##### Table of Contents



As filed with the Securities and Exchange Commission on June 30, 2004   SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549
   FORM 20-F   (Mark One) o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
SECURITIES EXCHANGE ACT OF 1934
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended: December 31, 2003 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the transition period from _____ to _____ Commission file number 0-28578 DASSAULT SYSTEMES(Exact name of Registrant as specified in its charter) France
(Jurisdiction of incorporation or organization) 9, Quai Marcel Dassault
B.P. 310, 92156 Suresnes Cedex, France
(33-1) 40-99-40-99
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each class:
    
    Name of each exchange on which registered:American
Depositary shares, each
representing one common share, nominal
value 1 per share
    
    The Nasdaq National MarketCommon Stock, nominal value 1 per share
    
    The Nasdaq National Market
 Securities registered or to be registered pursuant to Section 12(g) of the Act:
None Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:None Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by the annual
report: Common Stock, nominal value
1 per share as of December 31, 2003: 113,403,665 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes þ                    No o Indicate by check mark which financial statement item the Registrant has elected to follow: Item 17 o                    Item 18 þ




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##### Table of Contents



TABLE OF CONTENTS PagePART IItem 1
    
    Identity of Directors, Senior Management and Advisers
    
    
    1Item 2
    
    Offer Statistics and Expected Timetable
    
    
    1Item 3
    
    Key Information
    
    
    1Item 4
    
    Information on the Company
    
    
    9Item 5
    
    Operating and Financial Review and Prospects
    
    
    26Item 6
    
    Directors, Senior Management and Employees
    
    
    52Item 7
    
    Major Shareholders and Related Party Transactions
    
    
    63Item 8
    
    Financial Information
    
    
    66Item 9
    
    The Offer and Listing
    
    
    67Item 10
    
    Additional Information
    
    
    69Item 11
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    83Item 12
    
    Description of Securities Other than Equity Securities
    
    
    85PART IIItem 13
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    85Item 14
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    85Item 15
    
    Controls and Procedures
    
    
    85Item 16
    
    RESERVED
    
    
    86Item 16A
    
    Audit Committee Financial Expert
    
    
    86Item 16B
    
    Code of Ethics
    
    
    86Item 16C
    
    Principal Accountants Fees and Services
    
    
    86PART IIIItem 17
    
    Financial Statements
    
    
    87Item 18
    
    Financial Statements
    
    
    87Item 19
    
    Exhibits
    
    
    88




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Introduction The companies and brands we discuss in this report include: Companies
    
    BrandsDassault Systèmes, which refers to Dassault
Systèmes and its subsidiaries
    
    CATIADelmia, which refers to Delmia Corp. and
its subsidiaries, Delmia GmbH, Safework Inc.,
and Athys
    
    DELMIAEnovia, which refers to Enovia Corp.
    
    ENOVIASmarTeam, which refers to SmarTeam
Corporation Ltd. and its subsidiaries
    
    SMARTEAMSolidWorks, which refers to SolidWorks
Corporation and its subsidiaries
    
    SolidWorksSpatial Corp., which refers to Spatial
Corp. and its subsidiaries
    
    ACIS, which is Spatial Corp.s main brand for
software components.SRAC, which refers to Structural Research &
Analysis Corporation and its subsidiaries
    
    3DCOSMOS\
 i




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##### Table of Contents



PART I 
 Item 1: Identity of Directors, Senior Management and Advisers Not applicable. 
 Item 2: Offer Statistics and Expected Timetable Not applicable. 
 Item 3: Key Information A. Selected Financial Data. The following selected consolidated financial data with respect to each of
the years in the five-year period ended December 31, 2003 are derived from our
consolidated financial statements prepared in accordance with U.S. generally
accepted accounting principles. Year ended December 31,2003(1)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999(in millions, except per share data and percentages)Consolidated Statement of Income DataRevenue:(2)Software revenue(3)
    
    $
    813.3
    
    
    
    645.6
    
    
    
    669.9
    
    
    
    643.0
    
    
    
    541.7
    
    
    
    431.5Service and other revenue
    
    
    137.6
    
    
    
    109.2
    
    
    
    104.2
    
    
    
    103.1
    
    
    
    90.7
    
    
    
    73.2Total revenue
    
    
    950.9
    
    
    
    754.8
    
    
    
    774.1
    
    
    
    746.1
    
    
    
    632.4
    
    
    
    504.7Cost of revenue:Software
    
    
    (27.3
    )
    
    
    (21.7
    )
    
    
    (24.4
    )
    
    
    (20.8
    )
    
    
    (14.9
    )
    
    
    (9.8
    )Service and other
    
    
    (113.0
    )
    
    
    (89.7
    )
    
    
    (96.4
    )
    
    
    (86.6
    )
    
    
    (75.8
    )
    
    
    (58.9
    )Total cost of revenue
    
    
    (140.3
    )
    
    
    (111.4
    )
    
    
    (120.8
    )
    
    
    (107.4
    )
    
    
    (90.7
    )
    
    
    (68.7
    )Gross profit
    
    
    810.5
    
    
    
    643.4
    
    
    
    653.3
    
    
    
    638.7
    
    
    
    541.7
    
    
    
    436.0Research, selling and administrative
expenses:Research and development
    
    
    (271.6
    )
    
    
    (215.6
    )
    
    
    (221.6
    )
    
    
    (209.2
    )
    
    
    (169.8
    )
    
    
    (139.1
    )Marketing and sales
    
    
    (204.6
    )
    
    
    (162.4
    )
    
    
    (169.7
    )
    
    
    (164.3
    )
    
    
    (117.5
    )
    
    
    (83.8
    )General and administration
    
    
    (58.9
    )
    
    
    (46.8
    )
    
    
    (47.9
    )
    
    
    (44.2
    )
    
    
    (35.4
    )
    
    
    (28.7
    )Amortization of goodwill
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    (44.2
    )
    
    
    (29.5
    )
    
    
    (13.9
    )Amortization of acquired technology and in-process research
and development write-offs
    
    
    (7.4
    )
    
    
    (5.9
    )
    
    
    (11.1
    )
    
    
    (14.2
    )
    
    
    (10.7
    )
    
    
    (12.3
    )Total research, selling and administrative expenses
    
    
    (542.5
    )
    
    
    (430.7
    )
    
    
    (450.3
    )
    
    
    (476.1
    )
    
    
    (362.9
    )
    
    
    (277.7
    )Operating income
    
    
    267.9
    
    
    
    212.7
    
    
    
    203.0
    
    
    
    162.6
    
    
    
    178.8
    
    
    
    158.2As a percentage of total revenue
    
    
    28.2
    %
    
    
    28.2
    %
    
    
    26.2
    %
    
    
    21.8
    %
    
    
    28.3
    %
    
    
    31.3
    %Financial revenue and other, net
    
    
    (0.5
    )
    
    
    (0.4
    )
    
    
    2.8
    
    
    
    14.1
    
    
    
    11.0
    
    
    
    6.1Income before income taxes
    
    
    267.4
    
    
    
    212.3
    
    
    
    205.8
    
    
    
    176.7
    
    
    
    189.8
    
    
    
    164.4Income tax expense
    
    
    (96.9
    )
    
    
    (76.9
    )
    
    
    (79.4
    )
    
    
    (88.0
    )
    
    
    (86.1
    )
    
    
    (64.4
    )Net income
    
    $
    170.5
    
    
    
    135.4
    
    
    
    126.4
    
    
    
    88.7
    
    
    
    103.7
    
    
    
    100.0As a percentage of total revenue
    
    
    17.9
    %
    
    
    17.9
    %
    
    
    16.3
    %
    
    
    11.9
    %
    
    
    16.4
    %
    
    
    19.8
    %Basic net income per share
    
    $
    1.51
    
    
    
    1.20
    
    
    
    1.11
    
    
    
    0.78
    
    
    
    0.92
    
    
    
    0.89Diluted net income per share
    
    $
    1.49
    
    
    
    1.18
    
    
    
    1.09
    
    
    
    0.76
    
    
    
    0.87
    
    
    
    0.87Weighted average number of shares outstanding
    
    
    114.7
    
    
    
    114.7
    
    
    
    114.1
    
    
    
    113.7
    
    
    
    113.0
    
    
    
    112.1
 1




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##### Table of Contents



Year ended December 31,2003(1)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999(in millions, except per share data)Supplemental Statement of Income
Data:Financial information excluding
amortization of intangibles
incurred in business
combinations(4)Operating income
    
    $
    275.4
    
    
    
    218.6
    
    
    
    214.1
    
    
    
    221.0
    
    
    
    218.9
    
    
    
    184.4Net income
    
    
    176.9
    
    
    
    140.4
    
    
    
    136.0
    
    
    
    144.0
    
    
    
    139.2
    
    
    
    117.6Diluted net income per share
    
    
    1.54
    
    
    
    1.22
    
    
    
    1.17
    
    
    
    1.23
    
    
    
    1.17
    
    
    
    1.03
 December 31,2003(1)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999(in millions)Consolidated Balance Sheet DataCash, cash equivalents and
short-term investments
    
    $
    553.9
    
    
    
    439.7
    
    
    
    388.4
    
    
    
    369.2
    
    
    
    274.2
    
    
    
    259.5Net working capital(5)
    
    
    634.6
    
    
    
    505.1
    
    
    
    472.6
    
    
    
    411.5
    
    
    
    319.2
    
    
    
    270.1Total assets
    
    
    1,215.0
    
    
    
    964.5
    
    
    
    920.2
    
    
    
    831.4
    
    
    
    733.6
    
    
    
    581.4Long-term and short-term debt
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Long-term obligations and current
portion of long-term obligations(6)
    
    
    69.4
    
    
    
    55.1
    
    
    
    50.4
    
    
    
    47.2
    
    
    
    52.8
    
    
    
    51.0Capital stock
    
    
    142.8
    
    
    
    113.4
    
    
    
    114.6
    
    
    
    114.5
    
    
    
    113.9
    
    
    
    113.2Shareholders equity
    
    
    828.5
    
    
    
    657.7
    
    
    
    628.3
    
    
    
    550.9
    
    
    
    465.7
    
    
    
    361.4
   (1)
    
    U.S. dollar amounts in this column have been translated solely for the
convenience of the reader at a conversion rate of $1.2597 per 1.00, the
Noon Buying Rate on December 31, 2003.(2)
    
    Due to the distribution of our products through IBM, as discussed in note
3 below, our revenue and percentage of various expenses and other line
items to revenue may not be comparable to those of our competitors. See
Item 5A: Operating Results.(3)
    
    More than half of our software revenue is derived from IBMs licensing of
our products pursuant to a mutually non-exclusive agreement under which we
license our products to IBM, which then sub-licenses them to end-users.
See Note P to our consolidated financial statements.(4)
    
    We believe that this supplemental information is an important indicator
of operational strength and performance of our business and is used by
analysts, investors and other interested parties. However, operating
income, net income and diluted net income per share excluding amortization
of intangibles incurred in business combinations is not a U.S. generally
accepted accounting principles measurement and should not be considered as
an alternative to amounts reported under U.S. generally accepted
accounting principles. Amortization of intangibles incurred in business
combinations totaled 5.9 million in 2003 (5.0 million after tax),
compared with
11.1 million in 2002 (9.6 million after tax), 58.4
million in 2001
(55.3 million
after tax),
40.2 million
(35.5 million
after tax) in 2000 and
26.2 million
(17.7 million
after tax) in 1999.(5)
    
    Net working capital consists of total current assets less total current
liabilities.(6)
    
    Includes financial leases. See Note K to our consolidated financial
statements. Exchange Rate Information We publish our consolidated financial statements in euro. Solely for the
convenience of the reader, this report contains translations of certain euro
amounts into U.S. dollars at specified rates. Unless otherwise stated, the
translations of euro into U.S. dollars have been made at the rate of $1.2597
per 1.00, which is the noon buying rate for euro in New York City for cable
transfers as certified for customs purposes by the Federal Reserve Bank of New
York (the Noon Buying Rate) on December 31, 2003. These translations should
not be construed as representations that the euro amounts represent such U.S.
dollar amounts or could be converted into U.S. dollars at the rates indicated
or at any other rate. The following table sets forth, for the period indicated, certain
information concerning the exchange rates based on the Noon Buying Rate
expressed as U.S. dollar per euro. Such rates are provided solely for the
convenience of the reader and are not necessarily the rates used by us in the
preparation of our consolidated financial statements. 2




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Exchange Rates Period end
    
    Average(1)
    
    High
    
    Low1999
    
    
    0.99
    
    
    
    0.94
    
    
    
    1.00
    
    
    
    0.852000
    
    
    0.94
    
    
    
    0.92
    
    
    
    1.03
    
    
    
    0.832001
    
    
    0.89
    
    
    
    0.89
    
    
    
    0.95
    
    
    
    0.842002
    
    
    1.05
    
    
    
    0.95
    
    
    
    1.05
    
    
    
    0.862003
    
    
    1.26
    
    
    
    1.14
    
    
    
    1.26
    
    
    
    1.042004:January
    
    
    1.25
    
    
    
    1.26
    
    
    
    1.29
    
    
    
    1.24February
    
    
    1.24
    
    
    
    1.23
    
    
    
    1.24
    
    
    
    1.21March
    
    
    1.23
    
    
    
    1.23
    
    
    
    1.24
    
    
    
    1.21April
    
    
    1.20
    
    
    
    1.20
    
    
    
    1.24
    
    
    
    1.18May
    
    
    1.22
    
    
    
    1.20
    
    
    
    1.23
    
    
    
    1.18June (through June 29)
    
    
    1.21
    
    
    
    1.21
    
    
    
    1.23
    
    
    
    1.20
   (1)
    
    The average of the Noon Buying Rates on the last business day of each
month during the relevant period, except for June 2004, in which case the
average Noon Buying Rate on June 29, 2004, was used. B. Capitalization and Indebtedness. Not applicable. C. Reasons for the Offer and Use of Proceeds. Not applicable. D. Risk Factors. You should carefully consider the risks described below and the other
information in this report. If any of the following risks actually
materialize, our business, financial condition, cash flows or results of
operations could suffer and you could lose all or part of your investment in
our shares. The risks described below are not the only ones we face. Risks Related to Our Business Current
economic and business conditions may lead to the continuation of slower decision-making or reduced corporate spending on information
technology infrastructure, which would cause our revenues and earnings to grow
more slowly and increase quarterly fluctuation. A weak U.S. dollar may
adversely impact the growth rate of other major markets where we operate. Over the past several years, the slowdown in general economic growth in
Europe has led to a reduction or postponement in corporate spending on
information technology infrastructure, including on software applications for
Product Lifecycle Management developed by us. This may adversely affect the
growth in our revenues and earnings or cause them to decline in some markets. The different industrial sectors we serve have different degrees of
exposure to this reduction in or postponement of corporate investment, both in
terms of intensity and timing, due to their specific investment cycles and
sensitivities to short-term economic conditions. In addition, a weak U.S. dollar may adversely affect the economic
situation in certain major industrial zones outside the U.S. dollar-zone, such
as Europe or Asia. In this case our customers may change their outlook for
future growth or may decide to delay or cancel their investments, including in
our products. 3




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##### Table of Contents



Errors or defects in our products could harm our reputation and expose us
to potential liability. Sophisticated software often contains errors, defects or other performance
problems when first introduced or when new versions or enhancements are
released. If errors or defects are discovered in our current or future
products, we may not be able to correct them in a timely manner, or at all.
Any insurance we carry may only partially offset the cost of correcting
significant errors or defects. We may therefore need to expend significant
capital resources in order to eliminate or work around errors or defects.
Errors, defects or other performance problems in our products may result in the
loss of, or a delay in, market acceptance of our products or postponement of
customers deployment, the diversion of development resources, damage to our
reputation and, in turn, may increase service and warranty costs. Because errors, defects or other performance problems in our software
could result in significant financial or other damage to our customers, our
customers could pursue claims against us. A product liability claim brought
against us, even if not successful, would likely be time consuming for our
management and costly to defend and could adversely affect our marketing
efforts. Currency fluctuations may significantly affect our results of operations
since we generate revenue and incur expenses in currencies other than the euro. Our results of operations can be significantly affected by changes in
exchange rates. Exchange rate fluctuations can impact the amount of revenue
and the amount of expenses recorded in our statement of income upon translation
of other currencies into euro. Since market growth rates for our software applications and the revenue
growth rates of our significant competitors are computed based on U.S. dollar
revenue, such growth rates from period to period may not be comparable to our
euro-computed revenue growth rates for the same periods. Our net financial revenue can also be significantly affected by changes in
exchange rates between the time we recognize revenue and receive cash payments
or record and pay an expense. Any such differences are accounted for in the
Exchange gain/loss portion of our financial revenue. See Item 11:
Quantitative and Qualitative Disclosures About Market Risk  Foreign currency
exchange risk. Our failure to adapt to rapid changes in technology or to develop and
introduce new products or enhancements to existing products in a user-friendly
way could seriously reduce demand for our products and have a material adverse
effect on our financial condition and results of operations. Product Lifecycle Management (PLM) software applications are characterized
by the use of rapidly changing technologies and innovation. These applications
must address sophisticated engineering needs in various areas of product design
and production, and must also meet sophisticated process requirements in the
area of change management, industry collaboration and cross enterprise work.
As a result, our success is highly dependent upon our ability to enhance our
existing products and to introduce new products in a cost-effective and timely
manner to meet evolving customer requirements. Our success is also linked with our customers ability to understand,
finance and support deployment of such products through their enterprises.
This process may include reengineering of some of our customers processes and
migration of substantial amounts of data. The combination of these
technological and organizational challenges, together with the inability or
difficulty of our customers to deploy our new products and technologies as they
become increasingly complex and pervasive may slow down our customers
acceptance of our PLM products and delay their investment decisions and production
deployments which may in turn adversely impact our results of operations. We have committed substantial resources to the development of new
products, but we face the challenge of increasingly complex integration of our
different functionalities to address the PLM opportunity and, as a result,
longer and more difficult industrialization work for new releases and products. During the year 2003, approximately 59% of our revenue resulted from
licensing of our products to IBM pursuant to a mutually non-exclusive marketing
and distribution agreement under which we license products to IBM who then
sublicenses the products to end-users. A decision by IBM to cease or reduce
substantially its distribution of our products would have an immediate and
material adverse effect on our financial condition and results of operations. IBM markets and distributes our products worldwide, primarily CATIA,
ENOVIA and SMARTEAM, pursuant to a mutually non-exclusive agreement. Revenue
generated through our agreement with IBM represented 59%, 61%, and 60% of our
total revenue in 2003, 2002 and 2001, respectively. 4




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##### Table of Contents



IBM markets and distributes our products primarily through IBM PLM, an
organization within IBM dedicated primarily to the marketing and distribution
of CATIA, ENOVIA and SMARTEAM, and through IBM distribution partners. IBM has
substantial discretion and control over such marketing and distribution,
including the financial resources devoted to marketing, the selection of
marketing and distribution channels and the compensation of its sales personnel
and agents. Therefore, IBMs decisions and performance with respect to these matters
have a material impact on revenue generated from sales of CATIA, ENOVIA and
SMARTEAM products. IBM is under no contractual obligation to continue to market and
distribute our products. A decision by IBM to cease, freeze, or reduce
substantially its marketing and distribution efforts would have an immediate
and material adverse effect on our financial condition and results of
operations, because we may not be able to establish effective alternative
distribution channels rapidly. In addition, establishing such channels would
require significant management and financial resources. Furthermore, this
agreement does not prohibit IBM from competing with us, marketing and
distributing other competing PLM software applications, providing services around
other competing PLM software applications, or acquiring or forming a strategic
alliance with one or more of our competitors, which could have a material
adverse effect on our financial condition and results of operations. Finally,
should IBM encounter market perception problems that impact its relationship
with the market, this could have a direct effect on the sales of our products. Our failure to adequately protect our intellectual property could harm our
competitive market position and have a material adverse effect on our financial
condition and results of operations. Our success is heavily dependent upon proprietary software technology. We
rely on a combination of copyright, patent, trademark, trade secret law and
contractual restrictions to protect the proprietary aspects of our technology.
These legal protections afford only limited protection. In addition, effective
copyright, patent, trademark and trade secret protection may be unavailable or
limited in certain countries where intellectual property rights are protected
less than in the United States or Western Europe. Our failure to adequately protect our technology may lead to the
development of similar technology by third parties and reduce our software
license revenues. Furthermore, we enter into confidentiality and license
agreements with our employees, distributors, customers and potential customers
and limit access to and distribution of our software, documentation and other
proprietary information. There can be no assurance that the steps taken by us
in this regard will be adequate to deter misappropriation or independent third
party development of our technology. In addition, like most of our
competitors, we are facing an increasing level of piracy of our successful
products, both by individuals and by groups acting worldwide. Litigation may be necessary to enforce our intellectual property rights
and to determine the validity and scope of the proprietary rights of others.
Any litigation could result in substantial costs and diversion of our resources
and could seriously harm our operating results. We may not prevail in any such
litigation and our intellectual property rights may be found invalid or
unenforceable. Claims that our products infringe the proprietary rights of others could
harm our sales and increase our costs and, as a result, have a material adverse
effect on our financial condition and results of operations. Other companies or individuals, including our competitors, may have, or
obtain copyrights, patents or other proprietary rights that could prevent,
limit or interfere with our ability to make, use, or sell our software.
Furthermore, companies in the software market are increasingly bringing suits
alleging infringement of their proprietary rights by others, particularly
patent rights. As a result, in such circumstances, a court may decide that we
have infringed on the proprietary rights of others. We have received in the
past, and may in the future receive, communications alleging possible
infringement by us of patents and other intellectual property rights of others.
We could incur substantial costs to defend any litigation brought against us,
regardless of its merits, and our failure to prevail in intellectual property
litigation could force us to do one or more of the following:  
    
    cease making, licensing or using products or services that
incorporate the challenged intellectual property;
    
    obtain and pay for licenses from the holder of the infringed
intellectual property right, which licenses might not be available on
acceptable terms, if at all; or
    
    redesign our products, which could involve substantial costs
and require us to interrupt product licensing and product releases,
or which might not be feasible at all. 5




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If any of the above situations were to occur for a significant product, it
could have a material adverse effect on our financial condition and results of
operations. We expect that our quarterly operating results will fluctuate and this
could cause our stock price to fluctuate. Our quarterly operating results have varied significantly and are likely
to vary significantly in the future, depending on factors such as:  
    
    the number, timing and significance of product enhancements or
new products developed by us or our competitors;
    
    our ability to develop, introduce and market new and enhanced
versions of our products and customer order deferrals in anticipation
of new or enhanced products introduced by us;
    
    the timing and cyclical nature of royalties received from our distribution agreement with IBM;
    
    fluctuations in foreign currency exchange rates; and
    
    general conditions in our software markets, software
applications generally and computer industries and regional
economies. We may also experience greater fluctuations in our quarterly results,
since customer decisions to invest in our products may be affected by
short-term economic, political and business conditions. A substantial portion of our orders and shipments typically occur in the
last month of each quarter and we may therefore experience significant
quarterly fluctuations in our results of operations. Additionally, as is
typical in the software applications industry, we have historically experienced
our highest licensing activity for the year during the month of December.
Delays in orders and shipments can affect our revenue and income. The trading price of our shares and the ADSs may be subject to wide
fluctuations in response to quarterly variations in our operating results and
the operating results of other software applications developers in our markets.
In addition, capital markets around the world experience from time to time
extreme price and volume fluctuations, which may particularly affect the market
prices for many high technology companies which have become highly volatile. Because we rely on IBM to provide us information as to the level of a
significant portion of our revenue, we generally are not in a position to know
our revenue for any particular period within the same timeframe as would
otherwise be possible. As a result, we may not be able to confirm or adjust
expectations as to sales achieved for a particular period as quickly as we
otherwise could, or within the same timeframe as some other companies in our
industry. Accounting standards and rules, and the regulatory environment in general,
have become increasingly complex and are subject to change. As a result,
changes in the applicable standards, rules or interpretations may require us to
modify our accounting policies and business practices, which could adversely
affect our results of operations. We report both in French GAAP and in U.S. GAAP and prepare two sets of
financial statements. In both France and the United States, the applicable
accounting standards and related interpretations are highly complex and
continue to evolve. Under U.S. GAAP, the accounting profession continues to
review certain provisions of SOP 97-2 and SAB 104, which provide guidance on
software revenue recognition, in an effort to provide additional insight into
implementation of these provisions. We review our compliance with all new and
existing accounting rules and pronouncements on an ongoing basis. Depending on
the outcome of these ongoing reviews, and the potential issuance of further
accounting pronouncements, implementation guidelines and interpretations,
particularly with respect to revenue recognition, we may be required to modify
our accounting policies and business practices, which could have a material
adverse effect on our results of operations. Our current revenue recognition
policies are described in Item 5A: Operating Results  Critical Accounting
Policies  Revenue Recognition and Note A to our consolidated financial
statements. In June 2002, the Council of Ministers of the European Union adopted new
regulations requiring all listed EU companies, including us, to apply
International Financial Reporting Standards (IFRS), in preparing their
consolidated financial statements effective January 1, 2005. We are currently
in the process of preparing for the 6




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transition from French GAAP to IFRS. These standards continue to evolve
quickly and substantially, and reporting requirements are occasionally
contradictory or ambiguous. The outcome of this regulatory uncertainty may
result in additional costs to us or adversely affect our financial reporting or
results of operations. As a result of our strategy of partnering with other companies for product
development, marketing and services, our products and business development
could be adversely affected if we experience difficulties with our partners. Our Product Lifecycle Management strategy requires fully integrated
solutions of CAD/CAE/CAM/PDM products, which are themselves increasingly
complex. To implement our PLM strategy, we have chosen to partner with other
companies: in product development, to integrate other software components; in
marketing, to integrate in our offer complementary products made by other
software providers; and in services, to provide adequate support for customers
adapting and deploying Product Lifecycle Management solutions. We believe that
our partnering strategy allows us to reduce costs while achieving broader
market coverage. Nevertheless, our broad partnering strategy creates a higher dependency on
such partners. Serious difficulties in our relationships with our partners, or
an unfavorable change of control of our partners, may adversely affect our
products or business development. If we are unable to hire or retain our key personnel and executives, or if
we experience difficulties in our employee relationships generally at one of
our major sites, our business activities and operating results may be
negatively affected. Our success depends to a significant extent upon, among other factors, the
continued service of our key managers and highly qualified research and
development, technical, support and other personnel, and on our ability to
continue to attract, retain and motivate qualified personnel. The competition
for such employees is intense, and if we lose the ability to hire and retain
key employees and executives, it could have a material adverse effect on our
business activities and operating results. Similarly, we have various important sites located in different countries,
and serious difficulties in our employee relationships generally at any such
sites could also have a negative effect. We generally do not maintain
insurance with respect to the loss of our key personnel. Continuous growth of our Group, either internally or through acquisitions,
adds complexity to our organization and may make consistent management and
appropriate visibility with respect to our operations and strategy more
difficult. External growth through acquisitions may adversely affect our
business or financial performance as a result of, among other things, our
inability to integrate such other businesses, products or technologies with our
existing business, products and technologies. We continue to grow internally in our markets around the world. This
continuous growth in terms of revenues, employees and operations creates
increasing complexity for us as we take measures to ensure consistency of our
various offerings, control of our operations and appropriate follow-up of
return on investments. In addition, we continue to seek opportunities for external growth.
Integration of newly acquired companies or businesses is challenging and it is
consuming both in terms of management time and control systems. Financial
markets may not support an acquisition. Also, due to regulatory constraints in
Europe and in the United States, a planned acquisition might not be realized at
all or as anticipated. Finally, future acquisitions may require us to use significant financial
resources, to make potentially dilutive issuances of equity securities, to
incur debt and to incur amortization expenses related to intangible assets
other than goodwill and may generally reduce our operating margin or net
income. Goodwill generated by these transactions will be subject to annual or
more frequent impairment tests, which may also reduce our operating margin or
net income. Acquisition of minority interests might also have to be written
off or devalued in our accounts. A
decrease in prices and a longer sales cycle could negatively impact
revenue growth. Over the last several years, prices have declined in the technological
market and this could continue or accelerate. This price decline is due to
competition, low marginal costs and rapid technological change. In parallel, due to economic conditions as well as to the complexity of
our PLM products, the sales cycle for PLM products has lengthened. As a
consequence, predictability over our revenues and their timing between quarters
is becoming more complex. We could face a slowdown in our revenue growth as a
result. 7




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Since we have multinational operations, we are subject to certain risks,
inherent in international operations, that could adversely affect our financial
condition and results of operations. As a global participant in the Product Lifecycle Management software
applications industry, our business is subject to certain risks inherent in
international operations that are beyond our control. These risks include:  
    
    tariffs, duties, export controls and other trade barriers;
    
    unexpected changes in regulatory requirements and applicable laws;
    
    the burden of complying with a wide variety of foreign laws and regulations; and
    
    political and economic instability. Any of these factors could harm our operating results. There can be no
assurance that we will not experience material adverse effects with respect to
our international operations and sales. Our research and production facilities are subject to risks of damage or
temporary loss due to both system interference or breakdown and physical harm.
The short or long-term loss of the use of these facilities could have a
material negative impact on our business, results of operations and financial
condition. Our research and development facilities are computer-based and rely on the
proper functioning of complex software and integrated hardware systems.
However, it is not possible to guarantee the uninterrupted operation and
security of these systems. For example, the invasion of our computer-based
systems by either computer hackers or industrial pirates could interfere with
their proper functioning and cause substantial damage, loss of data or delays
in on-going research and production activities. Computer viruses, whether
deliberately or unintentionally introduced, could also cause similar damage,
loss or delays. As many of our systems include advanced or state-of-the-art
functionalities, computer bugs or design errors could cause malfunctions. In addition, because our research and production facilities are located in
five principal sites, including our headquarters outside Paris in a possible
flood zone and our SmarTeam site in Israel, substantial physical damage to any
one of our sites, by natural causes or by attack or local violence, could
materially reduce our ability to continue our normal business operations. If
any of these circumstances were to arise, the resulting damage, loss or delays
could have a material negative impact on our business, results of operations
and financial condition. Risks Related to an Investment in our Shares or ADSs Groupe Industriel Marcel Dassault owns approximately 45% of our
outstanding shares, and can therefore effectively determine shareholders
decisions. Groupe Industriel Marcel Dassault (GIMD), which represents the interests
of some of our founding shareholders, has maintained its substantial interest
in Dassault Systèmes and currently owns 45% of our outstanding shares and
controls approximately 42% of the voting rights. As a result, GIMD continues
to effectively decide matters submitted to our shareholders for approval,
including the election and removal of directors and the approval of any merger,
consolidation or sale of all or substantially all of our assets. Technology-related stock prices have generally been volatile, and this
volatility may depress our stock price. The market price of our shares and ADSs is likely to be highly volatile,
as the market for shares of technology companies have generally been more
volatile than the stock market overall. A large number of technology companies
have reached a market price significantly inferior to their historical highest
market price. The price of our ADSs and the U.S. dollar value of any dividends will be
affected by fluctuations in the U.S. dollar/euro exchange rate. The ADSs are quoted in U.S. dollars. Fluctuations in the exchange rate
between the euro and the U.S. dollar are likely to affect the market price of
the ADSs. For example, because our financial statements are reported in euro,
a decline in the value of the euro against the U.S. dollar would reduce our
earnings as reported in U.S. dollars. This could adversely affect the price at
which the ADSs trade on the U.S. securities markets. Any dividend we might pay
in the future would be denominated in euro. A decline in the value of the euro
against the U.S. dollar would reduce the U.S. dollar equivalent of any such
dividend. 8




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Holders of ADSs may face disadvantages compared to holders of our shares
when attempting to exercise voting rights. Holders of shares wishing to
exercise their voting rights must block their shares for at least five days
prior to the shareholders meeting pursuant to French law. In order to vote at shareholders meetings, ADS holders who are not
registered on the books of the depositary are required to transfer their ADSs
for a certain number of days before a shareholders meeting into a blocked
account established for that purpose by the depositary. Any ADS transferred to
this blocked account will not be available for transfer during that time. ADS
holders who are registered on the books of the depositary must give
instructions to the depositary not to transfer their ADSs during this period
before the shareholders meeting. ADS holders must therefore receive voting
materials from the depositary sufficiently in advance in order to make these
transfers or give these instructions. There can be no guarantee that ADS
holders will receive voting materials in time to instruct the depositary to
vote. Also, the depositary is not responsible for failing to carry out voting
instructions or for the manner of carrying out voting instructions. It is
possible that ADS holders, or persons who hold their ADSs through brokers,
dealers or other third parties, will not have the opportunity to exercise a
right to vote at all. In order to participate in any general meeting, a holder of shares held in
registered form must have its shares registered in its name in a shareholder
account maintained by us or on our behalf by an agent appointed by us at least
five days prior to the date set for the meeting. A holder of bearer shares
must obtain a certificate from the accredited intermediary with whom the holder
has deposited its shares, and the certificate must state that the shares are
not transferable from five days before the meeting until the completion of the
meeting. Preemptive rights may be unavailable to holders of our ADSs. Holders of our ADSs may be unable to exercise preemptive rights granted to
our shareholders, in which case holders of our ADSs could be substantially
diluted. Under French law, whenever we issue new shares for payment in cash or
in kind, we are usually required to grant preemptive rights to our
shareholders. However, holders of our ADSs may not be able to exercise these
preemptive rights to acquire our shares unless both the rights and the shares
are registered under the Securities Act of 1933 or an exemption from
registration is available. If the depositary is unable to sell rights that are not exercised or not
distributed or if the sale is not lawful or reasonably practicable, it will
allow the rights to lapse, in which case you will receive no value for these
rights. 
 Item 4: Information on the Company A. History and Development of the Company. We are a leading developer of world-class software solutions using
three-dimensional (3D) digital technology. Our strategic mission is to provide
software solutions and services that enable our customers to: (i) create more
innovative, higher quality products, (ii) develop products more quickly to
satisfy market demand, (iii) create and manufacture products more cost
effectively and (iv) develop products that better preserve the environment both
during their production and when in service. We were established in 1981 through the spin-off of a team of engineers
from Dassault Aviation, which was developing software to design products in 3D.
We entered into a distribution agreement with IBM the same year and started to
sell our software under the CATIA brand to automotive and aerospace customers.
Through our work with large industrial customers, we learned how important it
was for them to have a software solution that would support their product
development processes. With this in mind, we enriched our solution to enable
the design of digital mock-ups which helped our customers reduce the number
of physical prototypes and realize significant savings in product development
cycle times. The first significant project realized with this new approach was
the Boeing 777. We also broadened our targeted industry segments to
fabrication and assembly, consumer goods, electrical and electronics,
shipbuilding and plant design. In 1997, we decided to organize our business in two segments: the
Process-centric segment with the goal of supporting the end-to-end product
development process of customers and the Design-centric segment dedicated to
customers seeking to design products in 3D. In conjunction with this decision,
we acquired SolidWorks with the goal of targeting the significant market of
customers designing their products in two dimensions (2D) and looking to take
advantage of the power of 3D-design. In order to fulfill the mission to provide a real Product Lifecycle
Management (PLM) solution for our customers, in conjunction with our internal
development, we undertook a series of targeted acquisitions for the
Process-centric segment. We acquired the Product Manager software and
development laboratory from IBM in 1998, which we merged with our virtual
product data management application to create the ENOVIA product line. 9




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Following our acquisition of SmarTeam Corporation in 1999 we developed a
portfolio of applications across ENOVIA and SMARTEAM in order to manage data
product configurations, product lifecycle integration and collaboration.
Delmia was launched in 2000 in order to address the digital manufacturing world
following a series of three acquisitions, including (i) Deneb, a U.S. company
specialized in robotic simulation which we acquired in 1997, (ii) Safework, a
Canadian company specialized in human modeling technology, and (iii) Delta, a
German company specialized in the development of manufacturing process
management software. Both Safework and Delta were acquired in 2000. In 2003
we acquired Athys, a French company specialized in the development of workcell
control software. In 1999, we introduced Version 5 (V5), an innovative
software platform to develop integrated Product Lifecycle Management solutions.
As a result of this new platform, the different applications developed in the
companies we acquired, such as DELMIA, as well as the CATIA and ENOVIA product
lines, can be integrated to form a consistent Product Lifecycle Management
portfolio. Currently, our Product Lifecycle Management solutions are organized around
four brands: CATIA for product design, DELMIA for digital manufacturing, and
ENOVIA and SMARTEAM for product management and collaboration. As part of our
PLM solutions, we have also developed Best Practices, a set of tools and
methodologies to help customers deploy our software on their particular
industry processes. We offer consulting services with the same goal, and
distribute our PLM infrastructure under the name of Component Application
Architecture (CAA) V5 through Spatial Corp., a U.S. company we acquired in 2000
to help third-party developers build complementary applications to our PLM
solutions. Headquartered in France, we have a strong international presence. In
2003, 46% of our total revenues were derived from Europe, 29% from the Americas
and 25% from Asia. We employed 4,088 people worldwide at December 31, 2003.
In Europe/Middle East, in addition to France, we have offices in Belgium,
Germany, Israel, Italy, Netherlands, Spain, Sweden, Switzerland and the United
Kingdom. In the Americas, we have major subsidiaries headquartered in the
United States and Canada and we have offices in Argentina, Brazil and Mexico.
In Asia, we have offices in China, Hong Kong, India, Japan, Singapore and South
Korea. Moreover, through our extended enterprise strategy we have a broader
reach around the world through our partnerships in sales, marketing and
technology. We distribute our solutions through IBM, our strategic partner since our
inception in 1981, a network of other distribution partnerships and a direct
sales force for certain products. Our partnership with IBM is for the
marketing, distribution and support of most of our products. Over the years,
our partnership with IBM has been reinforced and has kept pace with changes in
both our markets and products. We have been listed on Euronext Paris and the Nasdaq Stock Markets
National Market since our initial public offering in 1996. Dassault Systèmes is a société anonyme, a form of limited liability
company, incorporated under the laws of France. Our company was created on
June 9, 1981 for a duration of 99 years and is governed by French company law
and related regulations. Our registered office is located at 9 Quai Marcel
Dassault, 92150 Suresnes, France, and the telephone number is: 33 (0) 1 40 99
40 99. For a list of our significant subsidiaries, please refer to
 Organizational Structure below. Dassault Systèmes is registered in the
Nanterre Commercial Register under No. 322 306 440. For a detailed discussion of our business and 2003 Highlights, see 
Business Overview and Item 5: Operating and Financial Review and Prospects
below. B. Business Overview. Our strategy is structured around two axes. The first is to enable
customers to create innovative products and simulate the whole product
lifecycle from their initial concept and design to their maintenance. The
second is to allow the broadest array of users to take advantage of
three-dimensional technologies as the most intuitive means of working and
communicating on industrial products. We believe that we are the global leader of the market for Product
Lifecycle Management software with an estimated market share of approximately
23% for 2003. Our PLM software applications, solutions and services enable
corporations of all sizes to define and manage their products end-to-end from
the conceptual stage through the manufacturing process and the product in
service. Our software applications address a wide range of products, from
every day consumer packaged goods to individual machine parts, automobiles,
entire ships, manufacturing plants and commercial aircraft. Our global
customer base is composed primarily of companies within seven manufacturing
sectors, including automotive, aerospace, fabrication and assembly, consumer
goods, electrical and electronics, plant design and shipbuilding. 10




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Our solutions are mission critical for our customers, enabling them to
increase innovation, reduce time to market and reduce costs, as well as to
better integrate their product creation and production processes with the needs
of their markets. Through the creation of a collaborative environment, a broad
range of persons involved in a products lifecycle can share, modify, manage
and archive complete data about the product and its production use and
maintenance on an integrated information platform. Using advanced and
breakthrough modeling technologies, including highly sophisticated 3D
visualization and Internet technology, our products allow engineers,
manufacturing teams, financial planners and other participants to simulate
product behavior and manufacturing operations through virtual prototypes rather
than actual physical mock-ups, thereby saving significant time and resources,
while increasing quality and innovation. We organize our business and market our products and services according to
customer requirements for two types of applications: the Process-centric
market, in which customers need to support product development, production and
maintenance; and the Design-centric market, in which customers need to
support product design. Our Process-centric products are organized under our
flagship CATIA brand for product creation (CAD/CAE), our DELMIA brand for
digital manufacturing process management and our ENOVIA and SMARTEAM brands for
virtual product synthesis, collaboration and product lifecycle integration.
Altogether, these four brands form our PLM offer and are hereafter referred to
as our PLM software applications. Spatial Corp., one of our wholly-owned
subsidiaries, distributes and supports our CAA V5 development platform. Our
Design-centric products are offered under the SolidWorks brand. Key Business Strengths We believe our key business strengths have enabled us to take a leadership
role in our industry and increase our market share in each of the last five
years.  
    
    Long-term, integrated relationships with our customers.Our
approach has always been to develop long-term partnerships with
customers in our targeted industries. We work closely with our
customers to involve them in all phases of product development and to
identify their evolving needs. Through these close, long-term
working relationships, we are able to gain a deep understanding of
their product design processes and requirements. We believe this
level of knowledge enables us to develop software solutions more
closely attuned to the requirements of our customers, and highly
suited to the industries we address. In addition to our software
solutions, we operate competency centers where we work with numerous
industry leaders to develop consulting methodologies and Best
Practices with the aim of improving the introduction and deployment
of our PLM solutions in response to the increasing demand for
expertise and optimization of processes.
    
    Substantial commitment to technological innovation.
Technological strength has underpinned our market success. Our
latest generation software platform for the Process-centric market,
Version 5 (V5), enables us to deliver integrated PLM solutions.
These solutions have been engineered to optimize industry specific
business processes end-to-end. This approach is the result of
considerable investment made in working with our customers to
understand their required processes and then to deliver applications
that support an optimized process. V5 solutions are engineered to
provide collaborative workspaces by sharing a common product,
process and resource (PPR) model across CATIA, DELMIA and ENOVIA.
The PPR model also allows companies to capture, share and reuse
knowledge throughout the entire product lifecycle, while the open
architecture provided by V5 allows extension and integration of our
solutions according to each Companys specific needs.Designed specifically for Windows, our technology for the
Design-centric market is based on enabling designers and engineers to
make an easy transition from 2D drafting tools to a 3D solid modeling
environment. Its intuitive Windows user interface enables users to
productively employ SolidWorks software without extensive training.
    
    Brand strategy.We believe that our brand strategy is a key
component to our success. The creation of our brand strategy enables
us to focus on developing best of breed software in each domain. Our
brands in the Process-centric market are designed to address the very
specific domain requirements along the product lifecycle. As a
result, we are able to develop R&D strategies as well as sales and
marketing strategies best suited to the individual domains. At the
same time, based upon our V5 platform, we are able to offer an
integrated set of solutions to our customers in the PLM market. Our
multiple brand strategy also provides significant flexibility to our
customers as they are able to choose multiple points of entry
depending on their individual needs and requirements. Similarly, in
the Design-centric market, our SolidWorks brand and solutions address
the specific needs of customers and companies in its market segment. 11




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
    
    Extended enterprise model.The execution of our strategy has
encompassed the creation and growth of an extended enterprise model
since our inception in 1981. We have developed a network of partners
for marketing, product development and enhancement of customer
relations, and we intend to continue to build on our extended
enterprise model. Our key alliance has been, and continues to be,
with IBM, our strategic partner of 23 years, particularly with
respect to distribution of our products. In addition to IBM, we
market our solutions through a network of distribution partners and a
direct sales force for certain products. We have developed a CAA
program with independent software developers to offer complementary
applications built upon our V5 platform. Through customer
cooperation, we establish a permanent dialogue between our customers
and our research and development teams commencing early in the
development process in order to ensure responsiveness to market
needs.
    
    Resilient financial model, with a high level of recurring
software revenue.Since our formation we have set for ourselves the
objective of generating a high recurring revenue stream and we have
had a high level of recurring software revenue each year. For 2003,
recurring revenue represented 51% of our total software revenue, with
total software revenue accounting for approximately 86% of our total
revenue. This high level of recurring revenue contributes to the
resiliency of our business, enabling us to continue to invest in
critical resources, even during periods of economic slowdowns. We
also believe that the high level of recurring revenue enhances our
visibility with respect to our future performance.
    
    Strong profitability and cashflow from operations.As a result
of our business success and market leadership, our financial model
reflects a strong level of profitability and significant cash
generation from operating activities. Our strong financial position
gives us significant operating flexibility. Growth Strategy We believe there are a number of opportunities to grow our business. Our
growth strategy addresses opportunities for growth with our Version 5 PLM
solutions and our Design-centric solutions. We have outlined below our most
significant growth opportunities.  
    
    Win new strategic customers.Our goal is to have a diversified
customer base, composed of both large companies and small and
medium-size businesses. With our latest software solutions, we
believe there are additional opportunities to grow our business with
leading companies within our targeted industrial segments.
    
    Extend our CAD penetration within our customer base.Our
current CATIA Version 5 software is designed to address the needs of
a wide range of users from entry-level to high-end users. In
addition, we are expanding the number of applications within CATIA,
which then broadens the potential usage of our CATIA Version 5
software.
    
    Implement complete PLM solutions with Product Data Management
and Digital Manufacturing solutions.Our Product Lifecycle
Management solutions bring the benefits of 3D across the entire
lifecycle. Our newest solutions include key Product Data Management
(PDM) solutions, ranging from collaboration to lifecycle capabilities
like change management with SMARTEAM and ENOVIA. We believe the PDM
market offers significant opportunities for growth as companies look
to adopt a complete PLM solution.Digital manufacturing is currently an emerging market within Product
Lifecycle Management. We address the digital manufacturing market
with our DELMIA brand. DELMIAs software is designed to help
manufacturers simulate and optimize manufacturing processes. DELMIA
is currently one of the main companies addressing the digital
manufacturing market.
    
    Extend our penetration of the supply chain in key industries.
Our customer base includes many of the leading original equipment
manufacturers (OEMs) in the aerospace and automotive industries.
Many of these customers have started their migration to our Version 5
platform. We believe their supply chain offers growth opportunities
as the environment continues to evolve, with OEMs, particularly in
the automotive and aerospace industries, seeking to better integrate
design and manufacturing through collaborating more closely with
their suppliers. We are seeing more interest in our solutions among
supply chain companies in part as a response to the changing
requirements of their OEM partners. In addition, our V5 solutions
have been designed to address both the needs of large companies as
well as small and medium-size businesses. 12




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
    
    Expand our presence in our target industries.Historically, a
large percentage of our revenues have been generated from the
automotive and aerospace industries, which together represented
approximately 50% of our total revenues in 2003. The fabrication and
assembly industry and others is also a significant contributor to
revenues, having represented approximately 33% of total revenues in
2003. In addition to ongoing opportunities in our largest target
industries, we believe our current software solutions present a good
opportunity to increase our presence in the consumer, electrical and
electronics, and shipbuilding industries. Additionally, commencing
in 2003, we have introduced our first PLM industry solutions that
combine a portfolio of products with PLM Best Practices. Our first
industry solutions address the automotive, aerospace and electrical
and electronics industries.
    
    Capitalize on the 2D to 3D migration opportunity.Many
designers continue to work within a 2D environment. We believe our
solutions, particularly our Design-centric solutions with SolidWorks,
are targeted to address the needs of these designers as they migrate
to 3D design solutions. Market Structure and Brands We currently organize our business and market our products and services
principally according to customer requirements for two types of applications:
the Process-centric market, in which customers need to support product
development, production and maintenance, and the Design-centric market, in
which customers are primarily focused on product design. In 2003, our
Process-centric business represented 83% of our consolidated revenue and our
Design-centric business represented 17% of our consolidated revenue. Process-centric market The Process-centric market focuses principally on Product Lifecycle
Management applications to create and simulate the entire product lifecycle
from initial concept to product in service. We serve it with our PLM offering,
which facilitates the simultaneous collaboration of the many different
functions involved in Product Lifecycle Management: engineering, strategy,
marketing and sales, planning and production, procurement, finance and human
resources as well as throughout the supply chain. We believe that our PLM
applications help businesses unleash creativity and innovation, reduce
development cycle time, store and share product knowledge and ultimately
improve quality and competitiveness. PLM products and solutions.We serve the Process-centric market by
principally offering the following products and solutions:  CATIA, which addresses the digital product creation processes and supports
product design, development, engineering and simulation;DELMIA, which addresses the digital production and manufacturing processes
and supports process planning, detailing, simulation, and validation as well as
resources modeling and simulation;ENOVIA, which manages product lifecycle information, including digital
mock-up configuration, processes knowledge and resources information;SMARTEAM, which manages product data information and enables product
lifecycle collaboration; andSpatial, which distributes and supports CAA V5, our open development
platform. We also offer PLM solutions that, in addition to brand applications,
include Best Practices and consulting services packaged to serve specific
processes of our target industries, such as PLM Express and industry solutions
as discussed more fully below in Brands, Products & Solutions Developments. CATIAis our largest software product line as our PLM solution for digital
product definition and simulation. It is integrated with DELMIA, our solution for defining and simulating lean digital manufacturing processes,
ENOVIA, our solution for managing product lifecycle information, including
digital mock-up configuration, processes knowledge and resources information
and SMARTEAM, our easy to implement, cost-effective solution for managing
product lifecycle collaboration of companies of all sizes. CATIA is a fully integrated system that allows users to tailor their
product development capability according to their own particular needs. CATIA
enables users to build a seamless product development environment in order to
simulate the entire range of industrial design processes, from the initial
concept to product design, analysis, assembly 13




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and maintenance. The CATIA product line addresses key domains, such as:
mechanical design, shape design and styling, product synthesis, equipment and
systems engineering and machining analysis. We believe that CATIA is among the most powerful product design and
simulation system in the world as illustrated by the markets adoption of the
digital mock-up process. We believe this leadership position is built on the
following differentiating features, including (i) the ability of companies to
capture and reuse their corporate knowledge; (ii) breakthrough technologies
such as generative design and functional modeling, enabling intelligent
morphing of designs across product programs; (iii) a simple and intuitive user
interface that optimizes productivity and reduces training time; (iv) full
integration of all CATIA applications based on a common PPR model; and (v) our
packaging approach that makes CATIA readily scalable from entry-level users to
high-end experts. The CATIA V5 product line supports widely available Unix
platforms and Windows platforms. DELMIAprovides comprehensive software applications to enable customers to
virtually create, monitor and control flexible, distributed manufacturing
processes. Manufacturing process coverage ranges from the concept development
phase to shop floor implementation and production management and optimization.
DELMIA software can be used to design and simulate the operation of an assembly
line and to optimize production processes. DELMIA software allows screen-based
simulation and optimization of manufacturing processes from single device work
cells to production lines, and from factory material flow to extended
enterprise production flow. The DELMIA software family contains process
planning, standard time measurement applications, human simulation, robot and
machine application simulation, as well as solutions for material flow
simulation. ENOVIAprovides manufacturing companies with a complete set of integrated
solutions to implement their digital enterprise, simulating the entire product
lifecycle from initial concept to design, synthesis, simulation, manufacturing,
production and after-market support. By providing unique collaborative
workspaces for engineering, manufacturing and enterprise-wide integration, our
ENOVIA solutions enable customers to manage their digital products with
configuration at each stage of the lifecycle and simulate industry-specific
business processes, with associated resources (e.g., robots, cells, lines,
plants). Benefiting from the open V5 platform, and using best-in-class
internet technologies, ENOVIA embodies the company-wide PLM backbone, providing
a gateway into the digital enterprise for collaboration, visualization,
analysis and decision support. SMARTEAMsoftware solutions enable product-centric web-based collaboration
between teams within extended enterprises of various industry sectors.
SMARTEAMs application portfolio enables organizations and their supply chains
to efficiently exchange, track and manage corporate product information all
along their lifecycle. SMARTEAM solutions offer an array of integrated,
on-line collaboration technologies and provide an affordable, readily
customizable, easy to implement solution that can easily be expanded throughout
the enterprise as its needs evolve. It can therefore range from collaborative
product data management to best-in-class entry access to PLM deployment. Version 5 technology Combining our technological capabilities with our understanding of market
needs, we have developed an innovative and open software architecture (Version
5 or V5) first released at the end of 1999. V5 is the technological platform
for the development of new products for the PLM market and makes possible a
tight integration of CATIA, DELMIA and ENOVIA. A
major component of V5 is its unique object model, allowing
joint/simultaneous definition of products, processes and resources to support
multidisciplinary collaboration. It enables dynamic, knowledge-based product
creation, engineering and manufacturing processes management and decision
support to drive optimized product definition, manufacturing preparation,
production and service. V5s open architecture enables other software developers to build on and
complement our software application, thus permitting integration of our V5
based products with third-party applications. V5 technology provides our PLM products with scalability. Scalability
allows enterprises of different sizes, and users with diverse profiles, from
occasional use to highly sophisticated engineering, to benefit from a fully
integrated PLM solution. Scalability is possible with our PLM solutions
because they have a common V5 architecture, which allows them to be packaged
according to the clients specific needs and because they promote the usage of
industry best of breed standards on which all participants can develop and
build their products. 14




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The following five fundamentals provide the underlying context for the
development of our V5 products:  Industry specific business process optimization.Business process
optimization can only be achieved by investing time, resources and
energy to grasp the underlying manufacturing industries processes.
True benefits for manufacturing industries will not be achieved by
only accommodating current practices, it will be achieved by
understanding the direction in which businesses are being
driven and by defining together the processes that need to be realized
(Best and Next Practices). Delivering competitive advantage through
end-to-end process optimization is achieved by sharing with our
customers a common and thorough view of the next breakthrough
processes and then realizing them through V5.Pervasive 3D based communication and collaboration.When people
interact in a shared workspace, they understand each other, they
communicate with each other and they collaborate in a manner that is
uniquely enhanced by the power of 3D. The most significant
contribution to collaboration in product development in the past ten
years has been digital mock-up (DMU). Pioneered by us, DMU provides
an immersive 3D environment where all the participants in the
product lifecycle can interact with each others designs, thus
significantly enhancing communication through rapid exchange,
direct-use, simulation and validation. Many major new projects are
now being developed by a network of partners spanning corporate and
geographic boundaries. It is crucial to have accurate and
comprehensive information circulating throughout such networks in
order to achieve virtual co-location of all the participants. V5
incorporates breakthrough technologies and delivers capabilities
that harness the Internet and corporate information hubs to extend
the pervasiveness of 3D across these partner networks. This brings
a new level of decision support and collaboration that breaks down
the barriers imposed by different partners or geography and further
accelerates the product development process.Unique product, process and resource description and integration
model.The lifecycle of a manufactured product extends beyond the
product itself to also include the means and methods required to
produce and maintain it. At the core of V5 lies a unique technology
called PPR that provides an associative model that integrates the
product with its processes and resources. PPR also incorporates a
virtual product model that captures the requirement view, as well as
the logical, functional and physical definitions of the product,
processes and resources. With this model, an accurate context can
now be established to ensure configuration management, simulation,
change propagation and thorough linkage across the lifecycle. True
product lifecycle optimization can only occur within this context
and this capability is unique within the V5 architecture.Capturing, sharing and re-applying corporate knowledge.
Manufacturing corporations have recognized that intellectual
property is increasingly becoming their most valuable asset as
competitive pressures place a premium on innovation. Harnessing
knowledge to innovate consists of being able to capture or mine
knowledge, share it and reuse or re-apply it quickly, accurately and
efficiently. The integration of knowledge-based services throughout
V5 provides the capability necessary to allow a corporation to
harness its knowledge to innovate. V5 applications make a further
breakthrough by directly embedding knowledge within the product,
process and resource model. Critical industry specific processes
are supported by dedicated applications that incorporate Best
Practices and design rules. These applications therefore address
corporations core know-how and aim at in-depth coverage of their
unique processes and sub-processes. For example, V5 applications
provide full, knowledge-grounded solutions that drive the nuanced
conceptual design of a car door, or the aero-elasticity study for an
airplane wing design.Openness and extension through component based architecture and
community. The specific needs of each customer require that their
PLM solution be tailored, extended and integrated. These
requirements necessitate openness and the ability to re-apply
components to achieve different behavior or capabilities. The
component application architecture provided within V5 has been
specifically developed to meet these needs. Built using state of
the art object oriented programming languages, including Java and
C++, the V5 architecture is similar to other leading-edge software
such as IBM and Microsoft platforms. Components are building units
that allow the design and implementation of sophisticated and
complex software products; they allow software designers to focus on
high level conceptual programming and enforce encapsulation of
implementation details. This approach allows larger groups of
developers to contribute to and enrich the software application
system as it evolves. We have thus developed a network of partner
companies that offer niche products incorporating specific
expertise. By using V5, these partners have a single development
platform that ensures delivery of a seamless, integrated software
solution composed of both our 15




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products and theirs. The component architecture also supports our
objective to generalize the markets use of our technology, an
activity that is conducted through Spatial Corp. CAA V5is our robust, open and comprehensive development platform. Our
CAA partners are developing, selling and supporting innovative applications
that integrate seamlessly with our PLM solutions. Spatial Corp. is the primary
channel for distribution and support of CAA V5. Our CATIA, DELMIA and ENOVIA
products are based on our V5 technology. Our partners may also choose to
benefit from the V5 platform possibilities to connect with other applications,
whether these be customers applications or other software companies
applications. We have developed stable and shared interfaces (CAA Authorized
APIs) to allow connection with non-V5 applications. The V5 platform supports
the use of standards such as WebSphere, Microsoft.net, PROSTEP, ONG, W3C and
XHL. Standards are widely created by industry consortia, or by leading
industry players for the exchange of data, or user interfaces or formats. Design-centric market The Design-centric market focuses principally on product design. We
address this market with our SolidWorks brand. SolidWorks mission is to
unleash the power of 3D for everyone in product development. Since its
founding in 1993, SolidWorks software products have been shipped to more than
300,000 products designers, engineers and engineering students worldwide
spanning both the commercial and educational markets. The Design-centric
market complements the Process-centric market in reaching a far larger number
of potential users. Design-centric products and solutions.To address the specific needs of
the Design-centric market, SolidWorks develops and markets easy-to-use solid
modeling, analysis, product data management and 3D online catalogs content
solutions that improve productivity for users who previously used 2D
applications. Its major product solutions include: (i) SolidWorks Office
Professional for organizations that need to manage workgroup design data more
efficiently; (ii) SolidWorks Office, which includes a complete design solution
with 3D mechanical design software and a full range of design communication and
productivity tools; and (iii) SolidWorks 3D mechanical design software. In addition to its portfolio of products, SolidWorks has developed
SolidWorks Solution Partner Program encompassing software and hardware vendors
whose products interoperate with SolidWorks software and provide solutions in
specific areas. Designed specifically for Windows, our technology for the Design-centric
market is based on enabling designers and engineers to make an easy transition
from 2D drafting tools to a 3D solid modeling environment. Its intuitive
Windows user interface enables users to productively employ SolidWorks
software without extensive training. SolidWorks applications provide users
with a 3D design process, for which a fully detailed solid model is used to
quickly produce drawings and perform downstream design functions. SolidWorks
focuses on three core capabilities: design, analysis and product data
management. SolidWorks software is an open system that allows independent
software developers to create complementary products that can be integrated
with SolidWorks, thereby significantly increasing the range of functions and
capabilities that can be offered to customers. Customers and Industrial Sectors We have a very broad and diversified customer base. We offer our products
primarily to the seven industrial sectors listed below, each of which is
followed by a sampling of customer names. Our largest customer represented 4%
of total revenue, and our five, ten and twenty largest customers accounted,
respectively, for 14%, 21% and 28% of total revenue in 2003. The table below sets forth the proportion of our revenues represented by
sales to our major industrial sectors for 2003, 2002 and 2001. These figures
are a percentage of our total sales, comprising both our Process-centric and
Design-centric segments. 16




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Year ended December 31,2003
    
    2002
    
    2001Automotive
    
    
    33
    %
    
    
    35
    %
    
    
    34
    %Aerospace
    
    
    17
    %
    
    
    16
    %
    
    
    17
    %Fabrication and assembly and others
    
    
    33
    %
    
    
    33
    %
    
    
    33
    %Consumer goods and electrical & electronics
    
    
    13
    %
    
    
    13
    %
    
    
    13
    %Plant design and shipbuilding
    
    
    4
    %
    
    
    3
    %
    
    
    3
    %100
    %
    
    
    100
    %
    
    
    100
    %
 Automotive.Original equipment manufacturers using our software solutions
include: BMW
China Motor Corporation
DaimlerChrysler
Dong Feng Motor Corp.
Ferrari
Ford
Honda
Hyundai Kia Motor Company
Irisbus
Iveco
MAN Nutzfahrzeuge AG
MG Rover
    
    Mitsubishi Fuso Truck & Bus
Mitsubishi Motors
Porsche
PSA Peugeot-Citroën
Renault
Scania
SsangYong Motor Company
Subaru
Toyota Motor
Volkswagen  Audi Group
Volvo AB
Yazaki
 Customers in the automotive sector supply chain using our software solutions
include: Aisin Seiki Co.
Autoliv
Behr
Bertone
Bertrandt AG
BorgWarner Automotive
Bosch
Brose Fahrzeugteile
Cimos
Comau Systems
Continental AG
Denso Corp.
Draexlmaier
Edag
Faurecia
Hella
Ichikoh Industries
Italdesign
    
    Kanto Automotive Works
Karmann
Koito Manufacturing
Koyo Seiko
Lear
Magna
Michelin
Paulstra
Pininfarina
Ruecker
Siemens VDO
Sumitomo Wiring Systems
Toyota Gosei
TRW Automotive
Universal Propulsion Co.
Valeo
Williams Controls
ZF
 Of the ten teams participating in the 2003 Formula 1 season, seven teams
employed our solutions to develop their engines or chassis. These include
McLaren-Mercedes, Williams BMW, Toyota Motorsport, Sauber, Bar Honda,
Ferrari, and the Renault F1 team. Aerospace. Customers in the aerospace sector using our software include: Aermacchi
AgustaWestland
Airbus
Alcatel Space
Alcoa Global Fasteners
Alenia Aeronautica
Alenia Spazio
AVIC
BAE Systems
Bell Helicopter
    
    KAI (Korea Aerospace Industries)
KHI (Kawasaki Heavy Industries)
Latécoère
Liebherr
Litton Guidance & Control Systems
Lockheed Martin
Loral
Lufthansa Technik AG
MHI (Mitsubishi Heavy Industries)
MTU
 17




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Boeing
Bombardier
Cessna
Dassault Aviation
EADS
El-OP
Embraer
Eurocopter
FHI (Fuji Heavy Industries)
Flight Safety International
Goodrich
Gulfstream
Honeywell
    
    NASA
Northrop Grumman
Piaggio Aero
Pratt & Whitney Canada
Raytheon
Saab
Sikorsky
Singapore Technologies Aerospace
Smiths Aerospace
Snecma
Stork Fokker
Sukhoi
Vought Aircraft Industries
 Fabrication & assembly. Customers in the fabrication and assembly sector
using our software include a wide range of companies, including heavy equipment
manufacturers and industrial machines. Some of our customers are listed below
as follows: Alstom Power
Arburg
Bobst
Bridgestone
Claas
Daewoo Heavy Industries
Elopak, Inc.
F.L. Smidth & Co
FlexLink Systems AB
Framatome
GoodYear
Grundfos
Halla Engineering & Construction
Homag
Industrias Romi S.A.
Iscar
Julius Blum GmbH
Kalmar
Kikuchi Press
    
    Kliklok International
Kobelco Construction Machinery
Krebs
Metso
Michelin
Multivac Sepp Haggenmueller GmbH
NTN
OshKosh Group
Paper Converting Machine Corporation
Philips Oral Healthcare Inc.
Sanyo Machine Works
Scheidt and Bachmann
Schuler
Sidel
Staubli
Sumitomo Heavy Industries
Toyota Industries Corporation
Volvo Construction Equipment
Volvo Penta
 Customers in the train industry using our products include: Bombardier
Transport, Allusuisse Road & Rail Ltd. and Alstom Transport. Consumer goods. Customers in the consumer goods sector using our software
solutions include: AEG
Arc International
Asahi
Austria Gaming Industries
Black & Decker
Bombardier Recreation
Coca Cola
Crown, Cork & Seal
De Longhi
Dorel Juvenile Group
Electrolux
ETA Swatch
Fratelli Guzzini
Gucci
Herman Miller
    
    Isafrance
Kärcher
Konica
Leifheit
Metabo
Miele
Nilfisk Advance
Rain Bird
Rayovac
Samsonite
Smoby
Solo Golf
Werner Ladder Co.
Yakima
 18




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Electrical & electronics. Customers in the electrical and electronics
sector using our software solutions include: Alpine Electronics
AMC Centurion AB
Ares Communications Tech
Ascom Monetel
Automatic Systems
Ceragon Networks
Clarion
Gnatus
Grundig
Hubert and Suhner
IBM
IFM Electronic GmbH
Intel Corporation
Johnson Electric
Kinpo Electronics
Legrand
    
    Mars Electronics
Matsushita Electrical Industrial
MDS Sciex
Newport Corporation
Nikon
Pioneer
Promise Technology
Radio Frequency Systems
Sagem
Sanyo Electronics
Siemens
Sony
Sub-Zero
Thales
Wolf Appliance
 Plant design. Customers in the plant design sector using our software
solutions include: Aker
Albert Kahn Associates
Alstom Power
Ansaldo
BEI
Consol Energy
DaimlerChrysler
Farnham & Pfile Engineering and Construction
Gehry Partners
    
    Haden International
ITER
Kvaerner
METSO Corporation
Oceanografia
PEMEX
Shell
Southern California Edison
Trinity Industrial
 Shipbuilding yards and operators of passenger and cruise ships. The
shipbuilding sector is the most recent segment we have targeted. Our customers
include: Bénéteau
General Dynamics Bath Iron Works
General Dynamics Electric Boat
HDW AG
HSD Engines
IHI-Marine United
MeyerWerft
    
    MHI (Mitsubishi Heavy Industries)
Namura Shipbuilding
Northrop Grumman Newport News
Northrop Grumman Ship Systems
Samsung Heavy Industries
Universal Shipbuilding Corporation
Yantai Raffle Shipyards
 In addition to the seven industrial sectors discussed above, we also offer
3D software components across all industry sectors. Set forth below is a list
of customers for our 3D software components: ABAQUS/CAE by Hibbit, Karlsson & Sorensen, Inc.
Alibre Design by Alibre Inc.
Ansoft Corporation
Cimatron E by Cimatron
Dynamic Designer on CAA V5 (ADAMS) by Applied
    Research Associates
GSCAD by Intergraph Corporation
IronCAD
    
    Kubotek
Proficiency LTD (CAA V5)
Radan LTD (ACIS)
Sandia National Laboratory
Space-E by Hitachi Zosen Information Systems
Vistagy
 Our Extended Enterprise Partnerships We have reinforced our extended enterprise approach through our
relationships with customers, technological partners, product development
partners and cooperation with computer hardware manufacturers. IBM partnership.The extended enterprise concept emerged from our
partnership with IBM for the distribution of our products. We have had a
long-standing partnership with IBM for 23 years that has provided us with deep
technical expertise and commercial strength beyond the distribution agreement
described more fully below under Sales and Marketing. In the hardware,
middleware and consulting services domains, IBM has been a key partner to us.
Furthermore, collaboration in several areas of research and development has
been the cornerstone of our and IBMs commitment to technical leadership for
the digital enterprise. 19




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In June 2000, IBM created an organization, known as IBM PLM, for marketing
PLM products and services exclusively dedicated to our solutions. This results
in a strong platform for marketing CATIA, ENOVIA, DELMIA and SMARTEAM with two
specific channels to manage large accounts and small and medium-sized accounts.
IBM also manages an important network of dedicated business partners,
providing the market with a unique structure for PLM. Since January 2002, IBM IGS, the IBM global services organization, has
been a Dassault Systèmes Premier PLM Consulting Partner. IBM IGS provides
consulting and implementation services to customers in order to drive adoption
of our PLM solutions. We collaborate with IBM IGS to develop service offerings
related to our PLM solutions. Customer partners.We establish a permanent dialogue between our research
and development teams and our customers, thereby ensuring product developments
that are responsive to market needs. Principally due to the openness of our
software applications, we offer our customers the opportunity to develop
complementary seamless software applications for internal use. We believe that
thousands of applications have been thus developed by our customers to meet
their specific needs. In addition, we have created competency centers based on
specialized industrial segments to gather information on our customers
processes and thus help develop additional applications tailored to the needs
of each industry. In 2003, we continued active development of customer partnerships to
specify, evaluate and test process-oriented applications. We also organized
user groups and forums in the United States, Europe, Asia and Australia to
enable customers to share their experiences with our software products and
solutions. Over 10,000 people attended such forums around the world in 2003. Technology and development partners.In order to maximize our benefits
from available technology, we have established technical collaborations with
IBM, Hewlett Packard, SUN Microsystems, Silicon Graphics Inc. (SGI), Intel and
Microsoft, as well as prestigious universities. The new technologies included
in Version 5 were developed as both native Windows and Unix environments. In order to optimize the technology of our products with computer
manufacturers power in graphics and calculation, we work in close
collaboration with the computer hardware industry. In the Unix environment,
these partnerships have been active for a number of years with suppliers of
IBM, Sun Microsystems, SGI, and Hewlett Packard workstations. We have also set
up a certification program with numerous vendors of Windows workstations,
including IBM, Hewlett Packard, Compaq, SGI, Dell, Fujitsu Siemens Computers
and NEC. We have also been working closely with the primary suppliers of virtual
reality software applications since 1998 to deliver more leading-edge
technologies for innovation. For example, in February 2003, we announced with
Immersion Corporation the signing of an agreement under which Immersion will
develop a new hand-interaction software suite based on our CAA V5 development
platform. The suite, VirtualHand® for V5, will enable CATIA and ENOVIA digital
mock-up users to manipulate and feel a 3D digital mock-up in a natural way
using their hands and thereby experiencing realistic force feedback while
touching or grasping a 3D digital part. Other examples include the tactile
design technology of SensAble Technologies, the immersive design technologies
of Fakespace, the immersive visualization display of Barco NV, Projection
Systems, and the advanced visualization solutions of Panoram Technologies. In November 2003, we announced with Intel Corporation and IBM the delivery
of an integrated wireless computing platform. The offering equips CATIA V5
certified IBM T40p Thinkpads with Intel Centrino mobile technology to give
manufacturers the benefits of wireless computing as they develop new products,
whether working in the office, on the shop floor, or in the field while
connected to a Hotspot. Product development partners.In order to enable software developers to
create and market their own software applications using the Version 5
architecture, we set up a CAA program, named the Software Community Program
(SCP). This program was launched in July 2001 to provide independent software
vendors with open next-generation CAA V5 and with comprehensive support to
deliver best-in-class PLM applications to the market that are fully integrated
and complementary to CATIA, ENOVIA and DELMIA V5. By using V5, these partners
have a single development platform that ensures delivery of a seamless,
integrated software tool composed of both our products and theirs. The
SCP program has been very successful with approximately 140 products
based on CAA V5 introduced on the PLM market with V5R12 by 38
independent software companies as of January 2004. Companies which
have joined the SCP program in 2003 or early 2004 include: Immersion
Corp., ESI Group, TDM Systems GmbH, Fluent Inc., ImpactXoft, IGE XAO,
Gehry Technologies LLC, Centric Software Inc. and Noesis Solutions
N.V. 20




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We entered into a strategic alliance with ImpactXoft in 2002 to deliver
advanced design collaboration solutions and functional modeling applications
within V5. This alliance is leveraging ImpactXofts awarding-winning IXSPeeD
technology with our Version 5 technology to deliver and market innovative
applications that will target Process-centric applications for the electrical &
electronics, consumer goods, and fabrication and assembly industries. In
September 2003, we extended this alliance and ImpactXoft joined our CAA V5
Software Community Program as a Gold Software Partner. ImpactXoft will deliver
a new version of its award-winning IX SPeeD Suitesoftware for Simultaneous
Product Development based on our CAA V5 development platform, enhancing
functional modeling and collaborative design capabilities. In October 2003, we announced jointly with Gehry Technologies, an
independent organization created by Gehry Partners research group, that Gehry
Technologies (GT) will develop and sell PLM solutions to the building industry
based upon our CAA V5 development platform. Through the partnership, GT will
deliver a suite of products dedicated to the building industries that combine
the collaborative 3D design and data management capabilities of PLM with the
project experience in 3D collaboration and digital contracting that Frank Gehry
gained while building world-renowned structures with CATIA. SolidWorks operates a two-tier development partnership program bringing
together companies supplying products that are either compatible with or
entirely integrated with SolidWorks. SolidWorks extensively tests the
integration between products and today, over 250 compatible products are
available in many areas, including machining, analysis, simulation and rapid
prototyping. In 2003, 52 products from 38 SolidWorks partners had achieved Certified
Gold status. Gold Products are software applications developed by partners,
and tested and certified by SolidWorks to ensure high quality, integration and
interoperability with SolidWorks software, thereby delivering a higher degree
of productivity to our customers. These products are part of the more
expansive SolidWorks Solution Partner program that includes over 600 companies
worldwide. Systems integrators alliances.Our ecosystem of industry alliances also
includes a community of consulting firms and systems integrators. These
Consulting and Services Partners are able to assist customers to optimize their
business processes as well as integrate global PLM solutions in line with
best-of-class implementation practices. In addition to the key role played by
IBM IGS, this network of consulting and services partners includes AtosOrigin,
Axiom Systems, CSC, Incat, Geometric Software Solutions, PCO Technologies,
T-Systems and Volvo IT. It is expanding as selected companies with recognized
skills and expertise in delivering PLM and integration services are added to
the ecosystem. Academic relationships.We have established a number of relationships
with research centers, universities and schools throughout the world over the
years. Some of these academic institutions include: California Institute of
Technology, Cambridge University, Georgia Tech, Hong Kong Polytechnic, MIT,
Purdue University, Royal College of Art in London, Stanford University, the
University of Seoul and the University of Tokyo. Sales and Marketing IBM Channel  Overview. Revenue generated through our marketing and
distribution agreement with IBM represented approximately 59%, 61% and 60% of
our total revenue in 2003, 2002 and 2001, respectively. Under such agreement,
we license CATIA, ENOVIA and SMARTEAM products to IBM, which then sublicenses
them to end-users. Since our inception in 1981, our CATIA products, since 1998
our ENOVIA products, and since the Fall of 2001 our SMARTEAM products, have
been marketed and distributed principally by IBM pursuant to a mutually
non-exclusive agreement. See Item 3D: Risk Factors  Risks Related to Our
Business  During the year 2003, approximately 59% of our revenue resulted from
licensing of our products by IBM pursuant to a mutually non-exclusive marketing
and distribution agreement under which we license products to IBM who then
sublicenses the products to end-users. A decision by IBM to cease or reduce
substantially its distribution of our products would have an immediate and
material adverse effect on our financial condition and results of operations.
and  As a result of our strategy of partnering with other companies for
product development, marketing and services, our products and business
development could be adversely affected if we experience difficulties with our
partners. IBM pays us royalties, which approximate 50% of total CATIA, ENOVIA and
SMARTEAM license fees invoiced by IBM. IBM may earn an incentive provided it
reaches certain royalty growth targets. In July 2002, we entered into our
current agreement whereby IBM agreed to significantly increase the resources of
the IBM PLM organization and we, in turn, modified the incentive to link it to
IBM making such investments. Specifically, under our current royalty agreement
with IBM, our initial royalty rate is 50% of the license fees invoiced by IBM
and moves down a sliding scale to 46.8% of the license fees invoiced by IBM if
IBM meets its resources investment objectives as well as annual royalty growth
objectives. The resources investment criteria is expressed as a level of
marketing and 21




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sales expenses and can lead to an incentive of up to 2% of end-user
revenues, and the royalty growth achievement can lead to up to the remaining
1.2%. In addition, specifically for DELMIA products, IBM and we have agreed to
team together through a cooperative licencing agreement to deliver digital
manufacturing software applications to accounts where both IBM and we can bring
value. This agreement enables IBM to sub-license DELMIA products to certain
customers on a case-by-case basis, while ensuring that the DELMIA specialized
sales force maintains the customer support lead. IBM ChannelMarketing Structure. Our marketing strategy with IBM is
focused on addressing the needs of large companies and small and medium-sized
businesses. IBM PLM is an IBM organization exclusively dedicated to the
marketing and sales of our CATIA, ENOVIA and SMARTEAM products to large
enterprises primarily. Small and medium-sized businesses (SMBs) are primarily addressed through a
network of IBM business partners devoted to market, on a non-exclusive basis,
our CATIA, ENOVIA and SMARTEAM products. Since 2000, we provide additional
support to this network of IBM business partners and contribute funds to an
enhanced marketing budget in order to ensure more brand awareness for CATIA,
ENOVIA and SMARTEAM and to enhance lead generation for the IBM business
partners. In early 2004, IBM increased the fees paid to its business partners,
which improved their business model, and the support provided to them was
reinforced. In addition, we became a Master Agent for IBM in France and
Belgium, whereby we manage and provide marketing support to the French and
Belgian network of IBM Business Partners. Direct Sales Channels. DELMIAs products are marketed by a direct sales
force, which is complemented primarily by resellers. In some geographic
markets, and in addition to the IBM sales channel, SMARTEAM uses a direct sales
force to market and sell its solutions. Indirect Sales Channels. SolidWorks products are marketed by a network
of independent resellers specifically focused on the local markets in 100
countries around the world. DELMIAs solutions are also sold by a network of
business partners. SMARTEAMs products are also marketed and sold in part by
resellers, including recently added Avatech Solutions. 2003 Highlights Selected Major Customer Developments SAMSUNG
HEAVY INDUSTRIES  In January 2003, SHI, a key member of Koreas
Samsung Group, delivering a broad range of services in the shipbuilding
industry, announced that they will invest in a Digital Shipbuilding Development
System using DELMIA software to simulate and optimize the entire shipbuilding
lifecycle process in a virtual environment from the initial stage to the
launch. FORD
 In February 2003, we announced, jointly with IBM, that Ford Motor
Company has decided to purchase and integrate our PLM solutions, including
CATIA V5 and ENOVIAvpm software, into the automakers design and manufacturing
processes. Ford will integrate these solutions into its next generation C3P
(PLM) systems environment across the company. DAEWOO
HEAVY INDUSTRIES & MACHINERY LIMITED  In February 2003, Daewoo
Heavy Industries & Machinery Ltd announced that they will integrate our PLM
solutions to enhance their product development platform. Using CATIA V5 and
ENOVIA Lifecycle Applications solutions, Daewoo Heavy Industries & Machinery
Ltd will consolidate its collaboration environment and maximize efficiencies
surrounding the development of products such as forklifts or passenger car
engines. BERTRANDT
AG  In April 2003, Bertrandt AG, a leading engineering services
provider for the automotive industry, announced the selection of our PLM
solutions to maximize the efficiency of its development platform. Integrating
the ENOVIA Lifecycle Applications solution with the existing CATIA-based
development environment, Bertrandt AGs teams will share design information in
real time across the extended enterprise and with international partners and
automotive manufacturing customers. CHINA
MOTOR CORP  In May 2003, China Motor Corp, Taiwans leading
automotive manufacturer, announced it had selected DELMIA software to further
improve an important pioneering digital factory project. Adding DELMIA digital
manufacturing solutions to CATIA and ENOVIA solutions already used in
production, China Motor Corp will now benefit from this global PLM approach. 22




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YANTAI RAFFLES  In July 2003, IBM and we announced that Yantai Raffles
Shipyard (YRS) had acquired our Product Lifecycle Management Shipbuilding
Solutions. With the integrated PLM platform, comprised of CATIA V5 for
collaborative virtual product development and ENOVIA Lifecycle Applications and
ENOVIA Portal 3d com for real-time product data management, YRS is already
realizing the benefits of seamless sharing of vessel lifecycle information
between product development teams in the company. The advanced PLM solution
has enabled the shipyard to streamline design processes for its vessels, from
floating storage and off-take ships to oilrigs and luxury yachts. BMW  In July 2003, IBM and we announced that BMW was developing a new
vehicle program with our Product Lifecycle Management technology and software.
Using CATIA V5 for collaborative product development and ENOVIA for product
data and lifecycle management development, BMW Group is reusing standard
vehicle components to create multiple variants that can be morphed from one
model to the next. Integrating all product information throughout the vehicle
development lifecycle, the new PLM platform is therefore set to boost
operational efficiency, increase collaboration between development teams,
reduce time to market, and ultimately deliver better premium vehicles for
increased customer satisfaction. PACKSYS GLOBAL LTD  In August 2003, PackSys Global Ltd, an international
company specializing in packaging machine engineering, announced it had
standardized on SolidWorks 3D mechanical design software for its worldwide
operations. PackSys Global will use SolidWorks software in Thailand and
Switzerland to design packaging machines with up to 10,000 parts or more. AVIC-I  In October 2003, IBM and we announced that the First Aircraft
Institute of AVIC-I (FAI), a leading Chinese aircraft research institute, has
selected our PLM solutions to develop Chinas Advanced Regional Jet Program,
ARJ21. With CATIA V5 for collaborative product design and digital mock-up
creation, and ENOVIAVPM for product data and process management, AVIC will
enable the institutes engineering teams to share data and work in a common 3D
development environment across its multi-site operations. KINPO ELECTRONICS  In November 2003, Kinpo Electronics Inc, the worlds
leading manufacturer of calculators, announced it had implemented CATIA V5 to
help significantly shorten its product design time. The collaborative product
development application has enabled Kinpo to launch new calculator, digital
voice recorder, digital still camera, global positioning systems and cable
modem products on the market within a very short product lifecycle time. LIEBHERR AEROSPACE  In December 2003, Liebherr Groups aerospace
division, a key global aerospace supplier, announced that it will implement our
PLM solutions for product data management company-wide. Liebherr Aerospace
provides the worlds major aircraft manufacturers with aircraft control,
hydraulic, landing gear, air conditioning and ventilation systems. To support
company growth, Liebherr Aerospace chose SMARTEAM, as a collaborative
application robust enough to manage and share the product data of its wide
range of offerings between both of its European production centers and also
with its customers based around the world. CLARION ELECTRONICS  In December 2003, Clarion Electronics announced that
its Malaysian subsidiarys use of our PLM solutions has led to a 50% reduction
in its design cycle time, and helped the car-audio electronics manufacturer to
bring products to market faster. Clarion deployed CATIA V5 technology to
streamline product development, efficiently reduce design time and penetrate
new markets. THE BOEING COMPANY  In February 2004, the Boeing Company and we announced
that we were partnering to accelerate the development of the Version 5 Product
Lifecycle Management platform. The enhanced PLM solutions will enable Boeing
and its partners to implement the digital tools and processes necessary to meet
the challenges of the new technologically advanced 7E7 aircraft. Working
together, we are creating a virtual collaborative development workspace known
as the 7E7 Global Collaboration Environment where Boeing and all its partners
will design, build and test the 7E7 airplane and its manufacturing processes
digitally before production begins using the full suite of our PLM software
solutions. Brands, Products and Solutions Developments During 2003, we introduced two new PLM releases: V5R11 Built-in Reality Announced in April 2003, CATIA, DELMIA, ENOVIA
and SMARTEAM V5R11 are characterized by the high value-added capabilities V5R11
delivers to create realistic, effective PLM solutions. Built-in Reality
denotes the exceptional level of realism attainable in product and process
anticipation provided by this new release and is achieved through four
concepts: (1) Predictive PLM  What will a product look like? How will it age?
Through significant enhancements in CAE analysis and new partner solutions 23




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that take into account the physics of materials, V5R11 enables customers
to better simulate the functioning of a future product and hence reduce the
risk of potential problems; (2) Engineering of Emotion  V5R11 offers new
tools to engineer the emotional content of a product with improvements in Class
A surfacing, a novel approach for virtual clay modeling, and a light Digital
Mock-up Navigator for broader appearance testing with marketing specialists,
customers, and end-users; (3) Secure IP Circulation  V5R11 delivers enhanced
security and authentication mechanisms for intellectual property within
collaboration and collective decision-making processes; and (4) PLM for All 
V5R11 offers strengthened entry PLM for companies or departments across all
industries that are considering upgrading from 2D design practices with the
option of directly embracing true PLM. V5R12 Collaborative PLM for on-demand businesses Announced in
September 2003, CATIA, DELMIA, ENOVIA and SMARTEAM V5R12 introduces the next
step in the evolution of our PLM portfolio and allows critical PLM components
to be merged in collaborative workspaces enabling lifecycle management and
product design activities to be conducted in parallel while ensuring
synchronization of collaboration in the context of correct, up-to-date data.
New capabilities in ENOVIA Portal 3d com, including enhanced CATIA-ENOVIA
integration, permit 3D product information to be shared in real-time through
web portals. This new release enables companies to move one step closer to
becoming on demand businesses. It helps them focus on their products, become
more agile, deliver right-to-market products, and achieve lean manufacturing.
The new V5R12 product portfolio brings business value to manufacturers in the
following important areas: (1) Core Business: V5R12 delivers built-in lifecycle
management functions that enable designers to focus on the creative aspects of
their jobs while complying with standard corporate processes; (2) Content for
Collaboration: V5R12 integrates 3D product visualization functions and
navigation within related manufacturing data (process and resources) into
standard web portals; (3) Requirement & Specifications: V5R12 incorporates
revolutionary functional modeling technology from pioneering software company
ImpactXoft; and (4) Manufacturing Resources: V5R12 offers a unified workspace
that connects product creation and manufacturing resources definition to help
companies make cost-efficient production decisions. Finally, the V5R12
portfolio is designed to utilize industry-proven PLM methodologies to optimize
the manufacturing process. In addition to our new PLM releases in 2003, we also introduced PLM
industry solutions and PLM Express solutions discussed below. PLM industry
solutions are defined as a combination of dedicated products, Best Practices
and consulting services suited to specific markets, with our initial solutions
addressing the aerospace, automotive and electrical and electronics industries. We introduced a PLM industry solution for aerospace manufacturers based on
proven PLM Practices. The Best of Breed Structure Engineering solution
integrates the activities and processes required to design and manufacture
structural aircraft parts and assemblies (e.g., sheetmetal, machined, and
composite parts), as well as the corresponding tools required to build them. In the automotive industry, we introduced the Generative Car solution,
which is a comprehensive offering that applies to all facets of automotive
development processes, including body, interior and exterior trim, chassis,
powertrain, electrical, and vehicle synthesis and assembly. The Generative Car
solution consists of a set of integrated products from CATIA, ENOVIA, and
DELMIA, combined with a set of IBM Best Practices and DS PLM Practices
developed for the automotive industry. It enables automotive manufacturers and
suppliers to leverage valuable corporate knowledge in order to meet market
demands for an ever-increasing number of vehicle models. It permits
simultaneous engineering, fast design change, and seamless processes from early
styling to manufacturing definition. For the electrical and electronics (E&E) industry, we introduced the first
in a series of E&E industry-specific PLM solutions. The Integrated Mechanical
Product Development for Electronics (IMPD) solution is intended to speed
mechanical product development while strengthening innovation and consists of a
set of integrated products from CATIA and SMARTEAM, combined with a set of PLM
Practices developed for the E&E industry. The solution links the applications
and disciplines involved in mechanical product development and enables
manufacturers to reuse valuable corporate intellectual property. Specifically,
IMPD streamlines mechanical product development operations by increasing the
amount of semantic data exchanged between applications and development
disciplines such as style, design, manufacturing, and analysis. It allows them
to explore more design possibilities in less time, capture and reuse existing
features or assemblies made context sensitive, keep automatic links between
part and mold design, create designs in accordance with corporate standards
through automatic guidance, and take into account quickly and seamlessly the
results of digital simulation and analysis. During 2003, we, jointly with IBM, introduced PLM Express solutions for
small and medium-size businesses. These solutions combine CATIA Version 5 and
SMARTEAM, and have been designed (including new functionalities) to address the
needs of specific manufacturing segments including industrial components,
tooling suppliers, industrial machinery, mobile equipment, plastics
manufacturing and consumer goods. 24




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Spatial.In May 2002, Spatial became the primary channel for sales and
marketing of our CAA V5 platform to software developers. We benefit from
Spatials specific sales expertise to distribute our Product Lifecycle
Management development technologies and to accelerate the development of
value-added third-party applications based on our CAA V5 platform. As of the
end of 2003 Spatial had added 30 independent software developers to the CAA V5
platform under Spatial Adopter agreements. In May and September 2003, Spatial
completed the R11 and R12 releases of its complete 3D subsystems portfolio,
including key improvements for its 3D ACIS Modeler (ACIS) in performance,
modeling, quality and robustness. Spatial also announced in November 2003 the
support for 32- and 64-bit AMD Opteron Processor, demonstrating its key
commitment to assist companies in their transition to 64-bit technologies and
platforms. SolidWorks.In July 2003, SolidWorks announced its new product line,
SolidWorks 2004, featuring more than 250 customer-requested enhancements,
including performance that is an estimated 15 times faster than competing
midrange software. By significantly accelerating large assembly processing and
automating hundreds of tedious tasks, SolidWorks 2004 unleashes designer and
engineer creativity to make better, more attractive, more marketable products
in a fraction of the time some competing software takes. New important areas
include drawing automation, lightweight assembly management allowing users to
work on assemblies with thousands of parts, welding handling with a
revolutionary weldment environment for the first time simulating how designers
really work, and seamless integration with COSMOSWorks analysis software.
SolidWorks 2004 also offers new best in class capabilities for sectors such as
consumer product design and mold design. Competition Markets for our products are highly competitive and characterized by
rapidly changing technology and evolving standards. Our main competitors in
most product areas include UGS and PTC. We compete principally with Tecnomatix
Technologies, Ltd. in manufacturing process management. For our Design-centric
products, our main competitors include Autodesk, Inc., PTC, and others. In the
area of collaborative commerce, we also compete with several supply-chain
management software providers, as well as other enterprise software vendors,
including Agile Software Corporation, i2 Technologies, Inc., MatrixOne, Oracle,
SAP and Siebel Corporation. In addition, numerous specialist software
developers compete with us in niche applications. We compete in our various product lines on the basis of product features,
product coverage and optimization, price, openness, customized design,
marketing, sales and technical support. Our ability to compete successfully
depends on elements both within and outside our control, including successful
and timely development of new products, product performance and quality,
pricing, customer service, and industry trends. C. Organizational Structure Dassault Systèmes SA is the parent company of the Dassault Systèmes Group
with two primary functions: first, it provides certain centralized services to
all the companies within the Group and in this role operates in a fashion
similar to a holding company. Second, the parent company is also the largest
operating company of the Group, responsible for the development of our CATIA
and ENOVIA software and the CAA V5 platform. As the parent company for the Group, Dassault Systèmes SA defines the
Groups strategy and operating plans. The executive management team is located
at the parent Companys principal office in Suresnes, France, which is also the
headquarters for Dassault Systèmes. The parent company directs the following
activities from its principal office: finance, investor relations,
communications, legal, human resources, and information technology, as well as
our global research and development strategies and management of our strategic
partnership with IBM. The costs of providing centralized services are billed
back at their actual costs to the respective subsidiaries using these services.
The total amount charged back to subsidiaries was 1.5 million in 2003, 1.5
million in 2002 and 1.7 million in 2001. With respect to the assets of the
Group, the assets largely rest with the respective subsidiaries using such
assets for the development of software and services. 25




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The following table lists our principal operating subsidiaries and certain
additional information. Proportion of
    
    Country ofSubsidiary
    
    Ownership Interest
    
    OrganizationDelmia Corp.
    
    
    100
    %
    
    United StatesEnovia Corp.
    
    
    100
    %
    
    United StatesSmarTeam Corporation Ltd.
    
    
    100
    %
    
    IsraelSolidWorks Corporation.
    
    
    98.5
    %
    
    United StatesSpatial Corp.
    
    
    100
    %
    
    United States
 While our parent company accounted for 57% of total revenue, SolidWorks
was our only subsidiary that accounted for more than 10% of total revenue in
2003. SolidWorks revenue, which represents the total revenue of our
Design-centric segment, accounted for 18% of total revenue in 2003. The results
and activity of our Design-centric segment are discussed further below in Item
5  Executive Overview and Item 5  Results of Operations  Revenue and Operating
Income by Segment  Design-centric. For a list of our other principal direct
and indirect subsidiaries, see Note R to our consolidated financial statements. D. Property, Plant and Equipment. We partially own and partially lease our principal executive offices in
Suresnes outside Paris, France. We lease most of our other administrative,
research, production and distribution facilities, which are located principally
in France, the United States, Germany, Israel, Japan, Canada and the United
Kingdom. We believe that our existing facilities are adequate for our current
needs and that suitable additional or alternative space should be available in
the future on commercially reasonable terms as needed. We believe that we are not exposed to substantial risks relating to the
environment due to the nature of our business. On the contrary, our products
contribute to the protection of the environment since they are designed to
replace the construction of physical mock-ups and to reduce the environmental
issues that are common to all industries. We are insured under various global insurance policies, managed centrally.
These policies provide coverage for significant risks and activities related
to our operations, including damage to property, product liability, intellectual
property, directors and officers liability, and global electronic errors or
omissions. We believe that the guarantees provided for by these insurance
policies amount to sums proportionate to the risks involved. 
 Item 5: Operating and Financial Review and Prospects A. Operating Results. You should read the following discussion together with our consolidated
financial statements and the related notes included in this annual report on
Form 20-F. Summary Financial Results In 2003 total revenue decreased 2.5% to 754.8 million from 774.1 million
in 2002, but in constant currencies total revenue increased 5%. Software
revenue decreased 3.6% to 645.6 million, but increased 4% in constant
currencies. Service revenue increased 4.8% to 109.2 million in 2003 and
increased 13% in constant currencies. Process-centric revenue, accounting for
83% of our consolidated revenue, decreased 2.9% in 2003 to 629.1 million
(excluding 1.4 million of inter-segment sales) and included PDM revenue, which
increased 14.4% to 94.6 million. In constant currencies, Process-centric
revenue increased 2% and PDM revenue increased 21% in 2003. Design-centric
revenue, accounting for 17% of our consolidated revenue, amounted to 125.7
million in 2003 (excluding 0.4 million of inter-segment sales) compared to
126.4 million in 2002 (excluding 0.5 million of inter-segment sales). In
constant currencies, Design-centric revenue increased 17% in 2003. Operating
income totaled 212.7 million, representing an operating margin of 28.2% in
2003, compared to 203.0 million, representing an operating margin of 26.2% in
2002. Net income totaled 135.4 million or diluted net income per share of
1.18 in 2003, compared to 126.4 million or 1.09 per share in 2002,
representing an increase of 8.3% on a per share basis. Excluding amortization of intangibles incurred in business combinations
(acquisition costs), our net income for the year ended December 31, 2003,
totaled 140.4 million with diluted net income per share of 1.22, compared to 26




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136.0 million or 1.17 per share in 2002, representing an increase of
4.3% on a per share basis. We believe that this supplemental information is an
important indicator of operational strength and performance of our business and
is used by analysts, investors and other interested parties. However,
operating income, net income and diluted net income per share excluding
acquisition costs, as defined above, is not a U.S. generally accepted
accounting principles measurement and should not be considered as an
alternative to amounts reported under U.S. generally accepted accounting
principles. See  Results of Operations  Breakdown of Revenues and 
Consolidated Data. See our discussion of non-GAAP financial measures in Growth on a constant
currency basis and Results of Operations. Executive Overview We set two key objectives at the outset of 2003. The first was to
increase our market share within the PLM market. Our second objective for 2003
was to increase our operating margin before acquisition costs by approximately
one percentage point while also continuing to invest in growing our research
and development resources. We were pleased to accomplish these objectives. Market position.In U.S. dollars (used by industry consultants to measure
market share), our revenues increased 17% in 2003, leading to an estimated
market share gain of two percentage points to an estimated 23%. We were ranked
number one in PLM in 2002 with a market share of 21% and believe we continue to
be number one by a solid margin for 2003. Operating profitability.Our second key objective was to improve our
operating margin before acquisition costs by one percentage point in 2003.
This objective was achieved with our operating margin before acquisition costs
improving 1.3 percentage points to 29.0% for 2003, from 27.7% in 2002. And on
a constant currency basis, we also increased our operating margin before
acquisition costs by 1.0 percentage point. We achieved our objective by
focusing on improving the efficiency of our operations while continuing to
invest in our business. We increased average staffing by 3.5%, with a
strategic focus on increasing research and development. Our average staffing
in research and development increased 5.4% in 2003 and represented 49% of our
average employee base for 2003. Growth on a constant currency basis.The significant currency movements
in 2003 masked the underlying improvement in our level of activity. We
absorbed a seven-percentage point reduction in our revenue growth rate due to
the strengthening of the euro. As reported, total revenue decreased 2.5% to
754.8 million for 2003, with software revenue decreasing 3.6% to 645.6
million for 2003. However, total revenue and software revenue increased 5% and
4%, respectively, in constant currencies for 2003. More particularly, our PDM
business increased 21% and our Design-centric business increased 17% in
constant currencies. From a regional perspective, we experienced strong growth
in both the Americas and Asia, with revenues from the Americas growing 15% and
Asia growing 14% in constant currencies. We use constant currency revenue growth to evaluate our financial
performance in comparison to prior periods and as a measure of expected growth
in planning and in setting objectives for future periods. We believe this
measure is an important indicator of our progress and outlook because it
provides a better gauge of the level of change in business activity as it
eliminates any changes arising solely from currency fluctuations. The U.S.
dollar weakened 20% against the euro for 2003, with the U.S. dollar to euro
average exchange rate of $1.13 per euro for 2003, compared to $0.94 per euro
for 2002. The Japanese yen weakened by 11% versus the euro resulting in a
Japanese yen (JPY) to euro average exchange rate of JPY131 per euro for 2003
compared to JPY118 per euro for 2002. See Item 11  Foreign currency exchange
risk. The decreases in the value of the U.S. dollar and Japanese yen in 2003
negatively impacted our operating profit and earnings per share. The total
currency impact on operating profit before acquisition costs was 14.4 million
or 7% of total operating profit excluding acquisition costs, with 7.0 million
attributable to the U.S. dollar and 7.4 million arising from the Japanese yen.
On a constant currency basis and excluding acquisition costs, operating profit
increased 9% in 2003. 27




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Year ended December 31, 2003Operating
    
    Operating
    
    OperatingRevenue
    

    Expenses
    
    Income
    
    Margin(in millions of euro, except %)Information on a reported basis

    
    
    754.8
    

    
    
    542.1
    

    
    
    212.7
    
    
    28.2%Growth
    
    
    (2)%
    
    
    (5)%
    
    
    5%
    

    2 percentage pointsAmortization of intangibles
incurred in business
combinations
    
    
    0.0
    
    
    
    (5.9)

    
    
    5.9
    

    
    Excluding amortization of
intangibles incurred in
business combinations
    
    
    754.8
    
    
    
    536.2
    

    
    
    218.6
    

    
    29.0%Growth excluding amortization
of intangibles incurred in
business combinations
    
    
    (2)%
    
    

(4)%
    
    
    2%
    
    1 percentage pointUS$ impact
US$/ from $0.94 to $1.13
    
    
    45.1
    
    
    
    38.1
    

    
    
    7.0
    

    
    JPY/Won impact
JPY/ from JPY118 to JPY131
    
    
    12.0
    
    
    
    4.6
    

    
    
    7.4
    

    
    Total
    
    
    57.1
    
    
    
    42.7
    

    
    
    14.4
    

    
    Excluding amortization of
intangibles incurred in
business combinations and
currency exchange impact
    
    
    811.9
    
    
    
    578.9
    

    
    
    233.0
    

    
    28.7%Growth excluding amortization
of intangibles incurred in
business combination and
currency exchange impact
    
    
    5%
    
    
    3%
    
    
    9%
    
    1 percentage point
 Changes in the value of foreign currencies compared to the euro also had
an impact on our short-term assets, as those held in foreign currencies are
translated to euro at the end of period exchange rate. This impact is taken
into account in Financial revenue and other  net. In total, the weakening of
our major foreign currencies resulted in a 0.13 reduction in earnings per
share (EPS), excluding acquisition costs to 1.22 per diluted share. As a
result, we reported a growth rate for earnings per share, excluding acquisition
costs of 4% for 2003 rather than 15%. Year ended December 31, 2003Net Profit
    
    EPS(in millions of euro, except %and per share data)Information on a reported basis
    
    
    135.4
    
    
    
    1.18Growth
    
    
    7%
    
    
    8%Amortization of intangibles incurred in business combinations
    
    
    5.9
    
    
    
    0.05Tax on amortization of intangibles incurred
in business combinations
    
    
    (0.9)
    
    
    (0.01)Excluding amortization of intangibles
incurred in business combinations
    
    
    140.4
    
    
    
    1.22Growth excluding amortization of intangibles
incurred in business combinations
    
    
    3%
    
    
    4%Currency exchange impact on operating income
    
    
    14.4
    
    
    
    0.13Currency exchange impact on financial revenue and other
    
    
    8.1
    
    
    
    0.07Tax on currency exchange (tax rate = 35.7%)
    
    
    (8.0)
    
    
    (0.07)Total
    
    
    14.5
    
    
    
    0.13Excluding amortization of intangibles incurred in business
combinations and currency exchange impact
    
    
    154.9
    
    
    
    1.35Growth excluding amortization of intangibles incurred in
business combinations and currency exchange impact
    
    
    14%
    
    
    15%
 We calculate changes in revenues and expenses on a constant currency basis
by applying 2002 average market exchange rates to 2003 balances. We have used
the same methodology for the comparison of prior periods. For 2002, 28




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the average annual exchange rate for the U.S. dollar to euro was $0.94 to
1.00 and the average annual exchange rate for the Japanese yen to euro was
JPY118 to 1.00. For 2001, the average annual exchange rate for the U.S.
dollar to euro was $0.90 to 1.00 and the average annual exchange rate for the
Japanese yen to euro was JPY109 to 1.00. Quarterly Trends.Our revenue performance improved as 2003 progressed
with year over year growth comparisons improving with each quarter of the year.
We saw an improvement in revenue growth on an as reported basis and in
constant currencies. Revenue in the second half of the year increased 8%
compared to a 3% increase in the first half of the year, on a constant currency
basis. Year ended December 31, 20031st Quarter
    
    2nd Quarter
    
    3rd Quarter
    
    4th Quarter
    
    Full Year(Unaudited, in millions of euro, except %)Revenue
    
    
    169.4
    
    
    
    181.3
    
    
    
    176.3
    
    
    
    227.8
    
    
    
    754.8Growth
    
    
    (7)%
    
    
    (5)%
    
    
    0%
    
    
    2%
    
    
    (2)%US$ impact
    
    
    11.4
    
    
    
    12.8
    
    
    
    7.7
    
    
    
    13.2
    
    
    
    45.1JPY/Won impact
    
    
    2.6
    
    
    
    4.0
    
    
    
    3.6
    
    
    
    1.8
    
    
    
    12.0Revenue excluding currency exchange impact
    
    
    183.4
    
    
    
    198.1
    
    
    
    187.5
    
    
    
    242.8
    
    
    
    811.9Growth excluding currency exchange impact
    
    
    1%
    
    
    4%
    
    
    7%
    
    
    8%
    
    
    5%
 Our improvement was also reflected in our seat growth performance during
2003. For the full year, total seats licensed decreased 1%. However, while
seats licensed decreased 9% for the first half of the year, total seats
licensed increased 8% during the second half of the year. Recurring Revenue.An important attribute of our financial model is our
high percentage of recurring revenue. We have had, and continue to have, a
high level of recurring software revenue. In 2003, recurring revenue
represented 51% of our total software revenue, which in turn represented 86% of
total revenue. Financial Position.We continued to have a strong financial position,
with cash and short-term investments totaling 439.7 million at December 31,
2003. During the year, we added on a net basis 51.3 million to cash and
short-term investments. This figure is after cash dividends totaling 37.2
million and stock repurchases totaling 29.5 million in 2003. Economic and Other Business Indicators.A number of factors have an
influence on our revenue growth rate, including economic factors. The overall
economic environment has an impact on the level of activity of our businesses.
As a software company, we also look at overall information technology spending.
In addition, our customers are largely composed of manufacturing companies.
We, therefore, find it useful to look at industrial investment spending trends.
In Europe, which represented approximately 46% of our revenues in 2003,
industrial spending has trended down for two consecutive years and this clearly
had an impact on our results in the region. However, we are also a critical
tool for innovation and productivity gains for our customers. Therefore, in
the Americas, in spite of modest levels of investment spending in the U.S., for
example, in 2003, we had strong revenue growth of approximately 15% in constant
currencies. We have experienced strong revenue growth in Asia, in part
explained by the good level of industrial investment spending in Japan, and the
decision to invest in productivity gains that we bring to manufacturers. For
2003, business investment increased 2.8% in the U.S. and 8.7% in Japan, while
it declined 1.7% in France. Industrial production increased 0.3% in the U.S.,
3.2% in Japan, and 0.2% in Germany, while decreasing 0.8% in France for 2003.
Overall growth in the economy as measured by GDP was 3.1% in the U.S. and 2.3%
in Japan for 2003, while France grew only 0.1% and Germany decreased 0.1%. In addition to economic indicators, our level of business activity is also
affected by structural trends within the end markets we address. For example,
in the automotive and aerospace industries, spending decisions in part reflect
the timing of the introduction of new automotive processes or plans for new
aircraft programs. Financial Overview Revenue. Our total revenue is comprised of software licensing and service and other
revenue. Our primary source of revenue is derived from the licensing of our
software products, which accounted for 86%, 87% and 86% of our total revenue in
2003, 2002 and 2001, respectively. Our software solutions are marketed and
distributed principally by IBM, as well as through a network of other
distribution partners and a direct sales force for certain products. We
generate service revenue through the consulting and technical assistance we
provide to our customers. Revenue 29




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##### Table of Contents



generated through our marketing and distribution agreement with IBM
represented approximately 59% of our total revenue in 2003 compared with 61% in
2002 and 60% in 2001. See Item 4B: Business Overview  Sales and Marketing
and  Operating Results  Results of Operations  Breakdown of
Revenues. The royalties we receive from IBM for their distribution of CATIA,
ENOVIA, SMARTEAM and DELMIA products include both up-front license fees and
royalties related to periodic fees corresponding to either rental arrangements
or maintenance. We also sell our CATIA, ENOVIA, SMARTEAM and DELMIA products either
directly or through other partners. They are mainly licensed under one of two
payment structures: (i) rental licenses, for which the customer pays equal
periodic fees to keep the license active, and (ii) primary fee licenses, for
which the customer pays an initial fee (a primary fee). Customers who pay a
primary fee subsequently pay periodic fees (generally annual). For both forms
of license, periodic fees entitle the customer to corrective maintenance and
product updates without additional charge. Product updates include
improvements to existing products but do not cover new products. For a
breakdown of revenue between initial fees and periodic fees, see Note C to our
consolidated financial statements. Software licenses offered by SolidWorks require the payment of a one-time
fee. Access to upgrades and maintenance require payment of an annual
subscription fee. For software components sold by Spatial, we receive license and
maintenance fees as well as royalties on revenue derived from the sale of
software products including embedded Spatial components. Recurring software revenue represented 51%, 48% and 45% of total software
revenue in 2003, 2002 and 2001, respectively. Recurring software revenue is
comprised of rental fees (mainly to large customers) and maintenance fees. We generate service revenue mainly from consulting services in methodology
and engineering services. In addition, we generate service revenue from sales
activities as an IBM partner in France, Belgium and Switzerland, where we act
(through one of our French divisions and through our Swiss subsidiary) as IBMs
commercial partner for the sale of CATIA, ENOVIA and SMARTEAM licenses. We
record the commissions we receive from IBM for this activity as service
revenue. The division in charge of this activity also resells computer
hardware, but in this case we record only the gross margin from the sales as
service revenue. Expenses. Research and development expenses represented 29%, 29% and 28% of total
revenue in 2003, 2002 and 2001, respectively. Research and development
expenses primarily include personnel costs for specialists in software
architecture and various application fields such as mechanical design,
manufacturing, mechanical engineering and computer graphics, as well as for
specialists with significant experience and knowledge of our target industrial
sectors. Research and development expenses also include computer rental
expenses, the depreciation and cost of maintenance related to computer hardware
used in research and development, development tools, networking and
communication expenses. Costs for research and development of software are expensed when incurred,
if the analysis of technical criteria does not qualify them as a capital asset.
Since our founding in 1981, implementation of this accounting policy has
resulted in all such costs being expensed in the period in which they were
incurred. Marketing and sales expenses represented 22%, 22% and 22% of total revenue
in 2003, 2002 and 2001, respectively. Marketing and sales expenses are derived
principally from our marketing activities in support of IBM and the SolidWorks,
DELMIA, SMARTEAM and Spatial direct and indirect sales channels. We also incur
marketing and sales expenses from our activities as an IBM business partner in
France, Belgium and Switzerland. Marketing and sales expenses primarily
consist of personnel costs, travel expenses and marketing infrastructure costs,
such as computer and office rental expenses, as well as sales commissions. Amortization of intangibles incurred in business combinations includes
expenses for research and development projects that have not reached the
technical feasibility stage or are considered to have no future value.
Amortization of intangibles incurred in business combinations also includes
amortization of goodwill (prior to fiscal year 2002) and amortization of
technology acquired in connection with business combinations. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make certain
assumptions and judgments. Actual results may differ from these estimates
under different assumptions or conditions. 30




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We believe the following critical accounting policies, among others,
affect the more significant judgments and estimates used in the preparation of
our consolidated financial statements. Revenue recognition. We recognize revenue in accordance with American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions, Securities and
Exchange Commission (SEC) Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements (SAB-104) and other authoritative
guidance. Although we believe that we are currently in compliance with SOP
97-2, SOP 98-9 and SAB-104, the accounting profession continues to discuss
various provisions of these guidelines with the objective of providing
additional guidance on their future application. These discussions and the
issuance of new interpretations, once finalized, could lead to changes in our
revenue recognition policies. Our operating results and financial position may
be impacted by changes in these policies. See Note A to our consolidated
financial statements and Item 3  Risk Factors 
Risks Related to Our Business  Accounting standards and
rules, and the regulatory environment in general, have become increasingly
complex and are subject to change. As a result, changes in the applicable
standards, rules or interpretations may require us to modify our accounting
policies and business practices, which could adversely affect our results of
operations. Under our arrangement with IBM, royalties from products distributed by IBM
are recognized when IBM recognizes revenue and reports such revenue to us. The
reporting of IBM activity is subject to an annual audit and adjustment process,
whereby either party has the opportunity to correct differences that may have
occurred during the preceding year. Such differences generally result from
interim reporting which occasionally either overstates or understates the
number of software license transactions with a group or groups of end-user
customers. We monitor the possible differences based upon historical trends
and known specific situations, and defer the recognition of revenue by IBM
based upon its estimate of adjustments that will ultimately be made. Due to
the volume of revenues generated from our marketing and distribution
arrangement with IBM, significant audit adjustments could have a material
impact on our results of operations. Accounts receivable. Accounts receivable consist primarily of amounts due to us from our normal
business activities. We maintain an allowance for doubtful amounts to reflect
the expected uncollectibility of amounts receivable. These estimates are based
on bad debt write-offs, specific identification of probable bad debts based on
collection efforts, aging of accounts receivable and other known factors.
Actual results could differ from those estimates. Changes in these estimates
are recorded when known and could impact our operating results and financial
position. Taxes. We account for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes, which requires that deferred tax assets and liabilities be
recognized using enacted tax rates for the effect of temporary differences
between the book and tax bases of recorded assets and liabilities. SFAS No.
109 also requires that deferred tax assets be reduced by a valuation allowance
if it is more likely than not that some portion or all of the deferred tax
asset will not be realized. We evaluate regularly the realizability of our deferred tax assets by
assessing our valuation allowance and by adjusting the amount of such
allowance, if necessary. The factors used to assess the likelihood of
realization are our forecast of future taxable income and available tax
planning strategies that could be implemented to realize the net deferred tax
assets. We have used tax planning strategies to realize or renew net deferred
tax assets in order to avoid the potential loss of future tax benefits. In addition, we operate within multiple tax jurisdictions and are subject
to audit in these jurisdictions. These audits can involve complex issues,
which may require an extended period of time to resolve. In managements
opinion, adequate provisions for income taxes have been made for all years. Investments. We hold minority interests in and also grant loans to companies having
operations or technology in areas within our strategic focus, some of which are
publicly traded and have highly volatile share prices. We record an impairment
charge when we believe an investment or a loan has experienced a decline in
value that is other than temporary. Future adverse changes in market
conditions or poor operating results of these companies could result in 31




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##### Table of Contents



losses or an inability to recover the carrying value of the investments or
loans that may not be reflected in an investments current carrying value,
thereby possibly requiring an impairment charge in the future. New Accounting Pronouncements SFAS 132-R. In December 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, Employers Disclosures
about Pensions and Other Postretirement Benefits, an amendment of FASB
Statements No. 87, 88 and 106(SFAS 132-R). This Statement revises employers
disclosures about pension plans and other postretirement benefit plans. It
does not change the measurement or recognition of those plans required by FASB
Statements No. 87, Employers Accounting for Pensions,No. 88, Employers
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits,and No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions.This Statement retains the
disclosure requirements contained in the previously issued SFAS No. 132,
Employers Disclosures about Pensions and Other Postretirement Benefits,which
it replaces. It requires additional disclosures to those in the original
statement about the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. The required information should be provided separately for pension
plans and for other postretirement benefit plans. We have adopted the
disclosure provisions associated with domestic plans, effective December 31,
2003. We will adopt the disclosure provisions for foreign plans in the fiscal
year ending December 31, 2004, as required. Adoption of the provisions did not
and will not have an impact on our financial position or results of operations
for the years ended December 31, 2003 and 2004, respectively. FIN 46. The FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable
Interest Entities, in January 2003 and released a revised version of FIN 46 in
December 2003. FIN 46 requires an investor with a majority of the variable
interests in a variable interest entity to consolidate the entity. A variable
interest entity is an entity in which the equity investors do not have a
controlling interest or the equity investment at risk is insufficient to
finance the entitys activities without receiving additional subordinated
financial support. The consolidation requirements of FIN 46 are effective:
immediately for all variable interest entities created after January 31, 2003;
as of December 31, 2003 for special purposes entities created before February
1, 2003; and in the first quarter of 2004 for all other variable interest
entities. The application of the initial consolidation provisions of FIN 46 did not
have a material impact on our financial position or results of operations. We
do not expect the application of the remaining consolidation provisions of FIN
46, as required in the 2004 year, to have a material effect on our financial
statements. Results of Operations For the year ended December 31, 2003, we recorded revenue of 754.8
million and net income of 135.4 million, representing diluted net income per
share of 1.18. These results included acquisition costs of 5.9 million (5.0
million after tax). Excluding acquisition costs, our net income for the year
ended December 31, 2003, totaled 140.4 million with diluted net income per
share of 1.22. The table below sets forth key figures from our statements of
income. 32




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##### Table of Contents



Year ended December 31,2003
    
    2002
    
    2001(in millions of euro, except per share data)Revenue
    
    
    754.8
    
    
    
    774.1
    
    
    
    746.1Gross profit
    
    
    643.4
    
    
    
    653.3
    
    
    
    638.7Operating income
    
    
    212.7
    
    
    
    203.0
    
    
    
    162.6Net income
    
    
    135.4
    
    
    
    126.4
    
    
    
    88.7Basic weighted average
number of common shares
outstanding
    
    
    113.0
    
    
    
    114.1
    
    
    
    113.7Diluted weighted average
number of common shares
outstanding
    
    
    114.7
    
    
    
    116.2
    
    
    
    116.7Basic net income per share
    
    
    1.20
    
    
    
    1.11
    
    
    
    0.78Diluted net income per share.
    
    
    1.18
    
    
    
    1.09
    
    
    
    0.76Financial information
excluding amortization of
intangibles incurred in
business combinations(1)Operating income
    
    
    218.6
    
    
    
    214.1
    
    
    
    221.0Net income
    
    
    140.4
    
    
    
    136.0
    
    
    
    144.0Basic net income per share
    
    
    1.24
    
    
    
    1.19
    
    
    
    1.27Diluted net income per share
    
    
    1.22
    
    
    
    1.17
    
    
    
    1.23
   (1)
    
    We believe that this supplemental information is an important indicator
of operational strength and performance of our business and is used by
analysts, investors and other interested parties. However, operating
income, net income and diluted net income per share excluding amortization
of intangibles incurred in business combinations is not a U.S. generally
accepted accounting principles measurement and should not be considered as
an alternative to amounts reported under U.S. generally accepted
accounting principles. Amortization of intangibles incurred in business
combinations (acquisition costs) totaled 5.9 million in 2003 (5.0
after tax) compared with 11.1 million in 2002 (9.6 million after tax),
and consisted entirely of the amortization of acquired technology, and
58.4 million in 2001 (55.3 million after tax). 33




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##### Table of Contents



The table below sets forth the contribution of the Process-centric and
Design-centric segments to our revenue, gross profit, operating income and net
income (see Notes A and Q to our consolidated financial statements). Year ended December 31,2003
    
    2002
    
    2001(in millions of euro, except percentages)RevenueProcess-centric
    
    
    630.5
    
    
    
    83.5
    %
    
    
    649.4
    
    
    
    83.9
    %
    
    
    617.9
    
    
    
    82.8
    %Design-centric
    
    
    126.1
    
    
    
    16.7
    %
    
    
    126.9
    
    
    
    16.4
    %
    
    
    128.2
    
    
    
    17.2
    %Elimination
    
    
    (1.8
    )
    
    
    (0.2
    )%
    
    
    (2.2
    )
    
    
    (0.3
    )%Total
    
    
    754.8
    
    
    
    100.0
    %
    
    
    774.1
    
    
    
    100.0
    %
    
    
    746.1
    
    
    
    100.0
    %Gross profitProcess-centric
    
    
    530.3
    
    
    
    82.4
    %
    
    
    541.6
    
    
    
    82.9
    %
    
    
    522.4
    
    
    
    81.8
    %Design-centric
    
    
    114.4
    
    
    
    17.8
    %
    
    
    113.3
    
    
    
    17.3
    %
    
    
    116.3
    
    
    
    18.2
    %Elimination
    
    
    (1.3
    )
    
    
    (0.2
    )%
    
    
    (1.7
    )
    
    
    (0.2
    )%Total
    
    
    643.4
    
    
    
    100.0
    %
    
    
    653.3
    
    
    
    100.0
    %
    
    
    638.7
    
    
    
    100.0
    %Operating incomeProcess-centric
    
    
    175.4
    
    
    
    82.5
    %
    
    
    170.9
    
    
    
    84.2
    %
    
    
    126.6
    
    
    
    77.8
    %Design-centric
    
    
    37.3
    
    
    
    17.5
    %
    
    
    32.1
    
    
    
    15.8
    %
    
    
    36.0
    
    
    
    22.2
    %Total
    
    
    212.7
    
    
    
    100.0
    %
    
    
    203.0
    
    
    
    100.0
    %
    
    
    162.6
    
    
    
    100.0
    %Net incomeProcess-centric
    
    
    111.2
    
    
    
    82.1
    %
    
    
    104.2
    
    
    
    82.4
    %
    
    
    63.8
    
    
    
    72.0
    %Design-centric
    
    
    24.2
    
    
    
    17.9
    %
    
    
    22.2
    
    
    
    17.6
    %
    
    
    24.9
    
    
    
    28.0
    %Total
    
    
    135.4
    
    
    
    100.0
    %
    
    
    126.4
    
    
    
    100.0
    %
    
    
    88.7
    
    
    
    100.0
    %Financial information
excluding amortization
of intangibles incurred
in business
combinations(1)Operating incomeProcess-centric
    
    
    181.0
    
    
    
    82.8
    %
    
    
    181.8
    
    
    
    84.9
    %
    
    
    184.0
    
    
    
    83.3
    %Design-centric
    
    
    37.6
    
    
    
    17.2
    %
    
    
    32.3
    
    
    
    15.1
    %
    
    
    37.0
    
    
    
    16.7
    %Total
    
    
    218.6
    
    
    
    100.0
    %
    
    
    214.1
    
    
    
    100.0
    %
    
    
    221.0
    
    
    
    100.0
    %Net incomeProcess-centric
    
    
    116.1
    
    
    
    82.7
    %
    
    
    113.6
    
    
    
    83.5
    %
    
    
    118.2
    
    
    
    82.1
    %Design-centric
    
    
    24.3
    
    
    
    17.3
    %
    
    
    22.4
    
    
    
    16.5
    %
    
    
    25.8
    
    
    
    17.9
    %Total
    
    
    140.4
    
    
    
    100.0
    %
    
    
    136.0
    
    
    
    100.0
    %
    
    
    144.0
    
    
    
    100.0
    %
  (1)
    
    We believe that this supplemental information is an important indicator
of operational strength and performance of our business and is used by
analysts, investors and other interested parties. However, operating
income, net income and diluted net income per share excluding amortization
of intangibles incurred in business combinations is not a U.S. generally
accepted accounting principles measurement and should not be considered as
an alternative to amounts reported under U.S. generally accepted
accounting principles. Amortization of intangibles incurred in business
combinations (acquisition costs) totaled 5.9 million in 2003 (5.0
after tax) compared with 11.1 million in 2002 (9.6 million after tax),
and consisted entirely of the amortization of acquired technology, and
58.4 million in 2001 (55.3 million after tax). 34




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##### Table of Contents



The tables below set forth the breakdown of revenue by type of activity
and geographic region for the periods indicated. Breakdown of Revenue Year ended December 31,2003
    
    2002
    
    2001(in millions of euro)Revenue by activitySoftware revenue
    
    
    645.6
    
    
    
    669.9
    
    
    
    643.0Service and other revenue
    
    
    109.2
    
    
    
    104.2
    
    
    
    103.1Total
    
    
    754.8
    
    
    
    774.1
    
    
    
    746.1
 Year ended December 31,2003
    
    2002
    
    2001(in millions of euro)Revenue by geographic region(1)Europe(2)
    
    
    353.8
    
    
    
    374.5
    
    
    
    380.4North and South America(3)
    
    
    215.4
    
    
    
    224.0
    
    
    
    219.3Asia Pacific(3)
    
    
    185.6
    
    
    
    175.6
    
    
    
    146.4Total
    
    
    754.8
    
    
    
    774.1
    
    
    
    746.1
  (1)
    
    In our consolidated financial statements, we classify and state software
revenue by geographic region in two ways: (i) by the geographic location
of the end-user customer, and (ii) by the geographic location of our
business unit which records the transaction. See Note Q to our
consolidated financial statements. In the tables above, software revenue
is classified by the geographic location of the end-user customer, while
service and other revenue is classified by the location where the activity
is performed.(2)
    
    Germany and France account for most of our sales in Europe. See Note Q
to our consolidated financial statements.(3)
    
    Most of the revenue from North and South America comes from the United
States, and most of the revenue from the Asia Pacific region comes from
Japan. The tables below present certain financial data taken from our
consolidated financial statements expressed as a percentage of our total
revenue. Our revenue and the percentage of the various expense or other
revenue items of total revenue may not be comparable with those of our
competitors due to the distribution of our products by IBM. 35




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##### Table of Contents



Consolidated Data Year ended December 31,2003
    
    2002
    
    2001(as a % of total revenue)Total RevenueSoftware revenue
    
    
    85.5
    %
    
    
    86.5
    %
    
    
    86.2
    %Service and other revenue
    
    
    14.5
    
    
    
    13.5
    
    
    
    13.8Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenue:Software
    
    
    (2.9
    )
    
    
    (3.2
    )
    
    
    (2.8
    )Service and other
    
    
    (11.9
    )
    
    
    (12.4
    )
    
    
    (11.6
    )Total cost of revenue
    
    
    (14.8
    )
    
    
    (15.6
    )
    
    
    (14.4
    )Gross profit
    
    
    85.2
    
    
    
    84.4
    
    
    
    85.6Research, selling and administrative expenses:Research and development
    
    
    (28.6
    )
    
    
    (28.7
    )
    
    
    (28.0
    )Marketing and sales
    
    
    (21.5
    )
    
    
    (21.9
    )
    
    
    (22.0
    )General and administrative
    
    
    (6.2
    )
    
    
    (6.2
    )
    
    
    (5.9
    )Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    (5.9
    )Amortization of acquired technology
    
    
    (0.8
    )
    
    
    (1.4
    )
    
    
    (1.9
    )Total research, selling and administrative expenses
    
    
    (57.1
    )
    
    
    (58.2
    )
    
    
    (63.8
    )Operating income
    
    
    28.2
    
    
    
    26.2
    
    
    
    21.8Equity in net income of unconsolidated affiliates
 joint ventures
    
    
    0.1
    
    
    
    0.0
    
    
    
    0.0Financial revenue and other  net
    
    
    (0.1
    )
    
    
    0.4
    
    
    
    1.9Income before income taxes
    
    
    28.1
    
    
    
    26.6
    
    
    
    23.7Income tax expense
    
    
    (10.2
    )
    
    
    (10.3
    )
    
    
    (11.8
    )Net income
    
    
    17.9
    
    
    
    16.3
    
    
    
    11.9Financial information excluding amortization of
intangibles incurred in business
combinations:(1)Operating income
    
    
    29.0
    
    
    
    27.7
    
    
    
    29.6Net income
    
    
    18.6
    
    
    
    17.6
    
    
    
    19.3
   (1)
    
    We believe that this supplemental information is an important indicator
of operational strength and performance of our business and is used by
analysts, investors and other interested parties. However, operating
income, net income and diluted net income per share excluding amortization
of intangibles incurred in business combinations is not a U.S. generally
accepted accounting principles measurement and should not be considered as
an alternative to amounts reported under U.S. generally accepted
accounting principles. Amortization of intangibles incurred in business
combinations (acquisition costs) totaled 5.9 million in 2003 (5.0
million after tax) (and consisted entirely of the amortization of acquired
technology) compared with 11.1 million in 2002 (9.6 million after tax)
and 58.4 million in 2001 (55.3 million after tax). 36




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##### Table of Contents



Process-centric Consolidated Data Year ended December 31,2003
    
    2002
    
    2001(as a % of Process-centric revenue)Revenue:Software revenue
    
    
    82.5
    %
    
    
    83.7
    %
    
    
    83.3
    %Service and other revenue
    
    
    17.5
    
    
    
    16.3
    
    
    
    16.7Total Process-centric revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenue:Software
    
    
    (1.6
    )
    
    
    (1.7
    )
    
    
    (1.4
    )Service and other
    
    
    (14.2
    )
    
    
    (14.8
    )
    
    
    (14.0
    )Total cost of revenue
    
    
    (15.9
    )
    
    
    (16.6
    )
    
    
    (15.4
    )Gross profit
    
    
    84.1
    
    
    
    83.4
    
    
    
    84.6Research, selling and administrative expenses:Research and development
    
    
    (30.6
    )
    
    
    (29.9
    )
    
    
    (29.5
    )Marketing and sales
    
    
    (18.2
    )
    
    
    (18.8
    )
    
    
    (19.0
    )General and administrative
    
    
    (6.7
    )
    
    
    (6.7
    )
    
    
    (6.2
    )Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    (7.0
    )Amortization of acquired technology
    
    
    (0.9
    )
    
    
    (1.7
    )
    
    
    (2.3
    )Total research, selling and administrative expenses
    
    
    (56.3
    )
    
    
    (57.1
    )
    
    
    (64.1
    )Operating income
    
    
    27.8
    
    
    
    26.3
    
    
    
    20.5Equity in net income of unconsolidated affiliates  joint
ventures
    
    
    0.1
    
    
    
    0.0
    
    
    
    0.0Financial revenue and other  net
    
    
    0.0
    
    
    
    0.2
    
    
    
    1.8Income before income taxes
    
    
    27.9
    
    
    
    26.5
    
    
    
    22.3Income tax expense
    
    
    (10.3
    )
    
    
    (10.5
    )
    
    
    (12.0
    )Net income
    
    
    17.6
    
    
    
    16.0
    
    
    
    10.3Financial information excluding amortization of
intangibles incurred in business
combinations:(1)Operating income
    
    
    28.7
    
    
    
    28.0
    
    
    
    29.8Net income
    
    
    18.4
    
    
    
    17.5
    
    
    
    19.1
   (1)
    
    We believe that this supplemental information is an important indicator
of operational strength and performance of our business and is used by
analysts, investors and other interested parties. However, operating
income, net income and diluted net income per share excluding amortization
of intangibles incurred in business combinations is not a U.S. generally
accepted accounting principles measurement and should not be considered as
an alternative to amounts reported under U.S. generally accepted
accounting principles. 37




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##### Table of Contents



Design-centric Consolidated Data Year ended December 31,2003
    
    2002
    
    2001(as a % of Design-centric revenue)Revenue:Software revenue
    
    
    99.8
    %
    
    
    99.7
    %
    
    
    100.0
    %Service and other revenue
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.0Total Design-centric revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenue:Software
    
    
    (9.3
    )
    
    
    (10.7
    )
    
    
    (9.3
    )Service and other
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Total cost of revenue
    
    
    (9.3
    )
    
    
    (10.7
    )
    
    
    (9.3
    )Gross profit
    
    
    90.7
    
    
    
    89.3
    
    
    
    90.7Research, selling and administrative expenses:Research and development
    
    
    (18.5
    )
    
    
    (21.5
    )
    
    
    (20.8
    )Marketing and sales
    
    
    (38.2
    )
    
    
    (38.0
    )
    
    
    (36.7
    )General and administrative
    
    
    (4.2
    )
    
    
    (4.4
    )
    
    
    (4.4
    )Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    (0.8
    )Amortization of acquired technology
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    0.0Total research, selling and administrative expenses
    
    
    (61.1
    )
    
    
    (64.0
    )
    
    
    (62.6
    )Operating income
    
    
    29.6
    
    
    
    25.3
    
    
    
    28.1Equity in net income of unconsolidated affiliates  joint
ventures
    
    
    0.0
    
    
    
    
    
    
    
    0.0Financial revenue and other  net
    
    
    (0.8
    )
    
    
    1.4
    
    
    
    2.3Income before income taxes
    
    
    28.7
    
    
    
    26.7
    
    
    
    30.4Income tax expense
    
    
    (9.6
    )
    
    
    (9.2
    )
    
    
    (11.0
    )Net income
    
    
    19.2
    
    
    
    17.5
    
    
    
    19.4Financial information excluding amortization of
intangibles incurred in business
combinations:(1)Operating income
    
    
    29.8
    
    
    
    25.5
    
    
    
    28.8Net income
    
    
    19.3
    
    
    
    17.6
    
    
    
    20.1
   (1)
    
    We believe that this supplemental information is an important indicator
of operational strength and performance of our business and is used by
analysts, investors and other interested parties. However, operating
income, net income and diluted net income per share excluding amortization
of intangibles incurred in business combinations is not a U.S. generally
accepted accounting principles measurement and should not be considered as
an alternative to amounts reported under U.S. generally accepted
accounting principles. 2003 versus 2002 Consolidated Information Total revenue. Total revenue was 754.8 million in 2003, compared to 774.1 million in
2002. Total revenue was comprised of software revenue of 645.6 million,
representing 86% of total revenue, and service revenue of 109.2 million,
representing 14% of total revenue. Process-centric revenue totaled 629.1
million or 83% of total revenue and included PDM revenue of 94.6 million.
Design-centric revenue totaled 125.7 million or 17% of total revenue in 2003. As reported, total revenue decreased 2.5% but on a constant currency
basis, total revenue increased 5% in 2003 compared to 2002, reflecting strong
growth in our PDM and Design-centric businesses which grew 21% and 17%,
respectively, in constant currencies. Total revenue by geographic region.As a percentage of 2003 total
revenue, Europe represented 46%, the Americas accounted for 29% and Asia
represented 25%. As a percentage of 2002 total revenue, Europe represented
48%, the Americas accounted for 29% and Asia represented 23%. Revenue declined 5.5% in Europe in 2003 as we faced weak market conditions
throughout the year. In comparison, revenues decreased 1.5% in 2002 in Europe
as the economy began to weaken in the middle of the year, 38




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lagging the downturn in the U.S. economy. In Europe, software revenue
declined 8% in 2003, largely reflecting weaker performance in our
Process-centric segment while service revenue was up 7% reflecting an increase
in PLM consulting projects. For the full year revenue declined 3.8% in the Americas. In constant
currencies, the Americas increased 15% in 2003. Contributing to the growth in
constant currencies were stronger performances both from our Process-centric
and Design-centric businesses. The United States is our largest market in the
Americas region. Revenue increased 5.7% in Asia in 2003 and 14% in constant currencies,
reflecting good performances by both our Process-centric and Design-centric
businesses. Software revenue. Software revenue totaled 645.6 million in 2003,
compared to 669.9 million in 2002, representing a decrease of 3.6%. On a
constant currency basis, software revenue increased 4% in 2003 primarily
reflecting year over year growth in our Design-centric segment and in our PDM
portion of the Process-centric segment. Recurring software revenue. Recurring software revenue totaled 332.0
million in 2003, compared to 320.1 million in 2002, representing an increase
of 3.7%. While total software revenue decreased in 2003, compared to 2002,
recurring software revenue increased reflecting the increase in the installed
workstation base of the Process-centric segment and to the growing share of
maintenance fees in the Design-centric segment. Recurring software revenue
represented 51% of total software revenue in 2003, compared to 48% in 2002. Seat licensing and pricing. In 2003 a total of 57,524 CATIA and
SolidWorks seats were licensed. CATIA seats licensed totaled 32,163 in 2003,
representing a decrease of 6.3% compared to 34,308 CATIA seats licensed in
2002. SolidWorks seats licensed in 2003 increased 7.3% to 25,361, compared to
23,626 in 2002. CATIA Version 5 seats represented 74% of total CATIA seats licensed in
2003, compared to 59% in 2002. The average CATIA Version 5 end-user price per
seat decreased 1%, but in constant currencies increased 7% as we added more
functions with the release of CATIA Version 5 Release 11 and Release 12 during
2003. The average CATIA end-user price per seat in 2003 decreased 10%, with 7
percentage points of the decrease attributable to unfavorable exchange rates.
In constant currencies, the average CATIA end-user price per seat decreased 3%.
This decrease was entirely due to the increased proportion of the Version 5
licenses sold in 2003, compared to 2002. The average SolidWorks end-user price per seat in U.S. dollars increased
7% in 2003. This increase reflected the favorable impact of both geographic
and product mix changes. SolidWorks Office and Office Professional represented
approximately 48% of total seats licensed in 2003. Service revenue. Service revenue totaled 109.2 million in 2003, compared
to 104.2 million in 2002, representing an increase of 4.8%. In constant
currencies, service revenue increased 13%. We experienced an increase in PLM
consulting projects. Gross profit. Gross profit totaled 643.4 million in 2003, compared to
653.3 million in 2002, representing a decrease of 1.5%. The gross profit
margin for software in 2003 was similar to 2002, at 96.6% in 2003, compared to
96.4% in 2002. The gross profit margin for services increased significantly in
2003 to 17.8%, compared to 7.5% in 2002. The improvement in the gross profit
margin for services is primarily attributable to a higher percentage of
consulting assignments in 2003 as a proportion of total service and other
revenue. Operating expenses. Summary. The Companys objective in 2003 was to limit operating expense
growth in light of the general weak business climate, while continuing to
invest in critical research and development staffing. In 2003, operating
expenses were comprised of (i) research and development costs of 215.6
million, (ii) marketing and sales costs of 162.4 million and (iii) general and
administrative expenses of 46.8 million. Operating expenses totaled 424.8
million in 2003, compared to 439.1 million in 2002, representing a decrease of
3.3%. Total expenses, including cost of revenue of 111.4 million and
operating expenses of 424.8 million, totaled 536.2 million in 2003. In
constant currencies, total expenses increased 3.4%, tracking closely average
headcount growth of 3.5% for 2003. The composition of operating expenses by
currency was approximately as follows: 56% euro, 36% U.S. dollars and 8%
Japanese yen. Research and development expenses. Research and development expenses
totaled 215.6 million in 2003, compared to 221.6 million in 2002,
representing a 2.7% decrease. The additional costs resulting from the 5.4%
increase in average headcount were more than offset by the decrease in research
and development expenses as a result 39




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##### Table of Contents



of the weakening of the U.S. dollar in 2003. On December 31, 2003, the
total headcount in research and development was 2,025 employees, representing
49.5% of total employees, compared to 48.1% at December 31, 2002. Research and
development expenses represented 28.6% of total revenue in 2003, similar to
2002. See the discussion under Item 5C: Research and Development, Patents
and Licenses  Research and Development, below. Marketing and sales expenses. Marketing and sales expenses totaled 162.4
million in 2003, compared to 169.7 million in 2002, representing a decrease of
4.3%. Marketing and sales average headcount growth was 1.8% in 2003,
reflecting selective hiring. These higher staffing expenses were more than
offset by the impact of a stronger euro on our non-euro denominated marketing
and sales expenses. On December 31, 2003, the total headcount in marketing and
sales was 1,763 employees, representing 43.1% of total employees, compared to
44.2% at December 31, 2002. Marketing and sales expenses represented 21.5% of
total revenue in 2003, compared to 21.9% in 2002. General and administrative expenses. General and administrative expenses
totaled 46.8 million in 2003, compared to 47.9 million in 2002, representing
a decrease of 2.6%. In 2003, our average headcount increased 1.7% and we also
incurred higher legal fees. These higher expenses were more than offset by the
impact of a stronger euro on our non-euro denominated general and
administrative expenses. General and administrative expenses represented 6.2%
of total revenue in 2003, unchanged from 2002. Amortization of intangibles incurred in business combinations
(acquisition costs). Acquisition costs totaled 5.9 million in 2003,
compared to 11.1 million in 2002, representing a decrease of 46.6%. This
decrease reflects the completion of the amortization of acquisition costs
related to several acquisitions. Operating income and operating margin. Operating income was 212.7 million in 2003, compared to 203.0 million in
2002. Operating income excluding acquisition costs increased to 218.6 million
in 2003 or 29.0% of total revenue, compared to 214.1 million or 27.7% in 2002.
See Item 11: Quantitative and Qualitative Disclosures About Market Risk. Financial revenue and other, net. Financial revenue and other totaled (0.9) million in 2003, compared to
2.5 million in 2002. The decrease in financial revenue and other primarily
reflected the revaluation of assets denominated in U.S. dollars. Specifically,
financial revenue and other in 2003 was comprised of net financial revenue of
10.1 million, exchange losses on accounts receivables of (8.1) million and
other losses of (2.8) million, including an impairment charge of 1.7 million.
Our average balance of cash and short-term investments increased in 2003. At
December 31, 2003, cash and short-term investments totaled 439.7 million,
compared to 388.4 million at December 31, 2002. See Note D to our
consolidated financial statements. Income tax expense. Income tax expense totaled 76.9 million in 2003, compared to 79.4
million in 2002. The effective tax rate in 2003 was 36.2%, compared to 38.6%
in 2002. The decrease in the effective tax rate between 2003 and 2002 was
largely attributable to reduced losses of our SmarTeam subsidiary, which
benefits from certain tax exemptions. See Note E to our consolidated financial
statements. Net income. Net income was 135.4 million in 2003, compared to 126.4 million in 2002.
Excluding acquisition costs, net income increased 3.3% to 140.4 million in
2003, compared to 136.0 million in 2002. Earnings per share. Diluted net income per share was 1.18 in 2003, compared to 1.09 per
share in 2002. Excluding acquisition costs, diluted net income per share
increased 4.3% to 1.22 in 2003, compared to 1.17 per share in 2002 and
reflected 0.13 per diluted share negative impact from currency fluctuations. 40




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##### Table of Contents



Revenue and Operating Income by Segment Process-centric. Summary. Overall, revenue results for the Process-centric segment
reflected in large measure the slowdown persisting in Europe throughout 2003.
Our PDM business performed well, with revenue increasing 14.4%, and 21% on a
constant currency basis for 2003. While total CATIA licenses declined in 2003,
we saw positive year over year growth trends in both the third and fourth
quarter of the year. In addition, CATIA Version 5 sales increased and pricing
was generally stable on a constant currency basis. Revenue. Revenue for the Process-centric segment, including PDM revenue,
totaled 630.5 million in 2003 (including 1.4 million of inter-segment sales)
compared with 649.4 million in 2002 (including 1.7 million of inter-segment
sales). Revenue decreased 2.9%, but on a constant currency basis, revenue
increased 2%, primarily reflecting growth in our PDM business. PDM revenue on
a stand-alone basis increased 14.4% to 94.6 million, up from 82.7 million in
2002 and increased 21% on a constant currency basis. Nearly all service revenue was generated by the Process-centric segment
(excluding inter-segment sales) in 2003 and 2002. See  Consolidated
Information  Service revenue above. Operating income. Operating income from the Process-centric segment
totaled 175.4 million in 2003, compared with 170.9 million in 2002.
Operating income, excluding acquisition costs, amounted to 181.0 million in
2003, compared with 181.8 million in 2002. Operating income, excluding
acquisition costs, represented 28.7% of revenue for this segment in 2003,
compared to 28.0% in 2002. The increase primarily reflected our focus on
increasing the efficiency of our consulting services for PLM as well as cost
control initiatives. Design-centric. Summary. Excluding the impact of currency fluctuations, we believe our
Design-centric segment showed strong year over year improvement in both revenue
and operating income. In U.S. dollars, the functional reporting currency for
our Design-centric business, revenue grew 19% in 2003, compared to 2002. This
improvement reflected revenue growth in all three geographic regions. In
addition, both unit growth and pricing trends were positive in 2003, with the
number of units sold increasing 7% and the average end-user price per seat
rising 7% in U.S. dollars. Notwithstanding this strong performance, the
decline in the value of the U.S. dollar in 2003 compared to 2002 more than
offset the underlying revenue growth. At the operating income level, the operating margin showed good growth, as
revenue growth outpaced operating expense growth, resulting in a 4.3 percentage
point improvement in the operating margin. At the operating income level, the
negative impact of a weaker U.S. dollar at the revenue level is offset by the
favorable impact of translating U.S. dollar-denominated expenses into euro. Revenue. Revenue in the Design-centric segment was 126.1 million in 2003
(including 0.4 million of inter-segment sales), compared with 126.9 million
in 2002 (including 0.5 million of inter-segment sales). The decrease in
revenue net of inter-segment sales was due to the lower U.S. dollar to euro
exchange rate. On a constant currency basis, revenue increased 17% in 2003.
Software revenue represented 100% of total Design-centric revenue (after
inter-segment eliminations) in 2003 and 2002. Operating income. Operating income for the Design-centric segment
amounted to 37.3 million in 2003, compared with 32.1 million in 2002.
Operating income, excluding acquisition costs, amounted to 37.6 million in
2003, compared with 32.3 million in 2002. Operating income, excluding
acquisition costs, represented 29.8% of total segment revenue in 2003, compared
with 25.5% in 2002. 2002 versus 2001 Consolidated Information Total revenue. Revenue increased 3.8% to 774.1 million in 2002 compared with 746.1
million in 2001. On a constant currency basis, total revenue increased 7% in
2002. Specifically, our revenue was impacted by the decrease in the value of
the U.S. dollar, our principal invoicing currency outside the euro-zone, which
negatively impacted growth in consolidated revenue by 2 percentage points. The
decrease in the value of the U.S. dollar also led to a 2 percentage 41




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##### Table of Contents



point decrease in our expenditures. In addition, the Japanese yen, which
is our second most important invoicing currency outside the euro-zone,
accounted for a 1 percentage point decrease in the growth in consolidated
revenue. Software revenue.Software revenue increased 4.2% to 669.9 million in
2002 compared with 643.0 million in 2001. This increase can be attributed
principally to a 5.6% growth in software revenue (excluding inter-segment
sales) in our Process-centric segment. Process-centric growth benefited from
the strong performance of our PDM software solutions, which reported a 25%
increase in revenue, and from the strengthening of Version 5 including new
functionalities aimed at broadening our PLM offering. Software revenue (excluding inter-segment sales) in the Design-centric
segment decreased by 1.4% to 126.4 million in 2002 which reflected primarily
the weak economic environment, as well as unfavorable exchange rates. Software
revenue represented 100% of total Design-centric revenue (excluding
inter-segment sales) in both 2002 and 2001. Recurring software revenue.Recurring software revenue increased 9.7% to
320.1 million in 2002 compared to 291.8 million in 2001. Recurring software
revenue represented 48% of software revenue in 2002 compared with 45% in 2001.
The contribution of recurring software revenue to total software revenue is
growing largely due to the continuous increase in the installed workstation
base of the Process-centric segment and to the growing share of recurring
revenue fees in the Design-centric segment. Service revenue.Service revenue increased 1.2% to 104.2 million in
2002, compared with 103.1 million in 2001. This increase was lower than our
growth in sales of software in the Process-centric segment because part of the
services team was directed to develop new Version 5 methodologies as Best
Practices for our PLM solutions. Total revenue by geographic region.The growth in total revenue was 2.1%
in the Americas and the decrease in total revenue was 1.5% in Europe.
Performance in these two regions was negatively impacted by the slower economic
environment. In addition, in the Americas, growth was negatively impacted by
about 5 percentage points because of the decrease in value of the U.S. dollar
against the euro. Revenue from the Asia-Pacific region increased by 20.0% in
euro in 2002, despite the strong impact of the Japanese yen decrease
(approximately 10 percentage points of growth). This growth resulted from
continued strong interest in our products and on-going sales and marketing
efforts despite the crisis of recent years. Gross profit. Gross profit increased 2.3% to 653.3 million in 2002
compared with 638.7 million in 2001. This increase reflects the rise in
revenue, which was partially offset by a higher cost of sales principally from
consulting service activities. Gross profit for services represented 7.5% of
services revenue in 2002 compared with 16.0% in 2001 due to our increased
investment in new Version 5 methodologies as Best Practices for our PLM
solutions. Gross margin decreased from 85.6% in 2001 to 84.4 % in 2002.
Software cost of revenue represented 3.6% of software revenue in 2002 compared
to 3.2% in 2001, reflecting an increase in investment in third-party component
software. Operating expenses. Research and development expenses. Research and development expenses
increased by 5.9% to 221.6 million in 2002 compared with 209.2 million in
2001. This increase was due to the 11.2% increase in average research and
development staff devoted to the on-going development of the V5 architecture
and its related PLM software applications. These increases were partially
offset by the lower relative value of the U.S. dollar and cost control
measures. As a percentage of total revenue, research and development expenses
increased to 28.7% in 2002, compared with 28.0% in 2001. On December 31, 2002,
the total headcount involved in research and development and production
represented 48.1% of our total workforce, compared with 46.7% at the end of
2001. Marketing and sales expenses. Marketing and sales expenses increased by
3.2% to 169.7 million in 2002, compared with 164.3 million in 2001. This
increase is due to a 6% increase in average sales and marketing headcount to
support sales growth, partially offset by a lower U.S. dollar and cost cutting
initiatives. The growth in marketing and sales expenses includes our
investment in connection with our agreement with IBM to share marketing and
publicity expenses to market CATIA, ENOVIA and SMARTEAM. See Item 4B:
Business Overview  Sales and Marketing. Marketing and sales expenses
represented 21.9% of total revenue in 2002, compared to 22.0% in 2001. General and administrative expenses. General and administrative expenses
increased 8.4% to 47.9 million in 2002, compared with 44.2 million in 2001,
and represented 6.2% of total revenue in 2002, compared with 5.9% in 2001. The
increase reflected an increase in professional fees and insurance fees, the
impact of 2001 and 2002 acquisitions and a 4% increase in average headcount
excluding the impact of 2001 and 2002 acquisitions. 42




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Amortization of intangibles incurred in business combinations
(acquisition costs). Acquisition costs amounted to 11.1 million in 2002,
compared with 58.4 million in 2001. The decrease was due to our adoption of
SFAS 141 as of January 1, 2002, pursuant to which goodwill is no longer
amortized. Operating income and operating margin. Our operating income was 203.0 million in 2002, compared with 162.6
million in 2001. Operating income excluding acquisition costs amounted to
214.1 million in 2002, or 27.7% of net revenue, compared with 221.0 million
in 2001, or 29.6% of net revenue, a decrease of 3.1%. This decrease is due
mainly to the negative impact of the decrease in the value of the Japanese yen
and the lower than anticipated revenue resulting from the significant slowdown
in the business environment, particularly in the second half of 2002, which was
partially offset by cost control initiatives. See Item 11: Quantitative and
Qualitative Disclosures About Market Risk. Financial revenue, investment in equity and other  net. Financial revenue, investment in equity and other  net amounted to 2.8
million in 2002, compared with 14.1 million in 2001. Our average cash
position increased in 2002, particularly at Dassault Systèmes, the parent
company, and at SolidWorks. At December 31, 2002, cash and cash equivalents
amounted to 388.4 million. The decrease in financial revenue, investment in
equity and other  net primarily reflects the revaluation of U.S. dollar and
Japanese yen denominated assets, the decrease in interest rates and a 3.1
million charge related to our investment in PlanetCad. See Note D to our
consolidated financial statements. Income tax expenses. Income tax expense. Income tax expense amounted to 79.4 million in 2002,
compared with 87.9 million in 2001. The decrease in effective tax rate
between 2002 and 2001 came from the approximately 1 percentage point decrease
in the French statutory income tax rate and the improvement of the results of
our SmarTeam subsidiary. See Note E to our consolidated financial statements. Net income. We realized net income of 126.4 million in 2002, compared with 88.7
million in 2001. Excluding acquisition costs, net income amounted to 136.0
million in 2002, compared with 144.0 million in 2001, a decrease of 5.6%. Earnings per share. We realized diluted net income per share of 1.09 for the year ended
December 31, 2002, compared with 0.76 for the year ended December 31, 2001.
Excluding acquisition costs, our diluted net income per share amounted to 1.17
in 2002, compared with 1.23 in 2001, a decrease of 4.9%. Revenue and Operating Income by Segment Process-centric. Revenue. Revenue for the Process-centric segment, including PDM revenue,
increased 5.1% to 649.4 million in 2002 (including 1.7 million of
inter-segment sales) compared with 617.8 million in 2001. PDM revenue on a
stand-alone basis increased 25% to 82.7 million, up from 65.9 million in
2001. Software revenue for the Process-centric segment increased 5.6% to 543.6
million in 2002, compared with 514.8 million in 2001. This increase in
software revenue mainly reflected the strong growth in software revenue from
ENOVIA and SMARTEAM. A total of 34,308 CATIA licenses were sold in 2002 compared with 33,962
CATIA licenses in 2001, a 1.0% increase. Sales of CATIA V5 licenses increased
substantially during 2002, with CATIA 5 licenses accounting for 59% of CATIA
licenses sold in 2002 compared with 36% in 2001. Following the release of
CATIA 5R9 in June 2002 and V5R10 in October 2002, CATIA 5 licenses sold during
the fourth quarter 2002 represented 67% of the overall CATIA license sales.
The average CATIA license price declined 5% during 2002 to 15,394. The
decrease in the average price per seat in 2002 primarily reflected the
increased proportion of the Version 5 licenses sold in 2002 compared to 2001,
since the price per Version 5 license is lower than Version 4 V4, due to a
still less mature product mix. The change in the V5 to V4 proportion had an
unfavorable effect on the price, which was partly offset by a higher price per
CATIA Version 5 license. V5 price per seat has increased approximately 9%
since 2001 to 43




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##### Table of Contents



13,129, reflecting the strong growth of our V5 product solutions. In
addition, the lower U.S. dollar to euro exchange rate also contributed to the
decrease in the average price per CATIA seat, accounting for 3 percentage
points of the 5% decrease. During 2002, we continued our investment in PLM. We introduced three new
releases during the year, including V5R8 in February 2002, V5R9 in June 2002
and V5R10 in October 2002. Commencing with V5R9, our new releases cover our
CATIA, DELMIA, ENOVIA and now SMARTEAM brands. Spatial announced its 3D ACIS
Modeler Version 8.0 in May 2002. Services revenue was generated entirely by the Process-centric segment
(excluding inter-segment sales) in 2002 and 2001. See 2002 versus 2001 
Consolidated Information  Service revenue above. Operating income. Operating income from the Process-centric segment
totaled 170.9 million in 2002, compared with 126.5 million in 2001.
Operating income, excluding acquisition costs, amounted to 181.8 million in
2002, compared with 184.0 million in 2001, a 1.2% decrease. Operating income,
excluding acquisition costs, represented 28.0% of revenue for this segment in
2002, compared to 29.8% in 2001. This decrease principally reflected lower
than anticipated revenue resulting from the significant slowdown in the
business environment particularly in the second half of 2002, which was
partially offset by cost control initiatives. Design-centric. Revenue. Revenue in the Design-centric segment was 126.9 million in 2002
(including 0.5 million of inter-segment sales), compared with 128.2 million
in 2001. The decrease in revenue net of inter-segment sales was mainly due to
the difficult market conditions existing in the Design-centric market,
reflecting the weak overall economic environment. In addition, the lower U.S.
dollar exchange rate contributed to the decrease in revenue. The number of
licenses sold by SolidWorks decreased 9.8% to 23,626 licenses in 2002, compared
with 26,183 licenses in 2001. Operating income. Operating income for the Design-centric segment
amounted to 32.1 million in 2002, compared with 36.0 million in 2001.
Operating income, excluding acquisition costs, amounted to 32.3 million in
2002, compared with 37.0 million in 2001. Operating income, excluding
acquisition costs, represented 25.5% of total segment revenue in 2002, compared
with 28.8% in 2001, reflecting higher software costs as well as a 2.2% increase
in other operating expenses (excluding acquisition costs). In 2002, SolidWorks continued to invest in research and development and
intensified its efforts in sales and marketing. These expenses increased
slightly by 2.4% and 2.6% respectively, from 2001 to 2002. Analysis of Quarterly Results The tables below present certain financial information for 2003 and 2002.
This information comes from our unaudited quarterly consolidated financial
statements, which are prepared according to generally accepted accounting
principles in the United States and on a comparable basis with our annual
audited consolidated financial statements. In the opinion of management, the
quarterly financial information includes only the normal adjustments recurring
and necessary for a fair presentation of the information. Operating income for
any given quarter is not necessarily representative of results for any future
period and should not be used as an indication of future results. 44




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Unaudited Quarterly Data 2003
    
    2002Dec. 31
    
    Sept. 30
    
    June 30
    
    Mar. 31
    
    Dec. 31
    
    Sept. 30
    
    June 30
    
    Mar. 31(in millions of euro or shares, except for amounts per share which are expressed in euro)Revenue:Software revenue
    
    
    196.5
    
    
    
    152.2
    
    
    
    151.8
    
    
    
    145.1
    
    
    
    194.4
    
    
    
    149.5
    
    
    
    166.7
    
    
    
    159.3Service and other revenue
    
    
    31.3
    
    
    
    24.1
    
    
    
    29.5
    
    
    
    24.3
    
    
    
    30.0
    
    
    
    26.4
    
    
    
    24.6
    
    
    
    23.2Total revenue
    
    
    227.8
    
    
    
    176.3
    
    
    
    181.3
    
    
    
    169.4
    
    
    
    224.4
    
    
    
    175.9
    
    
    
    191.3
    
    
    
    182.5Cost of revenue:Software
    
    
    (5.2
    )
    
    
    (5.1
    )
    
    
    (5.6
    )
    
    
    (5.8
    )
    
    
    (6.4
    )
    
    
    (6.3
    )
    
    
    (4.8
    )
    
    
    (6.9
    )Service and other
    
    
    (23.8
    )
    
    
    (19.4
    )
    
    
    (24.6
    )
    
    
    (21.9
    )
    
    
    (28.2
    )
    
    
    (23.9
    )
    
    
    (23.5
    )
    
    
    (20.8
    )Total cost of revenue
    
    
    (29.0
    )
    
    
    (24.5
    )
    
    
    (30.2
    )
    
    
    (27.7
    )
    
    
    (34.6
    )
    
    
    (30.2
    )
    
    
    (28.3
    )
    
    
    (27.7
    )Gross profit
    
    
    198.8
    
    
    
    151.8
    
    
    
    151.1
    
    
    
    141.7
    
    
    
    189.8
    
    
    
    145.7
    
    
    
    163.0
    
    
    
    154.8Research, selling and
administrative expenses:Research and development
    
    
    (55.8
    )
    
    
    (53.6
    )
    
    
    (52.6
    )
    
    
    (53.6
    )
    
    
    (54.6
    )
    
    
    (53.5
    )
    
    
    (56.3
    )
    
    
    (57.2
    )Marketing and sales
    
    
    (41.3
    )
    
    
    (41.4
    )
    
    
    (40.1
    )
    
    
    (39.6
    )
    
    
    (41.0
    )
    
    
    (41.4
    )
    
    
    (44.9
    )
    
    
    (42.4
    )General and administrative
    
    
    (10.9
    )
    
    
    (12.8
    )
    
    
    (11.4
    )
    
    
    (11.7
    )
    
    
    (10.7
    )
    
    
    (12.0
    )
    
    
    (12.7
    )
    
    
    (12.5
    )Amortization of goodwill
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Amortization of acquired technology
    
    
    (1.0
    )
    
    
    (1.4
    )
    
    
    (1.4
    )
    
    
    (2.1
    )
    
    
    (2.1
    )
    
    
    (2.5
    )
    
    
    (2.6
    )
    
    
    (3.9
    )Total research, selling and
administrative expenses
    
    
    (109.0
    )
    
    
    (109.2
    )
    
    
    (105.5
    )
    
    
    (107.0
    )
    
    
    (108.4
    )
    
    
    (109.4
    )
    
    
    (116.5
    )
    
    
    (116.0
    )Operating income
    
    
    89.8
    
    
    
    42.6
    
    
    
    45.6
    
    
    
    34.7
    
    
    
    81.4
    
    
    
    36.3
    
    
    
    46.5
    
    
    
    38.8Financial revenue and other  net
    
    
    (3.0
    )
    
    
    1.0
    
    
    
    (0.4
    )
    
    
    2.0
    
    
    
    (1.8
    )
    
    
    0.7
    
    
    
    (0.7
    )
    
    
    4.6Income before income taxes
    
    
    86.8
    
    
    
    43.6
    
    
    
    45.2
    
    
    
    36.7
    
    
    
    79.6
    
    
    
    37.0
    
    
    
    45.8
    
    
    
    43.4Income tax expense
    
    
    (29.0
    )
    
    
    (16.5
    )
    
    
    (17.0
    )
    
    
    (14.4
    )
    
    
    (28.2
    )
    
    
    (15.0
    )
    
    
    (18.1
    )
    
    
    (18.1
    )Net income
    
    
    57.8
    
    
    
    27.1
    
    
    
    28.2
    
    
    
    22.3
    
    
    
    51.4
    
    
    
    22.0
    
    
    
    27.7
    
    
    
    25.3Basic income per share
    
    
    0.51
    
    
    
    0.24
    
    
    
    0.25
    
    
    
    0.20
    
    
    
    0.45
    
    
    
    0.19
    
    
    
    0.24
    
    
    
    0.22Diluted net income per share
    
    
    0.50
    
    
    
    0.24
    
    
    
    0.25
    
    
    
    0.20
    
    
    
    0.45
    
    
    
    0.19
    
    
    
    0.24
    
    
    
    0.21Weighted averge number of shares
outstanding
    
    
    113.0
    
    
    
    112.9
    
    
    
    112.8
    
    
    
    113.5
    
    
    
    114.2
    
    
    
    114.2
    
    
    
    114.1
    
    
    
    114.0Diluted weighted average number of
shares outstanding
    
    
    116.0
    
    
    
    114.8
    
    
    
    114.1
    
    
    
    114.0
    
    
    
    114.7
    
    
    
    115.0
    
    
    
    117.1
    
    
    
    118.1Financial information excluding
amortization of intangibles incurred
in business combinations:(1)Operating income
    
    
    90.8
    
    
    
    44.0
    
    
    
    47.0
    
    
    
    36.8
    
    
    
    83.5
    
    
    
    38.8
    
    
    
    49.1
    
    
    
    42.7Net income
    
    
    58.7
    
    
    
    28.2
    
    
    
    29.3
    
    
    
    24.2
    
    
    
    53.2
    
    
    
    24.3
    
    
    
    30.0
    
    
    
    28.5Diluted net income per share
    
    
    0.51
    
    
    
    0.25
    
    
    
    0.26
    
    
    
    0.21
    
    
    
    0.46
    
    
    
    0.21
    
    
    
    0.26
    
    
    
    0.24
   (1)
    
    We believe that this supplemental information is an important indicator
of operational strength and performance of our business and is used by
analysts, investors and other interested parties. However, operating
income, net income and diluted net income per share excluding amortization
of intangibles incurred in business combinations is not a U.S. generally
accepted accounting principles measurement and should not be considered as
an alternative to amounts reported under U.S. generally accepted
accounting principles. 45




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##### Table of Contents



Unaudited Quarterly Data 2003
    
    2002Dec. 31
    
    Sept. 30
    
    June 30
    
    Mar. 31
    
    Dec. 31
    
    Sept. 30
    
    June 30
    
    Mar. 31(as a percentage of total revenue)Revenue:Software revenue
    
    
    86.3
    
    
    
    86.3
    
    
    
    83.7
    
    
    
    85.7
    
    
    
    86.6
    
    
    
    85.0
    
    
    
    87.1
    
    
    
    87.3Service and other revenue
    
    
    13.7
    
    
    
    13.7
    
    
    
    16.3
    
    
    
    14.3
    
    
    
    13.4
    
    
    
    15.0
    
    
    
    12.9
    
    
    
    12.7Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenue:Software
    
    
    (2.3
    )
    
    
    (2.9
    )
    
    
    (3.1
    )
    
    
    (3.5
    )
    
    
    (2.9
    )
    
    
    (3.6
    )
    
    
    (2.5
    )
    
    
    (3.8
    )Service and other
    
    
    (10.4
    )
    
    
    (11.0
    )
    
    
    (13.5
    )
    
    
    (12.9
    )
    
    
    (12.6
    )
    
    
    (13.6
    )
    
    
    (12.3
    )
    
    
    (11.4
    )Total cost of revenue
    
    
    (12.7
    )
    
    
    (13.9
    )
    
    
    (16.6
    )
    
    
    (16.4
    )
    
    
    (15.4
    )
    
    
    (17.2
    )
    
    
    (14.8
    )
    
    
    (15.2
    )Gross profit
    
    
    87.3
    
    
    
    86.1
    
    
    
    83.4
    
    
    
    83.6
    
    
    
    84.6
    
    
    
    82.8
    
    
    
    85.2
    
    
    
    84.8Research, selling and
administrative expenses:Research and development
    
    
    (24.5
    )
    
    
    (30.4
    )
    
    
    (29.0
    )
    
    
    (31.7
    )
    
    
    (24.3
    )
    
    
    (30.4
    )
    
    
    (29.4
    )
    
    
    (31.3
    )Marketing and sales
    
    
    (18.1
    )
    
    
    (23.5
    )
    
    
    (22.1
    )
    
    
    (23.4
    )
    
    
    (18.3
    )
    
    
    (23.5
    )
    
    
    (23.5
    )
    
    
    (23.2
    )General and administrative
    
    
    (4.7
    )
    
    
    (7.3
    )
    
    
    (6.4
    )
    
    
    (6.8
    )
    
    
    (4.8
    )
    
    
    (6.8
    )
    
    
    (6.6
    )
    
    
    (6.8
    )Amortization of goodwill
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Amortization of acquired technology
    
    
    (0.5
    )
    
    
    (0.7
    )
    
    
    (0.8
    )
    
    
    (1.2
    )
    
    
    (0.9
    )
    
    
    (1.4
    )
    
    
    (1.4
    )
    
    
    (2.1
    )Total research, selling and
administrative expenses
    
    
    (47.8
    )
    
    
    (61.9
    )
    
    
    (58.3
    )
    
    
    (63.1
    )
    
    
    (48.3
    )
    
    
    (62.2
    )
    
    
    (60.9
    )
    
    
    (63.6
    )Operating income
    
    
    39.5
    
    
    
    24.2
    
    
    
    25.1
    
    
    
    20.5
    
    
    
    36.3
    
    
    
    20.6
    
    
    
    24.3
    
    
    
    21.3Financial revenue and other  net
    
    
    (1.3
    )
    
    
    0.5
    
    
    
    (0.2
    )
    
    
    1.2
    
    
    
    (0.8
    )
    
    
    0.4
    
    
    
    (0.4
    )
    
    
    2.5Income before income taxes
    
    
    38.2
    
    
    
    24.7
    
    
    
    24.9
    
    
    
    21.7
    
    
    
    35.5
    
    
    
    21.0
    
    
    
    23.9
    
    
    
    23.8Income tax expense
    
    
    (12.8
    )
    
    
    (9.3
    )
    
    
    (9.4
    )
    
    
    (8.5
    )
    
    
    (12.6
    )
    
    
    (8.5
    )
    
    
    (9.5
    )
    
    
    (9.9
    )Net income
    
    
    25.4
    
    
    
    15.4
    
    
    
    15.5
    
    
    
    13.2
    
    
    
    22.9
    
    
    
    12.5
    
    
    
    14.5
    
    
    
    13.9Financial information excluding
amortization of intangibles
incurred in business
combinations:(1)Operating income
    
    
    40.0
    
    
    
    24.9
    
    
    
    25.9
    
    
    
    21.7
    
    
    
    37.2
    
    
    
    22.1
    
    
    
    25.7
    
    
    
    23.4Net income
    
    
    25.8
    
    
    
    16.0
    
    
    
    16.2
    
    
    
    14.2
    
    
    
    23.7
    
    
    
    13.8
    
    
    
    15.7
    
    
    
    15.6
   (1)
    
    We believe that this supplemental information is an important indicator
of operational strength and performance of our business and is used by
analysts, investors and other interested parties. However, operating
income and net income excluding amortization of intangibles incurred in
business combinations is not a U.S. generally accepted accounting
principles measurement and should not be considered as an alternative to
amounts reported under U.S. generally accepted accounting principles. As is typical in the Product Lifecycle Management software market, we
normally experience our highest licensing activity for the year in December.
Software revenue, total revenue, operating income and net income have generally
been highest in the fourth quarter of each year. For example, in 2003, revenue for the fourth, third, second and first
quarters of 2003, respectively, represented 30.2%, 23.4%, 24.0% and 22.4% of
total revenue for 2003 compared with our revenue for the fourth, third, second
and first quarters of 2002 which represented, respectively, 29.0%, 22.7%, 24.7%
and 23.6% of our total revenue for 2002. Quarterly operating results varied significantly and are likely to vary
significantly in the future, depending on factors such as foreign currency
exchange rates; the number, timing and significance of product enhancements or
new products by us or our competitors; our ability to develop, introduce, and
market new and enhanced versions of our products; customer order deferrals in
anticipation of new or enhanced products; the timing and cyclical nature of
royalties received from our distribution agreement with IBM; general conditions
in the Product Lifecycle Management software market, computer industries and
regional economies; and other factors and events. A significant portion of
sales typically occurs in the last month of each quarter. Therefore, the
timing of orders and shipments, including unexpected delays, or actions taken
by competitors in reducing prices or introducing new products, could result in
significant quarterly fluctuations in operating results. 46




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B. Liquidity and Capital Resources. Since 1994, our principal source of liquidity has been cash from
operations. Cash obtained from operations has been used primarily for working
capital, short-term investments, dividend payments and, since 1997, the
financing of business acquisitions. The table below presents the change in working capital as reflected in our
consolidated statements of cash flows. Year ended December 31,2003
    
    2002
    
    2001(in millions of euro)Changes in current assets and liabilities(Increase) decrease in trade accounts receivable
    
    
    (5.1
    )
    
    
    (29.2
    )
    
    
    (5.8
    )(Increase) decrease in other current assets
    
    
    2.2
    
    
    
    10.9
    
    
    
    1.8Increase (decrease) in accounts payable and accrued expenses
    
    
    12.4
    
    
    
    (2.8
    )
    
    
    0.2Increase (decrease) in income taxes payable
    
    
    0.6
    
    
    
    (20.0
    )
    
    
    (4.5
    )Increase (decrease) in sales incentive payable
    
    
    4.4
    
    
    
    2.8
    
    
    
    0.4Increase in unearned revenue
    
    
    6.1
    
    
    
    19.9
    
    
    
    3.0Increase (decrease) in other current liabilities
    
    
    7.9
    
    
    
    (3.0
    )
    
    
    5.5Change in working capital
    
    
    28.5
    
    
    
    (21.4
    )
    
    
    0.6
 Customers days of sales outstanding as of December 31, 2003 was 90 days,
compared to 92 days as of December 31, 2002. Under the marketing and distribution agreement with IBM, IBM is required
to pay us a cash settlement one month after it records its licensing activity.
However, due to holidays and other factors, such payments are not always
received precisely within the one-month period. Delays that cause a payment to
be made in a subsequent accounting period can lead to noticeable variations in
the balance of accounts receivable on any given balance sheet date. See Note A
to our consolidated financial statements. Cash and short-term investments totaled 439.7 million as of December 31,
2003, compared with 388.4 million and 369.2 million as of December 31, 2002,
and December 31, 2001, respectively. The 2003 increase reflects net cash
provided by operating activities. During 2003, net cash provided by operating
activities amounted to 177.4 million compared with 142.8 million during 2002.
45.2 million of this cash was used for investments, acquisitions and loans as
discussed below. Net cash used in financing activities totaled 62.4 million
in 2003, primarily comprised of cash dividends of 37.2 million and share
repurchases of 29.5 million. Exchange rates had a negative effect of 22.2
million on our December 31, 2003 cash balance. This decrease is primarily
attributable to the exchange rate translation loss in connection with
translating U.S. based subsidiaries cash balances from U.S. dollars to euro. In May 2003, we acquired Athys, a 13-employee company based in Grenoble,
France for 3.3 million. Athys specializes in the development of work cell
control software. In April 2002, we entered into an agreement with RAND A Technology
Corporation (Rand), to accelerate the development of marketing, sales and
services infrastructure required to support PLM. Under the terms of this
agreement, we granted Rand two 10-year convertible loans (the Loans), each
for a principal amount of
6.6 million and US$6.2 million (23.1 million in the
aggregate as of December 31, 2003). One of the Loans is convertible into
common shares of Rand at Rands option, and the other Loan is convertible into
common shares of Rand at our option. The conversion rights are subject to
certain limitations and their exercise must not result in our holding in excess
of 19.9% of Rands shares. The Loans are secured by certain tangible and
intangible assets of Rand and, to the extent not converted, are repayable in
quarterly installments beginning in 2004. See  Trend
Information, below. In November and December 2003, the Company made short-term advances in the
amount of 5.5 million to Rand. These advances bear interest at 5.5% and are
repayable in 2004. Due to their short-term maturity, these advances have been
classified in other current assets in our consolidated financial statements. We have no significant capital expenditure requirements, no financial
indebtedness other than financial leases relating to our offices, and no lines
of credit. Management believes that currently available sources of liquidity
will provide sufficient resources for its operations for the foreseeable
future. 47




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C. Research and Development, Patents and Licenses. Research and Development We believe that research and development is the most important element of
our success. We operate research laboratories in France, the United States,
Canada, Germany, the United Kingdom, Israel and India. In 2003, research and
development expenses amounted to 215.6 million, a decrease of 2.7% compared to
2002. Total research and development headcount increased 6.2% in 2003 to 2,025
at December 31, 2003, compared to 1,907 at December 31, 2002. Research and development investments over the past three years have been
devoted principally to the development of our various Product Lifecycle
Management applications, on the V5 development platform and infrastructure, and
of the integration of our CATIA, ENOVIA, DELMIA and SMARTEAM products. The table below sets forth information with respect to our research and
development expenses for 2003, 2002 and 2001. Year ended December 31,2003
    
    2002
    
    2001Research and development expenses (in millions)
    
    
    215.6
    
    
    
    221.6
    
    
    
    209.2As a percentage of total revenue(1)
    
    
    28.7
    %
    
    
    28.7
    %
    
    
    28.0
    %Research and development and product
production personnel (at period end)
    
    
    2,025
    
    
    
    1,907
    
    
    
    1,796
   (1)
    
    Due to the distribution of our products through IBM, our percentage of
various expenses, including research and development expenses, and other
line items to revenue may not be comparable to such percentages for our
competitors. See the discussion under Item 5A: Operating
Results  Financial Overview and  Results of Operations. Our expenses for research and development include primarily the personnel
cost for specialists in software architecture and various application fields
such as mechanical design, manufacturing, mechanical engineering and computer
graphics, as well as for specialists with significant experience and knowledge
of our target industrial sectors. Research and development expenses also
include computer rental expenses, the depreciation and cost of maintenance
related to computer hardware used in research and development, development
tools, networking and communication expenses. For a discussion of the
variation in research and development expenses between the periods indicated,
see the discussion under  Operating Results  2003
versus 2002  Consolidated Information  Research and development expenses and  2002
versus 2001  Consolidated Information  Research and development expenses,
above. Intellectual Property We rely on a combination of contracts, copyrights, trade secret laws and
patents to establish and protect our proprietary rights in our technology. We
distribute our products under software licenses, which grant customers licenses
to, rather than ownership of, our products and which contain various provisions
protecting our ownership and confidentiality of the licensed technology. The source code of our products is protected as a trade secret and as an
unpublished copyright work and in certain instances with a patent. However, no
assurance can be given that others will not copy or otherwise obtain and use
our products or technology without authorization. In addition, effective
copyright, trade secret and patent protection or enforcement may be unavailable
or limited in certain countries. We believe that, due to the rapid technological advances within the
industry, factors such as the technological and creative skills of our
personnel are more important to establishing and maintaining a technology
leadership position within the industry than are the various legal protections
of the technology. With regard to trademarks, our policy is to register trademarks for our
main lines of products, in the countries where we do business. Such
registrations are a combination of international registration (Madrid Agreement
and Madrid Protocol), community trademarks and national registrations. When
companies are acquired, a review and an assessment of their main trademarks is
made, and when necessary, additional applications for registrations are made in
order to establish coverage of such trademarks equivalent to that of our other
main trademarks. See Item 3D: Risk Factors  Risks Related to Our Business. 48




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With regard to patents, we generally file patent applications in Europe,
the United States, Canada and Japan, regions where the majority of our
customers and competitors are located. Our portfolio includes 37 patents
already granted (11 were granted in 2003) and approximately 30 patent
applications filed in each of the above-mentioned geographic areas (that is,
nearly 120 applications pending). D. Trend Information. Recent Developments V5R13 PLM Workspace for Collective Innovation was announced in March of
2004. CATIA, DELMIA, ENOVIA AND SMARTEAM V5R13 product portfolios bring
business value to manufacturers in the following areas: (1) Powers Major
Product Programs: V5R13 powers major product programs by enabling manufacturers
and their supply chain to deploy competitive new PLM Best Practices that reduce
development cycles by at least 20%; (2) Design in Context, Decide in Context: a
major innovation in the V5R13 release is the new
ENOVIAVPM Navigator product
that enables manufacturers to take advantage of relational design, integrating
ENOVIAs virtual product definition into CATIAs easy-to-use design
environment; (3) Process Expertise Inside: Best Practices captured in new
industry-specific applications and process templates enable manufacturers to
deploy competitive methodologies to increase productivity through streamlined
processes; (4) World Class PLM for Medium-sized Businesses: V5R13 makes PLM
practices available to companies of all sizes through specialized right-sized
PLM packages for industrial and consumer products, the electronics industry,
and the automotive and aerospace supply chains, and (5) Proven Openness and
Standards Support: underscoring our commitment to openness and global IT
standards, V5R13 includes enhancements to make it easier for companies to
personalize their PLM platforms, share data with systems used by partners, and
integrate PLM solutions with legacy systems. In April 2004, we announced plans with Rand A Technology Corporation,
operating as RAND Worldwide, to create RAND North America, Inc. (Rand
Americas), a new joint venture focused on increasing sales of our PLM software
in North America. Subject to the closing of the transaction, RAND Worldwide
will transfer its North American PLM software sales business unit
(approximately 55 employees) to Rand Americas, 60% owned by us and 40% owned by
RAND Worldwide. We will pay RAND Worldwide 11 million Canadian dollars, as
well as reschedule RAND Worldwide loan payments under the two 10-year
convertible loans we granted to RAND Worldwide in 2002. See   Liquidity and
Capital Resources, above. The transaction, which is expected to close on June
30, 2004, is subject to customary conditions, including documentation and
approval by RAND Worldwides Board of Directors. The new arrangement involves
neither RAND Worldwides PLM software sales business in Europe and
Asia-Pacific, nor any other parts of the RAND Worldwides global business
operations. Also in April 2004, we entered into a business partnership with Schneider
Electric pursuant to which Schneider Electric will sell DELMIA solutions and
develop consulting and services for the automation and production engineering
markets through a newly formed company called Dextus, fully owned by Schneider
Electric. The DELMIA solutions that will be distributed pursuant to this
partnership will include a new product line called DELMIA Automation, dedicated
to define, control and monitor automated systems. 2004 First Quarter Financial Results. Our financial results for the first quarter of 2004 exceeded our
objectives and were mainly attributable to our better than anticipated
performance in Europe. In the first quarter of 2004, total revenue increased
4% to 176.2 million as reported and increased 10% in constant currencies,
compared to total revenue of 169.4 million in the first quarter of 2003. For
an explanation of our use of constant currencies, please see   Executive
Overview  Growth on a constant currency basis, above. Software revenue
increased 3% as reported and 9% in constant currencies in the first quarter of
2004 compared to the first quarter of 2003. Software revenue, accounting for
85% of total revenue, totaled 148.9 million in the first quarter of 2004,
compared to 145.1 million in the first quarter of 2003. Recurring software
revenue represented 56% of total software revenue in the first quarter of 2004,
compared to 55% in the first quarter of 2003. CATIA and SolidWorks seats
licensed in the first quarter of 2004 increased 9% to 14,082 seats, compared to
12,917 seats in the first quarter of 2003. Service revenue, representing 15%
of total revenue, increased 12% to 27.3 million in the first quarter of 2004,
compared to 24.3 million in the first quarter of 2003. 49




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##### Table of Contents



Quarter ended March 31, 2004Operating
    
    OperatingRevenue
    
    Expenses
    
    Income
    
    Operating Margin(Unaudited, in millions of euro, except %)Information on a reported basis
    
    
    176.2
    
    
    
    133.3
    
    
    
    42.9
    
    
    
    24.4
    %Growth
    
    
    4.0
    %
    
    
    (0.1)%
    
    
    23.6
    %
    
    3.8 percentage pointsAmortization of intangibles
incurred in business
combinations
    
    
    0.0
    
    
    
    (0.6
    )
    
    
    0.6
    
    
    
    Excluding amortization of
intangibles incurred in
business combinations
    
    
    176.2
    
    
    
    132.7
    
    
    
    43.5
    
    
    
    24.7
    %Growth excluding amortization
of intangibles incurred in
business combinations
    
    
    4.0
    %
    
    
    0.1
    %
    
    
    18.2
    %
    
    3 percentage pointsUS$ impactUS$/ from $1.07 to $1.25
    
    
    9.3
    
    
    
    7.1
    
    
    
    2.2
    
    
    
    JPY/Won impactJPY/ from JPY128 to JPY134.
    
    
    1.5
    
    
    
    0.5
    
    
    
    1.0
    
    
    
    Total
    
    
    10.8
    
    
    
    7.6
    
    
    
    3.2
    
    
    
    Excluding amortization of
intangibles incurred in
business combinations and
currency exchange impact
    
    
    187.0
    
    
    
    140.3
    
    
    
    46.7
    
    
    
    25.0
    %Growth excluding amortization
of intangibles incurred in
business combinations and
currency exchange impact
    
    
    10
    %
    
    
    6
    %
    
    
    27
    %
    
    3.3 percentage points
 PLM performance in the first quarter of 2004 improved over the year-ago
period, led by activity in the aerospace end-market. Process-centric revenue,
including PDM revenue, totaled 143.6 million in the first quarter of 2004, an
increase of 3% as reported and an increase of 9% in constant currencies
compared to the first quarter of 2003. PDM revenue increased 15% as reported
and 22% in constant currencies in comparison to the first quarter of 2003. PDM
revenues totaled 19.9 million in the first quarter of 2004 and represented 11%
of total revenue. Design-centric revenue totaled 32.6 million in the first quarter of 2004,
an increase of 7%, compared to 30.5 million in the first quarter of 2003, and
an increase of 15% in constant currencies, reflecting good growth across all
major regions. Design-centric revenue increased 25% in U.S. dollars, the
reporting currency of most of our competitors. Operating income increased 23.6% to 42.9 million and our operating margin
increased 3.8 percentage points to 24.3% in the first quarter of 2004, compared
to operating income of 34.7 million and an operating margin of 20.5% in the
first quarter of 2003. Operating income, excluding amortization of intangibles
(acquisition costs), increased 18.2% to 43.5 million in the first quarter of
2004, compared to 36.8 million in the first quarter of 2003. The operating
margin excluding acquisition costs increased 3 percentage points to 24.7% in
the first quarter of 2004, compared to the first quarter of 2003, where the
operating margin was 21.7% excluding acquisition costs. The growth in
operating income and the operating margin as reported and excluding acquisition
costs, reflected primarily the growth in revenue as well as our continued focus
on managing costs to deliver operating leverage. For the first quarter of 2004 net income totaled 28.2 million, up 26.5%
compared to 22.3 million in the first quarter of 2003. Net income excluding
acquisition costs totaled 28.6 million in the first quarter of 2004, up 18.2%
compared to 24.2 million in the first quarter of 2003. Earnings per share
increased 20.0% to 0.24 per diluted share in the first quarter of 2004,
compared to 0.20 per diluted share in the first quarter of 2003. Earnings per
share excluding acquisition costs increased 19.0% to 0.25 per diluted share in
the first quarter of 2004, compared to 0.21 per diluted share in the first
quarter of 2003. The strong increases in net income and earnings per share for
the first quarter of 2004, as reported and excluding acquisition costs,
reflected the growth in revenue and the significant increase in the operating
margin compared to the first quarter of 2003, as higher revenue led to
operating leverage. We continued to maintain a strong financial position with cash and
short-term investments totaling 560.5 million at March 31, 2004, up from
439.7 million at December 31, 2003. Net cash provided by operations was
106.5 million for the first quarter of 2004. Outlook In 2004 we will look to continue developing our business around our two
axes: PLM and 3D for all by emphasizing our key business strengths and
pursuing our growth strategies. We will continue to focus on: (i) building and
strengthening long-term, integrated relationships with our customers; (ii)
maintaining a substantial commitment to technological innovation by a strong
level of investment in research and development; (iii) working closely with our
current partners in our extended enterprise as well as growing our existing
relationships; (iv) continuing to base our financial model upon a high level of
recurring software revenue; and (v) maintaining a strong level of profitability
and cash flow from operations. Our growth strategies address
opportunities to expand our business with our V5 PLM solutions and
with our Design-centric solutions. 50




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During 2004 we plan to focus on developing growth opportunities by
pursuing the following strategies: (i) win new strategic customers; (ii) extend
our CAD penetration in our customer base; (iii) implement the complete PLM
solution with product data management and digital manufacturing solutions; (iv)
extend our penetration of the supply chain within key industries; (v) expand
our presence in our target industries; and (vi) capitalize on the 2D to 3D
migration opportunity. Our CATIA, DELMIA, ENOVIA and SMARTEAM brands are our solutions for PLM.
In this market, we have two releases planned for 2004 including Version 5
Release 13 (V5R13) and Version 5 Release 14 (V5R14). The release of V5R13 was
announced in March of 2004 and V5R14 is planned for release in the second half
of 2004. More broadly, through the V5 platform and the resulting partnerships, we
will continue to provide product and data management solutions for end-users to
optimize the creation, manufacturing and maintenance processes for their
industrial products, as well as a development environment and software
components that meet the needs of our technology partners and many software
providers. Industries willing to implement a PLM solution will then benefit
from a broad and fully integrated software offer, as it is developed on the V5
platform. In addition to the fact that 3D representation has become an important
communication tool in the PLM market, we are also focused on addressing the
Design-centric market for customers who wish to also design their products in
3D. We address this market with our SolidWorks brand. In the Design-centric
market, SolidWorks has one new release planned for 2004. Our financial objectives for 2004 include moderate revenue growth on a
constant currency basis, assuming that business conditions, particularly in
Europe, remain similar to 2003. Based upon information currently available,
our revenue growth objective for 2004 is about 8% in constant currencies.
Assuming a U.S. dollar to euro exchange rate of $1.25 per 1.00, our actual
revenue would be expected to be about 785 million for 2004 and our earnings
per share objective for 2004 is approximately 1.29 to 1.31 per diluted share
and approximately 1.30 to 1.32 per diluted share excluding acquisition costs.
Our operating margin objective for 2004 is to maintain a stable to slightly
increasing operating margin in comparison to 2003, where our operating margin
was 29.0% before acquisition costs. All of our objectives discussed above are
based upon the assumption of a U.S. dollar to euro exchange rate of $1.25 per
1.00 for 2004. Our financial results will remain subject to any further weakening of
general economic conditions as well as currency fluctuations. See Item 3D:
Risk Factors  Risks Related to Our Business  Current economic and
business conditions may lead to the continuation of slower
decision-making or reduced corporate spending on information
technology infrastructure, which would cause our revenues and
earnings to grow more slowly and increase quarterly fluctuation. A weak U.S. dollar may adversely impact the growth rate
of other major markets where we operate and  Currency fluctuations may
significantly affect our results of operations since we generate revenue and
incur expenses in currencies other than the euro. Managements beliefs and expectations set forth in the preceding
paragraphs constitute forward-looking statements subject to risks and
uncertainties. These forward-looking statements are based on managements
current views and assumptions and involve known and unknown risks and
uncertainties that could cause actual results to differ materially from those
anticipated or expected. Factors which could cause actual results to differ
include a continuing general economic decline and/or a further reduction in the
level of corporate investment in information technology infrastructure;
currency fluctuations, particularly the value of the U.S. dollar or Japanese
yen with respect to the euro; unanticipated difficulties in our relationship
with IBM as the principal distributor of our products; growth in market share
by our competitors; and other factors, all as set forth under Item 3D: Risk
Factors. E. Off-balance sheet arrangements. The company has no material off-balance sheet arrangements. F. Tabular disclosure of contractual obligations. The following table summarizes our significant contractual obligations as
of December 31, 2003(1): 51




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##### Table of Contents



Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 years(in thousands of euro)Employee profit-sharing
    
    
    27,891
    
    
    
    8,630
    
    
    
    9,965
    
    
    
    9,296
    
    
    
    Operating lease obligations
    
    
    61,970
    
    
    
    12,614
    
    
    
    19,392
    
    
    
    15,101
    
    
    
    14,863Capital lease obligations
    
    
    6,095
    
    
    
    1,890
    
    
    
    4,205
    
    
    
    
    
    
    
    Total
    
    
    95,956
    
    
    
    23,134
    
    
    
    33,562
    
    
    
    24,397
    
    
    
    14,863
   (1)
    
    In addition to the obligations set forth in the table above, we also have
obligations with respect to our derivative financial instruments and our
retirement and pensions arrangements. See Notes D and M to our consolidated
financial statements. 
 Item 6: Directors, Senior Management and Employees A. Directors and Senior Management. In accordance with our statutsand French company law, our affairs are
managed by our Board of Directors and our Chief Executive Officer (Directeur
Général). As permitted under French law and as provided for in our statuts,
the functions of Chairman of the Board of Directors and of Chief Executive
Officer have been separated between two different persons by decision of the
Board of Directors. Directors Our Board of Directors determines our business strategy and oversees its
implementation. Under French law, the Board of Directors is also responsible
for, among other things, the presentation of the annual and consolidated
accounts to the shareholders and for convening the general shareholders
meeting to approve such accounts. In addition, the Board of Directors must
give prior authorization for any security, pledge or guarantee by the Company.
Under French law and our statuts, directors are liable for violation of French
legal or regulatory requirements applicable to sociétés anonymes, for the
violation of our statutsor for mismanagement. A director may be held liable
for such actions both individually and jointly with the other directors. Our statutsprovide that, generally, the Board of Directors must consist
of three to fifteen directors at any time. Only the shareholders can increase
the size of the Board of Directors. Members of the board are elected by the
shareholders at an ordinary general shareholders meeting to serve six-year
terms and may be reelected for consecutive terms. Directors serve until the
expiration of their respective terms, or until their resignation, death or
removal, with or without cause by the shareholders. Under certain conditions,
the Board of Directors may fill its vacancies until the subsequent
shareholders meeting. At no time may the number of directors exceeding the
age of 70 years constitute more than one-half of the Board of Directors. The
Chairman may not be more than 75 years old. 52




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The following table sets forth the names and birth dates of our current
directors, their principal occupation or employment, the dates of their initial
election as directors and the years of expiration of their current terms. Name
    
    Date of Birth
    
    Principal Occupation or Employment
    
    Director Since
    
    Term ExpiresCharles Edelstenne*
    
    January 9, 1938
    
    Chairman of Dassault Systèmes.
Chairman and Chief Executive
Officer of Dassault Aviation.
Director of the following
companies: Groupe Industriel
Marcel Dassault; Thales Systèmes
Aéroportés; Société Anonyme Belge
de Constructions Aéronautiques;
Sogitec Industries; and Dassault
Réassurance. Chairman of
Dassault Falcon Jet Corporation.
President of Dassault
International, Inc.
    
    
    1993
    
    
    
    2005Paul R. Brown***
    
    July 14, 1950
    
    Professor in the Accounting,
Taxation and Business Law
Department of the Leonard N.
Stern Business School at New York
University. Academic Director,
TRIUM Executive MBA program.
Director and member of the audit
committee of Dictaphone, Inc.
    
    
    2000
    
    
    
    2005Bernard Charlès*
    
    March 30, 1957
    
    President and Chief Executive
Officer (Directeur Général) of
Dassault Systèmes. President of
Dassault Systemes Canada Inc.
Chairman, President and Chief
Executive Officer of Dassault
Systemes Corp. Chairman,
President and representative
director of Dassault Systemes
K.K. Chairman of the following
companies: Dassault Data
Services; Delmia Corp.; Enovia
Corp.; and SolidWorks
Corporation. Director of the
following companies: SmarTeam
Corporation Ltd.; and Business
Objects.
    
    
    1993
    
    
    
    2005Laurent Dassault
    
    July 7, 1953
    
    Chairman of the following
companies: Midway Aircraft
Company; and Dassault Falcon Jet
do Brazil. President of the
following companies: Dassault
Investment Fund Inc.; Dassault
Belgique Aviation; Immobilière
Dassault; Sociéte des Voitures
Electriques; and Vina Totihue SA.
Director of the following
companies: Groupe Industriel
Marcel Dassault; Sogitec
Industries; Power Corporation du
Canada; Pechel Industries;
Generali France; Kudelski SA;
Banque Privée Edmond de
Rothschild Luxembourg;
Terramaris; BSS Investment SA;
Industrial Procurement Services;
NAFCO  National Aerospace Stener
Co.; Chenfeng Machinery; and Aero
Precision Repair and Overhaul
Company  A-pro. General
Manager of the following
companies: Dassault
Investissements; and Château
Dassault. Member of the
Supervisory Board of Eurazeo.
Member of the Advisory Board of
the following companies: Syntek
Capital SA.; Power Private Equity
Fund; and 21 Central Partners.
    
    
    1993
    
    
    
    2005Christian Decaix
    
    January 5, 1937
    
    Executive Vice President Social
and Industrial Operations of
Dassault Aviation. Director of
the following companies: Sogitec
Industries; Dassault Falcon Jet
Corporation; Dassault
Réassurance; and European
Aerosystems Ltd.
    
    
    1993
    
    
    
    2005
 53




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##### Table of Contents



Name
    
    Date of Birth
    
    Principal Occupation or Employment
    
    Director Since
    
    Term ExpiresBernard Dufau**
    
    April 24, 1941
    
    Strategic counsel and general
manager of B. Dufau Conseil.
Director and chairman of the
audit committee of France
Telecom. Director and member of
the audit committee of Kesa
Electricals. Director of Mood
Media.
    
    
    2001
    
    
    
    2007André Kudelski**
    
    May 26, 1960
    
    President and Chief Executive
Officer of the Kudelski Group.
Chairman and Chief Executive
Officer of Nagra +. Director of
the following companies: Nestlé;
Edipresse; and Swiss
International Airlines Ltd.
Member of the Advisory Board of
Crédit Suisse; and Swiss American
Chamber of Commerce.
    
    
    2001
    
    
    
    2007Loïk Segalen
    
    March 27, 1960
    
    Vice-President Economic and
Financial Affairs of Dassault
Aviation. Chairman and Chief
Executive Officer of Dassault
Assurances Courtage. Chairman of
Dassault Réassurance. Director
of the following companies: Dassault Belgique Aviation; Paris
Le Bourget Parc des Expositions;
Midway Aircraft Instrument
Corporation; and Dassault Falcon
Jet. General Manager of Dassault
Aéro Service. Permanent
Representative of Dassault
Aviation to the Board of
Directors of CorseComposites
Aéronautiques.
    
    
    1993
    
    
    
    2005Thibault de Tersant*
    
    July 22, 1957
    
    Executive Vice President and
Chief Financial Officer of
Dassault Systèmes. Director of
the following companies: SolidWorks Corporation, Delmia
Corp.; Dassault Systemes Corp.;
Enovia Corp.; and SmarTeam
Corporation Ltd.
    
    
    1993
    
    
    
    2005
   *
    
    Member of the Ad-hoc Committee.**
    
    Member of the Audit Committee.***
    
    Audit Committee Financial Expert. Meetings of the Board of Directors are normally convened by the Chairman
of the Board of Directors and are to be held as often as required in the
corporate interest. A quorum consists of at least one half of the members of
the Board of Directors. Decisions are made by majority vote of the members
present, deemed to be present or duly represented by other members of the Board
of Directors. A director may not vote on an arrangement or contract in which
he or she is materially interested; if he or she does vote, the decision will
be void. Our statutspermit any director to attend, participate in and vote at
any meeting by videoconference for certain decisions as provided by French law.
The Board of Directors met four times in 2003. Audit Committee.The Audit Committee was established in 1996 to assist
our Board of Directors in overseeing the quality and integrity of our financial
statements and the financial reporting process, our internal accounting and
financial control systems, and our compliance with legal and regulatory
requirements. Since September 2002, the Audit Committee has been fully
comprised of independent directors, according to the criteria set forth under
French law pursuant to the criteria recommended under French corporate
governance Best Practices contained in the Bouton Report, the Sarbanes-Oxley
Act of 2002, and Nasdaq corporate governance rules. On March 27, 2003, the Board of Directors revised the Audit Committee
charter to comply with the new requirements under the Sarbanes-Oxley Act of
2002. In accordance with the new charter, the primary responsibility of the
Audit Committee is to oversee our financial reporting process on behalf of the
Board of Directors and report the results of its activities to the board. The
Audit Committee assesses the independence of the independent auditors of our
financial statements and recommends to the Board of Directors their appointment
and termination (subject to shareholder approval under French law). In
connection with this process, the Audit Committee recommends the external
auditors compensation and discusses with them the scope of the audit, has the
authority to pre-approve all audit-related and non-audit related services
provided by the independent auditors, and discusses with the independent 54




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auditors all critical accounting policies used in connection with the
preparation of the financial statements. At the end of each fiscal year, the
Audit Committee reviews the audited annual consolidated financial statements
before it gives its report to the Board of Directors. The Audit Committee also supervises our internal audit and discusses with
management, the internal auditors, and the independent auditors the adequacy
and effectiveness of our accounting and financial controls, including our
policies and procedures to assess, monitor and manage business and financial
risk. The committee reviews managements assessment of the effectiveness of
internal controls as of the end of each year and the independent auditors
report on managements assessment. In 2003, in addition to their traditional
responsibilities (preliminary review of the 2002 individual and consolidated
statements, the 2003 provisional documents, and cash and currency risk
management), the members of the Audit Committee also, and more specifically,
pre-approved the duties assigned to the auditors of Dassault Systèmes for the
year. Beginning in July 2003, they also conducted a preliminary review with
management of the nature of financial information and outlook issued by
Dassault Systèmes before distribution to the financial community. Lastly, they
reviewed the impact on the Group of the French law on financial security (Loi
de sécurité financière) of August 1, 2003, and adopted a position concerning
certain transitional enforcement measures. More generally, they reported on
the progress of the internal procedures adopted pursuant to the French and
American regulations and recommendations in respect of corporate governance.
In 2003, the Audit Committee met five times, including three times in person
and twice by telephone. It is anticipated that the Audit Committee will meet a
minimum of seven times per year. Ad-hoc Committee.The Ad-hoc Committee was established in 1996 to assist
the Board of Directors by preparing and submitting to the board proposals
regarding beneficiaries of stock option plans to be granted to employees. The
Ad-hoc Committee met one time in 2003, with all committee members in
attendance, in order to prepare the implementation of the stock option plans
approved on January 20, 2003. Director Biographies Charles Edelstennefounded Dassault Systèmes in 1981 and was our Managing
Director until we were transformed into a sociéte anonymein 1993. From 1993
to 2002, Mr. Edelstenne was our Chairman and Chief Executive Officer. He is
still our Chairman. Mr. Edelstenne also serves the positions mentioned under
Directors and Senior Management  Principal Occupation or Employment. Mr.
Edelstenne devotes the majority of his time to his duties at Dassault Aviation. Bernard Charlèshas been our Chief Executive Officer since 2002, our
President since 1995 and one of our directors since 1993. Mr. Charlès also
serves the positions mentioned under Directors and Senior
Management  Principal Occupation or Employment. Prior to becoming our President, Mr.
Charlès served as our President of Research and Development from 1988 to 1995
and as President of Research and Strategy from 1985 to 1988. Thibault de Tersanthas been our Executive Vice President and Chief
Financial Officer since 1988 and one of our directors since 1993. Mr. de
Tersant also serves the positions mentioned under Directors and Senior
Management  Principal Occupation or Employment. Prior to joining us, Mr. de
Tersant served as a finance executive at Dassault International. Paul Brownhas been a certified public accountant in Pennsylvania since
1974. He is a professor in the Accounting, Taxation and Business Law
Department of the Leonard N. Stern Business School at New York University. He
chaired this Department from 1997 to 2002. Professor Brown is the Academic
Director of TRIUM Executive MBA program. He has also worked at the Yale School
of Management, INSEAD and the International University of Japan. Mr. Brown has
also worked for Arthur Andersen & Co. and for the Financial Accounting
Standards Boards (FASB). He is also a consultant for numerous financial
enterprises. Laurent Dassaultjoined the Groupe Industriel Marcel Dassault in 1991 and
serves as executive or director in its French and foreign subsidiaries.
Namely, Mr. Dassault is the General Manager of Dassault Investissements and the
President of Immobilière Dassault and Société des Voitures Electriques. Prior
to holding these positions, Mr. Dassault worked at Banque Parisienne
Internationale, at Banque Vernes and at Banque Industrielle et Commerciale du
Marais between 1977 and 1991. Christian Decaixhas been Executive Vice President Social and Industrial
Operations of Dassault Aviation since 1998. From 1992 to 1998, Mr. Decaix was
the Executive Vice President of Industrial Operations of Dassault Aviation.
Mr. Decaix first joined Dassault Aviation in 1962 and served as an engineer
(Ingénieur dÉtudes). Bernard Dufauhas been strategic counsel at B. Dufau Conseil since 2001.
Mr. Dufau served as Chairman and Chief Executive Officer of IBM France from
1996 to 2001 and Chairman of the Management Board of 55




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##### Table of Contents



IBM France from 1995 to 1996. He was Managing Director of the
Distribution Division of IBM Europe in 1994, Chief Operating Officer of IBM
France from 1992 to 1994 and Sales Director of IBM France from 1989 to 1992.
In the past years, he has also served as Marketing Director of IBM France,
Director of Support and Services Strategy of IBM Europe, Director of
Development and Information Technology of IBM France, and Marketing Manager of
the Public sector and Insurance of IBM France. Mr. Dufau first joined IBM
France in 1966 and served as Head of Division and Director of the Northern
region of IBM France. André Kudelskihas been President and Chief Executive Officer of the
Kudelski Group since 1991 and Chairman of Nagra +, a joint-venture of Kudelski
SA and Canal +, since 1992. Mr. Kudelski was Managing Director of Nagravision,
the pay-TV division of Kudelski SA from 1989 to 1990 and Product Manager for
pay-TV products, Kudelski SA. He first joined Kudelski SA in 1984 as an R&D
engineer. Loïk Segalenhas been Vice President of Economic and Financial Affairs of
Dassault Aviation since 1999. Mr. Segalen was Deputy Manager to the Vice
President of Economic and Financial Affairs of Dassault Aviation from 1998 to
1999, and Financial Advisor to the Vice President of Economic and Financial
Affairs of Dassault Aviation from 1990 to 1998. Prior to serving in these
positions, Mr. Segalen served as an executive in the Finance Division at
Dassault International. Executive Officers The Chief Executive Officer has full executive authority to manage our
affairs and has broad powers to act on our behalf within our corporate purpose
and to represent us in dealings with third parties. These powers of the Chief
Executive Officer are subject only to the powers expressly reserved to the
Board of Directors or shareholders by law or by our statuts, and are subject to
prior authorization of the Board of Directors or the general shareholders
meeting for the decisions specified by French law. The Board of Directors, in
its meeting of March 26, 2004, authorized the Chief Executive Officer to grant
pledges, sureties or securities in the name of the Company up to a maximum
limit of 25 million, thus renewing under the same terms the previous annual
authority granted on March 27, 2003. The Chief Executive officer is elected by the Board of Directors and may
be removed by the Board of Directors at any time. According to our statuts,
the Chief Executive Officer (Directeur Général) may not be more than 65 years
old. The following table sets forth the names and birth dates of our executive
officers and their current positions with us: Name
    
    Date of Birth
    
    PositionCharles Edelstenne
    
    January 9, 1938
    
    Chairman of the BoardBernard Charlès
    
    March 30, 1957
    

President
and Chief Executive OfficerDominique Florack
    
    June 26, 1959
    
    Executive Vice President, Strategy, Research and
DevelopmentThibault de Tersant
    
    July 22, 1957
    
    Executive Vice President and Chief Financial OfficerEtienne Droit
    
    September 3, 1959
    
    Executive Vice President PLM Sales and ServicesPhilippe Forestier
    
    May 16, 1950
    
    Executive Vice President Alliances, Marketing and
CommunicationsBruno Latchague
    
    January 28, 1957
    
    Executive Vice President PLM R&D Solutions, Quality
Assurance and SupportJoel Lemke
    
    January 12, 1956
    
    Chief Executive Officer of Enovia and General Manager
PLM AmericasJohn McEleney
    
    April 29, 1962
    
    Chief Executive Officer of SolidWorksMuriel Pénicaud
    
    March 31, 1955
    
    Executive Vice President Organization and Human Resources
 Executive Officer Biographies Etienne Droithas been our Executive Vice President PLM Sales and Services
since 1999. He also served as our Director of Applications Development
Division from 1991 to 1995, as Manager of the Strategy Department from 1987 to
1991 and as a member of our CATIA Development Team from 1986 to 1987. 56




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Bruno Latchaguehas been our Executive Vice President PLM R&D Solutions,
Quality Assurance and Support since 2004. Mr. Latchague served as our Executive
Vice President Development and Support from 2000 to 2003, our Executive Vice
President Research and Development, Architecture and Modeling Technology from
1995 to 1999. He also served as our Director of CATIA Products Infrastructure
from 1990 to 1995, as our Senior Manager CATIA Software Infrastructure from
1988 to 1990 and as our Manager CATIA Software Infrastructure from 1987 to
1988. Prior to joining us, Mr. Latchague served as Manager CAD/CAM Products
Support at Régie Nationale des Usines Renault. Dominique Florackhas been our Executive Vice President, Strategy,
Research and Development since 2004. Mr. Florack served as our Executive Vice
President Strategy and Research from 2000 to 2003, our Executive Vice President
Research and Development, Strategy and Mechanical Design from 1995 to 1999. He
also served as our Director of Mechanical CAD from 1994 to 1995 and as Director
of Strategy and Research from 1990 to 1993. Philippe Forestierhas been our Executive Vice President Alliances,
Marketing and Communications since 2003. Mr. Forestier served as our Executive
Vice President Sales and Marketing for Small and Medium Businesses (SMB) from
2000 to 2002. Living in the United States from 1995 to 2001, Mr. Forestier
served as Executive Vice President Americas Market Development from 1995 to
1999. He also served as General Manager of Dassault Systemes of America from
1996 to 1998, our Director of Worldwide CATIA/CADAM Marketing and Services from
1993 to 1995 and as our Director of Industrialization and Customer Support from
1988 to 1993. From 1984 to 1988, Mr. Forestier was in charge of implementing
marketing and technical support for our products and, from 1981 to 1984, was
responsible for development of the CATIA geometric modeler. Joel Lemkehas been the Chief Executive Officer of Enovia since its
creation in 1998 and our General Manager PLM Americas since 2003. Prior to
1998, Mr. Lemke served at IBM for nineteen years, notably as a General Director
of the Industrial Solutions Division of IBM. During the nineteen years of his
work for IBM, Mr. Lemke was responsible for strategy, product development,
service, marketing and sales of materials and software. John McEleneyhas been the Chief Executive Officer of SolidWorks since
2001. Mr. McEleney has been with SolidWorks since 1996 and has served in
several roles, including Chief Operating Officer and Vice President, Americas
Sales. Prior to joining SolidWorks, Mr. McEleney held several senior
management positions at Computervision. Muriel Penicaudhas been our Executive Vice President Organization and
Human Resources since the end of 2002. Prior to joining us, Mrs. Penicaud
served as Director for Organization Development and Human Resources Policies at
Groupe Danone. Previously she held several management positions at the French
Department of Labor, such as Regional Director and advisor to the Labor
Secretary. Financial and Contractual Relations Between Our Company and its Directors and
Executive Officers The French Commercial Code (Code de Commerce) strictly forbids loans by a
company (société anonyme) to its directors. No company may provide overdrafts
for directors or guarantee any directors obligations. This prohibition also
applies to the Chief Executive Officer (Directeur Général), permanent
representatives of companies on the Board of Directors, spouses or heirs of
such persons and other intermediaries. The French Commercial Code and our statutsrequire any director, the Chief
Executive Officer (Directeur Général) and any shareholder who holds more than
10% of the voting rights of our shares, or, if a corporate shareholder, the
company controlling it, that is considering entering into an agreement with the
company, either directly or indirectly, personally or through an intermediary,
to inform the Companys Board of Directors as well as its auditors before the
transaction is consummated. French law also requires such an agreement to be
authorized by the Board of Directors, and the director or person concerned may
not vote on the issue. French law further requires such an agreement to be
submitted to an ordinary shareholders meeting for approval once entered into,
upon presentation of a special report from the Companys auditors. Any
agreement entered into in violation of these requirements may be declared void
by the Commercial Court at the request of the company or that of any
shareholder, if such agreement is contrary to the interests of the company.
Moreover, French law also states that agreements entered into in the ordinary
course of business and with terms and conditions that are not out of the
ordinary are not subject to the prior authorization of the Board of Directors.
Nevertheless, as long as they are material to the company, such agreements must
be disclosed by the interested party to the Chairman of the Board of Directors,
who has the responsibility of communicating the list and the purpose of such
agreements to the Board of Directors and to the statutory auditors. 57




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B. Compensation. In consideration for their services on the board, directors are entitled
to receive directors fees (jetons de présence). The total annual amount of
directors fees is fixed by the general shareholders meeting, but the board
determines their allocation among the directors. In addition, remuneration may
be granted to directors on a case-by-case basis for special assignments. A
director may not vote for his or her own remuneration as a director. If he or
she does vote, the decision will be void. The board may also authorize the
reimbursement of travel and accommodation expenses as well as other expenses
incurred by directors in the corporate interest. The Chairman and/or the Chief
Executive Officer are entitled to receive remuneration in addition to the
jetons de présencefor their services to our Company as provided for in our
statuts. This additional remuneration is determined by the Board of Directors
and, in this instance, the Chairman and/or Chief Executive Officer is permitted
to vote on a resolution concerning his or her remuneration. On September 23, 2003, our Board of Directors approved two separate
indemnity payments to be made to our Chief Executive Officer, Bernard Charlès,
in the event that he is dismissed by the Company. First, Mr. Charlès would be
entitled to a payment equivalent to two times his gross annual compensation
received for the 12 months preceding his dismissal, pursuant to his mandate
(mandat social) as Chief Executive Officer. This indemnity payment would not
apply in the event of dismissal due to intentional misconduct aimed at harming
the interests of the Company. In addition, our Board of Directors approved a
change in Mr. Charlès employment contract (contrat de travail) with Dassault
Systèmes, pursuant to which he would be entitled to an additional indemnity
payment equivalent to two times his gross annual salary received for the 12
months preceding his dismissal under such employment contract. This indemnity
payment would not apply in the event of dismissal for gross or willful
misconduct (faute grave ou lourde). None of our other directors have entered
into any service contracts with our Company or any of its subsidiaries
providing for benefits upon dismissal. The relevant portion of the minutes of
the September 23, 2003 Board of Directors meeting and Mr. Charlès amended
employment contract are filed as Exhibits 4(c).1 and 4(c).2 to this Annual
Report on Form 20-F. Each director must own at least one of our shares throughout his term of
office. The aggregate amount of compensation paid by us and our subsidiaries to
our executive officers as a group (10 persons) for services in all capacities
in 2003 was 3,899,212 (including under our profit-sharing plans). As of
December 31, 2003, our executive officers and directors as a group owned stock
options to acquire 11,728,483 shares. The options under the 2002-04 Stock
Option Plans are not yet exercisable. See  Options to
Subscribe Securities
from Registrant or Subsidiaries below. Our directors are eligible to receive attendance fees for meetings of the
Board of Directors. We paid 100,000 in attendance fees to directors in 2003.
We also paid 9,000 in exceptional compensation to members of the Audit
Committee. The table below shows the total amount of compensation (including from
bonus and profit-sharing plans) and other benefits granted in euro to each
director by us and our subsidiaries during the 2003 fiscal year: Salary and Fees(3)Directors
    
    Fixed
    
    Bonus
    
    Total
    
    Other benefits
    
    Directors fees
    
    Total for 2003
    
    Total for 2002Charles Edelstenne(1)
    
    
    542,800
    
    
    
    
    
    
    
    542,800
    
    
    
    
    
    
    
    20,000
    
    
    
    562,800
    
    
    
    552,325Bernard Charlès
    
    
    541,304
    
    
    
    360,870
    (3)
    
    
    902,174
    
    
    
    4,666
    
    
    
    10,000
    
    
    
    916,840
    
    
    
    825,983Thibault de Tersant
    
    
    199,536
    
    
    
    85,515
    (4)
    
    
    285,051
    
    
    
    2,761
    
    
    
    10,000
    
    
    
    297,812
    
    
    
    260,760Paul Brown
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,000
    
    
    
    13,000
    
    
    
    8,000Laurent Dassault(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    8,000Christian Decaix
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    8,000Bernard Dufau
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,000
    
    
    
    13,000
    
    
    
    8,000André Kudelski
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,000
    
    
    
    13,000
    
    
    
    8,000Loïk Segalen
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    8,000
   (1)
    
    In 2003, Groupe Industriel Marcel Dassault paid 16,000 to Charles
Edelstenne in directors fees.(2)
    
    In 2003, Groupe Industriel Marcel Dassault paid
304,898 to Laurent Dassault as gross annual salary
and 15,000 in directors fees. 58




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##### Table of Contents



(3)
    
    Bernard Charlès also received 33,667 in profit-sharing.(4)
    
    Thibault de Tersant also received 33,667 in profit-sharing. Options to Subscribe Securities from Registrant or Subsidiaries Pursuant to four successive authorizations granted by our shareholders at
shareholders meetings held on April 15, 1996, June 6, 1997, January 26, 1998
and May 28, 2002, the Board of Directors implemented sixteen stock option plans
for the benefit of certain of our executive officers and employees. The
exercise price of stock options granted pursuant to the sixteen plans together,
was fixed by reference to the market value of the Dassault Systèmes shares on
the grant date of the stock options. The exercise price has always been equal
to the highest of the following three values: (1) the average share price,
without a reduction, of the 20 trading days preceding the grant date of the
stock options; (2) the closing share price the trading day before the grant
date of the stock options; and (3) the opening share price on the grant date of
the stock options. The following table provides certain information on our stock options
plans as of May 31, 2004 (taking into account the stock split of October 14,
1997). 59




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Stock option plan
    
    1996
    
    1997
    
    1998-1
    
    1998-2
    
    1998-3
    
    1998-4
    
    1998-5
    
    1998-8
    
    1998-9Meeting date of Board
    
    June 28, 1996
    
    
    Dec. 15, 1997
    
    
    Jan. 28, 1998
    
    
    Nov. 09, 1998
    
    
    Nov. 09, 1998
    
    
    Sept. 15, 1999
    
    
    Sept. 15, 1999
    
    
    Mar., 2001
    
    
    29 Mar., 2001Shareholders Meeting Dates
    
    April 15, 1996
    
    
    June 6, 1997
    
    
    Jan. 26, 1998
    
    
    Jan. 26, 1998
    
    
    Jan. 26, 1998
    
    
    Jan. 26, 1998
    
    
    Jan. 26, 1998
    
    
    Jan. 26, 1998
    
    
    Jan. 02, 1998Number of options
granted
    
    
    1,027,780
    (1)
    
    
    1,031,840
    
    
    
    750,000
    
    
    
    2,468,730
    
    
    
    354,750
    
    
    
    3,297,000
    
    
    
    320,000
    
    
    
    2,909,600
    
    
    
    553,300 to directors
    
    
    167,000
    
    
    
    175,400
    
    
    
    0
    
    
    
    1,042,850
    
    
    
    0
    
    
    
    1,845,750
    
    
    
    0
    
    
    
    1,676,150
    
    
    
    0 to the top 10
beneficiary
employees
    
    
    230,000
    
    
    
    411,600
    
    
    
    706,000
    
    
    
    838,000
    
    
    
    126,000
    
    
    
    844,000
    
    
    
    103,500
    
    
    
    736,000
    
    
    
    176,600Maximum number of
shares
    
    
    1,027,780
    
    
    
    1,031,840
    
    
    
    750,000
    
    
    
    2,468,730
    
    
    
    354,750
    
    
    
    3,297,000
    
    
    
    320,000
    
    
    
    2,909,600
    
    
    
    553,300Number of
beneficiaries
    
    
    916
    
    
    
    362
    
    
    
    26
    
    
    
    1,018
    
    
    
    296
    
    
    
    556
    
    
    
    290
    
    
    
    531
    
    
    
    513Exercise price per
option in euro
    
    
    9.00
    
    
    
    25.92
    
    
    
    26.37
    
    
    
    29.58
    
    
    
    29.58
    
    
    
    37.00
    
    
    
    37.00
    
    
    
    52.00
    
    
    
    52.00Exercise first date
    
    June 28, 1996
    
    
    Dec. 15, 1999
    
    
    Jan. 28, 1998
    
    
    Nov. 09, 2000
    
    
    Nov. 09, 1998
    
    
    Sept. 15, 2001
    
    
    Sept. 15, 1999
    
    
    Mar. 29, 2003
    
    
    29 Mar., 2001Exercise last date
    
    June 27, 2006
    
    
    Dec. 14, 2007
    
    
    Jan. 27, 2008
    (a)
    
    Nov. 08, 2008
    
    
    Nov. 08, 2008
    (b)
    
    Sept. 14, 2009
    
    
    Sept. 14, 2009
    (c)
    
    Mar. 28, 2011
    
    
    Mar. 28, 2011
    (d)Number of options
exercised 1996-2002
    
    
    806,066
    (2)
    
    
    76,244
    
    
    
    624,700
    
    
    
    34,094
    
    
    
    120,482
    
    
    
    13,500
    
    
    
    66,127
    
    
    
    0
    
    
    
    650Number of options
exercised in 2003
    
    
    35,555
    (3)
    
    
    66,660
    
    
    
    85,000
    
    
    
    10,040
    
    
    
    1,575
    
    
    
    0
    
    
    
    1,750
    
    
    
    0
    
    
    
    0Number of options
cancelled 1996-2002
    
    
    29,960
    
    
    
    24,946
    
    
    
    0
    
    
    
    52,790
    
    
    
    0
    
    
    
    44,640
    
    
    
    0
    
    
    
    18,360
    
    
    
    0Number of options
cancelled in 2003
    
    
    0
    
    
    
    4,900
    
    
    
    27,800
    
    
    
    2,620
    
    
    
    39,888
    
    
    
    9,340
    
    
    
    42,688
    
    
    
    8,220
    
    
    
    32,890Number of options
outstanding as of
December 31, 2003
    
    
    156,199
    
    
    
    859,090
    
    
    
    12,500
    
    
    
    2,369,186
    
    
    
    192,805
    
    
    
    3,229,520
    
    
    
    209,435
    
    
    
    2,883,020
    
    
    
    519,760Number of options
exercised between
Jan. 1, 2004 and May
31, 2004
    
    
    3,600
    
    
    
    90,342
    
    
    
    1,000
    
    
    
    6,300
    
    
    
    412
    
    
    
    0
    
    
    
    575
    
    
    
    0
    
    
    
    0Number of options
cancelled between
Jan. 1, 2004 and May
31, 2004
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    920
    
    
    
    0Number of
outstanding options
as of May 31, 2004
    
    
    152,599
    
    
    
    768,748
    
    
    
    11,500
    
    
    
    2,362,886
    
    
    
    192,393
    
    
    
    3,229,520
    
    
    
    208,860
    
    
    
    2,882,100
    
    
    
    519,760
   [Continued from above table, first column(s) repeated] Stock option plan
    
    1998-10
    
    1998-11
    
    1998-12
    
    2002-01
    
    2002-02
    
    2002-03
    
    2002-04
    
    TotalMeeting date of Board
    
    June 2, 2001
    
    
    Oct. 5, 2001
    
    
    Oct. 05, 2001
    
    
    May 28, 2002
    
    
    May 28, 2002
    
    
    Jan. 20, 2003
    
    
    Jan. 20, 2003ShareholdersMeeting Dates
    
    Jan. 02, 1998
    
    
    Jan. 02, 1998
    
    
    Jan. 26, 1998
    
    
    May 28, 2002
    
    
    May 28, 2002
    
    
    May 28, 2002
    
    
    May 28, 2002Number of options
granted
    
    
    138,000
    
    
    
    1,387,400
    
    
    
    328,650
    
    
    
    1,363,563
    
    
    
    355,300
    
    
    
    3,325,000
    
    
    
    675,000
    
    
    
    20,285,913 to directors
    
    
    0
    
    
    
    655,000
    
    
    
    0
    
    
    
    651,403
    
    
    
    0
    
    
    
    1,500,000
    
    
    
    0
    
    
    
    7,713,553 to the top 10
beneficiary
employees
    
    
    116,403
    
    
    
    424,100
    
    
    
    101,000
    
    
    
    454,000
    
    
    
    139,000
    
    
    
    1,060,000
    
    
    
    219,000
    
    
    
    6,685,203Maximum number of
shares
    
    
    138,000
    
    
    
    1,387,400
    
    
    
    328,650
    
    
    
    1,363,563
    
    
    
    355,300
    
    
    
    3,325,000
    
    
    
    675,000
    
    
    
    20,285,913Number of
beneficiaries
    
    
    44
    
    
    
    400
    
    
    
    434
    
    
    
    378
    
    
    
    401
    
    
    
    803
    
    
    
    533
    
    
    
    7,501Exercise price per
option in euro
    
    
    49.00
    
    
    
    35.00
    
    
    
    35.00
    
    
    
    45.50
    
    
    
    45.50
    
    
    
    23.00
    
    
    
    23.00Exercise first date
    
    June 29, 2001
    
    
    Oct. 05, 2002
    
    
    Oct. 05, 2002
    
    
    May 28, 2003
    
    
    May 28, 2003
    
    
    Jan. 20, 2004
    
    
    Dec. 31, 2004Exercise last date
    
    June 28, 2011
    (e)
    
    Oct. 04, 2011
    (f)
    
    Oct. 04, 2011
    (g)
    
    May 27, 2012
    (h)
    
    May 27, 2012
    (i)
    
    Jan. 19, 2013
    
    
    Jan. 19, 2013Number of options
exercised 1996-2002
    
    
    101
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    1,741,964Number of options
exercised in 2003
    
    
    0
    
    
    
    0
    
    
    
    7,295
    
    
    
    0
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    208,025Number of options
cancelled 1996-2002
    
    
    0
    
    
    
    4,800
    
    
    
    0
    
    
    
    3,569
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    179,065Number of options
cancelled in 2003
    
    
    0
    
    
    
    3,600
    
    
    
    8,500
    
    
    
    3,009
    
    
    
    0
    
    
    
    3,200
    
    
    
    0
    
    
    
    186,655Number of options
outstanding as of
December 31, 2003
    
    
    137,899
    
    
    
    1,379,000
    
    
    
    312,855
    
    
    
    1,356,985
    
    
    
    355,150
    
    
    
    3,321,800
    
    
    
    675,000
    
    
    
    17,970,204Number of options
exercised between
Jan. 1, 2004 and May
31, 2004
    
    
    0
    
    
    
    0
    
    
    
    3,505
    
    
    
    0
    
    
    
    237
    
    
    
    5,800
    
    
    
    0
    
    
    
    111,771Number of options
cancelled between
Jan. 1, 2004 and May
31, 2004
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    169
    
    
    
    0
    
    
    
    700
    
    
    
    0
    
    
    
    1,789Number of
outstanding options
as of May 31, 2004
    
    
    137,899
    
    
    
    1,379,00
    
    
    
    309,350
    
    
    
    1,356,816
    
    
    
    354,913
    
    
    
    3,315,300
    
    
    
    675,000
    
    
    
    17,856,644
 60




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##### Table of Contents



(1)
    
    including 946,680 to employees of Dassault Systèmes and Dassault Systemes
K.K. (DSKK) and 81,100 to employees of Dassault Systemes of America
Corp.(2)
    
    including 732,766 by employees of Dassault Systèmes and DSKK and 73,300
by employees of DSA.(3)
    
    by employees of Dassault Systèmes and DSKK only.(a)
    
    of which 475,002 have been exercisable since Jan. 28, 1998, an additional
100,000 exercisable since Jan. 28, 1999, an additional 99,998 exercisable
since Jan. 28, 2000, an additional 50,000 exercisable since Jan. 28, 2001
and the balance since Jan. 28, 2002.(b)
    
    of which 88,687 have been exercisable since November 9, 1998, an
additional 88,688 exercisable since November 9, 1999, an additional 88,687
exercisable since November 9, 2000 and the balance since November 9, 2001.(c)
    
    of which 80,000 have been exercisable since September 15, 1999, an
additional 80,000 exercisable since September 15, 2000, an additional
80,000 since September 15, 2001 and the balance since September 15, 2002.(d)
    
    of which 138,325 have been exercisable since Mar. 29, 2001, an additional
138,325 exercisable since Mar. 29, 2002, an additional 138,325 exercisable
since Mar. 29, 2003, and the balance since Mar. 29, 2004.(e)
    
    of which 34,500 have been exercisable since June 29, 2001, an additional
34,500 exercisable since June 29, 2002, an additional 34,500 exercisable
since June 29, 2003, and the balance since June 29, 2004.(f)
    
    of which 346,850 have been exercisable since October 5, 2002 and an
additional 346,850 exercisable since October 5, 2003.(g)
    
    of which 82,162 have been exercisable since October 5, 2002 and an
additional 82,163 exercisable since October 5, 2003.(h)
    
    of which 340,891 have been exercisable since May 28, 2003, and an
additional 340,890 have been exercisable since May 28, 2004.(i)
    
    of which 88,825 have been exercisable since May 28, 2003, and an
additional 88,825 have been exercisable since May 28, 2004. On July 25, 1997, as part of the SolidWorks acquisition, we issued
9,700,000 shares, 7,321,436 of which were issued to the former SolidWorks
shareholders in exchange for 100% of the outstanding capital stock and
redeemable convertible preferred stock of SolidWorks, and 2,378,564 of which
were issued to SW Securities L.L.C., our wholly owned subsidiary that holds
such shares solely for the purpose of distribution to the holders of stock
options under the SolidWorks Corporation 1994 Incentive and Nonqualified Stock
Option Plan. Pursuant to the SolidWorks merger, the rights to shares of
capital stock of SolidWorks under the stock options and the warrants were
converted into rights to receive our shares. The number of stock options in
circulation and attributed to the employees of SolidWorks amounted to 105,326
options at December 31, 2003. The shares held by SW Securities L.L.C. are not
outstanding and do not have voting rights, nor are they eligible for dividends
until these shares are issued. See Note O to our consolidated financial
statements. In 2003, 31,972 shares were issued to the SolidWorks holders of stock
options and 743 stock options were cancelled. As of December 31, 2003, SW
Securities L.L.C. held 359,438 of our shares. The aggregate exercise price of
the outstanding stock options at December 31, 2003 was approximately
446,155.00. On May 31, 2004, SW Securities L.L.C. held 340,131 of our shares. Finally, following the acquisition of SolidWorks in 1997, 2,800,000 stock
options giving the right to subscribe to shares of SolidWorks were granted to
our current executive officers. At May 31, 2004, our executive officers had
exercised 918,000 of the stock options. We granted 12,017,683 stock options for our shares to our executive
officers between June 28, 1996 and May 31, 2004 as follows: 266,000 stock
options granted on June 28, 1996; 321,200 stock options granted on December 15,
1997; 1,842,050 stock options granted on November 9, 1998; 2,619,750 stock
options granted on September 15, 1999; 2,352,250 stock options granted on March
29, 2001; 1,035,000 stock options granted on October 5, 2001; 1,071,433 stock
options granted on May 28, 2002; and 2,510,000 stock options granted on January
20, 2003. At December 31, 2003, our executive officers (ten persons) had
exercised 235,000 stock options pursuant to the June 2, 1996 Plan, 46,200 stock
options pursuant to the December 15, 1997 Plan, 8,000 stock options pursuant to
the November 9, 1998 Plan and held a total of 11,728,483 stock options. The table below shows the stock options granted by us to each director
during the 2003 fiscal year as well as the shares subscribed by each director
pursuant to the exercise of stock options during the 2003 fiscal year: Numberof stock
    
    
    
    Number
    
    Price of
    
    
    
    Stock optionoptions
    
    Exercise
    
    of shares
    
    the shares
    
    
    
    plangranted
    
    price
    
    subscribed
    
    subscribed
    
    Expiration date
    
    (number)Bernard Charlès
    
    1,200,000
    
    23.00
    
    
    
    
    
    January 19, 2013
    
    2002-03Thibault de Tersant
    
    300,000
    
    23.00
    
    
    
    
    
    January 19, 2013
    
    2002-03
    
    
    
    6,000
    
    25.92
    
    
    
    1997
 The following table shows, on a global basis, (i) the total number and
weighted average price of the stock options granted by us to the ten employees
who have received the most significant number of stock options during the 61




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##### Table of Contents



2003
fiscal year and who are not members of the board and (ii) the total number and
weighted average price of the shares subscribed by the ten employees who have
exercised the most significant number of stock options during the 2003 fiscal
year and who are not members of the board: Weighted average
    
    Weighted average
    
    StockTotal number of
    
    price of the stock
    
    price of the shares
    
    option planstock options
    
    options granted
    
    subscribed
    
    (number)Stock options granted
    
    
    1,140,000
    
    
    
    23.00
    
    
    
    
    
    
    
    2002-032002-04Stock options exercised
    
    
    166,906
    
    
    
    
    
    
    
    22.97
    
    
    
    199619971998-2
 Other than the stock options granted pursuant to the stock option plans
dated June 28, 1996, December 15, 1997, January 28, 1998, November 9, 1998,
September 15, 1999, March 29, 2001, June 29, 2001, October 5, 2001, May 28,
2002, and January 20, 2003, we have no other outstanding securities convertible
or exchangeable into, or representing the right to acquire, our shares.  C.
    
    Board Practices. See Item 6A: Directors and Senior Management.  D.
    
    Employees. At the end of 2003, we had 4,088 employees, up 3.1% over 2002, including
independent contractors. Of these employees, 2,025 were employed in research
and development and product production, 1,763 in marketing, sales and services
and 300 in administrative and other functions. Of our total employee base,
including independent contractors, 1,970 were based in France and 2,118 were
based in the United States and other locations. 62




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##### Table of Contents



The following tables show our employees both by function and
geographically for the past three years: December 31,2003
    
    2002
    
    2001Research and Development and Product Production
    
    
    2,025
    
    
    
    1,907
    
    
    
    1,796Marketing, Sales and Services
    
    
    1,763
    
    
    
    1,755
    
    
    
    1,755Administrative and Other Functions
    
    
    300
    
    
    
    304
    
    
    
    297Total
    
    
    4,088
    
    
    
    3,966
    
    
    
    3,848
 December 31,2003
    
    2002
    
    2001France
    
    
    1,970
    
    
    
    1,940
    
    
    
    1,913United States and other locations
    
    
    2,118
    
    
    
    2,026
    
    
    
    1,935Total
    
    
    4,088
    
    
    
    3,966
    
    
    
    3,848
  E.
    
    Share Ownership. See Item 7A: Major Shareholders and Item 6B: Compensation. 
 Item 7:   Major Shareholders and Related Party Transactions  A.
    
    Major Shareholders. The following table sets forth information with respect to the beneficial ownership of our shares by:  
    
    each person who is known by us to own beneficially more than 5% of our outstanding shares; and
    
    all of our directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the
U.S. Securities and Exchange Commission, based on factors including voting and
investment power with respect to the shares. Unless otherwise indicated in the
footnotes to the table, the following persons have sole voting and sole
investment control with respect to the shares they beneficially own, and the
address of each beneficial owner listed below is c/o Dassault Systèmes, 9, quai
Marcel Dassault, BP 310, 92156 Suresnes Cedex, France. The percent of beneficial ownership for each shareholder is based on
113,515,436 shares, including treasury shares, outstanding as of May 31, 2004. Shares beneficiallyName
    
    owned(1)
    
    Capital %(1)
    
    Voting %Groupe Industriel Marcel Dassault (GIMD)
    
    
    51,014,415
    
    
    
    44.9
    %
    
    
    42.2
    %Charles Edelstenne(2)
    
    
    7,658,007
    
    
    
    6.8
    %
    
    
    12.6
    %All directors and executive officers as
a group, excluding Charles Edelstenne
(15 persons)(3)
    
    
    6,647
    
    
    
    0.0
    %
    
    
    0.0
    %SW Securities L.L.C.(4)
    
    
    340,131
    
    
    
    0.3
    %
    
    
    Public
    
    
    54,496,236
    
    
    
    48.0
    %
    
    
    45.2
    %Total
    
    
    113,515,436
    
    
    
    100.00
    %
    
    
    100.00
    %
  (1)
    
    Such numbers and percentages do not take into account shares reserved for
issuance under our stock option plans, totaling 15.73% of our share
capital as of May 31, 2004.(2)
    
    Sole beneficial owner of 7,656,465 shares and has voting and dispositive
powers with respect to 1,542 shares held in trust for the benefit of his
family.(3)
    
    Excluding Charles Edelstenne, none of our directors or executive officers
beneficially owns more than 1% of our outstanding shares.(4)
    
    SW Securities L.L.C. is a subsidiary of SolidWorks Corporation. Voting
rights and dividend rights with respect to the shares held by SW
Securities L.L.C. shall not be exercised until the shares are distributed. 63




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##### Table of Contents



To our knowledge, as of May 31, 2004, (i) the proportion of our
outstanding shares held in the United States was approximately 4.16% and (ii)
the number of record holders of our ADSs in the United States, who hold either
for their own account or for the account of other beneficial owners, was 93. Changes in Principal Shareholders Over the Past Three Fiscal Years To our knowledge, the main changes in stock ownership have been a
significant increase in the percentage of ownership by GIMD in 2001, resulting
from our merger with Dassault Participation, of which GIMD was a 49.93%
shareholder before the merger. As a result of this combination, Dassault
Participation as an entity is no longer a shareholder and the French state
became a shareholder in our Company. The French state subsequently sold its
shareholding on September 4, 2003, effective September 8, 2003, through a
private placement with institutional investors. The table below shows the significant changes of which we are aware in the
percentage of ownership of our shares by our major shareholders during the past
three years. 64




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##### Table of Contents



December 31, 2003
    
    December 31, 2002
    
    December 31, 2001Number of
    
    
    
    
    
    
    
    Number of
    
    
    
    
    
    
    
    
    
    Number ofshares
    
    Capital %
    
    Voting%
    
    shares
    
    Capital%
    
    Voting%
    
    shares
    
    Capital%
    
    Voting%Groupe Industriel
Marcel Dassault
(GIMD)
    
    
    51,184,857
    
    
    
    45.1
    %
    
    
    42.4
    %
    
    
    51,184,857
    
    
    
    44.7
    %
    
    
    42.0
    %
    
    
    50,763,496
    
    
    
    44.3
    %
    
    
    44.6
    %French State
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,821,334
    
    
    
    15.6
    %
    
    
    14.6
    %
    
    
    17,821,334
    
    
    
    15.6
    %
    
    
    15.6
    %Charles Edelstenne(1)
    
    
    7,658,007
    
    
    
    6.8
    %
    
    
    12.7
    %
    
    
    7,657,884
    
    
    
    6.7
    %
    
    
    12.5
    %
    
    
    7,632,884
    
    
    
    6.7
    %
    
    
    6.7
    %SW Securities
L.L.C.(2)(3)
    
    
    359,438
    
    
    
    0.3
    %
    
    
    
    
    
    
    391,410
    
    
    
    0.3
    %
    
    
    
    
    
    
    502,417
    
    
    
    0.4
    %
    
    
    0.0
    %Dassault Systèmes(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,033
    
    
    
    0.0
    %
    
    
    0.0
    %Public
    
    
    54,195,716
    
    
    
    47.8
    %
    
    
    44.9
    %
    
    
    37,470,527
    
    
    
    32.7
    %
    
    
    30.9
    %
    
    
    37,243,961
    
    
    
    32.6
    %
    
    
    32.7
    %All directors and
executive officers
as a group(4)
    
    
    5,647
    
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    44,829
    
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    482,079
    
    
    
    0.4
    %
    
    
    0.4
    %Total
    
    
    113,403,665
    
    
    
    100
    %
    
    
    100
    %
    
    
    114,570,841
    
    
    
    100
    %
    
    
    100
    %
    
    
    114,475,204
    
    
    
    100
    %
    
    
    100
    %
  (1)
    
    Sole beneficial owner of 7,656,465 shares at December 31, 2003, 7,656,342
shares at December 31, 2002 and 7,631,342 shares at December 31, 2001 and
has voting and dispositive powers with respect to 1,542 shares held in
trust for the benefit of his family.(2)
    
    SW Securities L.L.C. is a subsidiary of SolidWorks Corporation that holds
issued but not outstanding shares solely for distribution to holders of
stock options under the 1994 SolidWorks stock option plan.(3)
    
    Shares owned by SW Securities L.L.C. in 2003, 2002 and 2001 and shares
owned by Dassault Systèmes in 2001 are the only shares that are not
outstanding.(4)
    
    Excluding Charles Edelstenne. To our knowledge, there are no other shareholders holding more than 5% of
our share capital or voting rights.  B.
    
    Related Party Transactions. We license our products to Dassault Aviation, one of our former direct
shareholders whose president is our Chairman, using commercial terms consistent
with those used by our other customers of similar size. We recorded licensing
revenue from Dassault Aviation of 5,779,000 for the year ended December 31,
2003. We also provide services and support to Dassault Aviation. This activity
generated revenues of 9,298,000 in the year ended December 2003. See Note P
to our consolidated financial statements. Most of our development organizations subcontract software development
work to 3D PLM Software Solutions Limited (3D PLM), a joint venture between
Dassault Systèmes and Geometric Software Solutions Co. Ltd., located in India.
This joint venture was created in January 2002 and works virtually exclusively
for us, and we retain the resulting intellectual property. We account for 3D
PLM as an equity investment and show our share of its results under Equity in
net income of unconsolidated affiliates-joint ventures. 3D PLMs total
revenue amounted to 5.7 million in 2003. Since January 15, 2004, the Audit Committee has been responsible for
pre-approving all related party transactions pursuant to a new Nasdaq corporate
governance requirement.  C.
    
    Interests of Experts and Counsel. Not applicable. 65




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##### Table of Contents



Item 8:   Financial Information  A.
    
    Consolidated Statements and Other Financial Information. See Item 18: Financial Statements for a list of financial statements
contained in this report. Legal Proceedings We are involved in litigation from time to time in the ordinary course of
business. We believe that there is no outstanding or threatened litigation or
arbitration which has recently had or is likely to have a significant impact on
our financial standing, our activities, or results. Dividend Policy We have paid dividends in each year since 1986. The payment and amount of
dividends depend on our earnings and financial condition and such other factors
as the Board of Directors deems relevant. Dividends are subject to
recommendation by the Board of Directors and a vote by the shareholders at the
ordinary general shareholders meeting. Dividends are paid in euro. Our dividends in respect of 2001 was equal to approximately 26% of our net
income, our 2002 dividend was equal to approximately 28% of our net income, and
our 2003 dividend, as approved by our last general shareholders meeting held
on June 2, 2004, is equal to 28% of net income. Future dividends will depend
on our earnings, financial condition and other factors. Dividends paid to holders of ADSs or shares who are not residents of
France generally will be subject to French withholding tax at a rate of 25%.
Holders who qualify for benefits under an applicable tax treaty and who comply
with the procedures for claiming treaty benefits may be entitled to a reduced
rate of withholding tax and, in certain circumstances, an additional payment
(net of withholding tax) representing all or part of the French avoir fiscal,
or tax credit, under conditions provided for in the relevant treaty and under
French law. See Item 10E: Taxation  French Taxation  Taxation of
Dividends. Prospective purchasers of ADSs or shares should consult their own
advisers with respect to the tax consequences of an investment in ADSs or
shares. The table below sets forth, in respect of the years indicated, the amount
of dividends paid per share excluding the French avoir fiscaland the amount of
dividends paid per share including the French avoir fiscal(before deduction of
applicable French withholding tax). Dividends declared in respect of a given
year are paid in the following year. Year to which
    
    Shares Outstanding
    
    Dividend per Share
    
    Dividend per ShareDividend Relates(1)
    
    at Year End
    
    Excluding avoir fiscal(2)
    
    Including avoir fiscal(2)1998
    
    
    111,863,091
    
    
    FF
    1.45
    
    
    $
    0.23
    
    
    FF
    2.175
    (3)
    
    or
    
    
    FF
    2.1025
    (4)
    
    $0.34 or $0.331999
    
    
    112,392,052
    
    
    FF
    1.75
    
    
    $
    0.25
    
    
    FF
    2.625
    (3)
    
    or
    
    
    FF
    2.45
    (4)
    
    $0.38 or $0.362000
    
    
    113,339,585
    
    
    
    0.31
    
    
    $
    0.27
    
    
    
    0.465
    (3)
    
    or
    
    
    
    0.3875
    (4)
    
    $0.40 or $0.332001
    
    
    113,943,754
    
    
    
    0.33
    

    
    $
    0.31
    
    
    
    0.495
    (3)
    
    or
    
    
    
    0.38
    (4)
    
    $0.48 or $0.362002
    
    
    114,179,431
    
    
    
    0.33
    
    
    $
    0.39
    
    
    
    0.495
    (3)
    
    or
    
    
    
    0.363
    (4)
    
    $0.57 or $0.422003
    
    
    113,044,227
    
    
    
    0.34
    
    
    $
    0.43
    
    
    
    0.51
    (3)
    
    or
    
    
    
    0.394
    (4)
    
    $0.64 or $0.50
  (1)
    
    Pursuant to French law, payment of dividends must be made within nine
months following the end of the fiscal year to which they relate.(2)
    
    Dividends for 1998 through 1999 were paid in French francs and, for 2000
through 2003, were declared in euro. U.S. dollar amounts are translated
at the Noon Buying Rate on the date the dividend was paid July 1, 1999 
FF 6.41 per $1.00; July 1, 2000  FF 6.89 per $1.00; June 25, 2001  1.16
per $1.00; June 18, 2002  1.05 per $1.00; June 18, 2003  0.8540 per
$1.00; June 22, 2004 
0.8257 per $1.00.(3)
    
    Dividends per share for individual shareholders and shareholding entities
benefiting from a tax credit at 50% for 1998, 1999, 2000, 2001, 2002 and
2003.(4)
    
    Dividends per share for shareholding entities benefiting from a tax
credit at 45% for 1998, 40% for 1999, 25% for 2000, 15% for 2001 and 10%
for 2002 and 2003. 66




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##### Table of Contents



B.
    
    Significant Changes. There has been no significant adverse change to our financial condition
since the date of the annual financial statements included in this report. 
 Item 9:   The Offer and Listing  A.
    
    Listing Details. Our shares have been listed in France on the Premier Marché, Euronext
Paris, since June 28, 1996. In the United States, the shares trade in the form
of ADSs. The ADSs are quoted through the Nasdaq Stock Markets National Market
(the Nasdaq National Market) under the symbol DASTY. Shares issued upon
exercise of our stock options during the period from January 1 through the date
dividends are paid in a given year will not have dividend rights with respect
to such dividends and during this period will be quoted with a second CUSIP
(DASXY). American Depositary Receipts evidencing the ADSs are issuable by
JPMorgan Chase Bank, as Depositary. The following table sets forth the high and low prices of our shares on
Euronext Paris and our ADSs on the Nasdaq National Market since 1999. Annual High and Low Prices of shares on Euronext Paris and ADSs on the Nasdaq
National Market Euronext Paris
    
    NasdaqHigh
    
    Low
    
    High
    
    Low
    
    U.S.$1999
    
    
    65.30
    
    
    
    29.80
    
    
    
    65.00
    
    
    
    30.062000
    
    
    126.00
    
    
    
    55.80
    
    
    
    121.19
    
    
    
    57.502001
    
    
    77.45
    
    
    
    29.50
    
    
    
    72.88
    
    
    
    26.902002
    
    
    59.40
    
    
    
    15.19
    
    
    
    52.00
    
    
    
    15.052003
    
    
    39.39
    
    
    
    19.10
    
    
    
    46.25
    
    
    
    21.252004
(through June 29)
    
    
    38.81
    
    
    
    30.05
    
    
    
    49.41
    
    
    
    36.87
    Quarterly High and Low Prices of shares on Euronext Paris and ADSs on the
Nasdaq National Market Euronext Paris
    
    NasdaqHigh
    
    Low
    
    High
    
    Low
    
    U.S.$20021st quarter
    
    
    59.40
    
    
    
    47.60
    
    
    
    52.00
    
    
    
    41.602nd quarter
    
    
    55.85
    
    
    
    38.20
    
    
    
    49.93
    
    
    
    36.303rd quarter
    
    
    46.30
    
    
    
    15.37
    
    
    
    45.78
    
    
    
    15.254th quarter
    
    
    28.80
    
    
    
    15.19
    
    
    
    28.97
    
    
    
    15.0520031st quarter
    
    
    25.39
    
    
    
    19.10
    
    
    
    26.31
    
    
    
    21.502nd quarter
    
    
    35.00
    
    
    
    20.39
    
    
    
    39.96
    
    
    
    22.453rd quarter
    
    
    36.32
    
    
    
    27.25
    
    
    
    39.39
    
    
    
    32.384th quarter
    
    
    39.39
    
    
    
    29.85
    
    
    
    46.09
    
    
    
    36.2520041st quarter
    
    
    39.00
    
    
    
    29.42
    
    
    
    49.41
    
    
    
    36.87
    67




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Monthly High and Low Prices of shares on Euronext Paris and ADSs on the Nasdaq
National Market Euronext Paris
    
    NasdaqHigh
    
    Low
    
    High
    
    Low
    
    U.S.$October 2003
    
    
    39.39
    
    
    
    29.85
    
    
    
    44.48
    
    
    
    36.25November 2003
    
    
    37.50
    
    
    
    34.07
    
    
    
    44.95
    
    
    
    40.83December 2003
    
    
    38.30
    
    
    
    34.50
    
    
    
    46.09
    
    
    
    43.20January 2004
    
    
    39.00
    
    
    
    34.99
    
    
    
    49.41
    
    
    
    44.82February 2004
    
    
    37.22
    
    
    
    34.05
    
    
    
    47.11
    
    
    
    42.84March 2004
    
    
    36.45
    
    
    
    29.62
    
    
    
    45.52
    
    
    
    36.87April 2004
    
    
    35.48
    
    
    
    33.05
    
    
    
    35.23
    
    
    
    33.15May 2004
    
    
    37.59
    
    
    
    32.41
    
    
    
    45.75
    
    
    
    39.49June 2004
(through June 29)
    
    
    38.81
    
    
    
    36.42
    
    
    
    46.81
    
    
    
    44.00
    Euronext Paris Securities approved for listing by Euronext Paris are traded in one of
three regulated markets: Premier Marché, Second Marché and Nouveau Marché. The
securities of most large public companies in France are listed on the Premier
Marché. Securities listed on the Premier Marché are officially traded through
authorized financial institutions that are members of Euronext Paris. Trading
takes place continuously on each business day from 9:00 a.m. to 5:25 p.m.
(Paris time), with a pre-opening session from 7:15 a.m. to 9:00 a.m. and a
pre-closing session from 5:25 p.m. to 5:30 p.m. during which transactions are
recorded but not executed, a closing auction at 5:30 p.m. and a trading at
last from 5:30 p.m. to 5:40 p.m. Any trade of securities that occurs after a
stock exchange session closes is recorded on the next business day at the
previous sessions closing price for that security. Euronext Paris publishes a
daily official price list that includes among other things, price information
on listed securities. Euronext Paris has introduced continuous electronic
trading during trading hours for most actively listed securities. Securities listed by Euronext Paris are placed in one of the two
categories, Continu or Fixing, depending on their trading volume. Our common
shares are listed in the category known as Continu, which includes the most
actively traded securities. The minimum yearly trading volume required for a
security to be placed in Continu for a company already listed on a regulated
market of Euronext Paris is 2,500 trades. Euronext Paris may suspend trading in a security listed on the Premier
Marché if the quoted price of the security exceeds certain price limits defined
by the regulations of Euronext Paris. In particular, if the quoted price of a
Continu security varies by more than 10% from the previous days closing price
(reference price), Euronext Paris may suspend trading in that security for up
to 4 minutes. Once trading has recommenced, further suspensions for up to 4
minutes are also possible if the price again varies by more than 10% from a new
reference price equal to the price which caused the first trading suspension.
During the continuous trading session, Euronext Paris may also suspend trading
for a 4-minute period if the price varies by more than 2% from the last traded
price. Euronext Paris also may suspend trading of a security listed on the
Premier Marché in certain other limited circumstances, including, for example,
when there is unusual trading activity in the security. In addition, in
certain exceptional cases, the Autorité des Marchés Financiers (AMF), the
self-regulatory organization that has general regulatory authority over the
French stock exchanges, may also suspend trading. Trades of securities listed on the Premier Marché are settled on a cash
basis on the third day following the trade. However, market intermediaries are
also permitted to offer investors a deferred settlement service (service de
réglement différéor SRD) for a fee. The deferred settlement service is only
available for trades in securities which have both a total market
capitalization of at least 1 billion and a daily average volume of trades
aggregating at least 1 million and which are cited on the list published by
Euronext Paris. Our shares are eligible for the deferred settlement service.
Investors in shares eligible for SRD can elect on the determination date (date
de liquidation), which is, at the latest, the fifth trading day before the end
of the month, either to settle the trade by the last trading day of the month
or to pay an additional fee and postpone the settlement to the determination
date of the following month. Ownership of equity securities traded on a deferred settlement basis is
considered to have been transferred only after such securities have been
registered in the purchasers account. Under French securities regulations,
any 68




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sale of securities traded on a deferred settlement basis during the month
of a dividend payment date is deemed to occur after the dividend has been paid.
If the sale takes place before, but during the month of, a dividend payment
date, the purchasers account will be credited with an amount equal to the
dividend paid, and the sellers account will be debited by the same amount. Prior to any transfer of securities held in registered form on the Premier
Marché, the securities must be converted into bearer form and accordingly
placed in an account maintained by an accredited intermediary with Euroclear
France S.A., a registered clearing agency. Transactions in securities are
initiated by the owner giving instructions (through an agent, if appropriate)
to the relevant accredited intermediary. Trades of securities listed on the
Premier Marché are cleared through clearing 21, a common Euronext platform,
and settled through Euroclear France S.A. using a continuous net settlement
system. A fee or a commission is payable to the broker-dealer or other agent
involved in the transaction.  B.
    
    Plan of Distribution. Not applicable.  C.
    
    Markets. See Item 9A: Listing Details.  D.
    
    Selling Shareholders. Not applicable.  E.
    
    Dilution. Not applicable.  F.
    
    Expenses of the Issue. Not applicable. 
 Item 10:   Additional Information  A.
    
    Share Capital. Not applicable.  B.
    
    Memorandum and Articles of Association. The information required for this Item 10B is specifically incorporated by
reference to the relevant information in theForm F-1filed by us with the
Securities and Exchange Commission on June 4, 1996 (Registration Statement on
Form F-1). The information provided below supplements the information
provided in the Registration Statement onForm F-1or, to the extent
inconsistent with such information, supersedes it. In this section, we summarize material information concerning our share
capital, together with material provisions of applicable French law and our
statuts(by-laws). An unofficial English translation of our statutsis
included as an exhibit to this report. You may obtain copies of our statutsin
French from the Registry of Commerce and Companies of Nanterre, France where we
are registered under number 322 306 440. Please refer to the complete
statuts or the unofficial English translation thereof for additional details. Board of Directors For a complete description of the powers of the directors under French law
and our statuts, see Item 6: Directors, Senior Management and Employees. 69




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Share Capital As of May 31, 2004, our share capital was 113,515,436 divided into
113,515,436 shares with a nominal value of 1.0 per share, including 340,131
treasury shares which under French law have no voting rights and no rights to
dividends. All the shares are fully paid. Purposes of the Company As set forth in Article 2 of our statuts, the purposes of our Company, in
France as well as abroad, are (1) to develop, produce, market, purchase, sell,
rent and provide after-sale service of computer hardware and/or software, (2)
to supply and sell services to users specifically in the area of training,
demonstration, methodology, display and utilization, and (3) to supply and sell
computer resources, together or separate from software or service, in the areas
of computer-aided manufacturing and design, management of the lifecycle of
products, collaborative work, technical databases, management of manufacturing
processes, and software development tools as well as research and development
in these areas. For a complete description of our purposes, please refer to
our statuts. Shareholders Meetings and Voting Rights Appointment of agents. In the case of the Companys bankruptcy, any of the following may request
the court to appoint an agent who may call a shareholders meeting in certain
instances: (i) one or several shareholders holding at least 5% of our share
capital; (ii) duly qualified associations of shareholders who have held their
shares in registered form for at least two years and who together hold at least
a specified percentage of the voting rights of our Company; (iii) the statutory
auditors; (iv) the workers committee in a case of emergency; or (v) a majority
of shareholders according to either share capital or voting rights after a
public tender offer or the acquisition of a controlling block of shares. Additional resolutions for shareholders meetings. Additional resolutions to be submitted to a vote of the shareholders at
the meeting may be proposed to the Board of Directors within 10 days of the
publication of the preliminary notice in the BALO by one or several
shareholders holding a specified percentage of our share capital, the workers
committee, or a duly qualified association of shareholders who have held their
shares in registered form for at least two years and who together hold at least
a specified percentage of the voting rights of our Company. During the two weeks preceding a meeting of shareholders, any shareholder
may submit written questions to the Board of Directors relating to the agenda
for the meeting. The Board of Directors must respond to these questions. Attendance and voting at shareholders meetings. In general, each share confers on the shareholder the right to one vote.
Nevertheless, our statutsprovide that a double voting right will be awarded to
all fully paid-up shares held in registered form for at least two consecutive
years in the name of the same holder. Under French company law, shares of a
company held by entities controlled directly or indirectly by that company are
not entitled to voting rights and do not count for quorum or voting purposes.
In the case of a capital increase by incorporation of reserves, profits or
premiums, this double voting right will be attached on the date of their
issuance to registered shares newly allotted to a shareholder in consideration
for the old shares giving rise to such right. Our statutsprovide that upon decision by our Board of Directors,
shareholders may participate and vote at general shareholders meetings by
videoconference or by other means of telecommunication permitting shareholders
identification in accordance with applicable laws and regulations. If such
participation is permitted, shareholders who participate in this manner will be
counted for the calculation of a quorum and a majority at general shareholders
meetings. Proxies and votes by mail. A shareholder not domiciled in France, as defined in the French Civil
Code, may be represented at a shareholders meeting by an intermediary
registered under the conditions set forth by the legal and regulatory
provisions in force. Such a shareholder will therefore be considered to be
present at the meeting for the computation of the quorum and the majority.
Alternatively, the shareholder may send us a blank proxy (dated and signed)
without nominating a representative. In this case, the chairman of the meeting
will vote the blank proxies in favor of all resolutions proposed or agreed to
by the Board of Directors and against all others. 70




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Financial statements and other communications with shareholders. In connection with any shareholders meeting, we must provide a set of
documents, including our annual report and a summary of the results of the five
previous fiscal years in French GAAP, to any shareholder who so requests.
French company law also requires that a special report must be provided to the
ordinary shareholders meeting regarding stock options authorized and/or
granted by us. Pursuant to a new French law n°2003-706 of August 1, 2003 (loi de sécurité
financière), the Chairman of our Board of Directors prepared a special report
to the annual general shareholders meeting regarding the work of our Board of
Directors, the internal controls procedures implemented by our Company and the
restrictions if any, that our Board of Directors have placed on powers granted
to the Directeur Général. More precisely, this report describes our internal
control objectives, the organization of internal control participants and
internal control procedures in place. This report was presented to our last
general shareholders meeting held on June 2, 2004. Dividends Legal reserve. At December 31, 2003, our legal reserve was 11.5 million. Distribution of dividends. French companies typically pay dividends once per year. Shares issued
upon exercise of our stock options during the period from January 1 through the
date dividends are paid in a given year will not have dividend rights with
respect to such dividends and during this period will be quoted with a second
CUSIP (DASXY). Following the dividend payment date, these shares will be
assimilated to, and prospectively will entitle the holder to the same rights
and benefits as shares issued before January 1. In addition, our statutsauthorize our shareholders, in an ordinary
general meeting, to authorize the grant to each shareholder of an option to
receive all or part of any dividends declared either in cash or in our shares. Changes in Share Capital Increases in share capital. As provided by French company law, our share capital may be increased only
with the shareholders approval at an extraordinary general shareholders
meeting following a recommendation of the Board of Directors. Increases in our
share capital may be effectuated by:  
    
    issuing additional shares;
    
    increasing the nominal value of existing shares; or
    
    issuing investment certificates or a new class of equity securities. Increases in share capital by issuing additional securities may be effectuated by issuing such securities:  
    
    for cash;
    
    for assets contributed in kind;
    
    by conversion, exchange or redemption of debt securities previously issued;
    
    by exercise of any other securities giving rights to such securities, such as warrants or stock options;
    
    by capitalization of profits, reserves or share premiums;
    
    subject to various conditions, in satisfaction of debt incurred by our Company; or
    
    any combination of the above. Decisions to increase the share capital through the capitalization of
reserves, profits and/or share premiums require the approval of an
extraordinary general meeting, acting under the quorum and majority
requirements applicable to ordinary shareholders meetings. Increases
effectuated by an increase in the nominal value of shares 71




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require unanimous
approval of the shareholders, unless effectuated by capitalization of reserves,
profits or share premiums. All other capital increases require the approval of
shareholders at an extraordinary general meeting. The shareholders may delegate the right to carry out any increase in share
capital (other than for an in-kind contribution) to the Board of Directors,
provided that this increase has been previously authorized by the shareholders.
The Board of Directors may further sub-delegate this right to our Chairman and
our Chief Executive Officer. Each time the shareholders decide to carry out a
capital increase or decide to delegate to the Board of Directors the right to
carry out a capital increase (except for a contribution in kind or when it
results from an earlier issue of securities giving rights to shares), they must
decide on whether or not to carry out a capital increase reserved to employees
of our Company and its subsidiaries or whether or not to delegate to the Board
of Directors the right to implement such reserved capital increase. At our last shareholders meeting held on June 2, 2004, our shareholders
authorized our Board of Directors to issue shares and/or any other securities
granting access, immediately or in the future, at any time or on a fixed date
by subscription, conversion, exchange, redemption, presentation of a warrant or
in any other manner, to a portion of our share capital, provided, however, that
(i) the nominal amount of increases in the share capital to be made either now
or in the future pursuant to this delegation may not exceed 25 million, and
(ii) the nominal amount of debt securities to be issued pursuant to such
delegation shall not exceed a maximum of 1 billion. This authorization, given
with and without preferential subscription rights, replaces the authorization
granted by our shareholders at our general shareholders meeting on May 28,
2002. As of May 31, 2004, we had not engaged in any increase of our share
capital under the resolutions of May 28, 2002. Decreases in share capital. According to French company law, any decrease in our share capital
requires approval by the shareholders entitled to vote at an extraordinary
general meeting. The shareholders may delegate the right to carry out any
decrease in share capital to the Board of Directors, provided that this
decrease has been previously authorized by the shareholders. In the case of a
capital reduction, other than a reduction to absorb losses or a reduction as
part of a program to purchase our own shares, all shareholders must be offered
the opportunity to participate in such a reduction. The share capital may be
reduced either by decreasing the nominal value of the outstanding share capital
or by reducing the number of outstanding shares. The number of outstanding
shares may be reduced either by an exchange of shares or by the repurchase and
cancellation of shares. Holders of each class of shares must be treated
equally unless each affected shareholder agrees otherwise. Preemptive Subscription Rights According to French company law, if we issue securities for cash giving a
right either immediately or at a later date to subscribe to our new shares,
current shareholders will have preemptive subscription rights to these
securities on a pro rata basis. These preemptive rights require us to give
priority treatment to those shareholders. The rights entitle the individual or
entity that holds them to subscribe to any issuance of securities that may
increase the share capital of our Company by means of a cash payment or a
settling of cash debts. Preemptive subscription rights are transferable during
the subscription period relating to a particular offering. These rights may
also be listed on Euronext Paris. A two-thirds majority of the shares entitled to vote at an extraordinary
general meeting may vote to waive preemptive subscription rights with respect
to any particular offering. French law requires that the Board of Directors
and our independent auditors present reports that specifically address any
proposal to waive preemptive subscription rights. In the event of a waiver,
the issuance of new securities must be completed within two years, the period
prescribed by law. The shareholders may also decide at an extraordinary
general meeting to give the existing shareholders a non-transferable priority
right to subscribe to such new securities during a limited period of time.
Shareholders may notify us if they wish to waive their own preemptive
subscription rights with respect to any particular offering. Form, Holding and Transfer of Shares Form and holding of shares. Our statutspermit us to request that Euroclear France provide us at any
time with the identity, nationality and address of the holders of our shares or
other securities granting immediate or future voting rights, held in bearer
form, and with the number of shares or other securities so held. French
company law states that shares held by any 72




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non-French resident may be held by
an intermediary on the shareholders behalf in a collective account or in
several individual accounts. The intermediary must declare his position as an
intermediary holding shares on behalf of the
beneficial owner. Consequently, the owner of shares recorded in the
collective account or in several individual accounts by an intermediary will be
represented at the general shareholders meetings by this intermediary. Transfer of shares. Registered shares must be converted into bearer form before being
transferred on Euronext Paris and, accordingly, must be registered in an
account maintained by an accredited intermediary. A shareholder may initiate a
transfer by giving instructions to the relevant accredited intermediary. For dealings on Euronext Paris, an impôt sur les opérations de bourse, or
a tax assessed on the price at which the securities were traded, is payable at
the rate of 0.3 percent on transactions up to 153,000 and at a rate of 0.15
percent thereafter, subject to a rebate of 23 per transaction and a maximum
assessment of 610 per transaction. Non-residents of France are generally not
subject to the payment of such impôt sur les opérations de bourse. In
addition, a fee or commission is payable to the broker, accredited intermediary
or other agent involved in the transaction (whether within or outside France).
No registration duty is normally payable in France, unless a transfer
instrument has been executed in France. See  Taxation
 French Taxation  Taxation on Sale or Disposal of
Shares, above. Requirements for Holdings Exceeding Certain Percentages French company law provides that any individual or entity, including a
holder of ADSs, acting alone or in concert with others, that becomes the owner,
directly or indirectly, of more than one-twentieth, one-tenth, one-fifth,
one-third, one-half or two-thirds of the outstanding share capital or the
voting rights of a listed company in France, or whose holdings fall below any
such level, must notify us within five trading days of the date it crosses the
threshold of the number of shares or ADSs it holds and their voting rights.
The individual or entity must also notify the AMF within five trading days of
such date of the number of equity securities it holds and the voting rights
attached thereto. This information will be made public pursuant to the
conditions set forth in the General Regulation of the AMF. French law and the AMF impose additional reporting requirements on
persons, acting alone or in concert with others, who acquire more than 10
percent, and subsequently, as the case may be, more than 20 percent of the
outstanding shares or voting rights of a listed company. These persons must
file with the AMF and such listed company a report disclosing its intentions
for the next 12 months with respect to such company. In this report, the
acquirer must disclose whether or not it intends, within the 12-month period
following the acquisition, to increase its shareholding, to acquire control of
such company, or to seek a nomination to such Companys Board of Directors.
Such report must be filed with the AMF and with such listed company within 10
trading days of the date such threshold has been crossed. The AMF publicly
releases the notice. The acquirer must also publish a press release stating
its intentions in a financial newspaper of national circulation in France. The
acquirer may amend its stated intentions, provided that it does so on the basis
of significant changes in its own situation or that of the shareholders. Upon
any change of intention, it must file a new report. In addition, our statutsprovide that any person who, directly or
indirectly, acting alone or in concert with others, becomes the owner of more
than 2.5 percent, or any subsequent multiple of 2.5 percent up to 50 percent,
of our share capital or voting rights, or whose holdings fall below any such
percentage, shall be required to notify us of such fact within five trading
days of such acquisition by registered mail. The notification period was
reduced from fifteen to five days as a result of a modification to our by-laws
by our last general shareholders meeting held on June 2, 2004. Failure to
comply with such notification provisions will result in the suspension for up
to two years of the voting rights attached to the excess of the relevant
threshold if requested in the minutes of a shareholders meeting by one or more
shareholders holding equity securities representing at least 2.5 percent of our
share capital or voting rights. Purchase of Our Own Shares Under French law, we may not subscribe to our own shares. However, we
may, directly or through an intermediary acting on our behalf, purchase our own
shares to, among other things:  
    
    reduce our share capital by canceling such acquired shares,
with approval of our shareholders at an extraordinary meeting;
    
    provide shares to our employees under a profit-sharing plan or
stock option plan; or 73




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
    
    acquire up to 10 percent of our share capital within a period
of time, which may not exceed eighteen months, in connection with a
corporate share repurchase program, provided that our shares are
listed on a regulated market (i.e., on the Premier Marché, the Second
Marché or the Nouveau Marché),
subject to the filing of a Note dinformationthat has received a
visa of the AMF and the approval from the shareholders at an ordinary
meeting. French regulation allows listed companies to file the Note
dinformationwith the AMF, either prior to the ordinary general
meeting granting the authorization or after the boards decision to
launch the program i.e., after the ordinary general meeting. In addition, under French law we may not, directly or through a person
acting on our behalf, own more than 10 percent of our outstanding share capital
or, if we have different classes of shares, more than 10 percent of the shares
in each class. We must hold any shares we repurchase in registered form. These shares
also must be fully paid up. Shares repurchased by us are deemed outstanding
under French law but are not entitled to dividends or voting rights, and we may
not exercise the preemptive subscription rights attached to them. The shareholders, at an extraordinary general meeting, may decide not to
take these shares into account in determining the preemptive subscription
rights attached to the other shares. However, if the shareholders decide to
take them into account, we must either sell the rights attached to the shares
we hold on the market before the end of the subscription period or distribute
them to the other shareholders on a pro rata basis. At our last general shareholders meeting held on June 2, 2004, our
shareholders authorized the Board of Directors to implement a share repurchase
program, limited to 10 percent of our share capital. This authorization
expires on the annual ordinary general shareholders meeting convened to
approve the accounts for the 2004 fiscal year. We may not buy shares at a
price exceeding 60 per share (transaction fees excluded). This authorization
replaces the one that was granted by our shareholders at the general
shareholders meeting on May 28, 2003. At such meeting, our shareholders also
authorized our Board of Directors to cancel the repurchased shares, and reduce
our share capital by up to 10 percent within any 24-month period. As of May 31, 2004, we have repurchased no shares under the resolution of
May 28, 2003. Trading in Our Own Shares Under Règlementn° 90-04 of the Commission des Opérations de Bourse, or
COB, as amended, we may not trade in our shares for the purpose of manipulating
the market. There are three requirements for trades by a company in its own
shares to be considered valid. Specifically:  
    
    trades must be executed on behalf of the company by only one
intermediary or, if the issuer uses its share repurchase program in
part by way of derivatives, by two intermediaries provided that the
issuer is able to ensure an appropriate coordination between the
intermediaries;
    
    any block trades may not be at a price above the current market
price; and
    
    each trade must be made at a price that falls between the
lowest and the highest trading price of the trading session during
which it is executed. If a Companys shares are continuously quoted (cotation en continu), then
a trade must meet the following further requirements to be considered valid:  
    
    the trade must not influence the determination of the quoted
price before the opening of trading, at the opening of the trading or
session, at the first trade of the shares, at the reopening of
trading following a suspension, or, as applicable, in the last
half-hour of any trading session or at the fixing of the closing
price;
    
    the trade must not be carried out in order to influence the
price of a derivative instrument relating to the Companys shares;
and
    
    the trade must not account for more than 25 percent of the
average total daily trading volume on the Premier Marché in the shares during the 3 trading days immediately preceding the trade.
This last requirement applies only to shares that are eligible for
the deferred settlement service (service de règlement différé). 74




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However, there are two periods during which we are not permitted to trade
in our own securities: the 15-day period before the date on which we make our
consolidated or annual accounts public, and the period beginning on the date at
which we become aware of information that, if disclosed, would have a
significant impact on the market price of our securities and ending on the date
this information is made public. This requirement does not apply to trades
executed on behalf of the issuer by an intermediary acting pursuant to a
liquidity agreement (contrat de liquidité) complying with a charter of ethics
approved by the AMF. After making an initial purchase of our own shares, we must file monthly
reports with the AMF that contain specified information about subsequent
transactions. The AMF makes this information publicly available. Ownership of Shares or ADSs by Non-French Residents Under French law, there is normally no limitation on the right of
non-French residents or non-French security holders to own, or, where
applicable, to vote securities of a French company. C. Material Contracts. For a discussion of material contracts between IBM and our Company, see
Item 3D: Risk Factors, Item 4B: Business Overview and Item 5A: Operating
Results. D. Exchange Controls. Under current French exchange control regulations, there are no
limitations on the amount of payments that may be remitted by a French company
to non-French residents. Laws and regulations concerning foreign exchange
controls do require, however, that all payments on transfers of funds made by a
French resident to a non-French resident be handled by an accredited
intermediary. In France, all credit establishments, including all registered
banks, are accredited intermediaries. E. Taxation. French Taxation The following is a general summary of the material French tax consequences
of owning and disposing of shares by a holder that is not a resident of France
and does not hold the shares in connection with a business conducted in France.
The statements relating to French tax laws set out below are based on the laws
in force as of the date hereof, and are subject to any changes in applicable
French tax laws or in any applicable double taxation conventions or treaties
with France occurring after such date. In particular, holders of shares should be aware that the French Budget
Law for 2004 (n° 2003-1311 dated December 30, 2003) has abolished the avoir
fiscaland the précomptewith respect to dividends to be paid to French
individual shareholders as of January 1, 2005. However, French non-individual
shareholders will no longer be entitled to use the avoir fiscalas of January
1, 2005. The French Budget Law for 2004 nonetheless provides that French
individual shareholders will be entitled, with respect to dividends paid as of
January 1, 2005, to a new tax credit equal to 50% of the dividend paid capped
at 230 or, as the case may be, 115 depending on the marital status of the
individual. Although yet unclear, non-resident individual shareholders that are
entitled to and that comply with the procedures for claiming benefits under an
applicable tax treaty should be entitled (i) to the refund of the avoir fiscal
with respect to distributions paid until December 31, 2004 and (ii) to the new
tax credit with respect to dividends paid as of January 1, 2005. Also,
non-resident shareholders that are not entitled to benefit from the transfer of
the avoir fiscalbut are otherwise entitled to benefit from a double tax treaty
(i.e., corporate shareholders and individuals, if they are not entitled to the
avoir fiscalrefund), should be entitled to a refund of the précompte, if any,
that our Company will pay in cash on distributions it will make in 2004. In addition, the French Budget Law for 2004 has implemented a temporary
equalization tax that will be levied at the rate of 25% (assessed on the net
dividends before withholding tax) on dividends paid in 2005 out of profits that
have not been taxed at the ordinary corporate income tax rate or that have been
earned and taxed more than five years before the distribution. However, unlike
the précompte, such temporary equalization tax will not be refundable to
non-resident shareholders. This discussion is intended only as a descriptive summary and does not
purport to be a complete analysis or list of all potential tax effects of the
purchase or ownership of the shares. 75




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Potential purchasers of shares are urged to consult their own tax advisers
concerning the consequences of ownership and disposal of shares. Taxation on Sale or Disposal of Shares.Subject to more favorable
provisions of any relevant double tax treaty, persons who are not French
residents for the purpose of French taxation (as well as, under certain
conditions, foreign states, international organizations and certain foreign
public bodies) and who have held, alone or with relatives, not more than 25%,
directly or indirectly, of our dividend rights (bénéfices sociaux) at any time
during the preceding five years are not generally subject to any French income
tax or capital gains tax on any sale or disposal of shares. If a share transfer is evidenced by a written agreement, such share
transfer agreement is, in principle, subject to registration formalities and
therefore to a 1% registration duty assessed on the higher of the purchase
price and the market value of the shares (subject to a maximum assessment of
3,049 per transfer), provided that, under certain circumstances, no duty is
due if such written share transfer agreement is executed outside France. Taxation of Dividends.In France, dividends are paid out of after-tax
income. French residents were entitled to a tax credit, known as the avoir
fiscal, in respect of dividends distributed by our Company in 2003. The amount of avoir fiscalattached to dividends paid in 2003 was equal
to:  
    
    50% of the dividend paid for (i) individuals and (ii) companies
which own at least 5% of the capital of the French distributing
company and meet the conditions to qualify under the French
parent-subsidiary regime; or
    
    10% of the dividend paid for other shareholders. In addition, if the distribution of dividends by us gave rise to the
précompte, shareholders entitled to the avoir fiscalat the rate of 10%
generally were entitled to an additional amount of avoir fiscalequal to 80% of
the précompte, we paid in cash (the précompteis a tax which is paid by French
companies when they distribute dividends out of certain profits which give rise
to the avoir fiscal). Pursuant to the French Budget Law for 2004, French individual residents
will generally be entitled to the avoir fiscalin respect of dividends to be
distributed by our Company until December 31, 2004, while French corporate
shareholders will not. From 2005 on, French individual shareholders will
instead be entitled to the new tax credit described in detail in the
introduction. Under French domestic law, dividends paid to non-residents are normally
subject to a 25% French withholding tax and non-residents are not eligible for
the benefit of the avoir fiscaland from 2005 on will not be eligible for the
new tax credit. Under most tax treaties entered into between France and other
countries, such withholding tax may, subject to certain conditions, be reduced
and give rise in such other country to a tax credit of the amount of the tax
withheld or, in the case of certain tax treaties, be eliminated. Certain tax
treaties further provide for a refund of the avoir fiscalto such
non-residents. Although the French tax authorities have not issued guidelines to confirm
this point, the provisions of a treaty, insofar as they provide for the
transfer of the avoir fiscalor, as the case may be, a refund of the précompte
(see paragraph on the précomptebelow), should continue to apply to
distributions paid until December 31, 2004, but will no longer apply from 2005
on. It is unclear however, whether non-resident individual shareholders that
benefit from a tax treaty which provides for the transfer of the avoir fiscal
will be entitled to the newly implemented tax credit described above. The following countries and Territoires dOutre-Mer and other territories
have entered into treaties with France whereby tax residents of such countries
and territories may, under certain circumstances, obtain from the French tax
authorities a reduction (generally reducing the withholding tax rate to 15%) of
all or part of such withholding tax and a refund of the avoir fiscal(net of
applicable withholding tax), to the extent, however, that the avoir fiscalis
still available. Australia
Austria
Belgium
    
    India
Israel
Italy
    
    Namibia
Netherlands
New Zealand
    
    Turkey
Ukraine
United Kingdom
    
    Territoires
dOutre-Merand
Other territories:Bolivia
Brazil
Burkina Faso
Canada
    
    Ivory Coast
Japan
Latvia
Lithuania
    
    Niger
Norway
Pakistan
Senegal
    
    United States
Venezuela
    
    Mayotte
New Caledonia
Saint-Pierre et
Miquelon
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Estonia
Finland
Gabon
Ghana
Iceland
    
    Luxembourg
Malaysia
Mali
Malta
Mauritius
Mexico
    
    Singapore
South Korea
Spain
Sweden
Switzerland
Togo
 Treaties with some of the countries and territories listed above contain
specific limitations applicable to corporate entities entitled to benefit from
the avoir fiscal, or limit the rights to the avoir fiscalstrictly to
individual residents (as opposed to corporate entities). In any event,
shareholders other than individuals will lose the benefit of the avoir fiscal
with respect to dividends paid from 2004 on. So long as the avoir fiscalis still available, dividends paid to
non-residents of France benefiting from the avoir fiscalin accordance with a
tax treaty will generally be subject, on the date of payment, to the
withholding tax at the reduced rate provided for by such treaty (subject to
certain filing formalities) rather than to the French withholding tax at the
rate of 25% to be later reduced to the treaty rate, provided, however, that
they establish their entitlement to such reduced rate before the date of
payment. Amounts distributed as dividends by French companies before December 31,
2004 out of profits which have not been taxed at the ordinary corporate income
tax rate or which have been earned and taxed more than five years before the
distribution are subject to a tax known as the précompteif such dividends
carry an avoir fiscal. The précompteis paid by the distributing company to
the French tax authorities and is equal to one-half of the nominal dividend
distributed. When a tax treaty in force does not provide for a refund of the avoir
fiscalor when the non-resident investor is not entitled to such refund but is
otherwise entitled to the benefits of a tax treaty, such investor may currently
obtain from the French tax authorities a refund of such précompteactually paid
in cash by us, if any (net of applicable withholding tax). Non-resident
shareholders entitled to the refund of the précomptethat our Company actually
paid in cash in respect of dividends it distributed in 2003 may claim any such
refund. Although the French tax authorities have not yet issued guidelines on
this matter, such non-resident shareholders should be entitled to the refund of
the précompte, if any, that our Company shall pay on distributions to be made
in 2004. As a consequence of the suppression of the précomptefor dividends which
will be paid as of January 1, 2005, French Budget Law for 2004 implements a
temporary equalization tax that will be levied at the rate of 25% (assessed on
the net dividends before withholding tax) on dividends paid in 2005 out of
profits that have not been taxed at the ordinary corporate income tax rate or
that have been earned and taxed more than five years before the distribution.
However, unlike the précompte, such temporary equalization tax will not be
refundable to the non-resident shareholders. Estate and Gift Tax.France imposes estate and gift tax on shares of
French companies acquired by inheritance or gift from a non-resident of France.
France has entered into estate and gift tax treaties with a number of
countries pursuant to which, assuming certain conditions are met, residents of
the treaty countries may be exempted from such tax or may obtain a tax credit.
Prospective investors in shares should consult their own advisors concerning
the applicability of French estate and gift tax to their holding of our shares
and the availability of, and the conditions for claiming exemption or tax
credit under, such a treaty. Wealth Tax.In the absence of a more favorable tax treaty, the French
wealth tax (impôt de solidarité sur la fortune) does not apply to the shares of
a non-French resident individual investors owning directly or indirectly less
than 10% of our share capital, provided that these shares do not enable their
holder to exercise influence on our Company. Taxation of U.S. Investors The following is a general summary of the material U.S. federal income tax
and French tax consequences to a U.S. Holder who is a beneficial owner of our
ADSs or shares and (a) who owns, directly, indirectly or by attribution, less
than 10% of our capital or our voting stock; (b) who is (i) a citizen or
individual resident of the United States for U.S. federal income tax purposes,
(ii) a corporation (or certain other entity treated as a corporation for U.S.
federal income tax purposes) created in or organized under the laws of the
United States or any state thereof (including the District of Columbia), (iii)
an estate the income of which is subject to U.S. federal income taxation
regardless of its source, or (iv) a trust if a court within the United States
is able to exercise primary supervision over its administration and one or more
U.S. persons have the authority to control all of the substantial decisions of
the trust; (c) who is entitled to the benefits of the Treaty (as defined below)
under the Limitation on Benefits article contained in the 77




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Treaty; (d) who holds the ADSs or shares as capital assets and (e) whose
functional currency is the U.S. dollar. If a partnership (including for this
purpose any entity treated as a partnership for U.S. federal income tax
purposes) holds our ADSs or shares, the tax treatment of a partner generally
will depend upon the status of the partner and the activities of the
partnership. If a U.S. holder is a partner in a partnership that holds our
ADSs or shares, the Holder should consult its tax advisor regarding the
specific tax consequences of owning and disposing of the ADSs or shares.
Certain holders (including, but not limited to, United States expatriates,
insurance companies, tax-exempt entities, regulated investment companies,
banks, financial institutions, persons subject to the alternative minimum tax,
securities broker-dealers, traders in securities who elect to apply a
mark-to-market method of accounting, persons holding the ADSs or shares as part
of a straddle or a hedging or a conversion transaction and persons who acquired
their ADSs or shares pursuant to the exercise of employee stock options or
otherwise as compensation) may be subject to special rules not discussed below.
Because this is a general summary, U.S. Holders are advised to consult their
own tax advisors with respect to the ownership and disposition of ADSs and
shares. The statements of U.S. and French tax laws set forth below assume that
each obligation in the Deposit Agreement and any related agreement will be
performed in accordance with its terms and are based on current U.S. and French
tax laws, including the U.S. Internal Revenue Code of 1986, as amended (the
Code), the Treasury regulations promulgated thereunder, rulings, judicial
decisions and administrative pronouncements, and the double taxation
conventions between the United States and France in force, and on the practice
of the French tax authorities, as of the date hereof, and as a consequence are
subject to any changes in such laws, conventions or practice occurring after
such date, which may have retroactive effect. In this regard, the Treaty
refers to the Convention between the United States of America and the French
Republic for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income and Capital of August 31, 1994, which
entered into force on December 30, 1995. Taxation of Dividends Withholding/Avoir fiscal.In France, dividends are paid out of after-tax
income. French residents were entitled to a tax credit, known as the avoir
fiscal, in respect of dividends distributed by our Company in 2003. The amount of avoir fiscalattached to dividends paid in 2003 was equal
to:  
    
    50% of the dividend paid for (i) individuals and (ii) companies
which own at least 5% of the capital of the French distributing
company and meet the conditions to qualify under the French
parent-subsidiary regime; or
    
    10% of the dividend paid for other shareholders. In addition, if the distribution of dividends by us gave rise to the
précompte, shareholders entitled to the avoir fiscalat the rate of 10%
generally were entitled to an additional amount of avoir fiscalequal to 80% of
the précomptewe paid in cash (the précompteis a tax which is paid by French
companies when they distribute dividends out of certain profits which give rise
to the avoir fiscal). Pursuant to the French Budget Law for 2004, French individual residents
will generally be entitled to the avoir fiscalin respect of dividends to be
distributed by our Company until December 31, 2004, while French corporate
shareholders will not. Under French domestic law, dividends paid to non-residents are normally
subject to a 25% French withholding tax, and non-residents are not eligible for
the benefit of the avoir fiscal. Under the Treaty, the rate of French withholding tax on dividends paid to
a U.S. Holder whose ownership of the ADSs or shares is not effectively
connected with a permanent establishment or a fixed base in France is reduced
to 15%. Dividends paid to an Eligible U.S. Holder, as defined below, will be
immediately subject to the reduced rate of 15%, provided that such Holder
establishes before the date of payment that such Holder is a resident of the
United States under the Treaty in accordance with the procedures described
below. An Eligible U.S. Holder would also be entitled to a payment equal to the
avoir fiscal, less a 15% withholding tax. As noted below, such payment will
not be made to an Eligible U.S. Holder until after the close of the calendar
year in which the dividend was paid and only upon receipt by the French tax
authorities of a claim made by the Eligible U.S. Holder for such payment in
accordance with the procedures set forth below. An Eligible U.S. Holder is, as regards distributions made in 2003, a U.S.
Holder whose ownership of ADSs or shares is not effectively connected with a
permanent establishment or fixed base in France, and who is (i) an individual
or other non-corporate holder that is a resident of the United States as
defined pursuant to the provisions of 78




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the Treaty, (ii) a U.S. corporation, other than a regulated investment
company, (iii) a U.S. corporation which is a regulated investment company only
if less than 20% of its shares are beneficially owned by persons who are
neither citizens nor residents of the United States or (iv) a partnership or
trust that is treated as a resident of the United States as defined pursuant to
the provisions of the Treaty, but only to the extent that its partners,
beneficiaries or grantors would qualify under clause (i) or (ii) above. Although it will have to be confirmed in guidelines yet to be published by
the French tax authorities, an individual holder that is a resident of the
United States as defined pursuant to the provisions of the Treaty and whose
ownership of our shares is not connected with a permanent establishment in
France should remain an Eligible U.S. Holder with respect to distributions to
be made by our Company in 2004, and should be entitled to the new tax credit
implemented by the French Budget Law for 2004. Other U.S. Holders will no longer be entitled to the refund of the avoir
fiscalin respect of dividends paid from 2004 on and will not be entitled to
the newly implemented tax credit. In general, under the Treaty, an Eligible U.S. Holder will receive a
payment of the avoir fiscalonly if such Holder (or its partners, beneficiaries
or grantors, if the Holder is a partnership or trust) attests that it is
subject to U.S. federal income taxes on the payment of the avoir fiscaland the
related dividend. Dividends paid to an Eligible U.S. Holder are subject to the reduced
withholding tax rate of 15% at the time the dividend is paid if (i) such Holder
duly completes and provides the French tax authorities with Treasury Form RF 1
A EU-NO. 5052 (the Form) before the date of payment of the relevant dividend,
together with, if such Eligible U.S. Holder is not an individual, an affidavit
attesting that it is the beneficial owner of all the rights attached to the
full ownership of the ADSs or shares, including, but not limited to, dividend
rights, or (ii) if completion of the Form is not possible prior to the payment
of dividends, such Holder duly completes and provides the French tax
authorities with a simplified certificate (the Certificate) stating that (a)
such Holder is a U.S. resident as defined pursuant to the provisions of the
Treaty, (b) such Holders ownership of the ADSs or shares is not effectively
connected with a permanent establishment or fixed base in France, (c) such
Holder owns all the rights attached to the full ownership of the ADSs or
shares, including, but not limited to, dividend rights, (d) such Holder meets
all the requirements of the Treaty for obtaining the benefit of the reduced
rate of withholding tax and the right to payment of the French avoir fiscal,
and (e) such Holder claims the reduced rate of withholding tax and payment of
the avoir fiscal. Holders of ADSs may provide the Form or the Certificate to
the Depositary provided that the Depositary is given sufficient time to file
such Form or Certificate with the French tax authorities before the date of
payment. Dividends paid to a U.S. Holder that is not entitled to the avoir fiscal
(i.e., not an Eligible U.S. Holder) but is entitled to the reduced rate of
withholding tax, will be subject to French withholding tax at the reduced rate
of 15%; provided, however, that such Holder files French Treasury Form RF1 B
EU-No. 5053 (or any other form that may replace Treasury
Form RF1 B EU-No. 5053)
with the French tax authorities before the date of payment of the dividends. If a U.S. Holder that has not filed a completed form or, where applicable,
the Certificates, before the dividend payment date, our Company must withhold
French withholding tax at the rate of 25%. Such Holder may claim a refund of
the excess withholding tax and an Eligible U.S. Holder may claim the avoir
fiscalattached to dividends paid by our Company in 2003 by completing and
providing the French tax authorities with the Form before December 31 of the
second year following the year during which the dividend is paid. Certain entities are not entitled to the full avoir fiscal. Tax-exempt
U.S. Pension Funds, as discussed below, and certain other tax-exempt entities
(including certain State-owned institutions, not-for-profit organizations and
individuals with respect to dividends beneficially owned by such individuals
and derived from an investment retirement account) (Other Tax-Exempt
Entities) that own, directly or indirectly, less than 10% of our capital, and
that satisfy certain filing formalities specified in the Treasury regulations
(i) were with respect to dividends paid until December 31, 2003, entitled to a
payment, subject to French withholding tax, equal to 30/85 of the gross avoir
fiscal(the partial avoir fiscal) and (ii) are eligible for the reduced
withholding tax rate of 15% on dividends. A U.S. Pension Fund includes the
exempt pension funds established and managed in order to pay retirement
benefits subject to the provisions of Section 401(a) (qualified retirement
plans), Section 403(b) (tax deferred annuity contracts) or Section 457
(deferred compensation plans) of the Code. U.S. Pension Funds and Other Tax
Exempt Entities will be treated like any other corporate shareholders as
regards the suppression of the avoir fiscal, and thus, will no longer be
entitled to their partial avoir fiscalwith respect to dividends that our
Company will pay as of January 1, 2004. As regards distributions received until December 31, 2003, U.S. Pension
Funds and Other Tax-Exempt Entities are subject to the same general filing
requirements as Eligible U.S. Holders except that they have to supply
additional documentation evidencing their entitlement to these benefits. 79




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Although the French tax authorities have not yet issued any guidance
regarding the procedures for claiming the benefit of the reduced rate of
withholding tax following the abolition of the avoir fiscaland, if applicable,
the refund of the newly implemented tax credit, any such benefits should be
subject to the accomplishment of insurance formalities. In all cases, any avoir fiscalor partial avoir fiscalis generally paid
to Eligible U.S. Holders, U.S. Pension Funds and Other Tax-Exempt Entities
within 12 months of filing the Form, but not before January 15 following the
end of the calendar year in which the related dividend is paid. Similarly, any
French withholding tax refund is generally expected to be paid to U.S. Holders
within 12 months of filing the Form, but not before January 15th following the
end of the calendar year in which the related dividend is paid. The Form or, where applicable, the Certificate, together with their
respective instructions, are provided by the Depositary to all U.S. Holders of
ADSs registered with the Depositary and are also available from the United
States Internal Revenue Service. The Depositary shall arrange for the filing
with the French tax authorities of all Forms or Certificates, as the case may
be, provided that they are completed by U.S. Holders of ADSs and returned to
the Depositary in sufficient time. For U.S. federal income tax purposes, the gross amount of any distribution
(and any related avoir fiscalpaid to a U.S. Holder, including any French
withholding tax thereon) will be taxable as ordinary dividend income to a U.S.
Holder to the extent paid or deemed paid out of our current or accumulated
earnings and profits as calculated for U.S. federal income tax purposes, based
on the U.S. dollar value of the distribution calculated by reference to the
spot rate in effect on the date the distribution is actually or constructively
received by the U.S. Holder, in the case of shares, or by the Depositary, in
the case of ADSs. To the extent (if any) that the amount of any distribution
exceeds our current and accumulated earnings and profits for a taxable year,
the distribution will be treated first as a tax-Free return of capital,
resulting in a reduction in the adjusted tax basis of the shares or ADSs
(thereby increasing the amount of gain, or decreasing the amount of loss, to be
recognized by the Holder on a subsequent disposition of the shares or ADSs),
and the balance in excess of adjusted tax basis will be taxed as capital gain
recognized on a sale or exchange. No dividends received deduction will be
allowed to U.S. corporate Holders with respect to dividends paid by us. For
foreign tax credit limitation purposes, such dividends generally will
constitute foreign source passive or (in the case of certain holders)
financial services income. The amount of any dividend paid in euro,
including the amount of any French taxes withheld therefrom, will be equal to
the U.S. dollar value of the euro amount received calculated by reference to
the spot rate in effect on the date the dividend is includible in income,
regardless of whether the payment is in fact converted into U.S. dollars. If
the euro are converted into U.S. dollars on the date of receipt, a U.S. Holder
generally should not recognize any foreign currency gain or loss upon
conversion. If the euro are not converted in to U.S. dollars on the date of
receipt, a U.S. Holder generally will have a basis in the euro equal to their
U.S. dollar value on the date of receipt. Such U.S. Holder will be required to
recognize foreign currency gain or loss, which generally will be U.S. source
ordinary income or loss, upon a subsequent sale or other disposition of the
euro. Moreover, a U.S. Holder may be required to recognize foreign currency
gain or loss upon the receipt of a refund of amounts, if any, withheld from a
dividend in excess of the Treaty rate of 15%. French withholding tax imposed at the Treaty rate of 15% on dividends paid
by us and on any related payment of avoir fiscalis treated as payment of a
foreign income tax and, subject to certain conditions and limitations, may be
taken as a credit against such U.S. Holders U.S. federal income tax liability.
Alternatively, a U.S. Holder may claim foreign taxes paid in a particular year
as an itemized deduction. A deduction does not reduce U.S. tax or a
dollar-For-dollar basis like a tax credit. The deduction, however, is not
subject to the limitations applicable to foreign tax credits. The United States Treasury has expressed concerns that parties to whom
ADSs are released may be taking actions that are inconsistent with the claiming
of foreign tax credits for U.S. Holders of ADSs. Accordingly, the discussion
above regarding the creditability of French withholding tax on dividends could
be affected by future actions that may be taken by the United States Treasury. Précompte. Dividends that carry an avoir fiscaland that are distributed
by French companies out of profits which have not been taxed at the ordinary
corporate income tax rate or which have been earned and taxed more than five
years before the distribution, insofar as it occurs before December 31, 2004,
are subject to a tax known as the précompte. The précompteis paid by the
distributing company to the French tax authorities and is equal to one-half of
the nominal dividend distributed by such company. A U.S. Holder not entitled to the full avoir fiscalmay obtain a refund
from the French tax authorities of any précomptepaid by us with respect to the
dividends distributed in 2003 and, although yet unclear, should be able to
obtain a refund of any précomptethat we shall pay with respect to the
dividends that we will distribute in 2004, if such U.S. Holder is not entitled
to the avoir fiscalon distributions to occur in 2004. 80




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Pursuant to the Treaty, the amount of the précompteto be refunded to U.S.
residents is reduced by the 15% withholding tax applicable to dividends and by
the partial avoir fiscalpaid to U.S. Pension Funds and Other Tax Exempt
Entities. A U.S. Holder is only entitled to a refund of précompteactually
paid in cash by us and is not entitled to a refund of the précomptepaid by us
by offsetting French and/or foreign tax credits. A U.S. Holder entitled to the refund of the précomptemust apply for such
refund by filing a French Treasury form RF 1 BEU-NO. 5053 before the end of the
second year following the year in which the dividend was paid. The form and
its instructions are available from the United States Internal Revenue Service
or at the Centre des Impôts des Non Résidents (9 rue dUzès, 75094 Paris Cedex
2). For U.S. federal income tax purposes, the gross amount of the précompte
including French withholding tax paid to a U.S. Holder will be includible in
gross income as ordinary income. Such amounts generally will constitute
foreign source passive or (in the case of certain holders) financial
services income for foreign tax credit purposes. The amount of any précompte
paid in euro, including the amount of any French taxes withheld therefrom, will
be equal to the U.S. dollar value of the euro on the date the précompteis
includible in income (which, for a U.S. Holder of ADSs, will be the date of
receipt by the Depositary), regardless of whether the payment is in fact
converted into U.S. dollars. A U.S. Holder of shares who does not convert the
euro into U.S. dollars on the date of receipt generally will be required to
recognize U.S. source ordinary income or loss upon the subsequent sale or other
disposition of the euro. As a consequence of the suppression of the précomptefor dividends which
will be paid as of January 1, 2005, French Budget Law for 2004 implements a
temporary equalization tax that will be levied at the rate of 25% (assessed on
the net dividends before withholding tax) on dividends paid in 2005 out of
profits that have not been taxed at the ordinary corporate income tax rate or
that have been earned and taxed more than five years before the distribution.
However, unlike the précompte, such temporary equalization tax will not be
refundable to U.S. Holders. Recent U.S. Tax Law Changes Applicable to Individuals Under 2003 U.S. tax legislation, individual U.S. Holders (and some trusts
and estates) are eligible for reduced rates of U.S. federal income tax
(currently a maximum of 15%) in respect of qualified dividend income received
in taxable years beginning after December 31, 2002 and beginning before January
1, 2009, provided that the Holders meet certain holding period and other
requirements. For this purpose, qualified dividend income generally includes
dividends paid by non-U.S. corporations if, among other things, (i) the ADSs or
shares with respect to which the dividend has been paid are readily tradable on
an established securities market in the United States, or (ii) the non-U.S.
corporation is eligible for the benefits of a comprehensive U.S. income tax
treaty (such as the Treaty) which provides for the exchange of information. We
currently believe that dividends paid with respect to our ADSs and shares
should constitute qualified dividend income for U.S. federal income tax
purposes. Some of the eligibility requirements for non-U.S. corporations are
not entirely clear, however, and further guidance from the IRS is anticipated.
In addition, the IRS is expected to issue certification procedures for 2004
whereby a non-U.S. corporation will have to certify as to the eligibility of
its dividends for the reduced U.S. federal income tax rates. Taxation of Capital Gains A U.S. Holder who is a resident of the United States as defined pursuant
to the provisions of the Treaty will not be subject to French tax on any
capital gain from the sale or other disposal of ADSs or shares unless these
ADSs or shares form part of a business property of a permanent establishment or
fixed base that the U.S. Holder has in France. Special rules apply to
individuals who are residents of more than one country. In general, for U.S. federal income tax purposes, a U.S. Holder will
recognize capital gain or loss on the sale or exchange of ADSs or shares in an
amount equal to the difference between the U.S. dollar value of the amount
realized for the ADSs or shares and the U.S. Holders basis (determined in U.S.
dollars) in the ADS or shares. This capital gain or loss will be U.S. source
gain or loss, and will be treated as a long-term capital gain or loss if the
Holders holding period in the ADSs or shares exceeds one year. In the case of
a U.S. Holder who is an individual, any capital gain generally will be subject
to U.S. federal income tax at preferential rates if specified minimum holding
periods are met. The deductibility of capital losses is subject to significant
limitations. The deposit or withdrawal of shares for ADSs by a U.S. Holder under the
Deposit Agreement will not be subject to U.S. federal income tax. 81




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Passive Foreign Investment Company Status A non-U.S. corporation will be classified as a passive foreign investment
company (a PFIC) for any taxable year if at least 75% of its gross income
consists of passive income (such as dividends, interest, rents or royalties
(other than rents or royalties derived in the active conduct of a trade or
business and received from an unrelated person), or gains on the disposition of
certain minority interests), or at least 50% of the average value of its assets
consist of assets that produce, or are held for the production of, passive
income. We believe that we did not qualify as a PFIC for the 2003 taxable year
for U.S. federal income tax purposes. If we were characterized as a PFIC for
any taxable year (which conclusion is a factual determination that must be made
as of the close of the taxable year), U.S. Holders would suffer adverse tax
consequences. These consequences may include having gains realized on the
disposition of ADSs or shares treated as ordinary income rather than capital
gains and being subject to punitive interest charges on certain dividends and
on the proceeds of the sale or other disposition of the ADSs or shares.
Furthermore, dividends paid by us would not be qualified dividend income and
would be taxed at the higher rates applicable to other items of ordinary
income. U.S. Holders should consult their own tax advisors regarding the
potential application of the PFIC rules to their ownership of ADSs or shares. French Estate and Gift Taxes Under The Convention Between the United States of America and the French
Republic for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Estates, Inheritance and Gifts of November 24,
1978, a transfer of ADSs or shares by gift or by reason of the death of a U.S.
Holder will not be subject to French gift or inheritance tax unless (i) the
donor or the transferor is domiciled in France at the time of making the gift,
or at the time of his or her death, or (ii) the ADSs or shares were used in, or
held for use in, the conduct of a business through a permanent establishment or
fixed base in France. French Wealth Tax The French wealth tax generally does not apply to the ADSs or shares owned
by a U.S. Holder who is a resident of the United States as defined pursuant to
the provisions of the Treaty. United States Information Reporting and Backup Withholding Dividend payments made to a Holder and proceeds paid from the sale,
exchange, or other disposition of ADSs or shares may be subject to information
reporting to the IRS and possible U.S. federal backup withholding at a current
rate of 28%. Backup withholding will not apply to a U.S. Holder who furnishes
a correct taxpayer identification number or certificate of foreign status and
makes any other required certification, or who is otherwise exempt from backup
withholding. U.S. persons who are required to establish their exempt status
generally must provide IRS Form W-9 (Request for Taxpayer Identification Number
and Certification). Non-U.S. Holders generally will not be subject to U.S.
information reporting or backup withholding. However, these Holders may be
required to provide certification of non-U.S. status (generally on IRS Form
W-8BEN) in connection with payments received in the United States or through
certain U.S.-related financial intermediaries. Backup withholding is not an
additional tax. Amounts withheld as backup withholding may be credited against
a Holders U.S. federal income tax liability. A Holder may obtain a refund of
any excess amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the Internal Revenue Service in a timely
manner and furnishing any required information. F. Dividends and Paying Agents. Not applicable. G. Statements by Experts. Not applicable. H. Documents on Display. We are subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the Exchange Act) and file reports, including annual
reports on Form 20-F, and other information with the U.S. Securities and
Exchange Commission (the SEC). As a foreign private issuer, we are exempt from
the rules under the Exchange Act prescribing the furnishing and content of
proxy statements and our officers, directors, and principal shareholders are
exempt from the reporting and short-swing profit recovery provisions contained
in Section 16 of the Exchange Act. Under the Exchange Act, as a foreign
private issuer, we are not required to publish financial statements as
frequently or as promptly as United States companies. However, we intend to
file with the SEC, as long as we are required to do so, 82




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within 180 days after the end of each fiscal
year, annual reports on Form 20-F containing financial statements audited by an
independent accounting firm. We also intend to furnish to the SEC a
translation of our semi-annual reports prepared in French GAAP pursuant to
French law under cover of Form 6-K. You may review a copy of our filings with the SEC including exhibits and
schedules filed with it, at the SECs public reference facilities in Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms
and their copy charges. In addition, the SEC maintains an Internet site at
http://www.sec.gov that contains reports and other information regarding
issuers that file electronically with the SEC. These SEC filings are also
available to the public from commercial document retrieval services. In addition, material filed by us with the SEC and other information about
us can be inspected at the offices of The Nasdaq Stock Market at 1735 K Street,
N.W., Washington D.C. 20006-1506. We provide JPMorgan Chase Bank with annual and semi-annual reports in
English, as well as summaries in English or an English version of all notices
of stockholders meetings and other reports and communications that we
generally make available to our stockholders. Copies of these reports and
other documents are available upon request from JPMorgan Chase Bank, attention
of the ADR department. I. Subsidiary Information. Not applicable. 
 Item 11: Quantitative and Qualitative Disclosures About Market Risk Our overall risk management policy is based upon the prudent management of
our market risks, primarily interest rate risk and foreign currency exchange
risk. Our programs with respect to the management of these risks, including
the use of hedging instruments, are discussed below. Our exposure to these
risks may change over time and there can be no assurance that the benefits of
our risk management policies will exceed the related costs. Such changes could
have a materially adverse impact on our financial results. Interest rate risk. With the exception of a change in the general
economic environment, which is difficult to assess, we believe that our revenue
and earnings, before financial income, were not materially affected by changes
in interest rates in 2003. Similarly, interest rates are not expected to
affect future earnings before financial income, but may affect financial
income. Therefore, our interest rate risk is primarily a risk related to a
reduction of financial revenue. We generate positive cash flows from operations and have some financial
obligations (e.g., employee profit-sharing and a long-term capital lease for a
building) but we are a net lender. We sometimes use bank overdrafts, for
non-significant amounts, for which the interest rate is a variable market rate. We have no loan agreement outside the Group except the long-term capital
lease for a building, as described in Note K to our consolidated financial
statements. Therefore, we have no risks linked to any early repayment
triggers. Financial revenue is composed in part of interest from cash and cash
equivalents, as well as revenue from short-term investments. As a result, it
is sensitive to fluctuations in interest rates. We follow a conservative
policy for investing our cash resources, mostly relying on short-term,
investment grade investments. Investment rules are determined and controlled
by the treasury department of the parent company. In 2003, the decrease of short-term interest rates in the U.S. and in
Europe had a negative impact on our financial revenue. For cash management
purposes, we do not invest in any common shares or any funds investing
primarily in common shares. Our financial results are therefore not directly
linked to stock market variations. Taking into account the low interest rates and our underwriting position,
we did not subscribe to any rate hedging products during 2003. Foreign currency exchange risk. Our revenue is primarily invoiced in U.S.
dollars, euro and Japanese yen. Under the IBM marketing and sales agreement,
the royalties we receive for the products distributed by IBM are generally set
in the local currency of the end purchaser, and then remitted to us by IBM in
U.S. dollars based on conversion rates adjusted monthly. In addition, we incur
expenses in several currencies, through our suppliers and employees in
different countries. Finally, we engage in mergers and acquisitions outside
the euro zone and may lend 83




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money in different currencies to our fully or partially owned
subsidiaries. As a result, our results of operations may be affected by
changes in exchange rates, particularly between the U.S. dollar or the Japanese
yen and the euro. To a certain extent, we experience natural hedging, with revenue
denominated in U.S. dollars partially compensated by our U.S. dollar expenses.
Our net exposure in Japanese yen is less in absolute terms, but more
significant as a proportion of Japanese yen-denominated revenue. In 2003,
revenue denominated in U.S. dollars represented approximately 40% of total
revenue, compared with 40% in 2002 and 41% in 2001, after taking into account
the monthly conversion by IBM of royalties coming from end-user payments in
currencies other than U.S. dollars. Our operating expenses denominated in U.S.
dollars represented 37% of total operating expenses in 2003, compared with 38%
in 2002 and 40% in 2001. As a result, our net operating exposure to U.S. dollars was limited to
103 million in 2003 (14% of our revenue), and this exposure was hedged through
market instruments at a level of 76 million, as further described below. The U.S. dollar depreciated approximately 20% against the euro in 2003
compared to 2002 and depreciated approximately 5% against the euro in 2002
compared to 2001. As a result of our U.S. dollar-denominated revenues and U.S.
dollar-denominated expenses being relatively comparable in amount, changes in
the value of the U.S. dollar compared to the euro had relatively little impact
on our operating income in 2002. In 2003, however, U.S. dollar depreciation
had a significant negative impact on operating income. In 2003 and 2002, the
Japanese yen depreciated 11% and 8% against the euro, respectively, compared to
the respective preceding year, with a negative impact on operating income. Currency fluctuations may impact revenue and expenses as well as financial
revenue. The main items of financial revenue subject to fluctuations linked to
exchange rates are:  
    
    The difference between the exchange rate used to record
invoices and expenses in foreign currencies and the exchange rate
when we receive or make the payment.  
    
    The revaluation of payables and receivables denominated in foreign currencies.
    
    The revaluation of assets denominated in foreign currencies. We are able to hedge some of our foreign currency exchange risk, but some
currency risks, such as the impact of the consolidation of subsidiaries
reporting in U.S. dollars, cannot be hedged. Our hedging transactions
typically involve purchasing currency options and foreign exchange contracts.
We only hedge our revenues and expenses coming from usual and predictable
activity arising in the normal course of operations. We do not hedge revenues
in local currencies from our North American or Japanese subsidiaries. We use
exclusively forward agreements or financial instruments with a maximum
predictable loss. All hedging activities are carried out by the parent company
and all hedging transactions and our resulting exposure are reported to the
Chief Financial Officer on a monthly basis. The table below sets forth, for
the year ended December 31, 2003, our revenue, operating expenses and net
position before and after hedging denominated in U.S. dollars, Japanese yen and
other currencies, principally the euro. Year ended December 31, 2003U.S. dollars
    
    Japanese yen
    
    Euro and others(in thousands)Revenue
    
    
    301,174
    
    
    
    134,358
    
    
    
    319,290Operating expenses
    
    
    (198,518
    )
    
    
    (41,515
    )
    
    
    (302,050
    )Net position
    
    
    102,656
    
    
    
    92,843
    
    
    
    17,240Hedge(1)
    
    
    76,450
    
    
    
    55,725
    
    
    
    Net position after hedge
    
    
    26,206
    
    
    
    37,118
    
    
    
    17,240
   (1)
    
    Includes operations considered as a cash flow or fair value hedge under
FAS 133 only. 84




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The following table presents the notional amount and market value of
financial instruments at December 31, 2003 and 2002: Year ended December 31,2003
    
    2002Notional
    
    Market
    
    Notional
    
    Marketamount
    
    value
    
    amount
    
    value(in thousands of euro)Call USD/euro
    
    
    1,979
    
    
    
    
    
    
    
    
    
    
    
    Digital JPY/euro(1)
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    135Collars USD/euro
    
    
    35,629
    
    
    
    3,441
    
    
    
    47,082
    
    
    
    7,096Collars JPY/euro(1)
    
    
    41,468
    
    
    
    7,893
    
    
    
    86,017
    
    
    
    7,073Forward exchange contract USD/euro
    
    
    10,821
    
    
    
    1,454
    
    
    
    20,625
    
    
    
    4,246Forward exchange contract JPY/euro(1)
    
    
    
    
    
    
    
    
    
    
    15,274
    
    
    
    2,395
   (1)
    
    JPY means Japanese yen. Revenue and expenses denominated in currencies other than the euro are
translated into euro using rates determined by the applicable accounting
regulation. For example, most non-euro transactions originating in France are
translated using the average exchange rate of the month preceding the
transaction. When consolidating subsidiaries reporting in currencies other
than the euro, however, the average exchange rate of the quarter in which the
consolidation takes place is used. In the context of business acquisitions,
the currency exchange rate used is the rate on the date of the acquisition, or
on the date the foreign currency used for the acquisition was purchased. 
 Item 12: Description of Securities Other than Equity Securities Not applicable. 
 PART II 
 Item 13: Defaults, Dividend Arrearages and Delinquencies To our knowledge, there has been no material default in the payment of
principal or interest or any other material default not cured within 30 days
relating to our indebtedness or that of any of our subsidiaries. 
 Item 14: Material Modifications to the Rights of Security Holders and Use of Proceeds To our knowledge, no one (i) has modified materially the instruments
defining the rights of holders of our shares or (ii) has modified materially or
qualified the rights evidenced by our registered securities by issuing or
modifying any other class of securities. 
 Item 15: Controls and Procedures Our Chief Executive Officer and our Chief Financial Officer have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rule 13a-14(c)) as of December 31, 2003.
Based on that evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that, as of December 31, 2003, our disclosure controls
and procedures were effective. In 2003, we implemented, or are currently in the process of implementing,
additional measures relating to our internal controls over financial reporting
(internal controls), in order to meet new requirements under French law and
in preparation for the additional requirements of the rules implemented
pursuant to the Sarbanes-Oxley Act of 2002. These measures include the
following:  
    
    The responsibilities of the Audit Committee as defined in its
Charter were expanded to include responsibilities outlined in French
corporate governance recommendations and the SEC rules promulgated
under the Sarbanes-Oxley Act of 2002. 85




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
    
    A Disclosure Committee was established in order to formally
review the information contained in this Annual Report on Form 20-F.
    
    An Internal Audit department was established within our
Financial Division. This department reports to our management and to
our Audit Committee.
    
    A project designed to promote, structure and systematize
evaluation of our internal controls was launched in the fourth
quarter of 2003 and will continue in 2004. As part of this project,
we are using the principles developed by the Treadway Commission in
1992, known as COSO (Commission of Sponsoring Organizations), to
organize our internal controls procedures around five major areas: a
control environment; risk assessment; control activities through a
definition of the procedures required; communications and information
processes; and management of control activities. 
 Item 16: [RESERVED] 
 Item 16A: Audit Committee Financial Expert The Board of Directors has determined that Paul Brown, Audit Committee
member and independent member of our Board of Directors, is an audit committee
financial expert as defined by the Sarbanes-Oxley Act of 2002 and Item 16.A of
Form 20-F. 
 Item 16B: Code of Ethics The Company has adopted a code of ethics that applies to its Chief
Executive Officer, all Executive Vice Presidents (including the Chief Financial
Officer), the Controller and the Group Accounting and Consolidation Manager,
the internal auditor as well as the Chief Executive Officers and Chief
Financial Officers of the main Dassault Systèmes Group companies. This code of
ethics is filed as Exhibit 11 to this Annual Report on Form 20-F. 
 Item 16C: Principal Accountants Fees and Services Deloitte Touche Tohmatsu and Ernst & Young Audit have served as the
Companys independent public accountants for each of the fiscal years in the
three-year period ended December 31, 2003, for which audited financial
statements appear in this annual report on Form 20-F. The Audit Committee
recommends to the Board of Directors the appointment and termination of the
auditors annually, subject to approval by shareholders at the Annual General
Meeting. The following table presents the aggregate fees for professional services
and other services rendered by Deloitte Touche Tohmatsu and Ernst & Young Audit
to the Company in 2003 and 2002. Deloitte Touche Tohmatsu
    
    Ernst & Young AuditPercentage of
    
    
    
    
    
    
    
    
    
    Percentage ofFee Amount
    
    Total Fees
    
    Fee Amount
    
    Total Fees2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002(in euro, except percentages)Audit fees(1)
    
    
    707,766
    
    
    
    523,519
    
    
    
    76.4
    %
    
    
    65.6
    %
    
    
    290,321
    
    
    
    292,396
    
    
    
    94.5
    %
    
    
    87.7
    %Audit-related
fees(2)
    
    
    17,000
    
    
    
    35,982
    
    
    
    1.8
    %
    
    
    4.5
    %
    
    
    17,000
    
    
    
    22,820
    
    
    
    5.5
    %
    
    
    6.9
    %Tax fees(3)
    
    
    201,852
    
    
    
    238,687
    
    
    
    21.8
    %
    
    
    29.9
    %
    
    
    
    
    
    
    17,904
    
    
    
    
    
    
    
    5.4
    %All other fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    926,618
    
    
    
    798,188
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    307,321
    
    
    
    333,120
    
    
    
    100.0
    %
    
    
    100.0
    %
   (1)
    
    Audit Fees consist of fees billed for the annual audit services
engagement and other audit services, which are those services that only
the external auditor reasonably can provide, and include the Group audit;
statutory audits; consents; attest services; and services provided in
connection with documents filed with the SEC and the French market
authorities (AMF).(2)
    
    Audit-related Fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or
review of the Companys financial statements or that are traditionally
performed by the external auditor, and include consultations concerning
financial accounting and reporting standards and the application of new
accounting pronouncements.(3)
    
    Tax Fees include fees billed for tax compliance services, including the
preparation of original and amended tax returns and claims for refund; tax
consultations, such as assistance and representation in connection with
tax audits and appeals. 86




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Audit Committee Pre-Approval Policies and Procedures The Audit Committee assesses the independence of the external auditors of
our financial statements and recommends to the Board of Directors their
appointment and termination (subject to shareholder approval under French law).
In connection with this process, the Audit Committee recommends the external
auditors compensation and discusses with them the scope of the audit, has the
authority to pre-approve all audit-related and non-audit related services
provided by the independent auditors, and discusses with the independent
auditors all critical accounting policies used in connection with the
preparation of the financial statements. At the end of each fiscal year, the
Audit Committee reviews the audited annual consolidated financial statements
before it gives its report to the Board of Directors. During 2003, none of Audit-Related Fees, Tax Fees and all Other Fees
provided to us by Deloitte Touche Tohmatsu and by Ernst & Young Audit were
approved by the Audit Committee pursuant to the de minimisexception to the
pre-approval requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X. 
 PART III 
 Item 17: Financial Statements Not applicable. 
 Item 18: Financial Statements The following financial statements, together with the report of Deloitte
Touche Tohmatsu and Ernst & Young Audit thereon, are filed as part of this
Annual Report on Form 20-F. Consolidated Financial Statements Independent Auditors Report
    
    
    F-1Consolidated Balance Sheets at December 31, 2003 and 2002
    
    
    F-2Consolidated Statements of Income for the years ended December 31,
2003, 2002 and 2001
    
    
    F-4Consolidated Statements of Cash Flows for the years ended December
31, 2003, 2002 and 2001
    
    
    F-5Consolidated
Statements of Shareholders Equity for the years ended December 31, 2003, 2002 and 2001
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-7
 87




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Item 19: Exhibits 1
    
    Dassault Systèmes bylaws amended through June 2, 2004 (Unofficial English translation).4(a).1
    
    Amendment 138, dated January 12, 2004, to the Amended and Restated License Agreement for the
Use and Marketing of Programming Materials between International Business Machines
Corporation and Dassault Systèmes*.4(a).2
    
    Amendment 140, dated January 20, 2003, to the Amended and Restated License Agreement for the
Use and Marketing of Programming Materials between International Business Machines
Corporation and Dassault Systèmes*.4(a).3
    
    Amendment 141, dated April 10, 2003, to the Amended and Restated License Agreement for the
Use and Marketing of Programming Materials between International Business Machines
Corporation and Dassault Systèmes*.4(a).4
    
    Amendment 142, dated June 3, 2003, to the Amended and Restated License Agreement for the Use
and Marketing of Programming Materials between International Business Machines Corporation
and Dassault Systèmes*.4(a).5
    
    Amendment 143, dated February 2, 2004, to the Amended and Restated License Agreement for the
Use and Marketing of Programming Materials between International Business Machines
Corporation and Dassault Systèmes*.4(c).1
    
    Extracts of the minutes of the meeting of the Board of Directors, dated September 23, 2003.
(Unofficial English translation).4(c).2
    
    Amended employment contract of Bernard Charlès, dated December 12, 2003 (Unofficial English
translation).11
    
    Code of Ethics.12.1
    
    Certification of Bernard Charlès, President and Chief Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.12.2
    
    Certification of Thibault de Tersant, Executive Vice President and Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.13.1
    
    Certification of Bernard Charlès, President and Chief Executive Officer of Dassault Systèmes
S.A. and Thibault de Tersant, Executive Vice President and Chief Financial Officer of
Dassault Systèmes S.A. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.14(a)
    
    Consent of Ernst & Young Audit and Deloitte Touche Tohmatsu as auditors of Dassault Systèmes.
   For a list of our subsidiaries, see Note R to our consolidated financial statements for the year 2003. 
    
    Confidential treatment has been requested with respect to certain portions
of this Exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.*
    
    The IBM Agreement was filed as Exhibit 10.1 to Amendment No. 1 to our
Form F-1 Registration Statement (Registration No. 333-04970), which was
filed with the Securities and Exchange Commission on June 24, 1996. 88




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SIGNATURES Pursuant to the requirements of Section 12 of the Securities and Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized. DASSAULT SYSTEMES S.A.Date: June 30, 2004/s/ Thibault de
TersantThibault de Tersant
Executive Vice President and
Chief Financial Officer
 89




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INDEPENDENT AUDITORS REPORT To the Board of Directors and Shareholders of
Dassault Systèmes
Suresnes, France: We have audited the accompanying consolidated balance sheets of Dassault
Systèmes as of December 31, 2003 and 2002, and the related consolidated
statements of income, shareholders equity, and cash flows for each of the
three years in the period ended December 31, 2003. 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 of America. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Dassault Systèmes at December 31, 2003 and 2002, and the consolidated
results of its operations and its cash flows for the years ended December 31,
2003, 2002 and 2001 in conformity with accounting principles generally accepted
in the United States of America. As discussed in Note I to the consolidated financial statements, in 2002,
the Company changed its method of accounting for goodwill and other intangible
assets in accordance with guidance provided in Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. Paris and Neuilly-sur-Seine, France, April 28, 2004 Ernst & Young Audit
    
    Deloitte Touche TohmatsuRepresented by
Jean-Marc MONTSERRAT
    
    Represented by
Philippe MOURARET
 F-1




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DASSAULT SYSTÈMES
CONSOLIDATED BALANCE SHEETS (All amounts in thousands except share amounts) December 31,2003
    
    2002AssetsCurrent assets:Cash and cash equivalents (Note F)
    
    
    419,572
    
    
    
    371,992Short-term investments (Note G)
    
    
    20,102
    
    
    
    16,436Trade accounts receivable, net of allowance for doubtful accounts
of 7,477 in 2003 and 7,881 in 2002
    
    
    227,579
    
    
    
    229,505VAT receivable
    
    
    6,732
    
    
    
    6,316Prepaid expenses and advances
    
    
    9,595
    
    
    
    19,172Financial instruments
    
    
    7,226
    
    
    
    17,270Income tax receivable
    
    
    12,664
    
    
    
    8,877Deferred tax assets (Note E)
    
    
    31,634
    
    
    
    27,947Other current assets
    
    
    32,446
    
    
    
    24,134Total current assets
    
    
    767,550
    
    
    
    721,649Property and equipment, at cost:Land
    
    
    6,037
    
    
    
    6,109Buildings
    
    
    29,801
    
    
    
    30,335Computer equipment
    
    
    57,885
    
    
    
    56,702Office furniture and equipment
    
    
    18,257
    
    
    
    19,280Leasehold improvements
    
    
    27,899
    
    
    
    23,708139,879
    
    
    
    136,134Less accumulated depreciation and amortization
    
    
    (83,340
    )
    
    
    (76,261
    )Property and equipment, net (Note H)
    
    
    56,539
    
    
    
    59,873Other non-current assets (Note J)
    
    
    39,507
    
    
    
    39,167Investment in equity of unconsolidated affiliates  joint ventures
    
    
    475
    
    
    
    304Long-term deferred tax assets (Note E)
    
    
    19,292
    
    
    
    15,405Intangible assets (Note I) :Goodwill
    
    
    73,804
    
    
    
    71,599Other intangible assets (less accumulated depreciation of 
92,616 in 2003 and 94,496 in 2002)
    
    
    7,323
    
    
    
    12,167Total assets
    
    
    964,490
    
    
    
    920,164
 See accompanying notes to consolidated financial statements. F-2




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##### Table of Contents



DASSAULT SYSTÈMES
CONSOLIDATED BALANCE SHEETS (All amounts in thousands except share amounts) December 31,2003
    
    2002Liabilities and shareholders equityCurrent liabilities:Accounts payable
    
    
    42,264
    
    
    
    31,638Accrued wages and other personnel costs
    
    
    54,212
    
    
    
    56,892Sales incentive payable (Note P)
    
    
    15,787
    
    
    
    15,668Unearned revenue
    
    
    85,188
    
    
    
    92,229Income taxes payable
    
    
    21,258
    
    
    
    14,535Current portion of long-term obligations
    
    
    10,713
    
    
    
    7,475VAT and sales tax payables
    
    
    6,551
    
    
    
    8,182Deferred tax liabilities (Note E)
    
    
    4,937
    
    
    
    6,135Accrued expenses and other current liabilities
    
    
    21,542
    
    
    
    16,209Total current liabilities
    
    
    262,452
    
    
    
    248,963Long-term obligations:Capital lease (Note K)
    
    
    4,205
    
    
    
    5,916Employee profit sharing (Note L)
    
    
    19,261
    
    
    
    22,655Pension and post retirements benefits (Note M)
    
    
    10,688
    
    
    
    8,388Deferred tax liabilities and other (Note E)
    
    
    10,206
    
    
    
    5,981Total long-term obligations
    
    
    44,360
    
    
    
    42,940Commitments and contingencies (Note N)Shareholders equity:Share capital, par value Euro 1, 113,403,665
shares authorized and issued and 113,044,227
shares outstanding at December 31, 2003, and
114,570,841 shares authorized and issued and
114,179,431 shares outstanding at December 31,
2002 (Note O)
    
    
    113,404
    
    
    
    114,571Additional paid-in capital
    
    
    66,694
    
    
    
    89,278Retained earnings  unrestricted
    
    
    514,363
    
    
    
    416,180Retained earnings  restricted (Note O)
    
    
    11,457
    
    
    
    11,446Accumulated other comprehensive income
    
    
    (48,240
    )
    
    
    (3,214
    )Total shareholders equity
    
    
    657,678
    
    
    
    628,261Total liabilities and shareholders equity
    
    
    964,490
    
    
    
    920,164
 See accompanying notes to consolidated financial statements. F-3




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##### Table of Contents



DASSAULT SYSTÈMES
CONSOLIDATED STATEMENTS OF INCOME(All amounts in thousands, except per share data) Year ended December 31,2003
    
    2002
    
    2001Revenue:Software revenue (Note C)
    
    
    645,565
    
    
    
    669,886
    
    
    
    643,034Services and other revenue
    
    
    109,258
    
    
    
    104,229
    
    
    
    103,019Total revenue
    
    
    754,823
    
    
    
    774,115
    
    
    
    746,053Cost of revenue:Software
    
    
    (21,664
    )
    
    
    (24,448
    )
    
    
    (20,791
    )Services and other
    
    
    (89,793
    )
    
    
    (96,413
    )
    
    
    (86,542
    )Total cost of revenue
    
    
    (111,457
    )
    
    
    (120,861
    )
    
    
    (107,333
    )Gross profit
    
    
    643,366
    
    
    
    653,254
    
    
    
    638,720Research, selling and administrative expenses:Research and development
    
    
    (215,609
    )
    
    
    (221,563
    )
    
    
    (209,235
    )Marketing and sales
    
    
    (162,414
    )
    
    
    (169,653
    )
    
    
    (164,323
    )General and administration
    
    
    (46,679
    )
    
    
    (47,908
    )
    
    
    (44,183
    )Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    (44,144
    )Amortization of acquired technology
    
    
    (5,925
    )
    
    
    (11,098
    )
    
    
    (14,240
    )(430,627
    )
    
    
    (450,222
    )
    
    
    (476,125
    )Operating income
    
    
    212,739
    
    
    
    203,032
    
    
    
    162,595Equity in net income of unconsolidated affiliates
    
    
    419
    
    
    
    214
    
    
    
    Financial revenue and other, net (Note D)
    
    
    (855
    )
    
    
    2,545
    
    
    
    14,062Income before income taxes
    
    
    212,303
    
    
    
    205,791
    
    
    
    176,657Income tax expense (Note E)
    
    
    (76,884
    )
    
    
    (79,376
    )
    
    
    (87,916
    )Net income
    
    
    135,419
    
    
    
    126,415
    
    
    
    88,741Basic net income per share (Note O)
    
    
    1.20
    
    
    
    1.11
    
    
    
    0.78Diluted net income per share (Note O)
    
    
    1.18
    
    
    
    1.09
    
    
    
    0.76
 See accompanying notes to consolidated financial statements. F-4




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##### Table of Contents



DASSAULT SYSTÈMES
CONSOLIDATED STATEMENTS OF CASH FLOWS (All amounts in thousands) Year ended December 31,2003
    
    2002
    
    2001CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    
    135,418
    
    
    
    126,415
    
    
    
    88,741Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization of property, plant and equipment
    
    
    15,302
    
    
    
    19,051
    
    
    
    18,174Amortization of intangible assets
    
    
    7,751
    
    
    
    13,999
    
    
    
    60,809Deferred income taxes
    
    
    (10,920
    )
    
    
    (8,004
    )
    
    
    (9,878
    )Tax benefits from employee stock plans
    
    
    814
    
    
    
    5,254
    
    
    
    Non-cash stock-based compensation
    
    
    
    
    
    
    3,636
    
    
    
    1,338Other
    
    
    533
    
    
    
    3,793
    
    
    
    (586
    )Changes in current assets and liabilities:(Increase) decrease in trade accounts receivable
    
    
    (5,093
    )
    
    
    (29,221
    )
    
    
    (5,778
    )(Increase) decrease in other current assets
    
    
    2,205
    
    
    
    10,929
    
    
    
    1,810Increase (decrease) in accounts payable and accrued expenses
    
    
    12,432
    
    
    
    (2,792
    )
    
    
    228Increase (decrease) in income taxes payable
    
    
    577
    
    
    
    (19,967
    )
    
    
    (4,519
    )Increase (decrease) in sales incentive payable
    
    
    4,376
    
    
    
    2,829
    
    
    
    364Increase in unearned revenue
    
    
    6,117
    
    
    
    19,870
    
    
    
    2,951Increase (decrease) in other current liabilities
    
    
    7,862
    
    
    
    (3,028
    )
    
    
    5,533NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    177,374
    
    
    
    142,764
    
    
    
    159,187CASH FLOWS FROM INVESTING ACTIVITIESAdditions to property, equipment and intangibles
    
    
    (19,236
    )
    
    
    (20,427
    )
    
    
    (22,956
    )Purchases of short-term investments
    
    
    (63,962
    )
    
    
    (10,351
    )
    
    
    (5,002
    )Proceeds from sales and maturities of short-term investments
    
    
    58,029
    
    
    
    
    
    
    
    7,752Payment for acquisitions, net of cash acquired
    
    
    (6,085
    )
    
    
    (29,923
    )
    
    
    (12,361
    )Proceeds from sale of Revit investment
    
    
    
    
    
    
    10,088
    
    
    
    Increase in long-term receivables
    
    
    (13,670
    )
    
    
    (25,601
    )
    
    
    (2,204
    )Other
    
    
    (270
    )
    
    
    216
    
    
    
    141NET CASH USED IN INVESTING ACTIVITIES
    
    
    (45,194
    )
    
    
    (75,998
    )
    
    
    (34,630
    )CASH FLOWS FROM FINANCING ACTIVITIESPurchase of treasury stock
    
    
    (29,450
    )
    
    
    
    
    
    
    (1,017
    )Proceeds from exercise of stock options
    
    
    4,458
    
    
    
    4,149
    
    
    
    4,380Proceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    20Cash dividends paid
    
    
    (37,225
    )
    
    
    (37,601
    )
    
    
    (35,135
    )Payments on capital lease obligations
    
    
    (211
    )
    
    
    (1,643
    )
    
    
    (1,643
    )NET CASH USED IN FINANCING ACTIVITIES
    
    
    (62,428
    )
    
    
    (35,095
    )
    
    
    (33,395
    )Effect of exchange rate changes on cash
    
    
    (22,172
    )
    
    
    (22,815
    )
    
    
    6,036Increase in cash and cash equivalents
    
    
    47,580
    
    
    
    8,856
    
    
    
    97,198CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    371,992
    
    
    
    363,136
    
    
    
    265,938CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    
    419,572
    
    
    
    371,992
    
    
    
    363,136SUPPLEMENTAL DISCLOSUREIncome taxes paid
    
    
    76,452
    
    
    
    97,922
    
    
    
    76,694Cash interest paid
    
    
    1,696
    
    
    
    1,295
    
    
    
    1,523
 See accompanying notes to consolidated financial statements. F-5




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##### Table of Contents



DASSAULT SYSTÈMES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY Share capitalShare capital issued
    
    outstandingRetained earnings
    
    Other items ofNumber of
    
    Stated
    
    Number of
    
    Paid in
    
    
    
    comprehensiveShares
    
    value
    
    shares
    
    capital
    
    Unrestricted
    
    Restricted
    
    income
    
    Total(All amounts in thousands, except number of shares)January 1, 2001
    
    
    113,926,963
    
    
    
    113,927
    
    
    
    113,319,196
    
    
    
    52,443
    
    
    
    274,874
    
    
    
    11,320
    
    
    
    13,101
    
    
    
    465,665Net income:Unrestricted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,741
    
    
    
    
    
    
    
    
    
    
    
    88,741Restricted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72
    )
    
    
    72
    
    
    
    
    
    
    
    Other items of comprehensive incomeAvailable for sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (760
    )
    
    
    (760
    )Net derivative gains on
cash-flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,433
    
    
    
    1,433Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,291
    
    
    
    7,291Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,705Exercise of stock options (Note
O)
    
    
    168,191
    
    
    
    168
    
    
    
    273,541
    
    
    
    4,197
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,365Other stock transaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,338
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,338Purchase of treasury stock
    
    
    (29,033
    )
    
    
    (29
    )
    
    
    (29,033
    )
    
    
    
    
    
    
    (988
    )
    
    
    
    
    
    
    
    
    
    
    (1,017
    )Shares issued in connection with
acquisitions
    
    
    380,050
    
    
    
    380
    
    
    
    380,050
    
    
    
    18,577
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,957Cash dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,135
    )
    
    
    
    
    
    
    
    
    
    
    (35,135
    )December 31, 2001
    
    
    114,446,171
    
    
    
    114,446
    
    
    
    113,943,754
    
    
    
    76,555
    
    
    
    327,420
    
    
    
    11,392
    
    
    
    21,065
    
    
    
    550,878Net income:Unrestricted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126,415
    
    
    
    
    
    
    
    
    
    
    
    126,415Restricted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54
    )
    
    
    54
    
    
    
    
    
    
    
    Other items
of comprehensive incomeAvailable for sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,017
    
    
    
    3,017Net derivative gains on
cash-flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,718
    
    
    
    9,718Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (384
    )
    
    
    (384
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,630
    )
    
    
    (36,630
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102,136Exercise of stock options (Note O)
    
    
    124,670
    
    
    
    125
    
    
    
    235,677
    
    
    
    3,833
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,958Other stock transaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,636
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,636Tax benefits (Note E)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,254
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,254Cash dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,601
    )
    
    
    
    
    
    
    
    
    
    
    (37,601
    )December 31, 2002
    
    
    114,570,841
    
    
    
    114,571
    
    
    
    114,179,431
    
    
    
    89,278
    
    
    
    416,180
    
    
    
    11,446
    
    
    
    (3,214
    )
    
    
    628,261Net income:Unrestricted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    135,419
    
    
    
    
    
    
    
    
    
    
    
    135,419Restricted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    11Other items of comprehensive
incomeNet
derivative losses on cash-flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,485
    )
    
    
    (6,485
    )Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (361
    )
    
    
    (361
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,180
    )
    
    
    (38,180
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,393Exercise of stock options (Note
O)
    
    
    208,025
    
    
    
    208
    
    
    
    239,997
    
    
    
    4,677
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,885Purchase of treasury stock
    
    
    (1,375,201
    )
    
    
    (1,375
    )
    
    
    (1,375,201
    )
    
    
    (28,075
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,450
    )Tax benefits (Note E)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    814
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    814Cash dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,225
    )
    
    
    
    
    
    
    
    
    
    
    (37,225
    )December 31, 2003
    
    
    113,403,665
    
    
    
    113,404
    
    
    
    113,044,227
    
    
    
    66,694
    
    
    
    514,363
    
    
    
    11,457
    
    
    
    (48,240
    )
    
    
    657,678
 See accompanying notes to consolidated financial statements. F-6




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##### Table of Contents



DASSAULT SYSTÈMES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 NOTE A.     DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND CONSOLIDATION, AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business. Dassault Systèmes and its subsidiaries (the Company) develops and sells
integrated solutions created to manage its customers industrial product
lifecycles (Product Lifecycle Management or PLM) from their initial product
concept and design to their maintenance through manufacturing simulation and to
offer the power of 3D visualization to the largest number of users. The Company operates in two segments: one dedicated to customers who need
to support product development, production and maintenance: the
Process-centric segment and one for customers primarily focused on product
design solutions: the Design-centric segment. Process-centric products are
organized under the Companys flagship CATIA brand for product creation
(CAD/CAE), its DELMIA brand for digital manufacturing process management, its
ENOVIA and SMARTEAM brands for virtual product synthesis, collaboration and
product lifecycle integration. Spatial, a wholly-owned subsidiary of the
Company, distributes and supports the Companys CAA V5 development platform.
CATIA, ENOVIA and SMARTEAM solutions are marketed, distributed, and supported
worldwide by International Business Machines Corporation (IBM). The Companys Design-centric products and services are offered under the
SolidWorks brand. SolidWorks solutions are marketed, distributed, and supported
directly by the Company or through various independent sales representatives. In addition to the development and sale of software products, the Company
also provides services and obtains other revenue from its support of IBM
marketing and distribution efforts, direct support to customers, technological
consulting services, and hardware resale activities. Basis of Presentation and Consolidation. The accompanying consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States.
The Company also prepared separate financial statements in conformity with the
generally accepted accounting principles in France. Differences between these
two sets of financial statements are summarized in Note T. The consolidated financial statements include the accounts of Dassault
Systèmes and its subsidiaries. Intercompany transactions and balances have
been eliminated. Companies over which the Company exercises significant influence over
operating and financial policies are accounted for under the equity method. As of December 31, percentage of capital and voting rights of the Company
were as follows: Year ended December 31,Voting rights
    
    Capital rights2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001French State
    
    
    
    
    
    
    14.6
    %
    
    
    15.6
    %
    
    
    
    
    
    
    15.6
    %
    
    
    15.6
    %GIMD (Groupe Industriel Marcel Dassault)
    
    
    42.4
    %
    
    
    42.0
    %
    
    
    44.6
    %
    
    
    45.1
    %
    
    
    44.7
    %
    
    
    44.3
    %Mr. Charles Edelstenne, Chairman of the Company
    
    
    12.7
    %
    
    
    12.5
    %
    
    
    6.7
    %
    
    
    6.8
    %
    
    
    6.7
    %
    
    
    6.7
    %Public
    
    
    44.9
    %
    
    
    30.9
    %
    
    
    33.1
    %
    
    
    48.1
    %
    
    
    33.0
    %
    
    
    33.4
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 F-7




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##### Table of Contents



Summary of Significant Accounting Policies. 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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Revenue Recognition. The Company derives revenues from three primary sources: (1) its marketing
and distribution agreement with IBM, (2) new software licenses and maintenance,
which includes software license updates and technical support, and (3) services
and other, which includes consulting and training services. Marketing
and distribution agreement with IBM Under the Companys
agreement with IBM, the Company licenses its products to IBM who then
sublicenses the products to end-users. The Company provides maintenance to IBM
but does not contract or directly interface with IBM customers. In addition,
the Company provides training to IBM employees for new product releases,
participates with IBM in a worldwide marketing arrangement and is involved in
other product development initiatives for both Company and IBM products. Royalties under this arrangement are earned as revenue is recognized by
IBM from its sublicensing of the products and services. In general, this
results in recognition of license royalties when IBM sublicense software to end
users and PCS royalties over the period which IBM is required to provide
support to end users. Royalty payments are made within 30 days after the end
of the month in which the royalties are earned. The reporting of IBM activity
is subject to an annual audit and adjustment process, whereby either party has
the opportunity to correct differences which may have occurred in the monthly
reporting process during the preceding year. Such differences nearly always
result from interim reporting which occasionally either overstates or
understates the number of software license transactions to a group or groups of
end-user customers. The Company monitors possible differences based upon
historical trends and known specific situations, and defers the recognition of
revenue by IBM based upon its estimate of adjustments that will ultimately be
made. The Companys agreement with IBM provides for increases in the share of
licensing revenue to be retained by IBM if certain annual sales and growth
targets are met by IBM. Since 2002, this incentive is also linked to IBM
meeting a certain level of sales and marketing expenses for the distribution of
CATIA, ENOVIA and SMARTEAM. This incentive is recorded as a reduction to the
royalties payable to the Company from IBM. New
Software License and Maintenance Revenue New software license
revenues represent all fees earned from granting customers licenses to use our
software. Our new software license revenues consist of perpetual and term
license sales of software products. New software license revenues are
recognized when: persuasive evidence of an arrangement exists, delivery and
acceptance of the software has occurred, the software license fee is fixed or
determinable, and collectibility is probable. In instances when any of the
four criteria are not met, we defer recognition of software license revenues
until the criteria are met. Revenue related to the licensing of software
through value-added-resellers (VAR) is recognized when the VAR provides notice
of delivery to an end-user customer, assuming all other revenue recognition
criteria have been met. Maintenance revenues represent fees associated with the sale of periodic
unspecified product updates and technical support. License updates consist of
the right to unspecified software updates on a when-and-if-available basis and
are entered into in connection with the initial software license purchase.
Maintenance support may be renewed at the conclusion of each term. Revenue
from maintenance is deferred and recognized as revenue on a straight-line basis
over the term of the maintenance agreement. Revenues under multiple-element arrangements, which typically include new
software licenses and maintenance agreements sold together, are allocated to
each element in the arrangement primarily using the residual method based upon
the fair value of the undelivered elements, which is specific to us
(vendor-specific objective evidence of fair value or VSOE). Discounts, if
any, are applied to the delivered elements, usually software licenses, under
the residual method. For maintenance, VSOE is based upon either the renewal
rate specified in each contract or the price charged when sold separately. Services
and Other Professional services revenues consist of fees from
consulting services and training and are recognized as the services are
performed. When we enter into consulting service arrangements that include
significant modifications to the software that are essential to the customers
use and the arrangement is bundled with software, revenue under the entire
arrangement is recognized under the percentage-of-completion method. We
estimate the percentage-of-completion based on our estimate of total hours to
complete the project as a percentage of F-8




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##### Table of Contents



total hours incurred and the estimated hours to complete. Revenue
derived from hardware resale activities is recognized upon delivery. Computer Software Costs/Research and Development. Costs incurred to research and develop computer software products to be
licensed or otherwise marketed to customers are expensed in the period
incurred, unless such costs qualify for capitalization after technological
feasibility is established. Application of this accounting policy has
resulted in all such costs being expensed in the period incurred.
Purchased in-process research and development that is not technologically
feasible as of the acquisition date and has no future alternative use is
expensed. Cash and Cash Equivalents and Short-Term Investments. The Company considers deposits with banks, investments in interest-bearing
accounts and marketable debt securities with maturities of less than 90 days
when acquired to be cash equivalents. Marketable debt securities with
maturities of more than 90 days when acquired are considered to be short-term
investments and are accounted for at carrying value which approximates fair
value based on quoted market price at December 31, 2003 and 2002. All of the
Companys short-term investments are classified as available-for-sale. The cost
of securities sold is based on the specific identification method. Property and Equipment. Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives: Buildings, 30 years;
computer equipment, 18 months to 5 years; office furniture and equipment, 5 to
10 years; leasehold improvements are amortized over the shorter of the life of
the assets or the remaining lease term, not exceeding 10 years. Goodwill and Intangible Assets. Goodwill, which is equal to the fair value of consideration paid in excess
of the fair value of the net assets purchased, has been recorded in conjunction
with several of the Companys purchase business combinations. Beginning in
fiscal 2002 with the adoption of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, goodwill is no longer amortized,
but instead tested for impairment at least annually. Prior to fiscal 2002,
goodwill was amortized using the straight-line method over its estimated period
of benefit. Intangible assets primarily include acquired technology, patents and
trademarks. Costs related to acquired technology, patents and trademarks
are capitalized and amortized using the straight-line method over their
estimated useful lives (generally 18 months to 5 years). Foreign Currency Adjustments. The functional currency of the Companys foreign subsidiaries is the
applicable local currency in accordance with Statement of Financial Accounting
Standards No. 52, Foreign Currency Translation, while the Companys reporting
currency is the euro. Assets and liabilities of the Company and its
subsidiaries with functional currencies other than the euro are translated into
euro equivalents at the rate of exchange in effect on the balance sheet date.
Revenues and expenses are translated at the weighted average monthly exchange
rates for the year. Translation gains or losses are recorded as a separate
component of shareholders equity and transaction gains and losses are
reflected in net income. Fair Value of Derivatives and Other Financial Instruments. The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued expenses approximate
fair value, due to the short-term maturities of such instruments. Realized
and unrealized gains or losses associated with foreign exchange options,
futures, and forward contracts, which are designated and serve as hedges,
are recorded at their fair market value. The Company accounts for its derivative instruments under the provisions
of Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities,as amended (SFAS 133). This
statement requires that each derivative instrument be recorded on the balance
sheet as either an asset or liability measured at its fair value, and that
changes in the derivatives fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The statement also
establishes criteria for a derivative to qualify as a hedge for accounting
purposes. Changes in fair value of derivatives designated as hedges of
forecasted transactions will be deferred and recorded as a component of
accumulated other comprehensive income until the hedged forecasted transaction
occurs and is recognized in earnings. The change in fair value of derivatives
designated as cash-flow hedges is reported as a component of other
comprehensive income until the hedged item is recognized in earnings. Income Taxes. Deferred tax assets and liabilities are recognized for temporary
differences between financial and tax reporting. Deferred taxes are adjusted
for changes in the applicable, enacted tax rates. Deferred tax assets are
recognized whenever the realization of such amounts is considered to be more
likely than not. F-9




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##### Table of Contents



Shipping and Handling. Shipping and handling costs related to license fees are included in cost
of software for all periods presented. Shipping and handling costs related to
maintenance releases are included in cost of software. Advertising Costs. Advertising costs are expensed as incurred. Pension and Post Retirement Benefits. The estimated cost of providing benefits to employees is accrued during
the years that the employees render services. The Company utilizes defined
benefit plans under which the fair value of plan assets is assessed annually
and actuarial assumptions are used to determine cost and benefit obligations.
Liabilities and prepaid expenses are accrued over the estimated term of service
of employees using actuarial methods. Experience gains and losses, as well as
changes in actuarial assumptions and plan assets and provisions are amortized
over the average future service period of employees. Information about Operating Segments. The Company reports its segments and related information in accordance
with Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information(SFAS 131). Operating
segments are components of the Company for which discrete financial information
is available and whose operating results are regularly reviewed by management
to assess performance and allocate resources. Comprehensive Income. Comprehensive income includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The
Company reports comprehensive income in the consolidated statements of
shareholders equity. Earnings Per Share. Basic earnings per share is determined by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is determined by dividing net income by the weighted average
number of common shares outstanding plus the effect of applying the treasury
stock method of computing dilution for the stock options outstanding during the
period. Stock Option Plans. The Company is accounting for its stock option plans in accordance with
the provisions of Accounting Principles Board Opinion No. 25 Accounting for
stock issued to employees (APB 25) and related Interpretations. Under those
rules, no compensation expense is recognized for stock options that are granted
at the market price at the date of grant. In addition, the Company applies the disclosure provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123), as amended by Statement of Financial Accounting Standards No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS 123 to
employee stock options: F-10




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##### Table of Contents



(in thousands except per share amounts) Year Ended December 31,2003
    
    2002
    
    2001Net Income:As reported
    
    
    135,419
    
    
    
    126415
    
    
    
    88,741Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effect
    
    
    
    
    
    
    3,636
    
    
    
    1,338Less: Stock-based employee
compensation expense determined
under fair value based method, net
of related tax effect
    
    
    (55,506
    )
    
    
    (54,300
    )
    
    
    (29,033
    )Pro forma
    
    
    79,913
    
    
    
    75,751
    
    
    
    61,046Basic net income per shareAs reported
    
    
    1.20
    
    
    
    1.11
    
    
    
    0.78Pro forma
    
    
    0.71
    
    
    
    0.66
    
    
    
    0.54Diluted net income per shareAs reported
    
    
    1.18
    
    
    
    1.09
    
    
    
    0.76Pro forma
    
    
    0.70
    
    
    
    0.65
    
    
    
    0.52
 The fair value of stock options granted during the year is estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions: Year Ended December 31,2003
    
    2002
    
    2001Weighted-average expected life (years)
    
    
    3.7
    
    
    
    3.5
    
    
    
    3.5Expected volatility rates
    
    
    60
    %
    
    
    58
    %
    
    
    44
    %Expected dividend yield
    
    
    1.4
    %
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    3.3
    %
    
    
    3.9
    %
    
    
    3.5
    %
 The estimated compensation expense determined under the fair value method
for the next three fiscal years is shown in the table below. The estimated
compensation expense amounts shown in the below table are based on existing
stock option plans as of December 31, 2003. These estimates reflect the
expected impact of stock options granted as of December 31, 2003 on future
periods and could change significantly if the Company decided to grant
additional stock options in the future. (in thousands) Stock-basedemployee compensationexpense, net ofrelated tax effectFor the year ended December 31, 2004
    
    
    9,749For the year ended December 31, 2005
    
    
    1,164For the year ended December 31, 2006
    
    
    
 The Black-Scholes option pricing model was developed to estimate the fair
value of fully transferable traded options, with no vesting requirements and
does not take into account certain characteristics of employee stock options.
In addition, option valuation models require the input of highly subjective
assumptions, including the options expected life and the expected stock price
volatility. Because the options granted by the Company to its employees have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in the opinion of management the existing model does not
necessarily provide a single reliable measure of the fair value of employee
stock options. Marketable securities. Marketable securities are classified as available-for-sale and initially
recorded at their acquisition cost and adjusted to current market value. Net
unrealized gains and losses on marketable securities classified as
available-for-sale are credited or charged to other comprehensive income. If it
is considered that a decline in market value is other-than-temporary, the
security is considered impaired and the difference between cost and current
market value is recorded as an expense in the statement of operations. Reclassifications. F-11




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Certain reclassifications have been made to prior years amounts to conform with
current year presentation. Recently issued accounting standards. In December 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 132, Employers Disclosures about Pensions
and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88
and 106(SFAS 132-R). This Statement revises employers disclosures about
pension plans and other postretirement benefit plans. It does not change the
measurement or recognition of those plans required by FASB Statements No. 87,
EmployersAccounting for Pensions,No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits,and No. 106, Employers
Accounting for Postretirement
Benefits Other Than Pensions.This Statement retains the disclosure
requirements contained in the previously issued Statement of Financial
Accounting Standard No. 132, Employers Disclosures about Pensions and Other
Postretirement Benefits,which it replaces. It requires additional disclosures
to those in the original statement about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans. The required information should be
provided separately for pension plans and for other postretirement benefit
plans. The Company has adopted the disclosure provisions associated with its
domestic plans, effective December 31, 2003. The Company will adopt the
disclosure provisions for its foreign plans in the fiscal year ending December
31, 2004, as required. Adoption of the provisions did not and will not have an
impact on the Companys financial position or results of operations for the
years ended December 31, 2003 and 2004, respectively. The FASB issued Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities,in January 2003 and released a revised version of
FIN 46 in December 2003. FIN 46 requires an investor with a majority of the
variable interests in a variable interest entity to consolidate the entity. A
variable interest entity is an entity in which the equity investors do not have
a controlling interest or the equity investment at risk is insufficient to
finance the entitys activities without receiving additional subordinated
financial support. The consolidation requirements of FIN 46 are effective;
immediately for all variable interest entities created after January 31, 2003;
as of December 31, 2003 for special purposes entities created before February
1, 2003 and; in the first quarter of 2004 for all other variable interest
entities. The application of the initial consolidation provisions of FIN 46 did not
have a material impact on the Companys financial position or results of
operations. We do not expect the application of the remaining consolidation
provisions of FIN 46, as required in the first quarter of 2004, to have a
material effect on the Companys financial statements. NOTE B.     BUSINESS COMBINATIONS On May 31, 2003, the Company acquired an interest in Athys, a 13-employee
company based in Grenoble (France), for 3.3 million. As a result of this
transaction, an amount of 4.5 million was recorded in goodwill. Athys
specializes in the development of work cell control software. On
July 20, 2001, the Company acquired the consulting and services business and
related assets of Alliance Commerciale Technologique (ACT) for 9 million in
cash. The total purchase price was allocated as follows: Trade accounts receivable
    
    2 millionProperty and equipment
    
    1 millionIntangible assets
    
    6 million
 On May 31, 2001, the Company acquired Structural Research and Analysis
Corp. (SRAC), a private company located in California, for 23 million. This
acquisition was financed by an issuance of shares for
19 million with the remainder paid in cash. SRAC is a supplier of CAE and CAD
integrated design analysis software. The purchase price in excess of the net
assets acquired was allocated as follows: Goodwill
    
    13 millionSoftware
    
    9 million
 On May 3, 2001, the Company exchanged its investment in Advanced
Entreprise Solutions (AES) for a 9% minority interest in MSC.Software
(MSC). This exchange did not result in any gain or loss. MSC is a provider of
simulation software, with related services and systems. All acquisitions were accounted for under the purchase method of
accounting and all acquisitions have been consolidated in the Companys
financial statements as of the date the acquisition was consummated. Pro forma
results of operations reflecting these acquisitions have not been presented
because the results of operations of the acquired companies, either
individually or collectively, are not material to the Companys results of
operations. F-12




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##### Table of Contents



NOTE C.     SOFTWARE REVENUE Software revenue was comprised of initial software license charges
(primary license charges) of 313,590,000, 349,784,000 and 351,196,000 and
periodic license and maintenance fees of 331,975,000, 320,102,000 and
291,838,000, in the years ended December 31, 2003, 2002, and 2001,
respectively. NOTE D.     FINANCIAL REVENUE AND OTHER, NET (In thousands) Year ended December 31,2003
    
    2002
    
    2001Interest income
    
    
    11,007
    
    
    
    11,648
    
    
    
    15,425Interest expense
    
    
    (949
    )
    
    
    (1,682
    )
    
    
    (2,354
    )Foreign exchange (losses) gains, net
    
    
    (8,086
    )
    
    
    (6,280
    )
    
    
    345Other, net
    
    
    (2,827
    )
    
    
    (1,141
    )
    
    
    646Total
    
    
    (855
    )
    
    
    2,545
    
    
    
    14,062
 The Company transacts in various foreign currencies, primarily U.S. dollars and
Japanese yen. To manage this currency exposure, the Company purchases and sells
currency options (puts or calls) and may purchase other foreign exchange
contracts from time to time. All the derivative instruments held by the Company
are designated as hedges, have high correlation with the underlying exposure
and are highly effective in offsetting underlying price movements. The fair market values of foreign forward contracts and options were
determined by a financial institution using quoted market prices and option
pricing models. The effectiveness of forward contracts is measured using forward rates and
the forward value of the underlying hedged transaction. For currency options,
effectiveness is measured by the change in the option intrinsic value, which
represents the change in the options strike price compared to the spot price
of the underlying hedged transaction. During 2003 and 2002, the portion of
hedging instruments gains or losses excluded from the assessment of
effectiveness and the ineffective portions of hedges had no material impact on
earnings and was recorded in financial revenue in the statement of operations. The Company recognized after-tax gains of 868,000 during the year ended
December 31, 2002, for cash flow hedges that were discontinued because the
forecasted transaction did not occur. All amounts have been included in
financial revenue in the statement of operations. No cash flow hedges were
discontinued for the years ended December 31, 2003 and 2001. In connection with its cash flow hedges, the Company has recorded
approximately 4.7 million (2002: 9.7 million) of net gains in accumulated
other comprehensive income as of December 31, 2003, net of tax, substantially
all of which is expected to be reclassified to net income within the next year
to provide an economic offset to the impact of the underlying anticipated cash
flows hedged. At December 31, 2003, the fair value of all derivative
instruments has been recorded in the balance sheet in other current assets. The following table presents the carrying amount of financial instruments
at December 31, 2003 and 2002: (In thousands) Year ended December 31,2003
    
    2002Nominal amount
    
    Market Value
    
    Nominal amount
    
    Market ValueCollars USD/euros
    
    
    35,629
    
    
    
    3,441
    
    
    
    47,082
    
    
    
    7,096Collars JPY/euros
    
    
    41,468
    
    
    
    7,893
    
    
    
    86,017
    
    
    
    7,073Forward exchange contrat USD/euros
    
    
    10,821
    
    
    
    1,454
    
    
    
    20,625
    
    
    
    4,246Forward exchange contrat JPY/euros
    
    
    
    
    
    
    
    
    
    
    15,274
    
    
    
    2,395Call USD/euros
    
    
    1,979
    
    
    
    
    
    
    
    
    
    
    
    Digital JPY/euros
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    135
 USD means United States Dollar; JPY means Japanese Yen F-13




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##### Table of Contents



All these financial instruments, which relate to the hedging strategy of the
Company, usually have a maturity date of less than 24 months. Management
believes counter-party risk on financial instruments is minimal since the
Company deals with major banks and financial institutions. The Company does not use derivative financial instruments for trading or
speculative purposes. NOTE E.     INCOME TAXES Deferred tax assets and (liabilities) are as follows: (in thousands) December 31,2003
    
    2002Deferred tax assets:Accelerated depreciation and amortization for financial
statement purposes
    
    
    17,212
    
    
    
    24,529Profit sharing and pension accruals not yet deductible
    
    
    7,336
    
    
    
    6,639Provisions and other expenses not currently deductible
    
    
    25,919
    
    
    
    15,865Net tax loss and tax credit carryforward assets
    
    
    20,724
    
    
    
    23,751Valuation reserves
    
    
    (20,228
    )
    
    
    (23,473
    )Total deferred tax assets
    
    
    50,963
    
    
    
    47,311Deferred tax liabilities:Accelerated depreciation and amortization for tax purposes
    
    
    (8,606
    )
    
    
    (8,144
    )Other
    
    
    (2,598
    )
    
    
    (6,217
    )Total deferred tax liabilities
    
    
    (11,204
    )
    
    
    (14,361
    )Net deferred tax asset
    
    
    39,759
    
    
    
    32,950
 The balance sheet classification of deferred tax is as follows and
reflects that, in accordance with SFAS 109, the Company has not offset deferred
tax assets and liabilities attributable to different tax jurisdictions: (in thousands) December 31,2003
    
    2002Short-term deferred tax assets
    
    
    31,634
    
    
    
    27,947Long-term deferred tax assets
    
    
    19,292
    
    
    
    15,405Total deferred tax assets
    
    
    50,926
    
    
    
    43,352Short-term deferred tax liabilities
    
    
    (4,937
    )
    
    
    (6,135
    )Long-term deferred tax liabilities
    
    
    (6,230
    )
    
    
    (4,267
    )Total deferred tax liabilities
    
    
    (11,167
    )
    
    
    (10,402
    )Net deferred tax asset (liability)
    
    
    39,759
    
    
    
    32,950
 The short-term deferred tax assets relate primarily to the profit sharing
expenses and reserves not currently deductible. Short-term deferred tax assets
are included in the balance sheet in other current assets. F-14




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##### Table of Contents



The components of income (loss) before income taxes are as follows: (in thousands) Year ended December 31,2003
    
    2002
    
    2001France
    
    
    177,748
    
    
    
    215,727
    
    
    
    221,899Foreign
    
    
    34,555
    
    
    
    (9,936
    )
    
    
    (45,242
    )Income before income taxes
    
    
    212,303
    
    
    
    205,791
    
    
    
    176,657
 The significant components of income tax expense are as follows: (in thousands) Year ended December 31,2003
    
    2002
    
    2001France
    
    
    63,277
    
    
    
    74,810
    
    
    
    80,304Foreign
    
    
    24,527
    
    
    
    12,570
    
    
    
    17,490Current taxes
    
    
    87,804
    
    
    
    87,380
    
    
    
    97,794Change in deferred taxes
    
    
    (10,920
    )
    
    
    (8,004
    )
    
    
    (9,878
    )Income tax expense
    
    
    76,884
    
    
    
    79,376
    
    
    
    87,916
 The differences between the income tax provision and the provision
computed using the statutory French income tax rate are as follows: (in thousands) Year ended December 31,2003
    
    2002
    
    2001Taxes computed at the statutory rate of 35.43% for 2003,
35.43% for 2002 and 36.43% for 2001
    
    
    75,219
    
    
    
    72,912
    
    
    
    64,356Foreign losses
    
    
    5,858
    
    
    
    1,788
    
    
    
    (74
    )Foreign tax rate differentials(1)
    
    
    1,419
    
    
    
    7,170
    
    
    
    14,722Permanent differences related to non-deductible goodwill and
other intangible assets
    
    
    
    
    
    
    
    
    
    
    10,342Other
    
    
    (5,611
    )
    
    
    (2,494
    )
    
    
    (1,430
    )Income tax expense
    
    
    76,884
    
    
    
    79,376
    
    
    
    87,916Effective tax rate
    
    
    36.2
    %
    
    
    38.6
    %
    
    
    49.8
    %
   (1)
    
    SmarTeam, a subsidiary with operating losses, has the status of an
Approved Enterprise as defined by the Israeli Investment Center and is
entitled to a tax exemption. Therefore the effective tax rate of SmarTeam
is 0%. At December 31, 2003, there were net tax operating losses and tax credit
carryforwards of 61,903,000 and 5,440,000 respectively. Net operating tax
loss carryforwards and tax credits are scheduled to expire in the following
years: (in thousands) Netoperatinglosses
    
    Tax credits2004
    
    
    
    
    
    
    2962005
    
    
    
    
    
    
    2006
    
    
    
    
    
    
    2007
    
    
    
    
    
    
    2008
    
    
    
    
    
    
    2009 and later
    
    
    61,903
    
    
    
    5,144Total
    
    
    61,903
    
    
    
    5,440
 The Company has not provided any deferred income taxes on the
undistributed earnings of its foreign subsidiaries based upon its determination
that such earnings will be indefinitely reinvested. Company management has
decided that the determination of the amount of any unrecognized deferred tax
liability for the cumulative undistributed earnings of the foreign subsidiaries
is not practical since it would depend on a number of factors that cannot be
known until such time as a decision to repatriate the earnings might be made. F-15




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##### Table of Contents



In connection with the exercise of stock options and warrants, SolidWorks
and Delmia Corp. realized tax benefits totaling 814,000, 5,254,000 and 0 for
the years ended December 31, 2003, 2002 and 2001 respectively, which were
reflected in shareholders equity. NOTE F.     CASH AND CASH EQUIVALENTS Cash and cash equivalents are maintained on deposit with large financial
institutions, principally in France. Management monitors the credit-worthiness
of such counter-parties. (in thousands) December 31,2003
    
    2002Bank accounts
    
    
    110,872
    
    
    
    118,450Money market accounts
    
    
    308,700
    
    
    
    253,542
    419,572
    
    
    
    371,992
 At December 31, 2003, 69% of such amounts were denominated in euros (2002:
65%), 27% in U.S. dollars (2002: 32%) and 3% in Japanese yen (2002: 2%). NOTE G.     SHORT-TERM INVESTMENTS Short-term investments are comprised of marketable interest-bearing
securities with large financial institutions. Management considers the credit
risk exposure due to counter-party failure to be minimal. At December 31, 2003, and 2002 such investments amounted to 20,102,324
(substantially all of which were denominated in U.S. dollars) and 16,436,000
(substantially all of which were denominated in euro), respectively. Such
short-term investments are liquid, and have stated maturities of one year or
less at each balance sheet date. Gross unrealized gains and losses are not
significant. NOTE H.     PROPERTY AND EQUIPMENT (in thousands) OfficeLand and
    
    Computer
    
    furniture
    
    Leaseholdbuildings
    
    equipment
    
    and equipment
    
    improvements
    
    TotalNet valueDecember 31, 2002
    
    
    25,929
    
    
    
    15,054
    
    
    
    7,845
    
    
    
    11,045
    
    
    
    59,873Acquisitions
    
    
    
    
    
    
    8,270
    
    
    
    1,910
    
    
    
    5,679
    
    
    
    15,859Disposals
    
    
    
    
    
    
    (455
    )
    
    
    (373
    )
    
    
    (116
    )
    
    
    (944
    )Depreciation and
amortization for
the year
    
    
    (925
    )
    
    
    (9,011
    )
    
    
    (2,492
    )
    
    
    (2,875
    )
    
    
    (15,303
    )Exchange differences
    
    
    (473
    )
    
    
    (1,193
    )
    
    
    (746
    )
    
    
    (535
    )
    
    
    (2,946
    )December 31, 2003
    
    
    24,531
    
    
    
    12,666
    
    
    
    6,144
    
    
    
    13,198
    
    
    
    56,539
 F-16




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##### Table of Contents



NOTE I.     INTANGIBLE ASSETS (in thousands) Patents andtrademarks andother intangibleGoodwill
    
    Software
    
    assets
    
    TotalNet balance at December 31, 2002
    
    
    71,599
    
    
    
    8,526
    
    
    
    3,641
    
    
    
    83,766Additions
    
    
    6,731
    
    
    
    4,414
    
    
    
    
    
    
    
    11,145Disposals
    
    
    
    
    
    
    (97
    )
    
    
    (110
    )
    
    
    (207
    )Amortization for the year
    
    
    
    
    
    
    (6,468
    )
    
    
    (1,314
    )
    
    
    (7,782
    )Exchange differences
    
    
    (4,526
    )
    
    
    (867
    )
    
    
    (402
    )
    
    
    (5,795
    )Net balance at December 31, 2003
    
    
    73,804
    
    
    
    5,508
    
    
    
    1,815
    
    
    
    81,127
 Substantially all of the goodwill at December 31, 2003 is allocated to the
process-centric segment. Goodwill at December 31, 2003 consists principally of
excess purchase price from the acquisitions of Delmia GmbH (18 million),
SmarTeam (16 million), Spatial (13 million) and SRAC (13 million). Goodwill
additions in 2003 resulted primarily from the acquisition of Athys. Total intangible amortization expense, excluding goodwill amortization,
was 7,782,000, 13,999,000 and 13,234,000 for the years ended December 31,
2003, 2002 and 2001, respectively. Based on the carrying value of intangible
assets as of December 31, 2003, intangible amortization expense is expected to
amount to
 5,247,000 in 2004 and 2,076,000 in 2005. The Company adopted SFAS 142 on January 1, 2002. During 2002, the Company
performed the transitional impairment test required upon the adoption of SFAS
142, which resulted in a finding that no impairment to goodwill existed. The
Company also performed its annual impairment test in the fourth quarter of 2003
and 2002; no impairment of goodwill was indicated as a result of these tests.
These tests consisted of a comparison of the fair value of the Companys
reporting units with their respective carrying amount, including the goodwill.
The fair value of the reporting units was determined based on the income
approach, which estimates the fair value based on the future discounted cash
flows. Based on the analysis, the Company determined that the fair value was in
excess of the carrying amount of the reporting units. The following table sets forth net income per share adjusted to exclude
goodwill amortization recognized prior to the adoption of SFAS 142 on January
1, 2002: (in thousands except per share amounts) Year ended December 31,2003
    
    2002
    
    2001Reported net income
    
    
    135,419
    
    
    
    126,415
    
    
    
    88,741Add back: goodwill amortization, net of tax benefit
    
    
    
    
    
    
    
    
    
    
    44,144Adjusted net income
    
    
    135,419
    
    
    
    126,415
    
    
    
    132,885Net income per share  basic:Reported net income
    
    
    1.20
    
    
    
    1.11
    
    
    
    0.78Add back: goodwill amortization, net of tax benefit
    
    
    
    
    
    
    
    
    
    
    0.39Adjusted net income
    
    
    1.20
    
    
    
    1.11
    
    
    
    1.17Net income per share  diluted:Reported net income
    
    
    1.18
    
    
    
    1.09
    
    
    
    0.76Add back: goodwill amortization, net of tax benefit
    
    
    
    
    
    
    
    
    
    
    0.38Adjusted net income
    
    
    1.18
    
    
    
    1.09
    
    
    
    1.14
 NOTE J.     OTHER NON-CURRENT ASSETS In April 2002, the Company entered into an agreement with RAND A
Technology Corporation (Rand), to accelerate the development of marketing,
sales and services infrastructure required to support PLM. Under the terms of
this agreement, the Company granted Rand two 10-year convertible loans (the
Loans), each for a principal amount of 6.6 million and U.S.$6.2 million
(23.1 million in aggregate as of December 31, 2003). One of the Loans is
convertible into common shares of Rand at Rands option, and the other one is
convertible into common shares of Rand at the Companys option. The conversion
rights are subject to certain limitations and their exercise must not result in
the Company holding in excess of 19.9% of Rands shares. The loans are secured
by certain tangible and intangible assets of Rand and, to the extent not
converted, are repayable in quarterly installments beginning in 2004. In November and December 2003, the Company made short-term advances
totaling 5.5 million to Rand. These advances bear interest at 5.5% and are
repayable in 2004. Due to their short-term maturity, these advances have been
classified in other current assets. F-17




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##### Table of Contents



At December 31, 2003 other non-current assets are comprised of the
following components: (in thousands) December 31,2003
    
    2002InvestmentsImpactXoft
    
    
    8,474
    
    
    
    9,589MSC.Software
    
    
    5,542
    
    
    
    6,506Other
    
    
    1,366
    
    
    
    437Total investments
    
    
    15,382
    
    
    
    16,532
 InterestLoans receivable
    
    
    
    
    
    
    
    
    
    rateRand
    
    
    23,128
    
    
    
    18,821
    
    
    
    5.5
    %ImpactXoft
    
    
    3,959
    
    
    
    4,768
    
    
    
    5.0
    %Other
    
    
    1,742
    
    
    
    Total loans receivable
    
    
    28,829
    
    
    
    23,589Less: Current portion
    
    
    (4,704
    )
    
    
    (954
    )Total loans and investments
    
    
    39,507
    
    
    
    39,167
 Loans receivable at December 31, 2003 are due as follows: (in thousands) 2004
    
    
    4,7042005
    
    
    4,9412006
    
    
    5,1792007
    
    
    4,6222008
    
    
    4,145Thereafter
    
    
    5,238Total
    
    
    28,829Less current portion
    
    
    (4,704
    )Long-term loans
    
    
    24,125
 F-18




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##### Table of Contents



NOTE K.     LEASES At December 31, 2003, future minimum annual rental commitments under
non-cancelable lease obligations were as follows: (in thousands) Capital
    
    OperatingLeases
    
    LeasesYear ending December 31:2004
    
    
    2,092
    
    
    
    12,6142005
    
    
    1,972
    
    
    
    10,6142006
    
    
    1,728
    
    
    
    8,7782007
    
    
    422
    
    
    
    7,8752008
    
    
    
    
    
    
    7,226Thereafter
    
    
    
    
    
    
    14,863Total minimum lease payments
    
    
    6,214
    
    
    
    61,970Less amount representing interest and
other
    
    
    (119
    )Present value of net minimum lease
payments
    
    
    6,095Less current maturities of capital
lease obligations
    
    
    (1,890
    )Capital lease obligations
    
    
    4,205
 The Company leases land and buildings related to its offices under capital
leases. The following summarizes property held under capital leases: (in thousands) Year ended December 31,2003
    
    2002Land
    
    
    5,680
    
    
    
    5,680Buildings
    
    
    27,188
    
    
    
    27,188Accumulated depreciation
    
    
    (10,649
    )
    
    
    (9,742
    )
    22,219
    
    
    
    23,126
 The Company also leases computer equipment, premises and office equipment
under operating leases.
Rent expense under operating leases was 33,159,360, 29,189,000 and
26,796,000, in the years ended December 31, 2003, 2002, and 2001,
respectively. NOTE L.     EMPLOYEE PROFIT-SHARING In accordance with French legal requirements, the Company has
profit-sharing arrangements for its French employees. Profit-sharing amounts
are based on formulas, which consider return on assets and employment levels.
Profit-sharing expense was  10,632,000, 11,623,000 and 11,701,000, for the
years ended December 31, 2003, 2002, and 2001, respectively. Such amounts are
accrued each year, are interest-bearing, and are paid in cash, including the
accrued interest, generally after five years. The interest rate applied was
4.6% and 5.1% in the years ended December 31, 2003 and 2002 respectively. F-19




---



##### Table of Contents



(in thousands) December 31,2003
    
    2002Employee profit-sharing liability,
including accrued interest
    
    
    27,891
    
    
    
    28,325Less current maturities
    
    
    (8,630
    )
    
    
    (5,670
    )
    19,261
    
    
    
    22,655
 Estimated maturities of these obligations at December 31, 2003 are as follows
(in thousands): 2004
    
    
    8,6302005
    
    
    2,1222006
    
    
    3,8322007
    
    
    4,0112008
    
    
    4,1832009
    
    
    5,113`
    
    
    
    27,891
 NOTE M.     RETIREMENT AND PENSION ARRANGEMENTS The Company provides defined benefit retirement indemnities to the
employees of its French operations, and sponsors defined benefit pension plans
for certain employees in the United States. In addition, the Company has certain other plans in countries other than the
United States, which are not significant and are combined with the French plan
for presentation purposes. The measurement date for all defined benefit plans is December 31. French plans and other In France, the retirement indemnities are based upon an individuals years
of credited service and annualized salary at retirement. Such benefits vest,
and are funded as a lump sum paid to the employee, upon the employees
retirement. Estimated retirement indemnities are accrued over the working life
of the employees using actuarial assumptions and calculations. The projected
benefit obligation was determined using the prospective method and the
following actuarial assumptions: retirement age 60 years; salary increases at
1% over inflation. Weighted-average assumptions used for the French operations
were as follows: Weighted-average assumptions used to determine the benefit obligation: Year ended December 31,French plans and other
    
    2003
    
    2002
    
    2001Discount rate
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    5.00
    %Expected return on plan assets
    
    
    5.50
    %
    
    
    5.50
    %
    
    
    5.50
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    3.00
    %
    
    
    3.00
    %
 Weighted-average assumptions used to determine the net periodic benefit cost: Year ended December 31,French plans and other
    
    2003
    
    2002
    
    2001Discount rate
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    5.00
    %Expected return on plan assets
    
    
    5.50
    %
    
    
    5.50
    %
    
    
    5.50
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    3.00
    %
    
    
    3.00
    %
 F-20




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##### Table of Contents



The components of net periodic benefit cost were as follows: (in thousands of euro) Year ended December 31,French plans and other
    
    2003
    
    2002
    
    2001Service cost
    
    
    1,779
    
    
    
    1,346
    
    
    
    1,208Interest cost
    
    
    684
    
    
    
    588
    
    
    
    475Expected return on plan assets
    
    
    (351
    )
    
    
    (382
    )
    
    
    (277
    )Net amortization and deferral
    
    
    1
    
    
    
    (14
    )
    
    
    (27
    )Net periodic benefit cost
    
    
    2,113
    
    
    
    1,538
    
    
    
    1,379
 Changes in the funded status of the benefit plans were as follows: (in thousands of euro) Year ended December 31,French plans and other
    
    2003
    
    2002Change in benefit obligationsBenefit obligations at beginning of year
    
    
    13,904
    
    
    
    12,175Service cost
    
    
    1,779
    
    
    
    1,346Interest cost
    
    
    684
    
    
    
    588Change in scope
    
    
    
    
    
    
    Actuarial gain
    
    
    (1,775
    )
    
    
    (155
    )Exchange rate differences
    
    
    (140
    )
    
    
    (11
    )Benefits paid
    
    
    (226
    )
    
    
    (39
    )Benefit obligations at end of year
    
    
    14,226
    
    
    
    13,904Change in plan assetsFair value of plan assets at beginning of year
    
    
    6,960
    
    
    
    7,468Employer contribution
    
    
    168
    
    
    
    39Return on plan assets
    
    
    446
    
    
    
    (508
    )Benefits paid
    
    
    (168
    )
    
    
    (39
    )Fair value of plan assets at end of year
    
    
    7,406
    
    
    
    6,960Funded status
    
    
    (6,820
    )
    
    
    (6,944
    )Unrecognized actuarial (gain) loss
    
    
    (1,702
    )
    
    
    595Accrued benefit cost  French plans and other
    
    
    (8,522
    )
    
    
    (6349
    )
 The accumulated benefit obligation for the French defined benefit plans
was  7.9 million and  8.0 million at December 31, 2003, and 2002,
respectively. Information for pension plans with an accumulated benefit obligation in excess
of plan assets is as follows: (in thousands of euro) Year ended December 31,French plans
    
    2003
    
    2002Projected benefit obligation
    
    
    11,456
    
    
    
    11,801Accumulated benefit obligation
    
    
    7,430
    
    
    
    7,505Fair Value of plan assets
    
    
    6,706
    
    
    
    6,317
 All plan assets for the French plans are invested in an insurance contract
with Sogecap, a life-insurance company, which is part of the Société Générale
group. To date, the Company has contributed  6.8 million to this insurance
contract. F-21




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##### Table of Contents



The Company does not expect to make any additional contributions to its French
pension plans in 2004. U.S. Plans In the United States, pension benefits are based upon years of credited
service and the employees average final earnings. Retirement benefits are
funded by the Companys contributions to segregated pension plan assets, in an
amount that is sufficient to meet or exceed the minimum annual funding
requirements of the Employee Retirement Income Security Act. The projected
benefit obligation was determined using the prospective method.
Weighted-average assumptions used for the U.S. plans were as follows: Weighted-average assumptions used to determine the benefit obligation: Year ended December 31,U.S. plans
    
    2003
    
    2002
    
    2001Discount rate
    
    
    6.00
    %
    
    
    6.75
    %
    
    
    7.25
    %Expected return on plan assets
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    3.75
    %
    
    
    4.25
    %
 Weighted-average assumptions used to determine the net periodic benefit cost: Year ended December 31,U.S. plans
    
    2003
    
    2002
    
    2001Discount rate
    
    
    6.75
    %
    
    
    7.25
    %
    
    
    7.50
    %Expected return on plan assets
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    8.50
    %Rate of compensation increase
    
    
    3.75
    %
    
    
    4.25
    %
    
    
    4.50
    %
 The components of net periodic benefit cost were as follows: (in thousands of euro) Year ended December 31,U.S. plans
    
    2003
    
    2002
    
    2001Service cost
    
    
    770
    
    
    
    756
    
    
    
    622Interest cost
    
    
    838
    
    
    
    902
    
    
    
    868Expected return on plan assets
    
    
    (722
    )
    
    
    (804
    )
    
    
    (648
    )Net amortization and deferral
    
    
    218
    
    
    
    133
    
    
    
    103Net periodic benefit cost  U.S. plans
    
    
    1,104
    
    
    
    987
    
    
    
    945
 F-22




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##### Table of Contents



Changes in the funded status of the benefit plan were as follows: (in thousands of euro) Year ended December 31,U.S. plans
    
    2003
    
    2002Change in benefit obligationsBenefit obligations at beginning of year
    
    
    13,209
    
    
    
    13,475Service cost
    
    
    770
    
    
    
    756Interest cost
    
    
    838
    
    
    
    902Actuarial loss
    
    
    1325
    
    
    
    768Benefits paid
    
    
    (303
    )
    
    
    (333
    )Exchange rate differences
    
    
    (2,516
    )
    
    
    (2,359
    )Benefit obligations at end of year
    
    
    13,323
    
    
    
    13,209Change in plan assetsFair value of plan assets at beginning of year
    
    
    8,616
    
    
    
    9,543Employer contribution
    
    
    1,186
    
    
    
    1,300Return on plan assets
    
    
    1,274
    
    
    
    (305
    )Benefits paid
    
    
    (303
    )
    
    
    (333
    )Exchange rate differences
    
    
    (1,687
    )
    
    
    (1,589
    )Fair value of plan assets at end of year
    
    
    9,086
    
    
    
    8,616Funded status
    
    
    (4,237
    )
    
    
    (4,593
    )Unrecognized actuarial loss
    
    
    3,108
    
    
    
    3,172Unrecognized prior service cost
    
    
    332
    
    
    
    494Accrued benefit cost  U.S. Plans
    
    
    (797
    )
    
    
    (927
    )Amounts recognized in the Statement
of financial position:Accrued benefit cost
    
    
    (797
    )
    
    
    (927
    )Accrued benefit liability
    
    
    (1,369
    )
    
    
    (1,112
    )Intangible assets
    
    
    332
    
    
    
    493Accumulated other comprehensive income
    
    
    1,037
    
    
    
    619Net amount recognized  U.S. Plans
    
    
    (797
    )
    
    
    (927
    )
 The Company recorded a minimum pension liability at December 31, 2003 as
required when the accumulated benefit obligation in the plan exceeds the fair
value of the underlying pension plan assets and accrued liability. The
adjustment related entirely to our U.S. plans and amounted to  361,000 (net of
tax), which is reflected in other comprehensive income. NOTE N.     CONTINGENCIES The Company is involved in litigation incidental to normal operations. It
is not possible to determine the ultimate liability, if any, in these matters.
In the opinion of management, after consultation with legal counsel, the
resolution of such litigation and proceedings will not have a material effect
on the consolidated financial statements of the Company. NOTE O.     STOCK OPTION PLANS, RETAINED EARNINGS AND EARNINGS PER SHARE Stock Option Plans On April 15, 1996, the Company implemented a stock option plan under which
1,027,780 shares were set aside for grants to officers and most employees of
the Company. The options were allocated on June 28, 1996, upon the Initial
Public Offering, to broaden employee ownership of the Company. All options were
vested and exercisable F-23




---



##### Table of Contents



immediately. The options may be exercised during 10 years subject to
continued employment. Each option entitles the holder thereof to purchase one
share at a price equal to the initial offering price ( 9 or U.S.$ 11.5). As
the stock was not publicly traded prior to the Initial Public Offering, the
fair market value of the stock at the date of grant is equal to the initial
offering price. The stock option plan is non-compensatory and therefore does
not result in compensation expense in the financial statements. At December 31,
2003, 841,621 options have been exercised and there were 176,359 unexercised
stock options. On June 6, 1997, an Extraordinary Shareholders Meeting of the Company
authorized the Board of Directors to establish a stock option plan, under which
1,031,840 shares of the Company were authorized to be issued pursuant to grants
to certain officers (including executive officers) and employees of the
Company. The options were allocated by the Board of Directors on December 15,
1997. Each option entitles the holder thereof to purchase one share at a strike
price of 25.92. The options can be exercised by the optionees from December
15, 1999 until December 14, 2007, subject to continued employment, and the
shares resulting from the exercise of the options cannot be sold before
December 15, 2002. At December 31, 2003, 142,904 options have been exercised
and there were 838,930 unexercised stock options. On July 25, 1997, the Company approved the SolidWorks merger. SolidWorks
had adopted an incentive and non-qualified stock option plan in 1994 and issued
a single warrant in 1995. Pursuant to the terms of the merger, all outstanding
stock options and the warrant previously issued by SolidWorks became
exercisable for shares of the Company. The Company reserved 2,378,564 shares
for the future exercise of such options and warrant, which is the total amount
of additional shares which would be issued if all such options and warrant were
to be exercised. At December 31, 2003 a total of 359,438 shares remain reserved
for that purpose. In 1998, the Board of Directors granted 3,573,480 options to officers and
certain employees of the Company (including its subsidiaries Dassault Systèmes
of America, Dassault Systèmes KK, Delmia and Enovia) with a strike price
ranging from 26.39 to 29.58. A total of 544,488 options were vested and
exercisable immediately. Other options vest over various periods subject to
continued employment but expire no more than ten years from the date of grant.
In addition, the shares resulting from the exercise of options granted to
French employees (2,468,730 options) cannot be sold before November 8, 2003. At
December 31, 2003, 875,891 options have been exercised and there were 2,574,491
unexercised options. In 1999, the Board of Directors granted 3,617,000 options to officers and
certain employees of the Company (including its subsidiaries Dassault Systèmes
of America, Dassault Systèmes KK, Delmia and Enovia) with a strike price of
37.00. As of December 31, 2003, 81,377 options were exercised and there were
3,438,955 unexercised options. Options vest over various periods subject to
continued employment but expire no more than ten years from the date of grant. In 2001, the Board of Directors granted 5,316,950 options to officers and
certain employees of the Company (including its subsidiaries Dassault Systèmes
Provence, Dassault Data Services, Dassault Systèmes of America, Dassault
Systèmes KK, Delmia, Delmia GmbH, Enovia, Safework, Spatial, Dassault Systèmes
AG, Dassault Systèmes Inc. and Structural Research and Analysis Corp.) with a
price ranging from 35 to 52. As of December 31, 2003, 8,046 options were
exercised and there were 5,232,534 unexercised options. Options vest over
various periods subject to continued employment but expire no more than ten
years from the date of grant. On May 28, 2002, an Extraordinary Shareholders Meeting of the Company
authorized the Board of Directors to implement additional stock option plans
until July 27, 2005 for officers and certain employees of the Company, subject
to a limitation under which options granted by the Board of Directors and not
exercised give right to purchase additional shares not to exceed 17% of
outstanding shares of the Company. In 2002, the Board of Directors granted 1,718,863 options to officers and
certain employees of the Company (including subsidiaries) with a strike price
of 45.50. Options vest over four years subject to continued employment but
expire no more than ten years from the date of grant. On January 20, 2003, the Board of Directors granted 4,000,000 options to
officers and certain employees of the Company (including subsidiaries) with a
strike price of 23. Options vest over one year subject to continued employment
for the plan dedicated to Dassault Systèmes, Dassault Systèmes Provence and
Dassault Data Services employees and almost two years for the plan dedicated to
employees of foreign subsidiaries (Dassault Systèmes of America, Dassault
Systèmes KK, Delmia, Delmia GmbH, Enovia, Dassault Systèmes Canada Inc.,
Spatial Corp., SmarTeam Corp, KTI and SolidWorks Corp.). Options expire no more
than ten years from the date of grant. The activity in the stock option plans of the Company is summarized below: F-24




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##### Table of Contents



2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    average
    
    
    
    
    
    averageNumber of
    
    exercise
    
    Number of
    
    exercise
    
    Number of
    
    exerciseshares
    
    price
    
    shares
    
    price
    
    shares
    
    priceOutstanding at beginning of year
    
    
    14,504,017
    
    
    
    38.01
    
    
    
    13,069,840
    
    
    
    37.30
    
    
    
    8,107,686
    
    
    
    30.45Granted
    
    
    4,000,000
    
    
    
    22.77
    
    
    
    1,718,863
    
    
    
    45.27
    
    
    
    5,316,950
    
    
    
    46.37Exercised
    
    
    (239,997
    )
    
    
    21.17
    
    
    
    (235,677
    )
    
    
    15.58
    
    
    
    (271,541
    )
    
    
    14.53Cancelled
    
    
    (188,490
    )
    
    
    33.77
    
    
    
    (49,009
    )
    
    
    38.66
    
    
    
    (83,255
    )
    
    
    25.81Outstanding at end of year
    
    
    18,075,530
    
    
    
    34.32
    
    
    
    14,504,017
    
    
    
    38.01
    
    
    
    13,069,840
    
    
    
    37.30Exercisable
    
    
    11,776,246
    
    
    
    37.46
    
    
    
    8,254,974
    
    
    
    32.64
    
    
    
    7,779,885
    
    
    
    31.43
 For various price ranges, information for options outstanding and
exercisable at December 31, 2003 was as follows: Outstanding options
    
    
    
    
    
    Exercisable optionsWeighted
    
    Weighted
    
    
    
    
    
    Weightedaverage
    
    average
    
    
    
    
    
    averageNumber of
    
    remaining
    
    exercise
    
    Number of
    
    exerciseshares
    
    life (years)
    
    price
    
    shares
    
    priceRange of exercise price0.09 to 23
    
    
    4,268,125
    
    
    
    8.66
    
    
    
    21.47
    
    
    
    290,093
    
    
    
    8.1023 to 26
    
    
    1,174,645
    
    
    
    4.97
    
    
    
    25.79
    
    
    
    991,709
    
    
    
    25.8426 to 30
    
    
    2,561,991
    
    
    
    4.86
    
    
    
    29.58
    
    
    
    2,561,991
    
    
    
    29.5830 to 34
    
    
    493,049
    
    
    
    8.16
    
    
    
    33.11
    
    
    
    192,074
    
    
    
    33.0334 to 37
    
    
    5,337,715
    
    
    
    6.39
    
    
    
    36.47
    
    
    
    4,518,112
    
    
    
    36.6837 to 46
    
    
    1,356,985
    
    
    
    8.41
    
    
    
    45.50
    
    
    
    339,247
    
    
    
    45.5046 to 52
    
    
    2,883,020
    
    
    
    7.25
    
    
    
    52.00
    
    
    
    2,883,020
    
    
    
    52.000.09 to 52
    
    
    18,075,530
    
    
    
    6.95
    
    
    
    34.32
    
    
    
    11,776,246
    
    
    
    37.46
 The weighted average fair value of the options granted during 2003, 2002
and 2001 are estimated at
 9.94, 20.82 and 17.11, respectively, on the date of grant, using the
Black-Scholes pricing model. In 2002, SolidWorks instituted a buy-back plan for the SolidWorks shares
held by its employees under which (i) an employee can put his mature shares to
SolidWorks (i.e., shares that have been owned by an employee for greater than 6
months) on specific dates at their then fair market value, and (ii) SolidWorks
can call such mature shares in this same timeframe at the same fair market
value. The adoption of this amendment did not create any compensation charge. Should all the options that are currently eligible be exercised and should all
the put rights be exercised when allowed, approximately 6.7 million shares may
have to be repurchased by SolidWorks in the future. Based on the current price
per share of SolidWorks and assumptions about the holding period, the Company
estimated the potential future cash outlays would be 42.6 million. F-25




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##### Table of Contents



Changes to Dassault Systèmes share capital during 2003 are as follows: Number of
    
    Nominal
    
    Shareshares
    
    value
    
    capital(in )
    
    (in )Share capital issued as of January 1st , 2003
    
    
    114,570,841
    
    
    
    1
    
    
    
    114,570,841Number of shares issued in 2003 with
reference to the stock option plan of June
28, 1996
    
    
    35,555
    
    
    
    1
    
    
    
    35,555Number of shares issued in 2003 with
reference to the stock option plan of
December 15, 1997
    
    
    66,660
    
    
    
    1
    
    
    
    66,660Number of shares issued in 2003 with
reference to the stock option plan of January
28, 1998
    
    
    85,000
    
    
    
    1
    
    
    
    85,000Number of shares issued in 2003 with
reference to the stock option plan of
November 9, 1998
    
    
    11,615
    
    
    
    1
    
    
    
    11,615Number of shares issued in 2003 with
reference to the stock option plan of
September 15, 1999
    
    
    1,750
    
    
    
    1
    
    
    
    1,750Number of shares issued in 2003 with
reference to the stock option plan of October
5, 2001
    
    
    7,295
    
    
    
    1
    
    
    
    7,295Number of shares issued in 2003 with
reference to the stock option plan of May 28,
2001
    
    
    150
    
    
    
    1
    
    
    
    150Common stocks repurchased and cancelled
    
    
    (1,375,201
    )
    
    
    1
    
    
    
    (1,375,201
    )Total
    
    
    113,403,665
    
    
    
    1
    
    
    
    113,403,665
 SmarTeam had a stock option plan covering certain employees. Options under
the plan vested over a period of four years from the date of grant. The Company
recorded 3,636,000 and 1,338,000 of compensation expense related to this plan
for the years ended December 31, 2002 and 2001, respectively. During 2002 the
Company terminated the option plan, which accelerated the vesting of certain
options of the plan, and repurchased the shares. Retained Earnings Under French law, the net profits, if any, related to the French legal
entities are allocated at a rate of 5% each year to a legal reserve (restricted
retained earnings) until the amount in the legal reserve is equal to 10% of the
nominal share capital of each entity. The legal reserve is distributable only
upon liquidation of the entity. Earnings per share The following table presents the calculation for both basic and diluted
earnings per share: (in units, except net income in thousands) Year ended December 31,2003
    
    2002
    
    2001Net income
    
    
    135,419
    
    
    
    126,415
    
    
    
    88,741Weighted average number of shares outstanding
    
    
    113,048,656
    
    
    
    114,118,817
    
    
    
    113,694,585Dilutive effect of stock options
    
    
    1,665,410
    
    
    
    2,128,909
    
    
    
    2,965,403Diluted weighted average number of shares
outstanding
    
    
    114,714,066
    
    
    
    116,247,725
    
    
    
    116,659,988Basic income per share
    
    
    1.20
    
    
    
    1.11
    
    
    
    0.78Diluted income per share
    
    
    1.18
    
    
    
    1.09
    
    
    
    0.76
 F-26




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##### Table of Contents



NOTE P.     TRANSACTIONS WITH IBM AND RELATED PARTIES Since the Companys inception in 1981, CATIA products, and since 1998
ENOVIA products, have been marketed, distributed and supported principally by
IBM, pursuant to a mutually, non-exclusive agreement that encompasses such
activities. Since 2001, SMARTEAM products are also marketed by IBM under this
non-exclusive agreement. Revenue obtained through the commercial relationship with IBM represents
59%, 61%, and 60% of consolidated revenues of the Company for the years ended
December 31, 2003, 2002, and 2001, respectively. IBM is under no contractual
obligation to continue to actively market and distribute the Companys
products, and IBM may choose to discontinue such activities, without penalty,
at its discretion. A decision by IBM to cease or substantially reduce its
marketing and distribution efforts would likely cause a significant
interruption in such activities which would adversely affect the financial
position and operating results of the Company, at least in the short-term.
However, management believes its long-term relationship with IBM is based upon
mutual respect and success, and management is not aware of circumstances
related to either party which would cause the relationship to be terminated. For the years ended December 31, 2003, 2002, and 2001, IBM met certain
annual sales and growth targets and the Company has charged a sales incentive
to software revenue of 15,462,000, 15,452,000 and 13,053,000, respectively.
The related liability on the balance sheet will be settled in U.S. dollars. The balances of trade accounts receivable with IBM were 101,986,000,
117,930,000, and 113,200,000 at December 31, 2003, 2002, and 2001,
respectively, substantially all of which relates to software revenue.
Management believes that the financial position of IBM mitigates the potential
credit risk related to the concentration of its trade accounts receivable with
IBM. At December 31, 2003, 95% of such accounts receivable were denominated in
U.S. dollars (2002: 95%), with the remainder denominated in euros. The Company licenses products for internal use to both IBM and to Dassault
Aviation, a former direct shareholder of the Company whose chief executive
officer is the chairman of the Company. For IBM, such activities generated
revenues of 2,512,000, 5,672,000, and 4,062,000 during the years ended
December 31, 2003, 2002, and 2001, respectively, using commercial terms
consistent with those granted to the Companys other customers of similar size.
Dassault Aviation licenses the Companys products on commercial terms
consistent with those granted to the Companys other customers of similar size.
Licensing revenue amounted to 5,779,000, 6,109,000, and 3,916,000 for the
years ended December 31, 2003, 2002, and 2001, respectively. The Company also provides service and support to Dassault Aviation. Such
activity generated service revenues of 9,298,000, 6,169,000, and 7,303,000
in the years ended December 31, 2003, 2002, and 2001, respectively. The balances of trade accounts receivable with Dassault Aviation were
7,502,000, 9,126,000 and 2,377,000 at December 31, 2003, 2002, and 2001,
respectively. Most of our development organizations subcontract software development
work to 3D PLM Software Solutions Limited (3D PLM), a joint venture between
Dassault Systèmes and Geometric Software Solutions Co. Ltd., located in India,
which is accounted for under the equity method. 3D PLMs revenue,
substantially all of which was realized with the Company, amounted to
5,698,000 in 2003. NOTE Q.     SEGMENT AND GEOGRAPHIC INFORMATION The Company is operating in two reportable segments: the Process-Centric
segment and the Design-centric segment. The Process-centric market serves customers seeking to optimize their
industrial processes from the design stage through to manufacturing and
maintenance. The Design-centric market serves companies seeking to support
product design. The accounting policies of the reportable segments are the same as those
described in Note A.
Data by operating segment is as follows: F-27




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##### Table of Contents



(in thousands) 2003Process-
    
    Design-centric
    
    centric
    
    Elim.
    
    TotalRevenue:Software revenue
    
    
    519,901
    
    
    
    125,834
    
    
    
    (170
    )
    
    
    645,565Service and other revenue
    
    
    110,608
    
    
    
    279
    
    
    
    (1,629
    )
    
    
    109,258Total revenue
    
    
    630,509
    
    
    
    126,113
    
    
    
    (1,799
    )
    
    
    754,823Cost of revenue:Software
    
    
    (10,344
    )
    
    
    (11,752
    )
    
    
    432
    
    
    
    (21,664
    )Service and other
    
    
    (89,810
    )
    
    
    
    
    
    
    18
    
    
    
    (89,793
    )Total cost of revenue
    
    
    (100,154
    )
    
    
    (11,752
    )
    
    
    450
    
    
    
    (111,457
    )Gross profit
    
    
    530,355
    
    
    
    114,361
    
    
    
    (1,349
    )
    
    
    643,366Research and development
    
    
    (192,750
    )
    
    
    (23,368
    )
    
    
    509
    
    
    
    (215,609
    )Marketing and sales
    
    
    (114,553
    )
    
    
    (48,133
    )
    
    
    272
    
    
    
    (162,414
    )General and administration
    
    
    (41,965
    )
    
    
    (5,282
    )
    
    
    568
    
    
    
    (46,679
    )Amortization of acquired technology
    
    
    (5,660
    )
    
    
    (265
    )
    
    
    
    
    
    
    (5,925
    )(354,928
    )
    
    
    (77,048
    )
    
    
    1,349
    
    
    
    (430,627
    )Operating income
    
    
    175,427
    
    
    
    37,313
    
    
    
    
    
    
    
    212,739Equity in net income of unconsolidated affiliates
    
    
    419
    
    
    
    
    
    
    
    
    
    
    
    419Financial revenue and other, net
    
    
    202
    
    
    
    (1,057
    )
    
    
    
    
    
    
    (855
    )Income before income taxes
    
    
    176,048
    
    
    
    36,256
    
    
    
    
    
    
    
    212,303Income tax expense
    
    
    (64,786
    )
    
    
    (12,098
    )
    
    
    
    
    
    
    (76,884
    )Net income
    
    
    111,262
    
    
    
    24,158
    
    
    
    
    
    
    
    135,419Depreciation and amortization of property and
equipment and amortization of intangible assets
    
    
    19,172
    
    
    
    3,881
    
    
    
    
    
    
    
    23,053Total assets
    
    
    807,740
    
    
    
    180,566
    
    
    
    (23,816
    )
    
    
    964,490Acquisitions of property and equipment and
intangible assets
    
    
    15,590
    
    
    
    3,646
    
    
    
    
    
    
    
    19,236
 F-28




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##### Table of Contents



(in thousands) 2002Process-
    
    Design-centric
    
    centric
    
    Elim.
    
    TotalRevenue:Software revenue
    
    
    543,622
    
    
    
    126,509
    
    
    
    (245
    )
    
    
    669,886Service and other revenue
    
    
    105,758
    
    
    
    374
    
    
    
    (1,903
    )
    
    
    104,229Total revenue
    
    
    649,380
    
    
    
    126,883
    
    
    
    (2,148
    )
    
    
    774,115Cost of revenue:Software
    
    
    (11,335
    )
    
    
    (13,540
    )
    
    
    427
    
    
    
    (24,448
    )Service and other
    
    
    (96,413
    )
    
    
    
    
    
    
    
    
    
    
    (96,413
    )Total cost of revenue
    
    
    (107,748
    )
    
    
    (13,540
    )
    
    
    427
    
    
    
    (120,861
    )Gross profit
    
    
    541,632
    
    
    
    113,343
    
    
    
    (1,721
    )
    
    
    653,254Research and development
    
    
    (194,493
    )
    
    
    (27,314
    )
    
    
    244
    
    
    
    (221,563
    )Marketing and sales
    
    
    (121,823
    )
    
    
    (48,204
    )
    
    
    374
    
    
    
    (169,653
    )General and administration
    
    
    (43,485
    )
    
    
    (5,526
    )
    
    
    1,103
    
    
    
    (47,908
    )Amortization of acquired technology
    
    
    (10,939
    )
    
    
    (159
    )
    
    
    
    
    
    
    (11,098
    )(370,740
    )
    
    
    (81,203
    )
    
    
    1,721
    
    
    
    (450,222
    )Operating income
    
    
    170,892
    
    
    
    32,140
    
    
    
    
    
    
    
    203,032Equity in net income of unconsolidated affiliates
    
    
    214
    
    
    
    
    
    
    
    
    
    
    
    214Financial revenue and other, net
    
    
    820
    
    
    
    1,725
    
    
    
    
    
    
    
    2,545Income before income taxes
    
    
    171,926
    
    
    
    33,865
    
    
    
    
    
    
    
    205,791Income tax expense
    
    
    (67,721
    )
    
    
    (11,655
    )
    
    
    
    
    
    
    (79,376
    )Net income
    
    
    104,205
    
    
    
    22,210
    
    
    
    
    
    
    
    126,415Depreciation and amortization of property and equipment and
amortization of intangible assets
    
    
    27,502
    
    
    
    5,548
    
    
    
    
    
    
    
    33,050Total assets
    
    
    782,256
    
    
    
    164,921
    
    
    
    (27,013
    )
    
    
    920,164Acquisitions of property and equipment and intangible assets
    
    
    14,191
    
    
    
    6,236
    
    
    
    
    
    
    
    20,427
 F-29




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##### Table of Contents



(in thousands) 2001Process-
    
    Design-centric
    
    centric
    
    TotalRevenue:Software revenue
    
    
    514,816
    
    
    
    128,218
    
    
    
    643,034Service and other revenue
    
    
    103,019
    
    
    
    
    
    
    
    103,019Total revenue
    
    
    617,835
    
    
    
    128,218
    
    
    
    746,053Cost of revenue:Software
    
    
    (8,864
    )
    
    
    (11,927
    )
    
    
    (20,791
    )Service and other
    
    
    (86,542
    )
    
    
    
    
    
    
    (86,542
    )Total cost of revenue
    
    
    (95,406
    )
    
    
    (11,927
    )
    
    
    (107,333
    )Gross profit
    
    
    522,429
    
    
    
    116,291
    
    
    
    638,720Research and development
    
    
    (182,562
    )
    
    
    (26,673
    )
    
    
    (209,235
    )Marketing and sales
    
    
    (117,323
    )
    
    
    (47,000
    )
    
    
    (164,323
    )General and administration
    
    
    (38,534
    )
    
    
    (5,649
    )
    
    
    (44,183
    )Amortization of Goodwill
    
    
    (43,225
    )
    
    
    (919
    )
    
    
    (44,144
    )Amortization of acquired technology
    
    
    (14,240
    )
    
    
    
    
    
    
    (14,240
    )(395,884
    )
    
    
    (80,241
    )
    
    
    (476,125
    )Operating income
    
    
    126,545
    
    
    
    36,050
    
    
    
    162,595Financial revenue and other, net
    
    
    11,153
    
    
    
    2,909
    
    
    
    14,062Income before income taxes
    
    
    137,698
    
    
    
    38,959
    
    
    
    176,657Income tax expense
    
    
    (73,844
    )
    
    
    (14,072
    )
    
    
    (87,916
    )Net income
    
    
    63,854
    
    
    
    24,887
    
    
    
    88,741Depreciation and amortization of property and equipment and
amortization of intangible assets
    
    
    73,336
    
    
    
    5,647
    
    
    
    78,983Total assets
    
    
    667,882
    
    
    
    163,545
    
    
    
    831,427Acquisitions of property and equipment and intangible assets
    
    
    17,704
    
    
    
    5,252
    
    
    
    22,956
 F-30




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##### Table of Contents



The data by geographic operations of the Company is established according to
the geographical location of the consolidated companies. (in thousands) United StatesFrance
    
    & Other
    
    Total2003Revenues
    
    
    450,501
    
    
    
    304,322
    
    
    
    754,823Operating income (loss)
    
    
    176,288
    
    
    
    36,451
    
    
    
    212,739Identifiable assets
    
    
    501,725
    
    
    
    462,765
    
    
    
    964,4902002Revenues
    
    
    473,788
    
    
    
    300,327
    
    
    
    774,115Operating income (loss)
    
    
    210,669
    
    
    
    (7,637
    )
    
    
    203,032Identifiable assets
    
    
    456,274
    
    
    
    463,890
    
    
    
    920,1642001Revenues
    
    
    462,154
    
    
    
    283,899
    
    
    
    746,053Operating income (loss)
    
    
    211,317
    
    
    
    (48,722
    )
    
    
    162,595Identifiable assets
    
    
    522,757
    
    
    
    308,670
    
    
    
    831,427
 Revenues generated by the parent company of the Company were 491,309,000, 515,653,000 and 496,799,000 for the years ended December 31,
2003, 2002 and 2001 respectively. Revenues generated by export transactions
from France into other geographic areas realized by the parent company were 447,097,000, 468,206,000, and 447,757,000 for the years ended December 31,
2003, 2002, and 2001, respectively. Nearly all of such revenues relate to the
IBM relationship, which is based in the United States. The Company also receives data from IBM that identifies the location of
IBMs end-user customers. Using such information, the revenues by geographic
area would be as follows: (in thousands) 2003
    
    2002
    
    2001France
    
    
    88,560
    
    
    
    102,338
    
    
    
    99,185Western Europe  other than France
    
    
    265,279
    
    
    
    272,221
    
    
    
    281,225Americas
    
    
    215,388
    
    
    
    223,988
    
    
    
    219,289Asia / Pacific
    
    
    185,596
    
    
    
    175,568
    
    
    
    146,354
    754,823
    
    
    
    774,115
    
    
    
    746,053
 F-31




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##### Table of Contents



NOTE R.     SCOPE OF CONSOLIDATION 2003
    
    2002
    
    2001% of
    
    % of
    
    
    
    % of
    
    % of
    
    
    
    % of
    
    % ofvoting
    
    share-
    
    
    
    voting
    
    share-
    
    
    
    voting
    
    share-Consolidated Companies
    
    rights
    
    holding
    
    Method
    
    rights
    
    holding
    
    Method
    
    rights
    
    holding
    
    MethodDassault Systèmes K. K.
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationDassault Data Services
    
    
    95
    %
    
    
    95
    %
    
    Consolidation
    
    
    95
    %
    
    
    95
    %
    
    Consolidation
    
    
    95
    %
    
    
    95
    %
    
    ConsolidationDassault Systèmes of America
Corp. and its subsidiaries
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationSolidWorks Corporation and
its subsidiaries
    
    
    99
    %
    
    
    99
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationDelmia Corp. and its
subsidiaries
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationEnovia Corp and its subsidiary
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationDassault Systèmes Corp
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationDassault Systèmes AG
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    99
    %
    
    
    99
    %
    
    ConsolidationSmarTeam Corporation Ltd. and
its subsidiaries
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    84
    %
    
    
    84
    %
    
    ConsolidationDassault Systèmes Provence
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationDelmia GmbH
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationDassault Systemes Canada Inc.
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationSafework Inc.
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationSpatial Corp. and its
subsidiaries
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationDassault Systèmes Srl.
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationStructural Research and
Analysis Corp.
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationInvention Machine Corporation
    
    
    20
    %
    
    
    20
    %
    
    Equity Method
    
    
    17
    %
    
    
    17
    %
    
    Equity Method
    
    
    17
    %
    
    
    17
    %
    
    Equity MethodDassault Systemes Inc.
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationKnowledge Technologies
International Inc
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationKnowledge Technologies
International Ltd.
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationKnowledge Technologies
International France
    
    
    100
    %
    
    
    100
    %
    
    Consolidation
    
    
    100
    %
    
    
    100
    %
    
    ConsolidationDassault Systemes
(Switzerland) Ltd.
    
    
    98
    %
    
    
    98
    %
    
    Consolidation
    
    
    98
    %
    
    
    98
    %
    
    Consolidation3D PLM Software Solutions Ltd.
    
    
    30
    %
    
    
    30
    %
    
    Equity Method
    
    
    30
    %
    
    
    30
    %
    
    Equity MethodAthys
    
    
    80
    %
    
    
    80
    %
    
    Consolidation
 NOTE S.     PERSONNEL COSTS Personnel costs were 297,846,360, 305,766,000 and 271,781,000 for the
years ended December 31, 2003, 2002, and 2001, respectively. Directors
compensation was 100,000, 80,000 and 61,000 in the years ended December 31,
2003, 2002, and 2001, respectively. F-32




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##### Table of Contents



NOTE T.     SUMMARY OF DIFFERENCES BETWEEN FINANCIAL STATEMENTS ESTABLISHED IN FRENCH GAAP AND U.S. GAAP The differences are summarized below (in thousands of euros): Net equity
    
    Net incomeAs of and for the year ended December 31, 2003U.S. GAAP
    
    
    657,678
    
    
    
    135,419Goodwill amortization(1)
    
    
    (52,465
    )
    
    
    (24,896
    )Derivative instruments(2)
    
    
    (3,256
    )
    
    
    508Accounting for issuance of SolidWorks stock(3)
    
    
    3,624
    
    
    
    2,488Other, net
    
    
    (206
    )
    
    
    579As
adjusted for French GAAP
    
    
    605,375
    
    
    
    114,098
  (1)
    
    Under French GAAP, Goodwill is amortized over its useful life.
Under U.S. GAAP, in accordance with SFAS 141 (Business Combinations) and
SFAS 142 (Goodwill and Other Intangible Assets), goodwill is not
amortized. Goodwill amortization is replaced by an annual impairment test
implemented at the reporting unit level using fair value measurement.(2)
    
    Under French GAAP, financial instruments designated as hedging
instruments are not recognized but are disclosed as off-balance sheet
instruments. The fair market value of a financial instrument is recognized
when the hedged item is recognized in earnings.Under U.S. GAAP, all derivatives instruments are recorded in the balance
sheet at fair value. Changes in the fair value are recognized in earnings
except for the effective portion of cash-flow hedging instruments, which
is reported as a component of other comprehensive income.(3)
    
    Under French GAAP, the issuance of new shares by SolidWorks, which
decreased the Companys ownership, was recognized as a proceeds of stock.
Accordingly, a dilution gain was recognized in earnings.Under U.S. GAAP, the gain is not recognized as reacquisition of shares is
contemplated at the time of issuance and this dilution gain is accounted
for as an equity transaction. F-33