As filed with the Securities and Exchange Commission on June 30, 2004

SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

(Mark One)

For the fiscal year ended: December 31, 2003

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:

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

TABLE OF CONTENTS

Introduction

     The companies and brands we discuss in this report include:

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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.

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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.

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Exchange Rates

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.

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     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.

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     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:

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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:

     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

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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.

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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:

     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.

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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.

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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.

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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.

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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.

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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:

     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.

     CATIA is 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

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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.

     DELMIA provides 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.

     ENOVIA provides 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.

     SMARTEAM software 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.

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     The following five fundamentals provide the underlying context for the development of our V5 products:

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     CAA V5 is 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.

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     Automotive. Original equipment manufacturers using our software solutions include:

Customers in the automotive sector supply chain using our software solutions include:

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:

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     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:

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:

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     Electrical & electronics. Customers in the electrical and electronics sector using our software solutions include:

     Plant design. Customers in the plant design sector using our software solutions include:

     Shipbuilding yards and operators of passenger and cruise ships. The shipbuilding sector is the most recent segment we have targeted. Our customers include:

     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:

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.

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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.

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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 Suite software 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

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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.

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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

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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.

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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.

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     The following table lists our principal operating subsidiaries and certain additional information.

     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

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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.

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     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%.

     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,

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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.

     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

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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.

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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

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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.

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     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).

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     The tables below set forth the breakdown of revenue by type of activity and geographic region for the periods indicated.

Breakdown of Revenue

     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.

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Consolidated Data

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Process-centric Consolidated Data

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Design-centric Consolidated Data