As filed with the Securities and Exchange Commission on June 28, 2005

SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

(Mark One)

For the fiscal year ended: December 31, 2004

For the transition period from ___to ___

Commission file number 0-28578

DASSAULT SYSTEMES

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, 2004: 113,786,411

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:

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, 2004 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 $1.2088 per €1.00, which was 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 June 24, 2005. 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 periods 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 weakness of the economic growth rate in Europe has led to restrictions in corporate spending for information technology, including on our offerings for Product Lifecycle Management. In addition, after several years of strong growth in the Asian markets, particularly Japan, economic growth is expected to moderate in that region. The ongoing weakness in Europe and moderation of growth in Japan and Asia may adversely affect the growth in our revenues and earnings in some markets.

     The different industrial sectors we serve have different degrees of exposure to this weakness in corporate investment, both in terms of intensity and timing, due to their specific investment cycles and sensitivities to short-term economic conditions.

     In addition, the continuing weakness of the 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 offerings.

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     Our failure to adapt to rapid changes in technology, either in terms of product content or in terms of product offerings could seriously reduce or delay demand for our products and have a material adverse effect on our financial condition and results of operations.

     Product Lifecycle Management (PLM) solutions are characterized by the use of rapidly changing technologies and innovation. They are becoming increasingly complex and pervasive. These solutions must address sophisticated engineering needs in various areas of product design and manufacturing, and must also meet sophisticated process requirements in the areas of change management, industry collaboration and cross enterprise work. As a result, our success is highly dependent upon our ability to understand our customers’ needs, to enhance our existing solutions and to introduce new solutions in a cost-effective and timely manner.

     Our success is also linked with our customers’ ability to understand, finance and support deployment of our solutions through their enterprises as well as their timetable for adopting our new offerings. 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 may slow down our customers’ acceptance of our existing or new PLM solutions offerings 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 offerings, 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 offerings.

     During the year 2004, approximately 56% 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. Changes in the relationship between IBM and us, and events impacting IBM, could have a 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 56%, 59%, and 61% of our total revenue in 2004, 2003 and 2002, respectively.

     IBM markets and distributes our products 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 distribution partners. Therefore, IBM’s performance has a material impact on revenue generated from sales of CATIA, ENOVIA and SMARTEAM products. There is no contractual obligation for either IBM or us to continue to market and distribute our products according to our present agreements. Changes in roles and responsibilities could cause disruptions and negatively affect the sales organizations performance; this could have an immediate and material adverse effect on the revenues generated from the IBM distribution efforts. If IBM does not invest enough to grow our PLM revenues, we may have to intensify our direct and other external sales efforts at the risk of creating sales channel conflicts. Also, 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, IBM is not prohibited 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.

     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

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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 customer deployment, the diversion of development resources, and damage to our reputation and, in turn, may result in a loss of revenue, and 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.”

     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 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:

     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.

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     The regulatory environment has become increasingly complex and is subject to change. 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. Implementation of regulatory requirements is costly and may have a negative adverse effect on our cost of operations or our stock price.

     We currently report both in U.S. GAAP and French GAAP and prepare two sets of financial statements. Commencing January 1, 2005, we will report according to International Financial Reporting Standards (IFRS), instead of French GAAP, and will continue to report in U.S. GAAP. The applicable U.S. GAAP and IFRS accounting standards and related interpretations are highly complex and continue to evolve. The reporting requirements may be contradictory or ambiguous. 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, scope of consolidation, and stock-based compensation, we may be required to modify our accounting policies and business practices, including license terms and conditions, which could have a material adverse effect on our results of operations or financial reporting. Our current accounting policies are described in “Item 5A: Operating Results—Critical Accounting Policies” and Note A to our consolidated financial statements.

     We are currently working on the implementation of our internal controls procedures in order to be ready for the 2006 Sarbanes-Oxley certification. Despite our efforts and investments on this matter, and because of continuing evolution of the regulatory environment, we may encounter deficiencies that we would then report and which could have an adverse effect on our results of operations.

     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 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.

     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:

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     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.

     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.

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     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, as well as changes in the organization of the Group, may adversely affect our business or financial performance.

     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. We also continue to re-organize our group structure in order to simplify it and remain focused on our strategy.

     Integration of newly acquired companies or businesses, as well as divestments, is challenging and 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 transactions 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. Minority interests or other investments in unaffiliated partners may also have to be written down in our accounts as a result of impairment.

     A decrease in prices, a longer sales cycle and changes in the competitive environment could negatively impact revenue growth, financial performance and market position.

     Over the last several years, prices have declined in the technological market and this trend could continue or accelerate. This price decline may result from competition, low marginal costs and rapid technological change. In addition, we have seen a recent move towards consolidation in our industry, which may lead to increased pressure on prices and negatively impact our revenue, financial performance and market position.

     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.

     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.

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     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. Also, our facilities in Japan and California could be exposed to earthquake and similar natural risks. 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 approximately 45% of our outstanding shares and controls approximately 44% 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.

     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

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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.

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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. We believe that we are the global leader of the market for Product Lifecycle Management (PLM) software with an estimated market share of approximately 23% for 2004 (source: Daratech).

     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” (DMU) which helped our customers reduce the number of physical prototypes and realize substantial 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 organized our business in two segments: the “Process-centric” segment with the goal of supporting the end-to-end product development process of customers by providing a PLM solution and the “Design-centric” segment dedicated to customers seeking to design products in 3D. In conjunction with this decision, we acquired SolidWorks Corporation, 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 robust PLM solution for our customers, in conjunction with our internal development, we undertook a series of targeted acquisitions and developed a new software platform, Version 5, 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. Following our acquisition in 1999 of SmarTeam Corporation we developed a portfolio of applications across ENOVIA and SMARTEAM in order to manage data product configurations, product lifecycle integration and collaboration (our “PDM offering”). DELMIA was launched in 2000 in order to address the digital manufacturing domain 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 manufacturing process management software. Both Safework and Delta were acquired in 2000. 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 powerful Product Lifecycle Management solutions portfolio. In 2000, we acquired Spatial Corp., a U.S. company to help third-party developers build their own complementary applications on our V5 software platform and to develop and sell its ACIS software components.

     In 2004 we announced our decision to enter the automation market. In connection with this decision we are introducing a new line of software solutions, DELMIA Automation, based upon internal development work as well as from the acquisition in 2003 of Athys, a French company specialized in the development of workcell control software.

     We have a strong international presence. In 2004, 47% of our total revenue was derived from Europe, 29% from the Americas and 24% from Asia. We employed 4,456 people worldwide at December 31, 2004. In Europe/Middle East, in addition to our headquarters and other offices in France, we have offices in Belgium, Germany, Israel, Italy, The 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.

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     We distribute our solutions through IBM, our strategic partner since our inception in 1981, a network of other distribution partnerships as well as a direct sales force for certain products and markets. IBM markets, distributes and supports most of our PLM solutions in our process-centric segment. Our partnership with IBM has evolved over the years reflecting changes in both our markets and products. We market our design-centric solutions (Mainstream 3D solutions) through a network of value-added resellers and distributors worldwide.

     Our shares have been listed in France on the Paris Stock Exchange (Euronext Paris) and in the United States on the Nasdaq Stock Market’s National Market since our initial public offering in 1996. In February 2005, Euronext Paris renamed its markets Eurolist, and we are now listed on Eurolist – Compartment A (“Eurolist”).

     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 in Suresnes, France, at 9 Quai Marcel Dassault, B.P. 310, 92156, and the telephone number is: 33 (0) 1 40 99 40 99. For a list of our significant subsidiaries, please refer to “Item 4C: 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 financials, see “––Business Overview” and “Item 5: Operating and Financial Review and Prospects” below.

B. Business Overview.

Summary

     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:

Product Lifecycle Management (PLM)

     Our PLM software applications, solutions and services enable customers of all sizes to create products and simulate the whole product lifecycle 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 PLM solutions (process-centric segment of our business) represented 82% of our total revenue in 2004.

     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.

     Our solutions are mission-critical for our customers, enabling them to increase innovation by significantly enhancing the management of a product through its entire lifecycle, thereby fostering a true transformation in the manner in which these companies manage product and process development. Moreover, our solutions help companies reduce time to market and reduce costs, as well as 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

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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 innovation and quality.

     Our Product Lifecycle Management solutions are organized around four of our brands: CATIA for product design, DELMIA for digital manufacturing, ENOVIA for product lifecycle management collaboration and decision support and SMARTEAM for product management and collaboration. Altogether, these four brands form our PLM offer and are hereafter referred to as our “PLM software applications.” As part of our PLM solutions, we have also developed PLM Best Practices and Business Process Content (customization of PLM software for specific business processes), which, if selected by the customers in a services engagement, help them deploy our software in their particular industry processes. In addition, we distribute our PLM V5 infrastructure under the name of Component Application Architecture (CAA V5) development platform.

Mainstream 3D

     Our mainstream 3D solutions, focusing principally on product design, complement our PLM software applications in reaching a far larger number of potential users. We primarily address the mainstream, 3D market with our SolidWorks brand whose objective is to be the global standard in 3D mechanical design software. Its products and solutions are designed to capitalize on the significant migration opportunity of 2D users to 3D design.

     Our mainstream 3D business (Design-centric segment of our business) accounted for 18% of our total revenues in 2004.

New Business Initiatives

     During 2004, we announced new business initiatives in automation and “3D For All.” In the automation domain, we announced our decision to offer a software solution that will allow customers to program, monitor and simulate automated production lines and help them bridge the manufacturing processes defined using DELMIA PLM with their actual production lines. This market, known as the industrial automation market, is focused on defining, controlling and monitoring automated production equipment. The automation market is a natural extension of our PLM business, leveraging our existing knowledge and expertise.

     We believe the automation market is potentially a large market with long-term opportunity for growth. In addition, automated systems are used in a number of industries that we do not currently address with our DELMIA PLM solutions, such as Consumer Package Goods, Food and Beverage and Pharmaceuticals. We do not expect automation to be a meaningful contributor to revenue for several years as we ramp-up our product offering and distribution network.

     We believe 3D technology can be made broadly available to many parties. A portion of our research and development resources has been focused on developing “3D For All” technologies, such as 3D XML, and applications. At the same time we have entered into new partnerships with companies that share our vision of “3D For All.”

Key Business Strengths

     We believe our key business strengths have enabled us to take a leadership role in the PLM and design-centric markets and increase our overall market share in each of the last six years.

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Growth Strategy

     We believe there are a number of opportunities to grow our business. 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 2004, our Process-centric business (our PLM solutions) represented 82% of our consolidated revenue and our Design-centric business (our Mainstream 3D solutions) represented 18% of our consolidated revenue.

PLM solutions

     Our Product Lifecycle Management solutions address the Process-centric market and focus on creating and simulating the entire product lifecycle from requirements and initial concepts to product in service and recycling. We serve it with our PLM offering, which facilitates the simultaneous collaboration of the many different functions involved in PLM: engineering, strategy, marketing and sales, planning and production, procurement, finance and human resources as well as throughout the supply chain.

     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 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. In addition, we have introduced many CATIA products that address the specific needs not just of our target markets, but specific subprocesses within those industries. For example, in 2004 we introduced CATIA composite design products for the aerospace industry as well as cast and forge parts for the fabrication and assembly industry. 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 and maintenance.

     We believe that CATIA is among the most powerful product design and simulation systems in the world as illustrated by the market’s adoption of the digital mock-up (DMU) 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) advanced complex surface modeling functionalities; (iii) breakthrough technologies such as generative design and functional modeling, enabling intelligent morphing of designs across product programs; (iv) a simple and intuitive user interface that optimizes productivity and reduces training time; (v) full integration of all CATIA applications based on a common product, process and resource (PPR) model and (vi) 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.

     The CATIA product line addresses key domains, including: mechanical design, shape design and styling, product synthesis, equipment and systems engineering and machining analysis.

     DELMIA PLM offers a comprehensive suite of digital 3D manufacturing solutions to deliver end-to-end solutions that allow complete design and validation of the manufacturing processes through digital mock-up. DELMIA solutions are built on an open product, process and resources model which enables the continuous creation and validation of the manufacturing process in the context of the product throughout the design phases. The solution portfolio covers the following domains: (i) process planning; (ii) process and resource plan definition; (iii) resource modeling and simulation; and (iv) digital manufacturing foundations.

     The DELMIA Process Planning solutions provide a comprehensive process and resource planning support environment that allows our customers to review the sequences and links between processes and resources early in

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the product design cycle. The DELMIA Process Detailing and Validation solutions employ the structure and diagrams of the Process Planning solutions into the application specific disciplines of manufacturing to verify process methodologies with actual product geometry and define processes to a greater level of detail. The DELMIA Resource Modeling and Simulation solutions provide tools to develop, create and implement resources, application routines and mechanical programming that are integral with the Process Planning and Process Detailing and Validation solutions. Resources such as robots, tooling, fixtures, machinery, automation and ergonomics are defined and infused into complete manufacturing scenarios.

     ENOVIA provides a complete set of integrated solutions to help customers 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.

     ENOVIA solutions cover the following domains: (i) product engineering; (ii) lifecycle management and decision support; (iii) digital mock-up and review; and (iv) collaboration and management with the supply chain.

     SMARTEAM software solutions enable product-centric, Windows and 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. It can therefore range from collaborative product data management to entry access to PLM deployment.

     SMARTEAM solutions cover the following domains: (i) requirement management; (ii) product and program management; (iii) document management; and (iv) product service and after-sales management.

     During 2004, we introduced two new PLM releases across our Process-centric brands:

     Version 5 Release 13 (V5R13), “PLM Workspace for Collective Innovation” — Announced in March of 2004, CATIA, DELMIA, ENOVIA and SMARTEAM V5R13 product portfolios bring business value to manufacturers by enabling them and their supply chain to deploy competitive new PLM Best Practices that reduce development cycles significantly. A major innovation in the V5R13 release is the new ENOVIA VPM Navigator product that enables manufacturers to take maximum advantage of relational design, integrating ENOVIA’s virtual product definition into CATIA’s easy-to-use design environment. This new ENOVIA application enables companies to view the full implications of design changes in order to facilitate decision-making and reduce the risks associated with new product introduction.

     Version 5 Release 14 (V5R14) “Imagine and Work as a Global Team” — Announced in September 2004, CATIA, DELMIA, ENOVIA and SMARTEAM V5R14 introduced breakthrough technologies for industrial design and improved collaborative product development while we continued to strengthen our V5 PLM engineering desktop by further enhancing capabilities of the VPM Navigator that was introduced in the prior release. V5R14 introduces: (i) stronger collaboration across the value chain, enabling companies to work as one extended enterprise with their customers and partners, whether acting in an OEM/supplier relationship or working together in a virtual co-location environment; (ii) an innovative “CATIA — Imagine and Shape” product that addresses industrial designers by enabling them to explore product ideas more rapidly, while permitting last-minute styling modifications for greater product success; and (iii) a new web-based ENOVIA LCA navigator that enables both engineers and non-engineers to navigate product, process and resource information they require to perform their work, thereby improving productivity.

     We also offer PLM industry solutions to serve specific processes of our target industries. PLM industry solutions are defined as a combination of dedicated products, PLM best practices and consulting services designed for specific

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industries. Our industry solutions for the aerospace, automotive and electrical and electronics markets include the following solutions:

Mainstream 3D solutions

     We primarily address the Mainstream 3D Design-centric market with our SolidWorks brand. Since the introduction of the first SolidWorks mechanical design software solution in 1995, SolidWorks’ software products have been shipped to more than 385,000 product designers, engineers and engineering students worldwide.

     SolidWorks products include 3D mechanical design solutions, design validation analysis tools, data management solutions, design communication and collaborative tools, CAD productivity enhancement tools and 3D online catalog solutions.

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     Major product solutions include:

     In June 2004, SolidWorks introduced SolidWorks 2005, its latest version. We believe SolidWorks 2005 is the most expansive product in the market currently as it encompasses 3D design, analysis, product data management, collaboration, and injection-molded plastic part validation software in a single offering. SolidWorks 2005 includes more than 250 customer-requested features and enhancements developed to help machine designers, mold parts designers, consumer product designers and others become faster, more accurate and more productive as they bring innovative products to market. New, key improvements in SolidWorks 2005 included an extensive design library for machine designers, the first mold design validation tool built into a solid modeling environment, enhanced loft features for consumer product designers and application-specific user interfaces. Enhancements for 2D users included a DWG editor that is a fully native, embedded application, allowing editing of data rather than translation from a legacy tool.

     In February 2005, SolidWorks introduced its newest product solution, SolidWorks Office Premium, a new suite of solutions including analysis and wire and harness functionalities.

     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.

Automation solutions

     DELMIA Automation, introduced in 2004, is our newest product line and is focused on control engineering and simulation. Historically, production engineering, which we address with our DELMIA PLM solutions, and control engineering have largely functioned as two distinct areas within the manufacturing process. Process engineering is focused on process planning, detailing and validation as well as resource definition. In contrast, control engineering, which is focused on defining, controlling and monitoring the automation systems, including programmable logic controllers, is largely validated only during real production, when all physical resources have been put in place.

     Our new solutions will enable customers to (i) simulate production resources before production begins; (ii) reduce time to design, program, test and optimize automated systems; and (iii) enable automated systems manufacturers to sell complete solutions, including hardware, software and associated services.

Technology, Research and Development

     The development of breakthrough technologies has been a core component of our business strategy since our inception. We have devoted significant resources each year to research and development. In 2004, research and development investments totaled €221.9 million and represented approximately 28% of total revenue. As of December 31, 2004, approximately 2,171 employees, representing 49% of our employee base, were in research and development.

     During 2004, we announced 3D XML (Extensible Markup Language), a universal, lightweight XML-based format that enables users to capture and share accurate 3D data. 3D XML compresses highly complex data, with file sizes up to 99 percent smaller than those of existing formats. The new format was designed to greatly enhance collaboration around 3D information.

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     We introduced in 2004 a breakthrough modeling product, “CATIA — Imagine and Shape,” designed to bring V5 PLM to industrial designers, who have long preferred to work by hand. Our new product easily facilitates the exploration of more product ideas in a shorter period of time, essentially enabling styling creation at the speed of the designer’s imagination.

     We first introduced functional modeling in 2003 and further enhanced it in our 2004 product releases. We created our “CATIA — Functional Molded Parts” product to greatly facilitate product design, particularly of plastic parts in the electronics and consumer goods industries. This product enables plastic parts designers to concentrate on what they want to design, rather than on how to design the part. Specifically, it allows them to design more freely, as the software will automatically adjust the new feature to fit predefined functional characteristics, such as thickness, detailed shape design or zones that must remain clear to prevent clashes or interferences.

     Our Convergent System Modeler is based on a new mathematical model that allows an enhanced (“highly-typed”) structuralization of data and flows. This new modeler enables system and control design of automated systems and is the foundation of the DELMIA Automation solutions.

     We believe we are the industry leader in connecting product design to manufacturing process design. We do this through a PPR model, shared by CATIA, DELMIA and ENOVIA. The PPR model allows companies to capture, share and reuse knowledge throughout the entire product lifecycle, while the open architecture provided by V5 allows extension and integration of our solutions according to each customer’s specific needs. The PPR connects our engineering hub with our manufacturing hub through the ENOVIA backbone. In 2004 we enhanced this capability by implementing integrated change management across the engineering and manufacturing hubs.

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 solutions.

     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 applications, 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.

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

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Mainstream 3D technology

     Designed specifically for Windows, our SolidWorks 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.

Openness of our software solutions

     In the PLM market, 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. Our partners may also choose to benefit from the V5 platform possibilities to connect with other applications, such as 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 XML. Standards are widely created by industry consortia, or by leading industry players for the exchange of data, or user interfaces or formats.

     In the mainstream 3D market, our 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.

     In addition to our software solutions for the PLM and Mainstream 3D markets, we also supply software components through our Spatial subsidiary, that are based on industry standards and increase the interoperability of software solutions to serve the broader software industry. Software developers in more than 14 industries around the world use our 3D ACIS Modeler (ACIS), a well-known, 3D modeling engine. ACIS features an open, object-oriented C++ architecture. We also offer InterOp Translators that allow software developers to easily integrate advanced 3D data interoperability capabilities with 3D software. For example, our InterOp CATIA V5 Reader and Writer translator enables data to be translated to and from other 3D formats.

Customers and Industrial Sectors

     Overview. Our diversification strategy into a broad number of industrial sectors has met with significant success. Historically, our two main markets were the automotive and aerospace industries. We have in the last few years strengthened our presence in the fabrication and assembly industry, which was our largest contributor to revenues in 2004, and have also increased our presence in the consumer goods and electronics industries. In addition to ongoing opportunities in our largest target industries, we believe our current software solutions present a good opportunity to increase our presence in the consumer goods, electrical and electronics, and shipbuilding industries.

     The table below sets forth the proportion of our revenues represented by sales to our major industrial sectors for 2004, 2003 and 2002. These figures are a percentage of our total sales, comprising both our Process-centric and Design-centric segments.

     During 2004 we expanded our client base, adding an estimated 11,500 new design customers and 1,200 new PDM customers. We sold 62,600 design seats comprised of our CATIA and SolidWorks new licenses and in PDM

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we sold 35,000 new licenses in 2004. We estimate that at the end of 2004, we had over 80,000 customers across 80 countries.

     While we have built long-standing relationships with our customers, we continue to have a diversified customer base. We estimate that our largest customer represented approximately 5% of total revenue, and our five, ten and twenty largest customers accounted, respectively, for approximately 17%, 24% and 33% of total revenue in 2004.

     The automotive market has been and continues to be an important market for our company, accounting for 33% of our total sales. We work with most of the world’s largest automotive OEMs. We also have developed business relationships with a number of companies within the automotive supply chain. The automotive market encompasses cars, motorcycles, trucks, buses and campers. In addition eight of the ten teams participating in the 2004 Formula 1 season employed our solutions to develop their engines or chassis. These include: Jordan, McLaren-Mercedes, Williams BMW, Toyota Motorsport, Sauber, Bar Honda, Ferrari, and the Renault F1 team.

     The aerospace industry accounted for approximately 16% of total revenue in 2004. We are the largest supplier of advanced design solutions to the aerospace industry. During 2004, our Version 5 PLM software was selected by The Boeing Company as its company-wide product development platform to develop the 787 Dreamliner. We are the standard design system at both Boeing and Airbus.

     Fabrication and Assembly (F&A) customers accounted for 34% of total sales in 2004. Our software solutions are purchased by a wide range of companies in the F&A industry, spanning fabricated metal products, industrial equipment and manufacturing machinery, mobile equipment and products, trains and other fabricated products. New customers in 2004 included Kobelco, a construction machinery manufacturer, Meyn, a manufacturer of poultry processing factories, Securistyle, a window hardware manufacturer, Volvo Penta, a manufacturer of engines and complete power systems for marine and industrial applications, Corus, a metals products manufacturer and F.L. Smidth, a supplier of cement production technology, to name a few.

     Consumer goods and electrical and electronics (E&E) represented 13% of total sales in 2004. In Consumer electronics and E&E, we made good progress in 2004. New consumer goods and E&E customers in 2004 included Siemens ICM, a GSM mobile and cordless phones manufacturer, Sennheiser, a sound equipment manufacturer, Neopost, a supplier of mailroom equipment and logistics solutions, Unipoint, a parts supplier for the automotive aftermarket, Sunten, an electrical network equipment supplier and Corecess, a network equipment manufacturer. And in consumer goods, we added Arc International, a glass and crystal manufacturer, Electrolux Home Products Europe, a producer of powered appliances for the kitchen, cleaning and outdoor use, Gardena, a garden supply manufacturer, Swagelok, a developer and manufacturer of fluid system component technology and Whirlpool Corporation, a manufacturer of major home appliances.

     Plant design and shipbuilding customers represented 4% of total sales in 2004. We had several key wins in these markets during 2004 including: Hydro-Quebec, an energy provider, Areva, a nuclear energy and electricity provider, Beneteau Group, a sailing and leisure motor boats manufacturer, Seaway, a boat development company and Berret Racoupeau, an architectural firm focused on the design of super yachts, mono-hulls and catamarans. In military shipbuilding, Northrop Grumman selected us as the PLM solutions provider for the U.S. Navy’s new destroyer program.

     Automotive. Original equipment manufacturers using our software solutions include:

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

     Aerospace. Customers in the aerospace sector using our software include:

     Fabrication & assembly. Customers in the fabrication and assembly sector using our software include:

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     Customers in the train industry using our products include: Bombardier Transport, Alusuisse Road & Rail Ltd., Alstom Transport, Changchun Car Co. and Westinghouse Rail Systems Ltd.

     Consumer goods. Customers in the consumer goods sector using our software solutions include:

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

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

     Shipbuilding yards and operators of passenger and cruise ships. Customers in the shipbuilding sector include:

     In addition to the seven industrial sectors discussed above, we also offer 3D software components across all our industry sectors. Set forth below is a list of customers for our 3D software components:

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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. We have also entered into agreements with companies for the sales and marketing of our automation products.

     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 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.

     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 and SMARTEAM, as well as DELMIA under a specific agreement, 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 Premier consulting partner to us. Through our services teams, IBM IGS now provides complementary consulting and implementation services to customers in order to drive adoption of our PLM solutions. IBM IGS collaborates with our integrated services teams to develop services 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 2004, 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 each of the last several years.

     Hardware and technology partners. In order to maximize our benefits from available technology, we have established technical collaborations with Dell, Hewlett Packard, IBM, Intel, Microsoft, Silicon Graphics Inc. (SGI) and SUN Microsystems, as well as prestigious universities. The new technologies included in Version 5 have been 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 Compaq, Dell, Fujitsu Siemens Computers, Hewlett Packard, IBM, NEC and SGI.

     During the fourth quarter of 2004 we entered into a multi-year, global strategic alliance with Microsoft Corporation to deliver our V5 PLM and 3D design solutions to companies of all sizes taking advantage of the Microsoft® software platform. By capitalizing on the Microsoft platform, the goal of the alliance is to deliver greater customer value through solutions that are easy to use, deploy and maintain with reduced ownership and integration costs. This alliance has been designed to enable a far broader set of customers to realize the benefits of 3D collaboration and PLM. We have also agreed with Microsoft to explore opportunities to work together to encourage broad market adoption of XML for 3D applications across the design and graphics industry.

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     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 V5 program. This program was launched in July 2001 to provide independent software vendors with an open next-generation V5 platform 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 seamless, integrated software solutions composed of both our products and theirs.

     Our CAA V5 program has been very successful with more than 270 products based on CAA V5 introduced on the PLM market with V5R14 by 100 CAA V5 partners as of January 2005. We also hold an annual CAA V5 Developer Conference focused on expanding the network of companies using our CAA V5 PLM development platform. In 2004, over 440 participants from around the world attended our annual conference.

     During 2004 we entered into a long-term strategic partnership with Lattice Technology. The goal of this partnership is to create a significantly more open and efficient 3D XML solution enabling a pervasive and broad usage of 3D technology all across the supply chain. Through a single, lightweight format the exchange of 3D data among manufacturers and suppliers, partners and customers is facilitated.

     In China, we entered into a strategic alliance with CAXA, the leading domestic PLM vendor, to create and sell design packages developed in China based on our V5 PLM technology. These solutions are expected to be developed in a joint R&D center operated by CAXA in Beijing combining CAXA’s R&D expertise and technology with our 3D PLM solutions and V5 technology components. Through the strategic alliance, CAXA plans to develop and market in China CAXA V5, a new generation of integrated and scalable 2D and 3D PLM solutions for the Chinese market that embed V5 technology components from us.

     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 over 250 compatible products are available in many areas, including machining, analysis, simulation and rapid prototyping.

     In 2004, 53 products from 41 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.

     Automation and sales partners. In April 2004, we entered into a business partnership with Schneider Electric, a world leader in Power and Control, to sell DELMIA solutions and develop consulting and services for the Automation and Production Engineering (production process planning, production assembly processes and factory simulation) markets. In connection with this partnership, Schneider Electric formed Dextus, a new wholly-owned subsidiary, which plans to sell and provide services to both DELMIA PLM and DELMIA Automation.

     In November 2004, we entered into a strategic partnership with OMRON Corp., a leading manufacturer of control equipment for factory automation, through which OMRON plans to distribute DELMIA Automation as its new collaborative programming desktop for control engineers. In connection with this agreement, OMRON has become a DELMIA Business Partner and plans to integrate DELMIA Automation into its new generation of Control and Network Solutions using our CAA V5 platform.

     Consulting and service partners. Our ecosystem of industry alliances also includes a community of consulting firms and systems integrators, led by our integrated services organization, Dassault Systèmes Services. These Consulting and Services Partners are able to complete our own Services Offerings to 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 also includes AtosOrigin, CSC, Incat, Geometric Software Solutions, PCO Technologies, Tata Technologies, T-Systems, Cenit 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.

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     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: AIP-PRIMECA, California Institute of Technology, Cambridge University, Georgia Tech, Hokkaido University, Hong Kong Polytechnic, JSS Noida, MIT, Polytechnico di Milano, Princeton, Purdue University, the University of Seoul, Tsinghua University and the University of Tokyo.

Sales and Marketing

     Overview. We largely market and sell our software solutions through indirect selling channels. With respect to most of our PLM solutions our primary partner is IBM, with whom we have had a strategic relationship since the inception of our company. IBM sells our product through a dedicated sales organization and a network of Business Partners. See “—IBM Channel—Marketing Structure” below.

     In the design-centric market, SolidWorks software is distributed through a network of approximately 300 value-added resellers and distributors worldwide. We support their activities through industry trade shows, seminars, online educational activities, advertisements and marketing materials.

     IBM Channel — Summary. Revenue generated through our agreements with IBM represented approximately 56%, 59% and 61% of our total revenue in 2004, 2003 and 2002, respectively. Under our marketing and distribution 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 second half 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.”

     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. 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. IBM’s achievement of certain levels of staffing and Business Partners’ fees 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 licensing 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 (SMBs). IBM PLM is an IBM organization exclusively dedicated to the marketing and sales of our CATIA, ENOVIA and SMARTEAM products to large enterprises primarily.

     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.

     Commencing in 2004, we have become a Master Partner for IBM in France and Belgium, whereby we manage and provide marketing support to the French and Belgian network of IBM Business Partners. Our primary objectives as Master Partner are to increase the penetration of our PLM solutions among SMB companies and create a positive dynamic that IBM Business Partners will benefit from.

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     To further address the opportunities for marketing and sales of our PLM solutions to SMBs, we have also become an IBM Business Partner in certain targeted geographies, to complement the work of IBM PLM and other IBM Business Partners. First, during 2004 we created a joint venture, RAND North America, Inc., which is currently 70% owned by us and 30% owned by RAND Worldwide. And in January 2005, we acquired RAND Worldwide’s subsidiaries in the United Kingdom, Sweden, Germany and Switzerland, as well as Rand Technologies C.I.S., Inc., which serves Russia.

     Direct Sales Channels. DELMIA products are marketed by a direct sales force, which is complemented primarily by resellers. To a small degree, in some geographic markets, and in addition to the IBM sales channel, SMARTEAM engages 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 solutions are also sold by a network of Business Partners. To a small degree, in some geographic markets and in addition to the IBM sales channels, SMARTEAM products and solutions are also marketed and sold in part by resellers.

Competition

     Markets for our products are highly competitive and characterized by rapidly changing technology and evolving standards. Our main competitors in the Process-centric market include UGS and PTC. For our Design-centric products, our main competitors include Autodesk, Inc., PTC, and others. We also compete with several supply-chain management software providers, as well as other enterprise software vendors, including Agile Software Corporation, 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 2004, €1.5 million in 2003 and €1.5 million in 2002. 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 56% of total revenue, SolidWorks Corporation (substantially represented by our Design-centric segment) was our only subsidiary that accounted for more than 10% of total revenue in 2004, reaching 20% of total revenue in 2004. The results and activity of our Design-centric segment are discussed further below in “Item 5: Operating and Financial Review and Prospects—Executive Overview, and —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, India, 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.

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Item 5: Operating and Financial Review and Prospects

A. Operating Results.

     For the benefit of readers, we have included an executive overview at the outset of this section to facilitate an understanding of our financial results. In addition, you should read the detailed discussion that follows together with our consolidated financial statements and the related notes included in this annual report on Form 20-F.

Summary Financial Results for 2004

     The table below sets forth key figures from our statements of income.

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     See our discussion of non-GAAP financial measures in “Growth on a constant currency basis” and “Results of Operations.”

Executive Overview

     Market position. In U.S. dollars (used by industry consultants to measure market share), our revenues increased 16% in 2004, leading to an estimated market share gain of one percentage point to 23%, using an exchange rate of $1.24 to €1.00. We were ranked number one in PLM in 2003 with a market share of 22%. Over the last three years we have increased our estimated market share by six percentage points. (Our market share for 2003 has been restated to reflect the upward revision of the market size by industry analyst (Daratech), with no change to our ranking.)

     Customer base. In addition to increasing our market share, we also expanded our customer base. During 2004 we added approximately 11,500 new customers and our new licenses reached a record 62,600 CATIA and SolidWorks seats.

     Operating profitability. One of our key objectives in 2004 was to maintain a stable operating margin. This objective was achieved with our operating margin excluding acquisition costs equaling 29.0%, stable with 2003.

     Growth on a constant currency basis. We experienced a good level of improvement in our financial performance in 2004 compared to 2003, with revenue growing 6% and earnings per share increasing 11% excluding acquisition costs. However, due to continued significant currency movements in 2004 as in 2003, the underlying improvement in our level of activity was even greater than that visible by looking at our reported financial results. On a reported basis, total revenue increased 6% and on a constant currency basis, total revenue increased 9%. Moreover, software revenue increased 4% as reported and increased 8% on a constant currency basis. Similarly, our Design-centric business reported an increase in revenue of 16%, and on a constant currency basis, revenue growth was 21%, while our PDM business increased 11% on a constant currency basis. From a regional perspective, it is particularly helpful to compare growth on a constant currency basis. On a constant currency basis, the Americas revenue growth was 18% compared to 7% on a reported basis and for the Asian region, revenues increased year-over-year 8% on a constant currency basis compared to 5% as reported. 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 9% against the euro for 2004, with the U.S. dollar to euro average exchange rate of $1.24 per euro for 2004, compared to $1.13 per euro for 2003. The Japanese yen weakened by 3% versus the euro resulting in a Japanese yen (JPY) to euro exchange rate of JPY134 per euro for 2004 compared to JPY131 per euro for 2003. See “Item 11: Quantitative and Qualitative Disclosures About Market Risk—Foreign currency exchange risk.”

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     The decreases in the value of the U.S. dollar and Japanese yen in 2004 negatively impacted our operating profit and earnings per share. The total currency impact on operating profit excluding acquisition costs was €9.1 million or 4 percentage points of total operating profit excluding acquisition costs, with €6.8 million attributable to the U.S. dollar and €2.3 million arising from the Japanese yen. On a constant currency basis and excluding acquisition costs, operating profit increased 10% in 2004.

     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 €0.08 reduction in earnings per share (EPS), excluding acquisition costs to €1.36 per diluted share. As a result, we reported a growth rate for earnings per share, excluding acquisition costs of 11% for 2004 rather than 18%.

     We estimate changes in revenues and expenses on a constant currency basis by applying 2003 average market exchange rates to our total 2004 revenues and expenses by currency. We have used the same methodology for the comparison of prior periods. For 2003, the average annual exchange rate for the U.S. dollar to euro was $1.13 to €1.00 and the average annual exchange rate for the Japanese yen to euro was JPY131 to €1.00. For 2002, 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.

     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 licenses revenue. In 2004, recurring licenses revenue represented 51% of our total software revenue, which in turn represented 84% of total revenue.

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     Financial Position. We continued to have a strong financial position, with cash and short-term investments totaling €552.8 million at December 31, 2004. During the year, we added on a net basis €113.1 million to cash and short-term investments. This figure is after cash dividends totaling €38.4 million in 2004.

     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 47% of our revenues in 2004, industrial spending has just begun to increase following two consecutive years of a downward trend, and this environment has clearly had an impact on our results in the European region. For example, in France, business investment spending increased by an estimated 2.9% in 2004 compared to 2003 where it declined by 1.7%. Following several years of very strong revenue growth in Asia, we are experiencing a more moderate level of growth. We believe this reflects the fact that in Japan, the largest contributor to our revenues in Asia, business investment spending while still strong is trending somewhat lower. Specifically, business investment spending growth in Japan moderated in 2004 to 6.7% compared to 8.7% in 2003 and is expected to moderate further in 2005. In the United States, our largest contributor to our Americas region, business investment spending increased dramatically in 2004 to an estimated growth rate of 10.3% from 3.3% in 2003.

     In 2004 industrial production increased 4.2% in the U.S., 5.6% in Japan, 2.1% in France and 2.5% in Germany. In comparison in 2003, industrial production increased 0.3% in the U.S., 3.2% in Japan, and 0.2% in Germany, while decreasing 0.8% in France. Overall growth in the economy in 2004 as measured by GDP was 4.4% in the U.S., 2.9% in Japan, 2.1% in France and 1.7% in Germany. In comparison, in 2003 GDP was 3.1% in the U.S. and 2.3% in Japan, while France grew only 0.1% and Germany decreased 0.1%.

Financial Overview

Revenue

     Our total revenue is comprised of software revenue and service and other revenue. Software revenue includes new licenses revenue as well as recurring licenses and product development revenue. Our primary source of revenue is our software revenue, which accounted for 84%, 86% and 87% of our total revenue in 2004, 2003 and 2002, 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, training and technical assistance we provide to our customers. Revenue generated through our marketing and distribution agreement with IBM represented approximately 56% of our total revenue in 2004 compared with 59% in 2003 and 61% in 2002. See “Item 4B: Business Overview––Sales and Marketing” and “Item 5A: 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. 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.

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     Recurring licenses revenue represented 51%, 51% and 48% of total software revenue in 2004, 2003 and 2002, respectively. Recurring licenses revenue is comprised of rental fees (mainly to large customers) and maintenance fees.

     Our product development revenue relates to the development of additional functionalities of standard products requested by customers.

     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 Business Partner for the sale of CATIA, ENOVIA and SMARTEAM licenses and in North America through our RAND North America, Inc. joint venture. We record the commissions we receive from IBM for this activity as service revenue. In addition we receive fees when we act as Master Partner for IBM. In our commercial partner activity, we also resell computer hardware, but in this case we record only the gross margin from the sales as service revenue.

Expenses

     Research and development expenses represented 28%, 29% and 29% of total revenue in 2004, 2003 and 2002, 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 2004, 2003 and 2002, 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, Switzerland, and in North America through our RAND North America, Inc. subsidiary. 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 related to the acquired company 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.

     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.

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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 3D: Risk Factors—The regulatory environment has become increasingly complex and is subject to change. 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. Implementation of regulatory requirements is costly and may have a negative adverse effect on our cost of operations or our stock price.”

     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.

Taxes

     We account for income taxes in accordance with Statement of Financial Accounting Standards (“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. The accounting for income taxes encompasses the use of judgments and estimates. Actual results and amounts could differ from those used in accounting for income taxes. Such differences could have a material impact on our future operating results.

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 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.

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Goodwill and other intangible assets

     We account for goodwill and other intangible assets in accordance with SFAS 142, which requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates, and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit, and consequently our results of operations.

Recently Issued Accounting Standards

     In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-based Compensation (“Statement 123(R)”). Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

     Statement 123(R) must be adopted no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company expects to adopt Statement 123(R) on January 1, 2006.

     The Company plans to adopt Statement 123(R) using the modified prospective method, in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.

     As permitted by Statement 123, the Company currently accounts for share-based payments to employees using the intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note A to our consolidated financial statements.

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Results of Operations

     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

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     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.

Consolidated Data

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Process-centric Consolidated Data