority shareholder. As of December
31, 2001, we have approximately 66.7% of the outstanding voting stock of
Actuate Japan. We have consolidated the results of Actuate Japan from the date
that we became the majority shareholder. Accumulated losses applicable to the
minority shareholders exceed their equity capital in Actuate Japan. This excess
loss applicable to the minority shareholders has been charged to us, as the
minority shareholders are not obligated to contribute their share of losses
exceeding their equity capital. In May 2001, we completed the acquisition of
Tidestone Technologies, Inc. ("Tidestone"), a software technology company.
These acquisitions were accounted for under the purchase method of accounting.
In accordance with the purchase method of accounting, the Consolidated
Statements of Operations include these companies' operating results from the
date of acquisition.

  Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. On a regular basis, we evaluate estimates, including
those related to bad debts, intangible assets, income taxes and restructuring.
Actual results could differ materially from these estimates.

                                      F-7

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Revenues

   Revenues from license fees from sales of software products directly to
end-user customers or indirect channel partners are recognized as revenues
after execution of a non-cancelable signed license agreement or receipt of a
definitive purchase order, and shipment of the product, if no vendor
obligations remain, there are no uncertainties surrounding product acceptance,
the license fees are fixed or determinable, and collection of the license fee
is considered probable. Probability of collection is based upon the assessment
of the customer's financial condition through the review of their current
financial statements or credit reports. For follow-on sales to existing
customers, prior payment history is also used to evaluate probability of
collection. Our products do not require significant customization. The majority
of end-user license revenues are derived from end-user customer orders for
specific individual products. These types of transactions are recognized as
revenues upon shipment of product, assuming that all other revenue recognition
criteria are met. Advance payments from end-users, in arrangements in which the
end-user customer has the right to future unspecified products, are deferred
and recognized as revenues ratably over the period, typically one year, during
which the end-user is entitled to receive the products. If the license
agreement contains extended payment terms that would indicate that the fee is
not fixed or determinable, revenues are recognized as the payments become due,
assuming that all other revenue recognition criteria are met.

   License arrangements with e.Business Application Partners are for specified
duration and require that such vendors only license our products to their
customers for use with such vendor's application. Furthermore, license
arrangements with distributors give such distributors the right to distribute
our products to customers headquartered in specified territories. License
arrangements with indirect channel partners such as e.Business Application
Partners, system integrators and distributors generally take the form of
arrangements pursuant to which a license fee is paid to us, which we recognize
as revenues when no further obligations remain, provided that the fees are
fixed or determinable and collection of the resulting receivables is deemed
probable. We have also entered into certain fixed price arrangements in which
the contracting entity has the right to the unlimited usage, unspecified future
products, and resale of the licensed software for a specified term and pursuant
to which license fee revenues are deferred and recognized on a straight-line
basis over the term of the license agreement.

   In certain situations where customers have received payment terms outside of
our customary standard terms but within one year, we have recognized revenues
upon delivery, provided that we have collected all payments as due under
comparable arrangements, without providing concession, in the past.

   We have not established vendor specific objective evidence of fair value
("VSOE") for license sales and therefore we recognize revenues from
arrangements with multiple elements involving software licenses under the
residual method as outlined in Statement of Position No. 97.2 "Software Revenue
Recognition." To the extent that a discount exists on any of the elements, we
follow the residual method and attribute that discount entirely to the
delivered elements.

   Service revenues consist of consulting, training, and related services that
we provide to our customers. Revenues from such services are generally
recognized when performed. If services are included with a license agreement,
amounts related to services are unbundled from the license fee based on VSOE as
established by transactions where such services have been sold separately. When
we provide a software license and the related maintenance for one bundled
price, the fair value of the maintenance, based on the price charged for that
element separately, is deferred and recognized ratably over the term of the
respective agreement.

  Cash, Cash Equivalents and Short-Term Investments

   Cash and cash equivalents consist of cash deposited with banks and highly
liquid, high quality debt securities with maturities at the date of purchase of
90 days or less. All short-term investments are classified as

                                      F-8

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

available-for-sale, are carried at amortized cost, which approximates fair
value based on quoted market price, and consist of high quality debt securities
with original maturities between 90 days and one year.

  Concentration of Credit Risk

   Financial instruments that potentially subject us to concentration of credit
risk consist principally of marketable investments and accounts receivable. We
place our investments with high-credit-quality multiple issuers. We sell to a
diverse customer base primarily to customers in the United States. No single
customer has accounted for more than 10% of our sales in any period presented.
We do not require collateral on sales with credit terms.

   Revenues for the years ended December 31, 2001, 2000 and 1999 are shown net
of customer returns of approximately $2.8 million, $2.2 million and $435,000,
respectively. Total write-offs of uncollectible accounts receivable were
approximately $1.8 million, $299,000 and $117,000 in fiscal years 2001, 2000
and 1999, respectively. During the years ended December 31, 2001, 2000 and
1999, we added approximately $7.9 million, $3.8 million and $1.3 million,
respectively, to our allowances for accounts receivable. There were no
significant reversals of allowances during all periods presented. Allowances
related to accounts receivable at December 31, 2001, 2000 and 1999 were $6.2
million, $2.9 million and $1.6 million, respectively.

  Fair Value of Financial Instruments

   The carrying amount of Actuate's cash and cash equivalents, short-term
investments, accounts receivable, accounts payable, accrued liabilities and
long-term liabilities approximate their respective fair value due to the short
timeframe to maturity or payment date.

  Software Development Costs

   Software development costs associated with new products and enhancements to
existing software products are expensed as incurred until technological
feasibility in the form of a working model has been established. To date, the
time period between the establishment of technological feasibility and
completion of software development has been short, and no significant
development costs have been incurred during that period. Accordingly, we have
not capitalized any software development costs to date.

  Property and Equipment

   Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets, which range from two to eight
years. Leasehold improvements are amortized over the shorter of the lease term
or estimated useful life.

  Intangible Assets

   Goodwill and other purchased intangibles, including assembled workforces,
non-compete agreements, customer lists and trademarks, relate to various
acquisitions. These amounts are being amortized over the expected useful life
not exceeding four years using the straight-line method. At December 31, 2001
and 2000, gross intangible assets, including goodwill, were $49.6 million and
$33.0 million, respectively, and related accumulated amortization was $19.1
million and $8.8 million at December 31, 2001 and 2000, respectively.

  Impairment of Long-Lived Assets

   In accordance with the Statement of Financial Accounting Standards ("SFAS")
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", we evaluate long-lived assets, including goodwill
and intangible assets, for impairment whenever events or changes in
circumstances indicate

                                      F-9

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

that the carrying value of an asset may not be recoverable; such calculations
to assess impairment would be based on expected undiscounted cash flows
attributable to that asset. The amount of any impairment is measured as the
difference between the carrying value and the fair value of the impaired asset.
There were no long-lived assets that were considered to be impaired during the
periods presented.

  Advertising Costs

   Advertising costs are expensed as incurred. Advertising costs are included
in sales and marketing expense and amounted to $400,000, $877,000 and $25,000
in fiscal 2001, 2000 and 1999, respectively.

  Income Taxes

   Income taxes are accounted for under the liability method whereby deferred
tax asset or liability account balances are calculated at the balance sheet
date using current tax laws and rates in effect for the year in which the
differences are expected to affect taxable income. A valuation allowance is
recorded to reduce the carrying amounts of deferred tax assets if it is more
likely than not that such assets will not be realized.

  Currency Translation

   Actuate translates the assets and liabilities of international non-U.S.
functional currency subsidiaries into dollars at the rates of exchange in
effect at the end of the period. Revenues and expenses are translated using
rates that approximate those in effect during the period. Gains and losses from
currency translation are included in stockholders' equity in the consolidated
balance sheet. Currency transaction gains or losses are recognized in current
operations and have not been significant to our operating results in any period.

  Stock Dividends

   We announced a two-for-one stock split in the form of a stock dividend on
November 8, 1999, which was distributed at the close of business on December 2,
1999. On July 12, 2000, we announced another two-for-one stock split in the
form of a stock dividend, which was distributed at the close of business on
August 14, 2000. All net income (loss) per share amounts, as well as references
to common stock and stockholders' equity amounts have been restated as if these
stock dividends had occurred as of the earliest period presented.

  Stock-Based Compensation

   We grant stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. In
accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), we have elected
to follow Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees" and related interpretations and to adopt the pro
forma disclosure alternative as described in SFAS 123 in accounting for our
employee stock option plan (see Note 7).

   We account for stock awards issued to non-employees in accordance with the
provisions of SFAS 123 and Emerging Issues Task Force No. 96-18, (EITF 96-18).
Under SFAS 123 and EITF 96-18, stock awards to non-employees are accounted for
at their fair value using the Black-Scholes method.

  Net Income (Loss) Per Share

   Basic net income (loss) per share is computed using the weighted-average
number of outstanding shares of common stock less weighted-average shares
subject to repurchase. Diluted net income (loss) per share is computed using
the weighted-average number of shares of common stock outstanding and, when
dilutive, potential common shares from options using the treasury stock method.

                                     F-10

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                                  Year ended December 31,
                                                                 -------------------------
                                                                  2001     2000     1999
                                                                 -------  -------  -------
<S>                                                              <C>      <C>      <C>
Net income (loss)............................................... $(6,417) $ 5,399  $ 3,886
                                                                 =======  =======  =======
Basic:
   Weighted-average shares of common stock outstanding..........  59,424   56,671   55,312
   Weighted-average shares subject to repurchase................    (125)    (557)  (1,386)
                                                                 -------  -------  -------
Shares used in computing basic net income (loss) per share......  59,299   56,114   53,926
                                                                 =======  =======  =======
Basic net income (loss) per share............................... $ (0.11) $  0.10  $  0.07
                                                                 =======  =======  =======
Diluted:
   Shares used above............................................  59,299   56,114   53,926
   Effect of dilutive potential common shares...................      --    8,369    5,974
                                                                 -------  -------  -------
   Shares used in computing diluted net income (loss) per share.  59,299   64,483   59,900
                                                                 =======  =======  =======
Diluted net income (loss) per share............................. $ (0.11) $  0.08  $  0.06
                                                                 =======  =======  =======
</TABLE>

   The total number of potential common shares excluded from the calculation of
diluted net loss per share was 3,779,900, nil and nil in fiscal years 2001,
2000 and 1999. These instruments have been excluded because their effect would
be antidilutive.

  Comprehensive Income (Loss)

   Other comprehensive income (loss) includes currency translation adjustments
that are not included in net income (loss), but rather are recorded directly in
stockholders' equity. Total comprehensive income (loss) includes net income
(loss) and other comprehensive income (loss), which has been disclosed in the
Consolidated Statements of Stockholders' Equity.

  Segment Information

   Actuate is principally engaged in the design, development, marketing and
support of Actuate e.Reporting Suite 5. Actuate's chief operating decision
maker reviews financial information presented on a consolidated basis,
accompanied by disaggregated information about revenues by geographic region
for purposes of making operating decisions and assessing financial performance.
Accordingly, Actuate considers itself to be in a single industry segment,
specifically the license, implementation and support of its software
application.

   Actuate evaluates the performance of its geographic regions based on
revenues only. Actuate does not assess the performance of its geographic
regions on other measures of income or expense, such as depreciation and
amortization, operating income or net income. In addition, as Actuate's assets
are primarily located in its corporate office in the United States and not
allocated to any specific region, Actuate does not produce reports for, or
measure the performance of, its geographic regions based on any asset-based
metrics. Therefore, geographic information is presented only for revenues in
Note 10.

  Accounting for Derivative Instruments

   In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards requiring
that every derivative instrument, including certain derivative instruments
embedded

                                     F-11

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

in other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. Our adoption of SFAS 133 on January 1, 2001 had no
material effect on the financial statements, as we currently do not utilize
derivative instruments.

  Recent Accounting Pronouncements

   In July 2001, the FASB issued SFAS 141, "Business Combinations" and SFAS
142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. SFAS 141 requires that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001. Use of the pooling-of-interest is prohibited. SFAS 142 requires that
goodwill and intangible assets deemed to have indefinite lives will no longer
be amortized but will be subject to annual impairment tests in accordance with
the new standards. Other intangible assets will continue to be amortized over
their useful lives. We will apply the new rules on accounting for goodwill and
other intangible assets beginning January 1, 2002. However, we are still
assessing the financial impact of the new standard. During the first six months
of 2002, we will perform the required transitional impairment tests of goodwill
and indefinite-lived intangible assets as of January 1, 2002 and have not yet
determined what the effect of these tests will be on our earnings and financial
position.

   In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated retirement costs. We are in the process of assessing the effect
of adopting SFAS 143, which will be effective for our fiscal year ending
December 31, 2002.

   In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS 144 addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. However, SFAS
144 retains the fundamental provisions of SFAS 121 for: 1) recognition and
measurement of the impairment of long-lived assets to be held and used; and 2)
measurement of long-lived assets to be disposed of by sale. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. We do not expect
the adoption of SFAS 144 to have a material effect on our financial condition
or results of operations.

   In November 2001, the staff of the FASB issued an announcement on the topic
of "Income Statement Characterization of Reimbursements Received for Out of
Pocket Expenses Incurred." This announcement requires companies to characterize
reimbursements received for out-of-pocket expenses incurred as revenue in the
income statement. This announcement should be applied in financial reporting
periods beginning after December 15, 2001 and comparative financial statements
for prior periods should be reclassified to comply with the guidance in this
announcement. We will adopt the policies outlined in the announcement beginning
in 2002. We are in the process of assessing the effect of adopting this
statement, which will be effective for our fiscal year ending December 31, 2002.

  Reclassifications

   Certain prior year amounts have been reclassified to conform with the
current year presentation. Such reclassifications had no impact on the results
of operations or shareholders' equity for the years presented.

2.  Investment in Actuate Japan

   In March 1996, we established a joint venture company in Japan with six
other corporate partners. We received approximately 8.3% of the equity
ownership of Actuate Japan. In June 1999, we purchased shares from

                                     F-12

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

an existing shareholder raising our equity ownership to 16.7%. Then in April
2000, we became the majority shareholder when we purchased additional shares
from existing shareholders raising our equity position to 66.7%. Goodwill
arising on consolidation was $1.5 million, which is being amortized over four
years.

   We have a call option for all of the shares issued to the other investors at
a fixed price indicated in the agreement that began increasing each year after
March 1999. The price to purchase the remaining portion of shares
(approximately 33.3%) of Actuate Japan was approximately $1.2 million as of
December 31, 2001 and will be approximately $1.3 million in April 2003, based
on current exchange rates. The other corporate partners also have the right to
sell us all of their outstanding shares at the same price as the call option.

3.  Acquisitions

   In June 1999, we acquired all of the outstanding stock of BV, the parent
company of our distributors based in France, Germany and the United Kingdom,
for cash. The total purchase price was $9.6 million, representing a payment of
$6.0 million in cash and the assumption of net liabilities of $3.6 million,
which includes direct merger costs of approximately $300,000. The acquisition
was accounted for by the purchase method of accounting. The results of
operations of BV and the estimated fair value of assets acquired and
liabilities assumed are included in our financial statements from the date of
acquisition. Actuate has allocated the excess purchase price over the fair
value of net tangible assets acquired to the following identifiable intangible
assets: $8.6 million to customer base, $900,000 to assembled workforce and
$100,000 to goodwill. Intangible assets and goodwill arising from the
acquisition are being amortized on a straight-line basis over periods not
exceeding four years.

   On February 29, 2000, we acquired all of the outstanding stock of OST, a
software consulting firm. The acquisition was accounted for using the purchase
method of accounting and accordingly, the purchased price was allocated to the
assets acquired and the liabilities assumed based on their estimated fair
values on the acquisition date. Since February 29, 2000, OST's results of
operations have been included in Actuate's Consolidated Statements of
Operations. The total purchase price was $13.1 million, consisting of $7.4
million in cash, 102,564 shares of Actuate's common stock with a fair value of
approximately $3.2 million, future cash payments of $2.0 million to be paid on
the second anniversary of the acquisition date and other acquisition related
expenses of approximately $500,000. Of the total purchase price, approximately
$100,000 has been allocated to net tangible assets acquired, and the remainder
was allocated to intangible assets, including assembled workforce of $2.2
million, a non-compete agreement of $100,000 and goodwill of $10.7 million.
Intangible assets and goodwill arising from the acquisition are being amortized
on a straight-line basis over periods not exceeding four years.

   On March 16, 2000, we purchased all the assets and business of
EnterpriseSoft for $8.8 million, consisting of $2.5 million in cash and 200,000
shares of Actuate's common stock with a fair value of approximately $6.3
million. The results of operations of EnterpriseSoft and the estimated fair
value of assets acquired are included in our financial statements from the date
of acquisition. Actuate has allocated the excess purchase price over the fair
value of net tangible assets acquired to the following identifiable intangible
assets: $86,000 to assembled workforce, $30,000 to non-compete agreement,
$10,000 to completed technology, and $8.6 million to goodwill. Goodwill and
other intangibles arising from the acquisition are being amortized on a
straight-line basis over periods not exceeding four years.

   On May 30, 2001, we acquired all of the outstanding stock of Tidestone, a
software technology company. The results of operations of Tidestone are
included in our financial statements from the date of acquisition. The total
purchase consideration was $16.7 million, consisting of 857,594 shares of our
common stock and assumed options with a fair market value of approximately
$10.6 million, net assumed liabilities of $5.9 million and other

                                     F-13

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

acquisition-related expenses of $164,000. This acquisition was accounted for as
a purchase, with the purchase price being allocated to developed
technology--$3.6 million, customer list--$2.0 million, assembled
workforce--$900,000, non-compete agreements--$900,000, trademarks--$700,000 and
goodwill--$8.6 million. In addition, $232,000 of the purchase consideration was
allocated to deferred compensation, which primarily represents the pro-rata
portion of the intrinsic value of the unvested options at the date of
acquisition. Goodwill and other intangibles arising from the acquisition are
being amortized on a straight-line basis over periods not exceeding four
years.

   The following unaudited pro forma financial information assumes the
Tidestone acquisition occurred at the beginning of the periods in which the
acquisition took place and, for comparative purposes, at the beginning of the
immediately preceding year. These results have been prepared for informational
purposes only and are not necessarily indicative of the operating results that
would have occurred had the acquisition been made as discussed above. In
addition, they are not intended to be a projection of future results (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                               -----------------------
                                                  2001         2000
                                                --------     --------
                                                     (unaudited)
           <S>                                 <C>          <C>
           Revenues........................... $126,675     $112,193
           Net income (loss).................. $(10,787)    $    614
           Diluted net income (loss) per share $  (0.18)    $   0.01
</TABLE>

4.  Cash Equivalents and Short-Term Investments

   The following table summarizes the amortized cost, which approximates the
fair value of our investments (in thousands):

<TABLE>
<CAPTION>
                                                          December 31,
                                                         ---------------
                                                          2001    2000
                                                         ------- -------
        <S>                                              <C>     <C>
        Corporate and municipal obligations and deposits $33,878 $11,932
                                                         ======= =======
        Included in cash and cash equivalents........... $28,731 $11,932
        Included in short-term investments..............   5,147      --
                                                         ------- -------
           Total........................................ $33,878 $11,932
                                                         ======= =======
</TABLE>

   Realized and unrealized gains or losses were not significant for all periods
presented.

5.  Property and Equipment

   Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                  December 31,
                                                ----------------
                                                 2001     2000
                                                -------  -------
               <S>                              <C>      <C>
               Furniture and fixtures.......... $ 3,778  $ 3,055
               Computers and purchased software   8,864    7,003
               Leasehold improvements..........   3,519    3,171
               Construction in progress........   3,379       --
                                                -------  -------
                                                 19,540   13,229
               Less accumulated depreciation...  (7,153)  (3,039)
                                                -------  -------
               Property and equipment, net..... $12,387  $10,190
                                                =======  =======
</TABLE>

                                     F-14

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Construction in progress consists primarily of furniture, fixtures and
leasehold improvements for the additional facility leased in December 2000 (see
Note 6 below). The construction is expected to be completed in the first
quarter of 2002 and depreciation/amortization will begin when the facility is
available for use.

6.  Commitments

  Operating Lease Commitments

   Actuate leases its headquarter facilities under noncancelable operating
leases expiring in March 2008. In December 2000, we entered into a ten-year
office building lease agreement for an additional office building adjacent to
our headquarters in South San Francisco, California. In conjunction with the
signing of the office building lease, we provided the landlord with a letter of
credit in the amount of $1.6 million as security deposit. Rent expense for
facilities under operating leases was approximately $7.0 million in fiscal
2001, $2.6 million in fiscal 2000 and $1.1 million in fiscal 1999. Aggregate
minimum lease commitments under all operating leases are as follows (in
thousands):

<TABLE>
<CAPTION>
                                          Payments
                                           Due by
                              Fiscal Year  Period
                              ----------- --------
                              <S>         <C>
                              2002....... $ 5,773
                              2003.......   5,552
                              2004.......   5,538
                              2005.......   5,663
                              2006.......   5,813
                              Thereafter.  18,336
                                          -------
                                          $46,675
                                          =======
</TABLE>

7.  Stockholders' Equity

  Preferred Stock

   Under the terms of the certificate of incorporation, the board of directors
is authorized, subject to any limitations prescribed by law, to issue the
preferred stock in one or more series. Each series shall have the rights,
preferences, privileges and restrictions, such as dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the right to increase or decrease the
number of shares of any series, as the board of directors shall determine. The
board of directors may issue preferred stock with voting or conversion rights
that may have the effect of delaying, deferring or preventing a change in
control of Actuate and could adversely affect the market price of the common
stock and the voting and other rights of the holders of common stock. We
currently have no plans to issue any of the preferred stock.

  Stock Option Plans

   In May 1994, our board of directors adopted the 1994 Stock Option Plan (the
"Predecessor Plan") for issuance of common stock to employees, consultants and
nonemployee directors. In May 1998, the 1998 Equity Incentive Plan (the "1998
Plan") was adopted by the board of directors and approved by the stockholders
in July 1998 as the successor to the Predecessor Plan. Employees, consultants
and directors are eligible for awards under the 1998 Plan. Outstanding options
under the Predecessor Plan have been incorporated into the 1998 Plan and no
further option grants will be made under the Predecessor Plan. Initially, a
total of 5,200,000 shares of common stock were reserved for issuance under the
1998 Plan. As of December 31, 2001, there were options to purchase

                                     F-15

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

1,330,308 shares outstanding under the Predecessor Plan. Except as otherwise
noted, options outstanding under the Predecessor Plan are subject to
substantially the same terms as described below for option awards under the
1998 Plan. As of January 1 of each year, the number of shares reserved for
issuance under the 1998 Plan will be increased automatically by the lesser of
(i) 5% of the total number of shares of Common Stock then outstanding or (ii)
2,800,000 shares. In addition to the 1998 Plan, the board of directors adopted
the 2001 Supplemental Stock Plan (the "2001 Plan") in January 2001. A total of
2,700,000 shares of common stock were reserved for issuance under the 2001
Plan. Employees and consultants are eligible for awards under the 2001 Plan.
Members of the board of directors and officers of Actuate are not eligible to
receive awards under the 2001 Plan. The 1998 Plan and the 2001 Plan are
collectively known as "the Plans".

   Under the 1998 Plan, eligible participants may be awarded options to
purchase shares of common stock, stock appreciation rights ("SARs"), restricted
shares or stock units (collectively, the "Awards"). Options under the 1998 Plan
may be incentive stock options designed to satisfy Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") or nonstatutory stock options not
designed to meet such requirements. Under the 2001 Plan, eligible participants
may be awarded options to purchase shares of common stock and restricted shares
only. All options granted under the 2001 Plan are nonstatutory stock options.
If restricted shares or shares issued upon the exercise of options granted
under the Plans or the Predecessor Plan are forfeited, then such shares will
again become available for awards under the Plans. If stock units, options or
SARs granted under the 1998 Plan or the Predecessor Plan are forfeited or
terminated for any other reason before being exercised, then the corresponding
shares will again become available for awards under the 1998 Plan. The exercise
price for nonstatutory and incentive stock options granted under the Plans may
not be less than 85% or 100%, respectively, of the fair market value of the
common stock on the option grant date. The Board may amend or terminate the
Plans at any time. Amendments may be subject to stockholder approval to the
extent required by applicable laws.

   Options granted under the Predecessor Plan are generally exercisable upon
grant, subject to repurchase rights by the Company until vested. Options
granted under the Plans are exercisable when vested. Shares generally vest at
the rate of 20% or 25% after one year from the date of grant and the remaining
balance vesting monthly over the next four or three years. Upon a change in
control, an Award will become fully vested as to all shares subject to such
Award if such Award is not assumed by the surviving corporation or its parent
and the surviving corporation or its parent does not substitute such Award with
another award of substantially the same terms. In the event of an involuntary
termination of a participant within 12 months following a change in control,
the vesting of an Award will accelerate in full. Options granted under the
Predecessor Plan become fully vested upon a change in control unless assumed or
replaced with a comparable option by the acquiring entity. At December 31, 2001
and 2000, 87,367 and 282,682 shares of common stock issued under the
Predecessor Plan were subject to repurchase by the Company, respectively. All
outstanding repurchase rights under the Plans shall terminate automatically
upon the occurrence of any merger, consolidation, or disposition of all or
substantially all of the Company's assets, except to the extent the repurchase
rights are expressly assigned to the successor corporation.

   As of December 31, 2001, 1,811,515 shares of common stock were reserved and
available for future grants under the Plans and the Predecessor Plan.

  1998 Non-Employee Directors Option Plan

   The 1998 Non-Employee Directors Option Plan (the "Directors Option Plan")
was adopted by the board of directors in May 1998, and approved by the
stockholders in July 1998. Under the Directors Option Plan, non-employee
members of the Board of Directors are eligible for automatic option grants.
800,000 shares of common stock have been authorized for issuance under the
Directors Option Plan. Each individual who first joins the

                                     F-16

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

board as a non-employee director, whether through election or appointment, will
receive at that time an automatic option grant for 80,000 shares of common
stock. With respect to the initial automatic option grant, the option will
become exercisable as to 25% of the shares after one year of board service,
with the balance of the shares becoming exercisable ratably in 36 monthly
installments over the remaining period of optionee's board service. At each
annual stockholders meeting beginning in fiscal 1999, each current non-employee
director will automatically be granted a stock option to purchase 10,000 shares
of common stock, whether or not he or she is standing for re-election at that
particular meeting, which will become fully exercisable on the first
anniversary of such meeting. Each option will have an exercise price equal to
the fair market value of the common stock on the automatic grant date and a
maximum term of ten years, subject to earlier termination following the
optionee's cessation of Board service. The Board may amend or modify the
Directors Option Plan at any time. The Directors Option Plan will terminate on
May 27, 2008, unless terminated sooner by the board. However, vesting will
automatically accelerate in full upon (i) an acquisition of Actuate by merger,
consolidation or asset sale, (ii) a tender offer for more than 50% of the
outstanding voting stock or proxy contest for Board membership or (iii) the
death or disability of the optionee while serving as a Board member. As of
December 31, 2001, 551,258 shares of common stock were reserved and available
for future grants under the Directors Option Plan.

  Stock Option Exchange Program

   On May 1, 2001, we implemented a stock option exchange program, whereby
eligible employees could exchange their outstanding options to purchase shares
of our common stock with an exercise price per share of $15.00 or more granted
under the Predecessor Plan, the 1998 Plan and the 2001 Plan. We implemented
this exchange program because a considerable number of employees had stock
options, whether or not they were currently exercisable, that were priced
significantly above the trading prices. We believed these options were unlikely
to be exercised in the foreseeable future. The exchange program was voluntary
and allowed employees to choose whether to keep their current stock options at
their current exercise price, or to rescind those options in exchange for a new
option for the same number of shares to be granted on December 3, 2001. The new
options have terms and conditions that are substantially the same as those of
the cancelled options. Members of our board of directors and officers were not
eligible for the exchange program.

   The total number of shares exchanged under this stock option exchange
program was 2,230,550. The average price per share of the options cancelled was
$26.32 and the new option price granted under this exchange program was $4.41
per share.

                                     F-17

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Activity under all option plans was as follows:

<TABLE>
<CAPTION>




                                                             Outstanding Options
                                               Shares     -------------------------   Weighted-
                                              Available   Number of     Price Per      Average
                                              for Grant    Shares         Share     Exercise Price
                                             -----------  ----------  ------------- --------------
<S>                                          <C>          <C>         <C>           <C>
Balance at January 1, 1999..................   3,195,104   6,644,700  $  0.04-$4.82     $ 2.02
   Additional authorization.................   2,755,868          --             --         --
   Options granted..........................  (6,732,900)  6,732,900  $ 4.38-$17.57     $ 9.30
   Options exercised........................          --    (334,678) $  0.04-$4.47     $ 0.97
   Options forfeited........................   1,134,762  (1,134,762) $  0.04-$8.85     $ 3.62
   Options repurchased......................     419,868          --  $  0.04-$0.75     $ 0.13
                                             -----------  ----------
Balance at December 31, 1999................     772,702  11,908,160  $ 0.04-$17.66     $ 6.02
   Additional authorization.................   8,373,830          --             --         --
   Options granted..........................  (7,910,556)  7,910,556  $ 7.97-$36.00     $22.69
   Options exercised........................          --  (1,530,036) $ 0.04-$17.25     $ 2.74
   Options forfeited........................   1,601,180  (1,601,180) $ 0.04-$34.94     $12.07
   Options repurchased......................      20,500          --  $        0.09     $ 0.09
                                             -----------  ----------
Balance at December 31, 2000................   2,857,656  16,687,500  $ 0.09-$36.00     $13.64
   Additional authorization.................   5,648,477          --             --         --
   Options granted.......................... (12,462,618) 12,462,618  $ 0.06-$24.00     $ 9.33
   Options exercised........................          --  (1,336,069) $ 0.06-$17.25     $ 3.99
   Options forfeited........................   4,045,936  (4,045,936) $ 0.06-$36.00     $20.39
   Options cancelled in connection with the
     stock option exchange program..........   2,230,550  (2,230,550) $15.19-$35.25     $26.32
   Options repurchased......................      42,772          --  $  0.09-$0.75     $ 0.31
                                             -----------  ----------
Balance at December 31, 2001................   2,362,773  21,537,563  $ 0.06-$35.25     $ 9.77
                                             ===========  ==========
</TABLE>

   The following table summarizes information concerning stock options
outstanding and exercisable under all plans as of December 31, 2001:

<TABLE>
<CAPTION>
                                     Options Outstanding                 Options Exercisable
                         -------------------------------------------- --------------------------
                                    Weighted-Average
                         Number of     Remaining     Weighted-Average Number of Weighted-Average
Range of Exercise Prices  Shares    Contractual Life  Exercise Price   Shares    Exercise Price
------------------------ ---------- ---------------- ---------------- --------- ----------------
<S>                      <C>        <C>              <C>              <C>       <C>
     $0.06-$3.75........  6,064,534    8.1 years          $ 3.02      1,860,339      $ 2.27
     $4.11-$8.10........  6,290,409    8.9 years          $ 6.19      1,799,293      $ 6.14
     $8.11-$17.25.......  6,200,859    8.6 years          $14.22      1,126,999      $13.67
     $17.34-$35.25......  2,981,761    8.2 years          $21.78      1,368,204      $21.58
                         ----------                                   ---------
     $0.06-$35.25....... 21,537,563    8.5 years          $ 9.77      6,154,835      $ 9.78
                         ==========                                   =========
</TABLE>

   At December 31, 2001, 2000 and 1999, 5,842,443, 2,273,401 and 1,462,796
outstanding options were vested, respectively. At December 31, 2000 and 1999,
3,209,571 and 1,516,614 options were exercisable.

  1998 Employee Stock Purchase Plan

   The 1998 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by
the board of directors in May 1998, and approved by the stockholders in July
1998. A total of 1,000,000 shares of common stock were

                                     F-18

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

initially reserved for issuance under the Purchase Plan. As of January 1 of
each year, the number of shares reserved for issuance under the Purchase Plan
will be automatically increased by 600,000 shares. The Purchase Plan is
intended to qualify under Section 423 of the Code. Each calendar year, two
overlapping 24-month offering periods will commence on February 1 and August 1.
Each offering period contains four six-month accumulation periods, with
purchases occurring at the end of each six-month accumulation period. The
Purchase Plan permits each eligible employee to purchase common stock through
payroll deductions, which may not exceed 15% of an employee's cash
compensation. No more than 4,000 shares may be purchased by any individual on
any accumulation date. The price of each share of common stock purchased under
the Purchase Plan will be 85% of the lower of (i) the fair market value per
share of common stock on the date immediately prior to the first date of the
applicable offering period or (ii) the date at the end of the applicable
accumulation period. Employees may end their participation in the Purchase Plan
at any time during the accumulation period, and participation ends
automatically upon termination of employment with us. As of December 31, 2001,
1,498,827 shares had been purchased under the Purchase Plan.

   As of December 31, 2001, 1,301,173 shares of common stock were reserved and
available for future issuance under the Purchase Plan.

  Pro Forma Information

   We have elected to follow APB 25 and related interpretations in accounting
for our employee stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS 123 requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of our employee stock options
equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.

   Pursuant to SFAS 123, we are required to disclose the pro forma effects on
net income (loss) and net income (loss) per share data as if we had elected to
use the fair value approach to account for all of our employee stock-based
compensation plans. Had compensation cost for our plans been determined
consistent with the fair value approach enumerated in SFAS 123, our net income
(loss) and net income (loss) per share for the years ended December 31, 2001,
2000 and 1999 would have been as indicated below (in thousands, except per
share data):

<TABLE>
<CAPTION>
                                              Year ended December 31,
                                            ---------------------------
                                              2001      2000     1999
                                            --------  --------  -------
       <S>                                  <C>       <C>       <C>
       Net income (loss) (in thousands):
          As reported...................... $ (6,417) $  5,399  $ 3,866
          Pro forma........................ $(49,170) $(46,077) $(1,940)
       Basic net income (loss) per share:
          As reported...................... $  (0.11) $   0.10  $  0.07
          Pro forma........................ $  (0.83) $  (0.82) $ (0.04)
       Diluted net income (loss) per share:
          As reported...................... $  (0.11) $   0.08  $  0.06
          Pro forma........................ $  (0.83) $  (0.82) $ (0.04)
</TABLE>

   These pro forma amounts may not be representative of the effects on pro
forma net income (loss) for future years as options vest over several years and
additional awards may be made in subsequent years.

                                     F-19

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The weighted-average deemed fair value of stock options granted was $8.33 in
fiscal 2001, $19.15 in fiscal 2000 and $6.81 in fiscal 1999. The fair value has
been estimated using the Black-Scholes Option Pricing Model with the following
weighted-average assumptions:

<TABLE>
<CAPTION>
                                          Year ended December 31,
                                          ----------------------
                                           2001      2000   1999
                                          ----      ----   ----
                 <S>                      <C>       <C>    <C>
                 Dividends...............    0%        0%     0%
                 Risk-free interest rate. 3.62%     5.96%  5.91%
                 Expected life (in years)  3.0       3.0    3.0
                 Expected volatility.....  143%      118%    87%
</TABLE>

   During fiscal years 2001, 2000 and 1999, we issued 449,851 shares, 604,576
shares and 444,400 shares, respectively, under the Purchase Plan. The
weighted-average deemed fair value of employees' stock purchase rights under
the Purchase Plan during fiscal years 2001, 2000 and 1999 was $9.93, $4.15 and
$2.40, respectively. The fair value of the purchase rights granted in fiscal
years 2001, 2000 and 1999 was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 3.62%, 5.96% and 5.91% for fiscal years 2001, 2000 and 1999,
respectively; expected dividend yield of zero percent and expected life of six
months for fiscal years 2001, 2000 and 1999; and expected volatility of 143%,
118% and 87% for fiscal years 2001, 2000 and 1999, respectively.

  Stock Repurchase Program

   On September 19, 2001, our board of directors authorized a stock repurchase
program of up to $6.0 million of our common stock. As of December 31, 2001, we
have repurchased 430,000 shares or $1.8 million worth of common stock under
this program.

8.  Restructuring Costs

   During the second and third quarter of fiscal 2001, we implemented
restructuring actions that resulted in aggregate charges of $859,000. The
restructuring costs consisted entirely of severance payments, payroll taxes and
extended medical benefits. The restructuring plan resulted in the elimination
of approximately 15% of our worldwide workforce. As of December 31, 2001, we
had eliminated 114 positions across all levels and functions. During the year,
we paid $782,000 in cash and we expect that our remaining accrual of $77,000
will be paid in the first calendar quarter of fiscal 2002.

   Our rent expenses for fiscal 2001 included approximately $2.3 million in
facility expenses for a building currently unoccupied. We continue to evaluate
our plans for this building and our other facilities. If we reach a decision to
abandon any of these facilities, we may have to accrue significant charges for
these payments due under remaining non cancelable lease terms net of
anticipated sub-lease income, and for the write-down in leasehold improvements
and construction in progress. Such charges may be material and may involve
significant use of cash if we chose to pay a settlement fee to exit any
abandoned facility.

                                     F-20

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


9.  Income Taxes

   The provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
                                           Year ended December 31,
                                           -----------------------
                                            2001      2000   1999
                                           ------    ------  ----
                <S>                        <C>       <C>     <C>
                Federal:
                   Current................ $2,400    $2,926  $437
                   Deferred...............   (228)     (675)   --
                                           ------    ------  ----
                                            2,172     2,251   437
                                           ------    ------  ----
                State:
                   Current................    286       847   113
                   Deferred...............    (32)     (524)   --
                                           ------    ------  ----
                                              254       323   113
                                           ------    ------  ----
                Foreign:
                   Current................     53        15    --
                   Deferred...............     --        --    --
                                           ------    ------  ----
                                               53        15    --
                                           ------    ------  ----
                Provision for income taxes $2,479    $2,589  $550
                                           ======    ======  ====
</TABLE>

   The tax benefits associated with exercises of stock options reduced taxes
currently payable as shown above by $2.6 million, $3.8 million and $59,000 for
the years ended December 31, 2001, 2000 and 1999, respectively. Such benefits
were credited to additional paid-in-capital when realized. The income (loss)
before income taxes for foreign operations was $(811,000), $1.3 million and
$(1.9) million for the years ended December 31, 2001, 2000 and 1999,
respectively.

   The difference between the provision for income taxes and the amount
computed by applying the federal statutory rate (35 percent) to income before
taxes is explained below (in thousands):

<TABLE>
<CAPTION>
                                                Year ended December 31,
                                               ------------------------
                                                2001     2000    1999
                                               -------  ------  -------
        <S>                                    <C>      <C>     <C>
        Income taxes at federal statutory rate $(1,379) $2,796  $ 1,552
        Non-deductible goodwill...............   1,838   1,090      525
        Non-deductible expense................      52     106       --
        Operating loss not utilized (utilized)   3,384    (241)  (1,600)
        State tax, net of federal benefit.....     165     209       73
        Tax credits...........................  (1,581)   (411)      --
        Tax losses carryforward...............      --    (960)      --
                                               -------  ------  -------
                                               $ 2,479  $2,589  $   550
                                               =======  ======  =======
</TABLE>

                                     F-21

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Significant components of deferred tax assets and liabilities for federal
and states are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                December 31,
                                                              ----------------
                                                               2001     2000
                                                              -------  -------
 <S>                                                          <C>      <C>
 Deferred Tax Assets
    Net operating loss carryforward.......................... $ 5,300  $ 3,954
    Research credit carryforward.............................   1,512    1,000
    Capitalized research and development.....................     214      421
    Accruals and allowances not currently deductible for tax
      purposes...............................................   2,963    2,323
                                                              -------  -------
    Total deferred tax assets................................   9,989    7,698
    Valuation allowance......................................  (8,790)  (6,499)
                                                              -------  -------
    Net deferred tax assets.................................. $ 1,199  $ 1,199
                                                              =======  =======
 Deferred Tax Liabilities
    Acquired intangible assets............................... $(1,529) $    --
                                                              =======  =======
</TABLE>


   Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", provides for the recognition of deferred tax assets if realization of
such assets is more likely than not. The net valuation allowance increased by
$2.3 million during the year ended December 31, 2001 and decreased by $39,000
during the year ended December 31, 2000. As of December 31, 2001, approximately
$5.8 million of the valuation allowances reflected above relates to the tax
benefits of stock option deductions, which will be credited to additional paid
in capital when realized.

   As of December 31, 2001 Actuate had net operating loss carryforwards for
federal tax purposes of approximately $11.7 million. Actuate also had federal
research and development tax credit carryforwards of approximately $1.5
million. The federal and state operating loss carryforwards will expire at
various dates beginning in year 2011 through 2021, respectively, if not
utilized.

   Utilization of the net operating losses and tax credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and tax credits
before utilization.

10.  Geographic Information

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

<TABLE>
<CAPTION>
                                          Year ended December 31,
                                         -------------------------
                                           2001     2000    1999
                                         -------- -------- -------
             <S>                         <C>      <C>      <C>
             Revenues:
                North America........... $ 96,116 $ 91,329 $40,229
                Europe..................   22,848   12,500   4,868
                Asia Pacific and others.    6,064    3,435   1,684
                                         -------- -------- -------
                    Total............... $125,028 $107,264 $46,781
                                         ======== ======== =======
</TABLE>

No single customer has accounted for 10% or more of total revenues in fiscal
2001, 2000 or 1999.

                                     F-22

<PAGE>

                              ACTUATE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


11.  Contingencies

   In August, 2001, a lawsuit was filed in the Virginia Circuit Court for
Fairfax County against us and two of our employees by MicroStrategy, Inc. The
lawsuit alleges that these employees, who previously worked for MicroStrategy,
breached their fiduciary and contractual obligations to MicroStrategy by, among
other things, misappropriating trade secrets and confidential information and
soliciting MicroStrategy employees. The complaint seeks injunctive relief and
damages. We believe the lawsuit is without merit and intend to defend this case
vigorously.

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

12.  Selected Quarterly Financial Data (Unaudited)

   The following tables set forth certain unaudited financial data for the
eight quarters ended December 31, 2001 (in thousands, except per share data).
All net income (loss) per share amounts have been restated to reflect the two
stock dividends as if these stock dividends had occurred as of the earliest
period presented.

<TABLE>
<CAPTION>
                                                Quarter ended
                                --------------------------------------------
                                March 31, June 30, September 30, December 31,
                                  2001      2001       2001          2001
                                --------- -------- ------------- ------------
  <S>                           <C>       <C>      <C>           <C>
  Revenues.....................  $35,508  $32,540     $28,201      $28,779
  Income (loss) from operations  $ 2,322  $  (825)    $(3,538)     $(3,046)
  Net income (loss)............  $ 1,663  $(1,093)    $(3,682)     $(3,305)
  Net income (loss) per share:
     Basic.....................  $  0.03  $ (0.02)    $ (0.06)     $ (0.06)
     Diluted...................  $  0.03  $ (0.02)    $ (0.06)     $ (0.06)
</TABLE>

<TABLE>
<CAPTION>
                                             Quarter ended
                             ---------------------------------------------
                             March 31, June 30, September 30, December 31,
                               2000      2000       2000          2000
                             --------- -------- ------------- ------------
      <S>                    <C>       <C>      <C>           <C>
      Revenues..............  $18,815  $24,417     $29,505      $34,527
      Income from operations  $ 1,150  $   823     $ 1,938      $ 3,186
      Net income............  $ 1,140  $   624     $ 1,315      $ 2,320
      Net income per share:
         Basic..............  $  0.02  $  0.01     $  0.02      $  0.04
         Diluted............  $  0.02  $  0.01     $  0.02      $  0.04
</TABLE>

                                     F-23