SY Sybase, Inc.

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 1-16493

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, $.001 par value per share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value

Preferred Share Purchase Rights

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

     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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes o No þ

     As of June 29, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $2,116,092,489 based on the closing sale price as reported on the New York Stock Exchange.

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

Class		Outstanding at February 15, 2008
Common Stock, $.001 par value per share		89,180,118 shares

 

 

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements that involve risk and uncertainties that could cause the actual results of Sybase, Inc. and its consolidated subsidiaries (“Sybase”, the “Company,” “we” or “us”) to differ materially from those expressed or implied by such forward-looking statements. These risks include the performance of the global economy and growth in software industry sales; market acceptance of the Company’s products and services; possible disruptive effects of organizational or personnel changes; shifts in our business strategy; interoperability of our products with other software products; the success of certain business combinations engaged in by us or by competitors; political unrest or acts of war; customer and industry analyst perception of the Company and its technology vision and future prospects; and other risks detailed from time to time in our Securities and Exchange Commission filings, including those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)- Overview,” and “MD&A — Future Operating Results,” Part II, Item 7 of this Annual Report on Form 10-K.

Expectations, forecasts, and projections that may be contained in this report are by nature forward-looking statements, and future results cannot be guaranteed. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” and similar expressions in this document, as they relate to Sybase and our management, may identify forward-looking statements. Such statements reflect the current views of our management with respect to future events and are subject to risks, uncertainties and assumptions. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false, or may vary materially from those described as anticipated, believed, estimated, intended or expected. We do not intend to update these forward-looking statements.

We file registration statements, periodic and current reports, proxy statements, and other materials with the Securities and Exchange Commission, or SEC. You may read and copy any materials we file with the SEC at the SEC’s Office of Public Reference at 450 Fifth Street, NW, Room 1300, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including our filings.

We are headquartered at One Sybase Drive, Dublin, CA 94568, and the telephone number at that location is (925) 236-5000. Our internet address is www.sybase.com . We make available, free of charge, through the investor relations section of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. The contents of our website are not incorporated into, or otherwise to be regarded as part of this Annual Report on Form 10-K.

Sybase, Adaptive Server Enterprise, Advantage Database Server, Afaria, Avaki, AvantGo, DataWindow. Net, Dejima, Extended Systems, Financial Fusion, iAnywhere, iAnywhere Solutions, Information Anywhere, Information Anywhere Suite, M-Business Anywhere, mFolio, Mirror Activator, Mobile 365, New Era of Networks, OneBridge, PocketBuilder, PowerBuilder, PowerDesigner, Replication Server, RFID Anywhere, SQL Anywhere, Sybase 365 and XcelleNet, are trademarks of Sybase, Inc. or its subsidiaries. All other names may be trademarks of the companies with which they are associated.

PART I

billion mobile subscribers) supported by high quality of service and worldwide message delivery, billing, and settlement capabilities. In 2007, Sybase 365 processed more than 89 billion messages.

A summary of financial results for these divisions is found in Note Ten to Consolidated Financial Statements, Part II, Item 8.

UNWIRED ENTERPRISE

We define the Unwired Enterprise as an enterprise that uses information technology to create the seamless flow of information from the data center to any device. An Unwired Enterprise breaks down information technology barriers and delivers critical information and applications to employees, partners, and customers, to any platform, device or network, anytime, anywhere. The benefits for enterprises becoming an Unwired Enterprise are substantial. An Unwired Enterprise is more efficient, more productive, and better able to capitalize on new opportunities because information is moved to the point of action, increasing its relevance and enhancing the power of decisions and transactions.

To enable the Unwired Enterprise, Sybase offers a cohesive platform that leverages our core strength in data management, market leading mobile solutions and operator-grade network infrastructure. This platform provides unique opportunities for Sybase to deliver ongoing value to the enterprise market, while at the same time dominating emerging high-growth markets, such as mobile banking and mobile commerce leveraging Sybase’s global enterprise reach and mobile messaging capabilities.

CUSTOMERS

Our customers are primarily Fortune 1000 companies in North America and their equivalents around the globe. No single customer accounted for more than 10 percent of total revenues during 2007, 2006 or 2005. In 2007 our customers included:

	•		A hedge fund uses Sybase IQ’s column-based database technology to deliver meaningful information from trade, bond and market data. Developing a customized, in-house analytics solution based on Sybase IQ, the hedge fund increased the ability to customize data for users and the company’s overall data agility. This private investment firm, like many financial service customers, uses Sybase IQ to deliver high speed analytics across large data sets.
	•		A global leader in medical technology uses Sybase iAnywhere Information Anywhere Suite and SQL Anywhere to support its field sales and marketing team with a mobile solution. The mobile solution is powered by SQL Anywhere’s mobile database and synchronization software, while Information Anywhere’s frontline management software provides the ability to centrally manage and secure these applications.
	•		One of India’s largest banks recently migrated 200 applications onto Sybase Adaptive Server Enterprise (ASE) in order to reduce their operational costs and improve performance. The bank utilizes Sybase IQ for fast reporting and query performance in their data warehouse applications. In addition, the bank employs Sybase replication technology to implement a reliable disaster recovery solution to ensure high availability. In choosing Sybase, the bank was able to address its strategic data management pain points while ensuring support for a heterogeneous data center environment.
	•		One of the world’s largest airlines uses Sybase Information Anywhere Suite to support a remote team of field engineers who install, maintain and repair on-site computer equipment and infrastructure across 321 cities in 58 countries and five continents. By using the Suite’s comprehensive mobile platform, field engineers are now able to receive, resolve and report on technology incidents more accurately, efficiently and quickly than ever before.

	•		A large, prestigious university’s medical system uses Sybase iAnywhere Information Anywhere Suite to manage the use of mobile computing and storage devices while ensuring the confidentiality, integrity, and accessibility of information accessed and stored. Leveraging the Information Anywhere’s frontline management capabilities, the university enforces and ensures compliance with standards governing the use, management, and configuration of all mobile computing and storage devices.
	•		One of the leading international banks uses Sybase 365 to enhance its Internet banking security and to strengthen online verification procedures through a two-factor authentication at login for all types of Internet banking systems. Sybase 365 provides the SMS connectivity so each time a customer conducts transactions on the bank’s Internet banking platform, a login PIN is required, in addition to a user ID and password. After the customer logs in with their user ID and password, Sybase 365 sends the PIN (a unique number) via SMS to the customer’s registered mobile phone.

PRODUCTS AND SERVICES

Depending on the product, Sybase offers products on an on-premise license model or as hosted services. On-premise license products are available on hardware platforms manufactured by Dell, Hewlett-Packard, IBM, Sun Microsystems, and others. We also make products that connect these platforms to other hardware platforms with large installed bases. These products are also available for a wide range of operating systems including various UNIX environments, Windows, Windows NT, and Linux. Sybase 365 offerings are available as hosted services. A description of our principal products and service offerings follows:

Infrastructure Platform Group (IPG)

Sybase Adaptive Server Enterprise (ASE) is a powerful data management platform for high performance business applications especially in large database, high-transaction, mission-critical environments. ASE combines a low total cost of ownership with excellent reliability, security, and scalability. Sybase ASE 15 key features include patented encryption, partitioning for scalability and new patent-pending query technology for “smarter” transactions, increased performance and enhanced support for unstructured data management.

Sybase IQ is a column-oriented analytics server optimized for outstanding query performance for high volumes of both structured and unstructured data in business intelligence applications such as accelerated reporting, advanced analytics and analytics services. Sybase IQ, which holds the record for the world’s largest data warehouse at one Petabyte of data, improves analytic performance by up to 10 — 100x over traditional solutions while lowering storage and maintenance costs.

Sybase Risk Analytics Platform (RAP) offers the most comprehensive, resilient platform for real-time and historical market data for the capital markets industry. It supports and integrates trade processing applications, such as risk management and algorithmic trading, throughout the trade life-cycle. Sybase RAP enables customers to respond more quickly to market events and increases real-time decision making capability.

Sybase Replication Server ^® increases the flexibility and lowers the cost of managing multiple data management platforms including Sybase ASE, Oracle, Microsoft, IBM DB2 and mainframes. It provides bi-directional, heterogeneous replication and synchronization across enterprise, client/server, desktop, and mobile systems.

Sybase Data Integration Suite streamlines data integration techniques into a single, out-of-the-box solution. Customers can choose the technology that best meets their needs — extract, transform and load (ETL) replication, federation or event-based integration — to build flexible data flows. With the modular suite, customers can start with today’s projects and scale to address the most serious integration

challenge. Using smart, easy-to-use tools Sybase Data Integration Suite accelerates the design, development, delivery, and management of seamless data flows. Common modeling, metadata management, development tooling, and administration form the smart “glue” that enables the holistic, controlled method for achieving agility.

Sybase Mirror Activator improves the economics of high-end storage replication systems by reducing network costs, accelerating recovery time and guaranteeing data integrity. It also extends the usefulness of standby systems by utilizing them for reporting and decision support.

Sybase PowerDesigner is a leading data-modeling and application design tool for enterprises that need to build or re-engineer applications quickly, cost-effectively and consistently (also sold as Sybase PowerAMC).

Sybase WorkSpace is an Eclipse-based unified development environment bridging the gap between development of applications for service-oriented-architectures (SOA) and traditional tooling. Sybase WorkSpace combines modeling, data management, services assembly and orchestration, Java development and mobile development.

Sybase PowerBuilder is an industry-leading rapid application development (RAD) tool that increases developer productivity through tight integration of design, modeling, development, and management.

Sybase Financial Fusion Banking Solutions enable financial institutions to offer multiple-delivery channel support to their consumer, small business, and large corporate clients. Features include account access, banking, cash management services, imaging, bill payment and presentment, customer care, and wireless application support.

iAnywhere Solutions (iAS)

SQL Anywhere is an industry leading mobile and embedded database providing data management and data synchronization technologies that operate in frontline environments without onsite IT support. It offers enterprise-caliber features in a database that is easily embedded and widely deployed in server, desktop, remote office and mobile application environments. In addition, our Advantage Database Server™ provides both ISAM table-based and SQL-based data access, enabling application developers to easily chart a growth path for legacy database applications to today’s modern techniques.

Information Anywhere Suite is a secure, scalable mobile software portfolio of products that address the converging IT requirements of enterprises today. By combining email, messaging, mobile device management, enterprise-to-edge security and back-office application extension capabilities, Information Anywhere enables organizations to empower employees to do the work they need to do anywhere, at anytime, on any device. Information Anywhere Suite leverages leading Sybase iAnywhere technologies including Afaria for managing and securing mobile devices, data and applications; OneBridge, which provides a flexible, powerful and secure way to extend email and applications to mobile workers; Information Anywhere Mobile IM, an easy-to-use, secure solution for extending instant messaging (IM) and presence to mobile devices; M-Business Anywhere, which leverages Web technologies to develop mobile applications; and SQL Anywhere, which provides mobile data management and synchronization.

RemoteWare ^® is an industry leader in polling, file transfer, and content distribution, RemoteWare supports a broad range of frontline systems and networking options, and supports both classic POS devices and contemporary software environments.

RFID Anywhere ™ is designed to automate the process of developing and deploying RFID applications, RFID Anywhere is a middleware platform that addresses the physical requirements of the technology, and even provides the ability to simulate and troubleshoot production RFID environments. This frees developers from getting bogged down in the code-level complexities of evolving devices and standards, differing topologies and far-flung reader locations, allowing them to quickly focus their efforts on applying their knowledge of the business to the task at hand.

Standards-based SDKs iAS provides standards-based software development kits (SDKs) for implementing protocol stack technologies for infrared, Bluetooth, data synchronization and device management. In addition, XTNDConnect ^® PC is a software application that allows users to synchronize contacts, calendar, tasks, email and notes between mobile devices and popular PC applications such as Microsoft Outlook and ACT! Over the past 10 years, iAS embedded SDKs have been used in hundreds of product designs resulting in tens of millions of iAS-enabled products deployed into the market.

AvantGo ^® is a free, ad-supported service that delivers rich, personalized mobile websites to smartphones, PDAs, and mobile browsers. Today, hundreds of major brands and media publishers, including Dell, CNET, Rolling Stone and The New York Times, leverage AvantGo to target a highly desirable demographic of millions of registered users with mobile content and mobile advertising. AvantGo offers the convenience of anywhere, anytime access, seamlessly supporting both wireless and “sync and go” connectivity. Until December 31, 2007, AvantGo results were reported as part of iAnywhere. Commencing on January 1, 2008, AvantGo is a part of Sybase 365.

Sybase 365

Operator Services are focused on Short Message Service (SMS) and Multimedia Messaging Service (MMS) messaging interoperability between mobile operators worldwide. Sybase 365 is a global leader in interoperability services. Messages are delivered through a secure operator-grade messaging platform, with advanced protocol conversion, routing, queuing, and transcoding capabilities. Sybase 365 interoperability service reaches over 700 mobile operators, with over 300 direct two-way SMS destinations — greatly simplifying the deployment and delivery of inter-operator messaging over incompatible networks, protocol stacks, and handsets. Services include robust traffic analysis and detailed reporting and statistics.

Brand and Content Provider Services. Sybase 365 is the premier provider of mobile services for media and entertainment brands, content providers, mobile marketers and agencies, enabling customers to monetize premium mobile content and deliver interactive services and mobile marketing campaigns to subscribers globally through SMS, MMS and Wireless Application Protocol (WAP). Services include MMS 365, content delivery gateway to send and receive MMS from multiple sources; application management, content management, global billing, settlement, reporting and analysis.

Enterprise Messaging Services provide secure global messaging services to enterprises across our operator grade network resulting in superior protection, service and support. Enterprise customers include financial corporations, such as Citibank, Standard Chartered, Banco Bilbao Vizcaya Agentina and MasterCard; and directory assistance services and airlines who rely on Sybase 365 to deliver mission critical mobile messaging services over SMS and MMS.

WORLDWIDE SERVICES

Technical Support. Our Customer Service and Support organization offers technical support for our family of IPG and iAS products. We currently maintain regional support centers in North America, South America, Europe, and Asia Pacific that can provide 24 x 7 technical services in all time zones around the world. Our end users and partners have access to technical information sources and newsgroups on our support website, including a “solved cases” database, and software fixes that can be downloaded. Generally, customers can choose technical support programs that best suit their business needs. All of the following support programs are priced on a percentage of net license fee basis and include updates and new version releases that become available during the support period.

     • Standard Support is designed for high quality around the clock support for critical issues, access to new releases and online support services.

     • Enterprise Support offers personalized high-availability support for companies with mission-critical projects. Services include priority access to the Enterprise Technical Team, proactive services, and other specialized options. Enterprise Support provides the highest priority of response times.

In addition to the above support offerings, we offer several support services options geared toward developers for designated workplace level and tools products. These programs are priced on a flat-fee annual basis with updates and new version releases available for purchase separately for an additional annual fee. iAS also offers support programs to end users priced on a flat-fee annual basis with updates and new version releases available for purchase separately for an additional fee.

Our IPG and iAS business divisions also offer a variety of support services to their partners and resellers.

Sybase 365 operates two 24x7 Network Operations Centers in Singapore and the Mid-Atlantic to monitor our messaging service infrastructure, direct and monitor global maintenance and repair activities, and provide direct technical support to our customers. Additionally, Sybase 365 maintains a 24x7 customer care facility in Dublin, Ireland that supports customer requests and services inquiries in 13 languages.

Consulting. The Sybase Professional Services (SPS) organization offers customers comprehensive consulting, education and integration services designed to optimize their business solutions using both Sybase IPG and iAS products and non-Sybase products. Service offerings include assistance with data and system migration, custom application design and development, implementation, performance improvement, knowledge transfer and system administration.

Education. We provide a broad education curriculum allowing customers and partners to increase their proficiency in our IPG and iAS products. Basic and advanced courses are offered at Sybase education centers throughout North America, South America, Europe, and Asia Pacific (including Australia and New Zealand). Specially tailored customer classes and self-paced training are also available. A number of our distributors and authorized training providers also provide education in our products.

SALES AND DISTRIBUTION

Licensing and Services Model. Consistent with software industry practice, we do not sell or transfer title to our IPG and iAS software products to our customers. Instead, customers generally purchase non-exclusive, nontransferable perpetual licenses in exchange for a fee that varies depending on the mix of products and services, the number and type of users, the number of servers, and the type of operating system. License fees range from several hundred dollars for single user desktop products to several million dollars for solutions that can support hundreds or thousands of users. We also license many of our products for use in connection with customer applications on the Internet. Our products and services are offered in a wide variety of configurations depending on each customer’s needs and hardware environment. In the case of Sybase 365, we sell hosted, turn-key messaging solutions where revenue is generated primarily on a per message or transactional basis.

Distribution Method. Sybase products and services are sold through our direct sales organizations and our indirect IPG and iAS sales channels. “Indirect sales channels” include value added resellers (VARs), systems integrators (SIs), original equipment manufacturers (OEMs) and international distributors and resellers. Our ability to utilize these channels is demonstrated in our license revenue from indirect sales channels which increased 11 percent in 2007 versus 2006.

International Business. In 2007, 48 percent of our total revenues were from operations outside North America, with operations in EMEA (Europe, Middle East and Africa) accounting for 33 percent, and operations in our Intercontinental region (Asia Pacific and Latin America) accounting for 15 percent. Most of our international sales are made by our foreign subsidiaries. However, certain sales are made in international markets from the United States. We also license our IPG and iAS products through distributors and other resellers throughout the world. A summary of our geographical revenues is set forth in “MD&A — Geographical Revenues,” Part II, Item 7, and Note Ten to Consolidated Financial Statements, Part II, Item 8. For a discussion of the risks associated with our foreign operations, see “Risk Factors — Future Operating Results — We are subject to risks arising from our international operations,” Part I, Item 1 (A).

INTELLECTUAL PROPERTY RIGHTS

We rely on a combination of trade secret, copyright, patent and trademark laws, as well as contractual terms, to protect our intellectual property rights. As of February 1, 2008, we had 160 issued patents (128 U.S. and 32 non-U.S.) that expire approximately 20 years from the date they were filed. These patents cover various aspects of our technology. We believe that our patents and other intellectual property rights have value. However, any of our proprietary rights could be challenged, invalidated or circumvented, or may not provide us with significant competitive advantage. For a discussion of additional risks associated with our intellectual property, see “Risk Factors — Future Operating Results — Insufficient protection for our intellectual property rights may have a material adverse affect on our results of operations or our ability to compete” and “If third parties claim that we are in violation of their intellectual property rights, it could have a negative impact on our results of operations or ability to compete,” Part I, Item 1(A).

RESEARCH AND DEVELOPMENT

Since inception, we have made substantial investments in software research and product development. We believe that timely development of new products and enhancements to our existing products is essential to maintaining a strong position in our market. During 2007, our investment in research and product development generated expenses of $152.6 million, or 15 percent of our total revenue. These amounts compared to $149.5 million and 17 percent in 2006, and $139.0 million and 17 percent in 2005. In addition, our capitalized software costs were $36.2 million and $37.5 million in 2007 and 2006, respectively. We intend to continue to invest heavily in these areas. However, future operations could be affected if we fail to timely enhance existing products or introduce new products to meet customer demands. For a further discussion of the risks associated with product development, see “Risk Factors — Future Operating Results — The ability to rapidly develop and bring to market advanced products and services that are successful is crucial to maintaining our competitive position” and “We may not receive significant revenues from our current research and development efforts for several years, if at all,” Part I, Item 1(A).

COMPETITION

The market for our products and services is extremely competitive due to various factors including a maturing enterprise infrastructure software market, changes in customer IT spending habits, and the trend toward consolidation of companies within the telecommunications and software industries.

Principal competitors to IPG vary by product type.

      Information Management Products. Principal competitors to our Information Management Products include Oracle, IBM and Microsoft. We also compete with specialized vendors such as Teradata and Netezza in data warehousing; Informatica, GoldenGate Software, RedHat and Composite Software in data integration; and CA in modeling.

      Financial Fusion Products: Principal competitors for our banking solutions include FiServ, S1, and Intuit.

Principal competitors to iAS vary by product type.

      Mobile and Embedded Database Products . Principal competitors to our mobile and embedded database products include Pervasive Software, Progress Software, Intersystems, MySQL, IBM and Oracle.

      Mobile Middleware and Device Management Products. Principal competitors to our mobile middleware products include IBM, Nokia’s Intellisync and host of numerous small vendors. For mobile

device management and security products, we compete with Microsoft, Symantec, iPass, Check Point and Credant.

      AvantGo. There are a number of competitors who provide alternatives for viewing content on mobile devices, including extensions of existing Internet portal services such as Yahoo, AOL, and MSN, media publishers own mobile offerings, as well as content provided by carriers.

Principal competitors to Sybase 365 vary by service.

      Operator Services. Principal competitors to our interoperability services include VeriSign, Syniverse, Aicent, Iris and Belgacom. While the industry is highly competitive, we and others may “peer” from time to time in order to provide more ubiquitous coverage to our customers.

      Brand and Content Provider Services. Principal competitors to our content aggregation services include mBlox, NetSize, VeriSign via its mQube and 3 United acquisitions and Amdocs through its OperMarket division.

      Enterprise Messaging Services. Principal competitors to our enterprise messaging services include NetSize, Clikatel, Air 2 Web and operators who already have a sales force or relationships with large enterprises.

We believe that we compete favorably against our competitors in each of these areas. However, some of our competitors have longer operating histories, greater name recognition, stronger relationships with partners, larger technical staffs, established relationships with hardware vendors and/or greater financial, technical and marketing resources. These factors may provide our competitors with an advantage in penetrating markets. For a discussion of certain risks associated with competition, see “Risk Factors — Future Operating Results — Industry consolidation and other competitive pressures could affect prices or demand for our products and services, and our business may be adversely affected,” Part I, Item 1(A).

EMPLOYEES

As of February 1, 2008, Sybase and its subsidiaries had approximately 3,996 regular employees. For information regarding our executive officers, see “Directors, Executive Officers of Registrant and Corporate Governance,” Part III, Item 10.

customers are larger enterprises, an apparent trend toward more conservative IT spending could result in fewer of these customers making substantial investments in our products and services in any given period. Therefore, if one or more significant orders do not close in a particular quarter, our results of operations could be materially and adversely affected, as was the case in the second quarter of 2007 we refused to accept certain terms in a large transaction, which delayed the closing of this transaction from the second quarter of 2007 to the third quarter of 2007, but resulted in better terms for the Company.

Our operating expenses are based on projected annual and quarterly revenue levels, and are generally incurred ratably throughout each quarter. Since our operating expenses are relatively fixed in the short term, failure to realize projected revenues for a specified period could adversely impact operating results, reducing net income or causing an operating loss for that period. The deferral or non-occurrence of such revenues would materially adversely affect our operating results for that quarter and could impair our business in future periods. Because we do not know when, or if, our potential customers will place orders and finalize contracts, we cannot accurately predict our revenue and operating results for future quarters.

In addition to the above factors, the timing and amount of our revenues are subject to a number of factors that make it difficult to accurately estimate revenues and operating results on a quarterly or annual basis. Our financial forecasts are based on aggregated internal sales forecasts which may incorrectly assess our ability to complete sales within the forecast period, due to competitive pressures, economic conditions or reduced information technology spending. In our experience IPG and iAS revenues in the fourth quarter benefit from large enterprise customers placing orders before the expiration of budgets tied to the calendar year. As a result, revenues from license fees tend to decline from the fourth quarter of one year to the first quarter of the next year. In the past, this seasonality has contributed to lower total revenues and earnings in the first quarter compared to the prior fourth quarter. We cannot assure you that estimates of our revenues and operating results can be made with certain accuracy or predictability. Fluctuations in our operating results may contribute to volatility in our stock price.

Economic and credit market conditions in the U.S. and worldwide could adversely affect our revenues.

Our revenues and operating results depend on the overall demand for our products and services. In part due to strength in the worldwide economy, as well as our acquisition of Mobile 365, our revenues for the quarter ending December 31, 2007 exceeded revenues for the quarter ending December 31, 2006 by 15%. If the U.S. and worldwide economies weaken, either alone or in tandem with other factors beyond our control (including war, political unrest, shifts in market demand for our products, actions by competitors, etc.), we may not be able to maintain or expand our recent revenue growth. Continued weakness in the credit markets and financial services industry may also impact our revenues. While we have not noted a change in buying patterns by financial services customers, the financial services industry is one of the largest markets for our products and services and decreased demand from this industry would adversely affect our revenues and operating results.

If we fail to maintain or expand our relationships with strategic partners and indirect distribution channels our license revenues could decline.

We currently derive a significant portion of our license revenues from sales of our IPG and iAS products and services through non-exclusive distribution channels, including strategic partners, systems integrators (SIs), original equipment manufacturers (OEMs) and value-added resellers (VARs). We generally anticipate that sales of our products through these channels will account for a substantial portion of our software license revenues in the foreseeable future. Because most of our channel relationships are non-exclusive, there is a risk that some or all of them could promote or sell our competitors’ products instead of ours, or that they will be unwilling or unable to effectively sell new products that we may introduce. Additionally, if we are unable to expand our indirect channels, or these indirect channels fail to generate significant revenues in the future, our business could be harmed.

Our development, marketing and distribution strategies also depend in part on our ability to form strategic relationships with other technology companies. If these companies change their business focus, enter

into strategic alliances with other companies or are acquired by our competitors or others, support for our products could be reduced or eliminated, which could have a material adverse effect on our business and financial condition.

System failures, delays and other problems could harm our reputation and business, cause us to lose customers and expose us to customer liability.

The success of Sybase 365 is highly dependent on its ability to provide reliable services to customers. These operations could be interrupted by any damage to or failure of our customers, or suppliers, computer software, hardware or networks, and our connections and outsourced service arrangements with third parties.

Sybase 365’s systems and operations may also be vulnerable to damage or interruption from power loss, transmission cable cuts and other telecommunications failures, natural disasters, interruption of service due to potential facility migrations, computer viruses or software defects, physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events and errors by our employees or third-party service providers.

Because many of our services play a mission-critical role for our customers, any damage to or failure of the infrastructure we rely on, including that of our customers and vendors, could disrupt the operation of our network and the provision of our services, result in the loss of current and potential customers and expose us to potential contractual performance and other liabilities.

Industry consolidation and other competitive pressures could affect prices or demand for our products and services, and our business may be adversely affected.

The IT industry and the market for our core database infrastructure products and services is becoming increasingly competitive due to a variety of factors including a maturing enterprise infrastructure software market and changes in customer IT spending habits. There is also a growing trend toward consolidation in the software industry. Continued consolidation within the software industry could create opportunities for larger technology companies, such as IBM, Microsoft and Oracle, to increase their market share through the acquisition of companies that dominate certain lucrative market niches or that have loyal installed customer bases. Continued consolidation activity could pose a significant competitive disadvantage to us.

The significant purchasing and market power of larger companies may also subject us to increased pricing pressures. Many of our competitors have greater financial, technical, sales and marketing resources, and a larger installed customer base than us. In addition, our competitors’ advertising and marketing efforts could overshadow our own and/or adversely influence customer perception of our products and services, and harm our business and prospects as a result. To remain competitive, we must develop and promote new products and solutions, enhance existing products and retain competitive pricing policies, all in a timely manner. Our failure to compete successfully with new or existing competitors in these and other areas could have a material adverse impact on our ability to generate new revenues or sustain existing revenue levels.

We may encounter difficulties in completing the integration of our Mobile 365 acquisition, other acquisitions or strategic relationships and we may incur acquisition-related charges that could adversely affect our operating results.

We regularly explore possible acquisitions and other strategic ventures to expand and enhance our business. We have recently acquired a number of companies.

For example, in November 2006 we acquired Mobile 365, Inc in an all cash transaction with a purchase price of $418 million. In addition, in October 2005 we acquired Extended Systems Incorporated, a NASDAQ listed company. In June 2006 we acquired Solonde AG, a privately-held company and in October 2006 we acquired certain assets of iFoundry, a privately-held company. In August 2007 we

acquired Coboplan, a privately-held Japanese company. We expect to continue to pursue acquisitions of complimentary or strategic business product lines, assets and technologies.

We may not achieve the desired benefits of our Mobile 365 or other acquisitions and investments. Acquisitions may not further our business strategy or we may pay more for acquired companies or assets than they may prove to be worth. Further, such companies may have limited infrastructure and systems of internal controls. In addition, for portions of the first year after acquisition, acquired companies may not be subject to our established system of internal control or subject to internal control testing by internal and external auditors.

We may be unable to successfully assimilate an acquired company’s management team, employees, business infrastructure or data centers and related systems, capacity requirements, customer mandated requirements, and third party communication provider relationships or implement and maintain effective internal controls. Our acquisition due diligence may not identify technical, legal, financial, internal control or other problems associated with an acquired entity and our ability to seek indemnification may be limited by the acquisition structure or agreement. Also, dedication of additional resources to execute acquisitions and handle integration tasks and management changes accompanying acquisitions could divert attention from other important business. Acquisitions may also result in costs, liabilities, additional expenses or internal control weaknesses that could harm our results of operations, financial condition or internal control assessment. In addition, we may not be able to maintain customer, supplier, employee or other favorable business relationships of ours, or of our acquired operations, or be able to terminate or restructure unfavorable relationships, any of which might reduce our revenue or limit the benefits of an acquisition.

Under Statement of Financial Accounting Standard No. 142 we do not amortize goodwill but evaluate goodwill recorded in connection with acquisitions at least annually for impairment. As of December 31, 2007, we had approximately $533.3 million of goodwill recorded on our balance sheet, none of which was determined to be impaired as of that date. Goodwill impairments are based on the value of our reporting units, and reporting units that previously recognized impairment charges are prone to additional impairment charges if future revenue and expense forecasts or market conditions worsen after an impairment is recognized. We test the impairment of goodwill annually in our fourth fiscal quarter or more frequently if indicators of impairment arise. The timing of the formal annual test may result in charges to our statement of operations in our fourth fiscal quarter that could not have been reasonably foreseen in prior periods. New acquisitions, and any impairment of the value of purchased assets, could have a significant negative impact on our future operating results.

Acquisitions may also result in other charges, including stock-based compensation charges for assumed stock awards, restructuring charges and charges related to in process research and development. The timing and amount of such charges will be dependent on future acquisition and integration activities.

With respect to our investments in other companies, we may not realize a return on our investments, or the value of our investments may decline if the businesses in which we invest are not successful. Future acquisitions may also result in dilutive issuances of equity securities, the incurrence of debt, restructuring charges relating to the consolidation of operations and the creation of other intangible assets that could result in amortization expense or impairment charges, any of which could adversely affect our operating results.

The ability to rapidly develop and bring to market advanced products and services that are successful is crucial to maintaining our competitive position.

Widespread use of the Internet and fast-growing market demand for mobile and wireless solutions may significantly alter the manner in which business is conducted in the future. In light of these developments, our ability to timely meet the demand for new or enhanced products and services to support wireless and mobile business operations at competitive prices could significantly impact our ability to generate future revenues. If the market for unwired solutions does not continue to develop as we anticipate, if our solutions and services do not successfully compete in the relevant markets, or our new products, either

internally developed or resulting from acquisitions, are not widely adopted and successful, our competitive position and our operating results could be adversely affected.

If our existing customers cancel or fail to renew their technical support agreements, our technical support revenues could be adversely affected.

We currently derive a significant portion of our overall revenues from technical support services, which are included in service revenues. The terms of our standard software license arrangements provide for the payment of license fees and prepayment of first-year technical support fees. Support is renewable annually at the option of the end user. We have recently been experiencing increasing pricing pressure from customers when purchasing or renewing technical support agreements and this pressure may result in our reducing support fees or in lost support fees if we refuse to reduce our pricing, either of which could result in reduced revenue. If our existing customers cancel or fail to renew their technical support agreements, or if we are unable to generate additional support fees through the license of new products to existing or new customers, our business and future operating results could be adversely affected.

Pricing pressure in the mobile messaging market could adversely affect our operating results.

Competition and industry consolidation in the mobile messaging market have resulted in pricing pressure, which we expect to continue in the future. This pricing pressure could cause large reductions in the selling price of our services. For example, consolidation in the wireless services industry could give our customers increased transaction volume leverage in pricing negotiations. Our competitors or our customers’ in-house solutions may also provide services at a lower cost, significantly increasing pricing pressures on us. While historically pricing pressure has been largely offset by volume increases and the introduction of new services, in the future we may not be able to offset the effects of any price reductions.

Unanticipated delays or accelerations in our sales cycles could result in significant fluctuations in our quarterly operating results.

The length of our sales cycles varies significantly from product to product. The sales cycle for some of our IPG and iAS products can take up to 18 months to complete. Any delay or unanticipated acceleration in the closing of a large license or a number of smaller licenses could result in significant fluctuations in our quarterly operating results. For example, in the second quarter of 2007 we refused to accept certain terms in a large transaction, which delayed the closing of this transaction from the second quarter of 2007 to the third quarter of 2007, but resulted in better terms for the Company. The length of the sales cycle may vary depending on a number of factors over which we may have little or no control, including the size and complexity of a potential transaction, the level of competition that we encounter in our selling activities and our potential customers’ internal budgeting process. Our sales cycle can be further extended for product sales made through third party distributors. As a result of the lengthy sales cycle, we may expend significant efforts over a long period of time in an attempt to obtain an order, but ultimately not complete the sale, or the order ultimately received may be smaller than anticipated.

Our mobile messaging customer contracts may not continue to generate revenues at or near our historical levels of revenues from these customers.

If our customers decide for any reason not to continue to purchase services from us at current levels or at current prices, to terminate their contracts with us or not to renew their contracts with us, our revenues would decline.

If we do not adapt to rapid technological change in the telecommunications industry, we could lose customers or market share.

The mobile market is characterized by rapid technological change, frequent new service introductions and changing customer demands. Significant technological changes could make our technology and services obsolete. Our success depends in part on our ability to adapt to our rapidly changing market by continually improving the features, functionality, reliability and responsiveness of our existing services

and by successfully developing, introducing and marketing new features, services and applications to meet changing customer needs. We cannot assure you that we will be able to adapt to these challenges or respond successfully or in a cost-effective way to adequately meet them. Our failure to do so would impair our ability to compete, retain customers or maintain our financial performance. Our future revenues and profits will depend, in part, on our ability to sell to new market participants.

Restructuring activities and reorganizations in our sales model or business units may not succeed in increasing revenues and operating results.

Since 2000, we have implemented several restructuring plans in an effort to align our expense structure to our expected revenue. As a result of these restructuring activities, we have recorded gross restructuring charges totaling approximately $119 million through December 31, 2007. Our ability to significantly reduce our current cost structure in any material respects through future restructurings may be difficult without fundamentally changing elements of our current business. If we are unable to generate increased revenues or control our operating expenses going forward, our results of operations will be adversely affected.

Our sales model has evolved significantly during the past few years to keep pace with new and developing markets and changing business environments. If we have overestimated demand for our products and services in our target markets, or if we are unable to coordinate our sales efforts in a focused and efficient way, our business and prospects could be materially and adversely affected. For example, in the second quarter of 2005, our FFI business was integrated into IPG in an effort to better support the FFI product line and promote synergies between FFI and IPG technical resources. In the second quarter of 2006 IPG’s International and North American sales organizations were combined to form Worldwide Field Operations. Starting in January 2007, our corporate, product and field marketing operations were consolidated into a new Worldwide Marketing Operations organization. Other organizational changes in our sales or divisional model could have a direct effect on our results of operations depending on whether and how quickly and effectively our employees and management are able to adapt to and maximize the advantages these changes are intended to create. We cannot assure that these or other organizational changes in our sales or divisional model will result in any increase in revenues or profitability, and they could adversely affect our business.

Our results of operations may depend on the compatibility of our products with other software developed by third parties.

Our future results may be affected if our products cannot interoperate and perform well with software products of other companies. Certain leading applications currently are not, and may never be, interoperable with our products. In addition, many of our principal products are designed for use with products offered by competitors. In the future, vendors of non-Sybase products may become less willing to provide us with access to their products, technical information, and marketing and sales support, which could harm our business and prospects.

We are subject to risks arising from our international operations.

We derive a substantial portion of our revenues from our international operations, and we plan to continue expanding our business in international markets in the future. In 2007, revenues outside North America represented 48 percent of our total revenues. As a result of our international operations, we are affected by economic, regulatory and political conditions in foreign countries, including changes in IT spending, the imposition of government controls, changes or limitations in trade protection laws, unfavorable changes in tax treaties or laws, natural disasters, labor unrest, earnings expatriation restrictions, misappropriation of intellectual property, acts of terrorism, continued unrest and war in the Middle East and other factors, which could have a material impact on our international revenues and operations. Our international operations also require that we comply with, any could have liabilities due to, US laws that may not apply to companies that operate only in the United States, including the Foreign Corrupt Practices Act and export control laws. Our revenues outside North America could also fluctuate due to the relative immaturity of some markets, rapid growth in other markets, the strength of local

economies, the general volatility of worldwide software markets and organizational changes we have made to accommodate these conditions.

We may not receive significant revenues from our current research and development efforts for several years, if at all.

Developing and localizing software is expensive and the investment in product development often involves a long payback cycle. We have and expect to continue making significant investments in software research and development and related product opportunities. Accelerated product introductions and short product life cycles require high levels of expenditures for research and development that could adversely affect our operating results if not offset by revenue increases. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. Revenues may not be realized from particular research and development expenditures and revenues which are generated may occur significantly later than when the associated research and development costs were incurred.

We might experience significant errors or security flaws in our products and services.

Despite testing prior to their release, software products may contain errors or security flaws, particularly when first introduced or when new versions are released. Errors in our software products could affect the ability of our products to work with other hardware or software products, could delay the development or release of new products or new versions of products and could adversely affect market acceptance of our products. If we experience errors or delays in releasing new products or new versions of products, we could lose revenues. Our customers rely on our products and services for critical parts of their businesses and they may have a greater sensitivity to product errors and security vulnerabilities than customers for software products generally. Software product errors and security flaws in our products or services could expose us to product liability, performance and/or warranty claims as well as harm our reputation, which could impact our future sales of products and services. The detection and correction of any security flaws can be time consuming and costly.

Unanticipated changes in our tax rates could affect our future financial results.

Our future effective tax rates could be favorably or unfavorably affected by unanticipated changes in the valuation of our deferred tax assets and liabilities, the geographic mix of our revenue, or by changes in tax laws or their interpretation. In addition, we are subject to the continuous examination of our income tax returns by tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition.

We face exposure to adverse movements in foreign currency exchange rates.

We experience foreign exchange translation exposure on our net assets and transactions denominated in currencies other than the U.S. dollar. We do not utilize foreign currency hedging contracts to smooth the impact of converting non-U.S. dollar denominated revenues into U.S. dollars for financial reporting. Because we do not anticipate entering into currency hedges for non-U.S. dollar revenues, our future results will fluctuate based on the appreciation or depreciation of the U.S. dollar against major foreign currencies.

Due to the significance of our business conducted in currencies other than the U.S. dollar, our results of operations could be materially and adversely affected by fluctuations in foreign currency exchange rates, even though we take into account changes in exchange rates over time in our pricing strategy.

As of December 31, 2007, we had identified net assets totaling $272.5 million associated with our EMEA operations, and $115.0 million associated with our Asia Pacific and Latin America operations.

Accordingly, we may experience fluctuations in operating results as a result of translation gains and losses associated with these asset and liability values. In order to reduce the effect of foreign currency fluctuations on our and certain of our subsidiaries’ balance sheets, we utilize foreign currency forward exchange contracts (forward contracts) to hedge certain foreign currency transaction exposures. Specifically, we enter into forward contracts with a maturity of approximately 30 days to hedge against the foreign exchange exposure created by certain balances that are denominated in a currency other than the principal reporting currency of the entity recording the transaction. The gains and losses on the forward contracts are intended to mitigate the gains and losses on these outstanding foreign currency transactions and we do not enter into forward contracts for trading purposes. However, our efforts to manage these risks may not be successful. Failure to adequately manage our currency exchange rate exposure could adversely impact our financial condition and results of operations.

Growing market acceptance of “open source” software could cause a decline in our revenues and operating margins.

Growing market acceptance of open source software has presented both benefits and challenges to the commercial software industry in recent years. “Open source” software is made widely available by its authors and is licensed “as is” without charge for the license itself (there may be a charge for related services or rights). We have developed certain products to operate on the Linux platform, which has created additional sources of revenues. Additionally, we have incorporated other types of open source software into our products, allowing us to enhance certain solutions without incurring substantial additional research and development costs. Thus far, we have encountered no unanticipated material problems arising from our use of open source software. However, as the use of open source software becomes more widespread, certain open source technology could become competitive with our proprietary technology, which could cause sales of our products to decline or force us to reduce the fees we charge for our products, which could have a material adverse impact on our revenues and operating margins.

Insufficient protection for our intellectual property rights may have a material adverse affect on our results of operations or our ability to compete.

We attempt to protect our intellectual property rights in the United States and in selected foreign countries through a combination of reliance on intellectual property laws (including copyright, patent, trademark and trade secret laws) and registrations of selected patent, trademark and copyright rights in selected jurisdictions, as well as licensing and other agreements preventing the unauthorized disclosure and use of our intellectual property. We cannot assure you that these protections will be adequate to prevent third parties from copying or reverse engineering our products, from engaging in other unauthorized use of our technology, or from independently developing and marketing products or services that are substantially equivalent to or superior to our own. Moreover, third parties may be able to successfully challenge, oppose, invalidate or circumvent our patents, trademarks, copyrights and trade secret rights. We may elect or be unable to obtain or maintain certain protections for certain of our intellectual property in certain jurisdictions, and our intellectual property rights may not receive the same degree of protection in foreign countries as they would in the United States because of the differences in foreign laws concerning intellectual property rights. Lack of protection of certain intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition. Moreover, monitoring and protecting our intellectual property rights is difficult and costly. From time to time, we may be required to initiate litigation or other action to enforce our intellectual property rights or to establish their validity. As an example, Sybase filed a complaint against Vertica Systems, Inc., on January 30, 2008 in the Eastern District of Texas, alleging infringement of Sybase’s patent #5,794,229 (“Database System with Methodology for Storing a Database Table by Vertically Partitioning All Columns of the Table). Such action could result in substantial cost and diversion of resources and management attention and we cannot assure you that any such action will be successful.

If third parties claim that we are in violation of their intellectual property rights, it could have a negative impact on our results of operations or ability to compete.

Patent litigation involving software and telecom companies has increased significantly in recent years as the number of software and telecom patents has increased and as the number of patent holding companies has increased. We face the risk of claims that products or services that we provide have infringed the intellectual property rights of third parties. We are currently litigating with different parties regarding claims that our products or services violate their patents, we have in the past received similar claims and it is likely that such claims will be asserted in the future. See Footnote 12 in the Notes to the Condensed Consolidated Financial Statements for a discussion of our patent litigation with Telecommunications Systems, Inc. In May 2005, we received a claim from TeliaSonera alleging that iAnywhere’s product now known as Answers Anywhere Mobile Edition infringes a TeliaSonera patent issued in Finland. We are currently involved in litigation in Finland regarding the ownership of the patent. No trial date has been set. Additionally, in February 2006, two Financial Fusion product customers received claims from a patent licensing company, Ablaise, Ltd., alleging that the customers’ websites are infringing. Financial Fusion filed a declaratory judgment action against Ablaise in the Northern District of California which is ongoing. The customers’ websites are based in part on our products and the customers tendered defense of the claims to us under their contractual indemnification provisions. In August 2007 Sybase (along with 20 other defendants, including Microsoft and IBM) was sued by JuxtaComm Technologies, a Canadian company, for infringement of its US patent 6,195,662 (“System for Transforming and Exchanging Data Between Distributed Heterogeneous Computer Systems”). We are in the process of assessing the claims and potential defenses for this matter. We believe that our positions in each of the matters noted above are meritorious and we intend to pursue our positions vigorously.

Regardless of whether patent or other intellectual property claims have merit, they can be time consuming and expensive to defend or settle, and can harm our business and reputation. In particular, such claims may cause us to redesign our products or services, if feasible, or cause us to enter into royalty or licensing agreements in order to obtain the right to use the necessary intellectual property. Patent claimants may seek to obtain injunctions or other permanent or temporary remedies that prevent us from offering our products or services, and such injunctions could be granted by a court before the final resolution of the merits of a claim. Our competitors in both the U.S. and foreign countries, many of which have substantially greater resources than we have and have made substantial investments in competing technologies, may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make and sell our products and services. We have not conducted an independent review of patents issued to third parties. The large number of patents, the rapid rate of new patent issuances, the complexities of the technology involved and uncertainty of results and expense of potential litigation increase the risk of business assets and management’s attention being diverted to patent issues.

Laws and regulations affecting our customers and us and future laws and regulations to which they or we may become subject may harm our business.

When Sybase 365 delivers mobile messages on behalf of content owners into our network of wireless carriers, we are subject to legal, regulatory and wireless carrier requirements governing, among other things, the nature of content delivered, as well as necessary notice and disclosure to, and consent from, consumers receiving mobile messages. If we are unable to effectively prevent or detect violations of legal, regulatory or wireless carrier requirements, or otherwise unable to mitigate the effect of these violations, we may be subject to fines or the suspension or termination of some or all of our wireless carrier connections or telecommunications licenses in one or more territories which could materially and adversely affect our business and results of operation. Such suspension or termination may also result in loss of current and potential customers and expose us to potential customer liability. Also, we cannot predict when, or upon what terms and conditions, future regulation might occur or the effect regulation may have on our business or our markets.

Our key personnel are critical to our business, and we cannot assure that they will remain with us.

Our success depends on the continued service of our executive officers and other key personnel. In recent years, we have made additions and changes to our executive management team. For example, in connection with our acquisition of Mobile 365, Marty Beard was appointed to be the President of Sybase 365 in November 2006. In January 2007, Raj Nathan, formerly the head of IPG was named our Chief Marketing Officer, Billy Ho was promoted to head IPG’s technology operations and Mark Westover was promoted to head Corporate Development. In November 2007, Pieter Van der Vorst, our Chief Financial Officer relocated to London to be our Senior Vice President and General Manager for the EMEA region and Jeff Ross, our Corporate Controller became our Chief Financial Officer. Additionally, Keith Jensen, our current senior director became our Corporate Controller at that time. Further changes involving executives and managers resulting from acquisitions, mergers and other events could increase the current rate of employee turnover, particularly in consulting, engineering and sales. We cannot be certain that we will retain our officers and key employees. In particular, if we are unable to hire and retain qualified technical, managerial, sales, finance and other employees it could adversely affect our product development and sales efforts, other aspects of our operations, and our financial results. Competition for highly skilled personnel in the software industry is intense. Our financial and stock price performance relative to the companies with whom we compete for employees, and the high cost of living in the San Francisco Bay Area, where our headquarters is located, could also impact the degree of future employee turnover.

Our sales to government clients subject us to risks including early termination, audits, investigations, sanctions and penalties.

We derive revenues from contracts with the United States government, state and local governments and their respective agencies, which may terminate most of these contracts at any time, without cause. Federal Government contracts may be affected by political pressure to reduce government spending. Our federal government contracts are subject to the approval of appropriations being made by the United States Congress to fund the expenditures under these contracts. Similarly, our contracts at the state and local levels are subject to government funding authorizations.

Additionally, government contracts are generally subject to audits and investigations which could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from future government business.

Changes in accounting and legal standards could adversely affect our future operating results.

During the past several years, various accounting guidance has been issued with respect to revenue recognition rules in the software industry. However, much of this guidance addresses software revenue recognition primarily from a conceptual level, and is silent as to specific implementation requirements. As a consequence, we have been required to make assumptions and judgments, in certain circumstances, regarding application of the rules to transactions not addressed by the existing rules. We believe our current business arrangements and contract terms have been properly reported under the current rules. However, if final interpretations of, or changes to, these rules necessitate a change in our current revenue recognition practices, our results of operations, financial condition and business could be materially and adversely affected.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes: An Interpretation of FASB Statement No. 109, or FIN No. 48. FIN 48 prescribes a recognition and measurement threshold for a tax position taken or expected to be taken in a tax return. We adopted FIN No. 48 on January 1, 2007. It had no material effect on our financial statements.

In addition to the changes discussed above, the U.S. Congress enacted the Sarbanes-Oxley Act of 2002 in July 2002, providing for or mandating the implementation of extensive corporate governance reforms relating to public company financial reporting, internal controls, corporate ethics, and oversight of the

accounting profession, among other areas. We are also subject to additional rules and regulations, including those enacted by the New York Stock Exchange where our common stock is traded. Compliance with existing or new rules that influence significant adjustments to our business practices and procedures could result in significant expense and may adversely affect our results of operations. Failure to comply with these rules could result in delayed financial statements and might adversely impact the price of our common stock.

In August 2007 the FASB Staff issued for public comment FASB Staff Position 14-a (FSP 14-a), Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement. This proposed FSP would require that the issuer of a convertible debt instrument within its scope separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The proposed FSP indicated that convertible debt instruments such as those issued by the Company would be required to comply with the new accounting standard during 2008 and would require retrospective application to all periods presented. Subsequent to the end of the comment period, in December 2007 the FASB Staff decided to redeliberate FSP 14-a, Our current accounting and reporting related to our convertible debt instruments are in accordance with current accounting rules. If final interpretations of, or changes to, these rules necessitate a change in our current practices, our previously reported and future results of operations could be adversely affected.

In December 2007, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 141(R), “Business Combinations.” FAS 141(R) establishes principles and requirements for how an acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and, (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The provisions of FAS 141(R) are effective for our fiscal year beginning January 1, 2009. We are currently evaluating the impact of the provisions of FAS 141(R).

The unfavorable outcome of litigation and other claims against us could have a material adverse impact on our financial condition and results of operations.

We are subject to a variety of claims and lawsuits from time to time, some of which arise in the ordinary course of our business. Adverse outcomes in some or all of such pending cases may result in significant monetary damages or injunctive relief against us. While management currently believes that resolution of these matters, individually or in the aggregate, will not have a material adverse impact on our financial position or results of operations, the ultimate outcome of litigation and other claims are subject to inherent uncertainties, and management’s view of these matters may change in the future. It is possible that our financial condition and results of operations could be materially adversely affected in any period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.

Our operations and financial results could be severely harmed by certain natural disasters.

Our headquarters, some of our offices, and some of our major customers’ facilities are located near major earthquake faults. We have not been able to maintain earthquake insurance coverage at reasonable costs. Instead, we rely on self-insurance and preventative safety measures. We currently ship most of our products from our Dublin, California corporate headquarters. If a major earthquake or other natural disaster occurs, disruption of operations at that facility could directly harm our ability to record revenues for such quarter. This could, in turn, have an adverse impact on operating results.

Provisions of our corporate documents have anti-takeover effects that could prevent a change in control.

Provisions of our certificate of incorporation, bylaws, stockholder rights plan and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our

stockholders. These provisions include authorizing the issuance of preferred stock without stockholder approval, prohibiting cumulative voting in the election of directors, prohibiting the stockholders from calling stockholders meetings and prohibiting stockholder actions by written consent.

because we are not able to estimate the amount of a potential loss in a matter, or if we determine that a loss is not probable, we are nevertheless required to disclose certain information regarding such matter if we determine that there is a reasonable possibility that a loss has been incurred. Because of the inherent uncertainties related to these types of matters, we base our loss reserves on the best information available at the time. As additional information becomes available, we may reevaluate our assessment regarding the probability of a matter or its expected loss. Our financial position, results of operations or cash flows could be materially and adversely affected by such revisions in our estimates. For further discussion of contingencies and liabilities, see “Future Operating Results,” above.

For a discussion of risks related to intellectual property rights and certain pending intellectual property litigation, see “Future Operating Results — If third parties claim that we are in violation of their intellectual property rights, it could have a negative impact on our results of operations or ability to compete,” Part I, Item 1(A).

A former employee, who was terminated as part of position elimination in February 2003, filed a civil action in the Superior Court for the State of California, Alameda County, alleging discrimination on the basis of gender, national origin, and race. The former employee also alleged retaliation for discussing her working conditions with senior managers. The parties were not able to settle the matter and trial commenced on August 27, 2004. Sybase’s motion for non-suit on the retaliation claim was granted and that claim was dismissed. On October 5, 2004, the jury found in favor of the plaintiff on the remaining claims and awarded her $1,845,000 in damages. Sybase filed a motion to set aside the jury verdict or, in the alternative, for a new trial. The motion also asked the judge to set aside the punitive damage part of the award in the amount of $500,000. On December 7, 2004, the judge issued a decision denying the motion to set the verdict aside and order a new trial, but he did grant that part of the motion asking to set aside the $500,000 punitive damage award, reducing the damage amount to $1,345,000. Additional awards for legal fees and costs amounted to $750,000. Sybase filed a notice of appeal of the $1,345,000 jury verdict, as well as the fee and cost awards. Sybase filed its opening brief in the appeal on January 27, 2006. Plaintiff filed their reply brief in April 2006, responding to Sybase’s appeal and appealing the non-suit judgment on the retaliation claim and the judge’s decision to grant Sybase’s motion setting aside the $500,000 punitive damages award. All briefs have been filed in the appeal and oral arguments have occurred. The parties are awaiting a ruling from the court of appeal.

On July 13, 2006, Telecommunications Systems, Inc. (“TCS”), a wireless services provider, filed a complaint for patent infringement in the U.S. District Court for the Eastern District of Virginia, alleging that Mobile 365 infringes U.S. Patent 6,985,748 (the “‘748 patent”). The matter was tried before a jury beginning on May 14, 2007. On May 25, 2007, the jury rendered its verdict, finding that Mobile 365 willfully infringed the ‘748 patent, and awarded TCS a total amount of $12.1 million. TCS has filed post-trial motions for enhanced damages and attorneys’ fees, for an award of prejudgment interest, and for entry of a permanent injunction (although it has requested that any injunction be stayed pending the outcome on appeal). Sybase 365 has filed post-trial motions for a judgment in its favor as a matter of law, for reduction of the jury award, and for entry of judgment in its favor based on TCS’s inequitable conduct before the Patent and Trademark Office in obtaining the patent. The court has granted TCS’s motion for an injunction but stayed it pending the outcome on appeal, and for pre-judgment interest at the rate of prime plus 1%, compounded quarterly. The court has also partially granted Sybase’s motion for remittitur, reducing the pre-issuance damages portion of the jury award by $2.2 million. The court has not yet ruled on the other outstanding motions. If the jury award stands after the court issues its rulings on the remaining motions, Sybase 365 intends to appeal.

The November 2006 merger agreement between Sybase and Mobile 365 established an escrow which provides for indemnification of Sybase by Mobile 365’s former stockholders for certain losses related to the TCS litigation. If both parties post trial motions do not prevail and if damages are limited to the adjusted jury verdict of $9.9 million, Sybase would bear responsibility for approximately $1 million of this amount after reflecting the merger indemnification rights. Sybase believes that the escrow established by the merger agreement will be adequate to address the substantial majority of losses, if any, related to this litigation.

Since the jury’s verdict, Sybase 365 has developed a design-around so that its service for intercarrier wireless text messaging can operate in a way that avoids the infringement as found by the jury. Sybase 365 is in the process of implementing the design-around.

We currently believe that the ultimate liability, if any, for any pending claims of any type (either alone or combined) will not materially affect our financial position, results of operations or cash flows. We also believe that we would be able to obtain any necessary licenses or other rights to disputed intellectual property rights on commercially reasonable terms. However, the ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on Sybase because of defense costs, negative publicity, diversion of management resources and other factors. Our inability to obtain necessary license or other legal rights, or litigation arising out of intellectual property claims could adversely affect our business.

Beginning in 1998 our Board of Directors implemented our stock repurchase program and has authorized an aggregate of $850 million for stock repurchases. After completing the repurchases noted above, $83.1 million remained authorized for repurchase pursuant to our publicly announced repurchase program. For additional information about our historical stock repurchase activities see Note Seven to the Consolidated Financial Statements — Stockholders’ Equity, Part II, Item 8.

On February 25, 2008 the Company agreed to conduct a self-tender offer for $300 million of the Company’s common stock at a price between $28 and $30 in a modified Dutch auction. The Company also agreed to use its best efforts to complete approximately $82.9 million in additional open market repurchases prior to the Company’s 2009 Annual Meeting, this amount represents the remaining authorization in the Company’s Stock Repurchase Program. See Note Sixteen to the Consolidated Financial Statements — Subsequent Events, Part II, Item 8.

PERFORMANCE GRAPH

The graph and table below compare the cumulative total return on a $100 investment in our Common Stock on December 31, 2002, with the cumulative total return on a $100 investment (assuming reinvestment of all dividends) in the indices noted. The six companies comprising the S&P Systems Software index are BMC Software Inc., CA Inc., Microsoft Corporation, Novell, Inc., Oracle Corporation and Symantec Corporation.

Copyright © 2008, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.

Executive Overview

Our Business

Sybase is a global enterprise software and services company exclusively focused on managing and mobilizing information from the data-center to the point of action. We provide open, cross-platform solutions that securely deliver information anytime, anywhere, enabling customers to create an information edge.

Our value proposition involves enabling the Unwired Enterprise through integrated applications, solutions designed to manage information across the enterprise, allowing customers to extract more value from their information technology (IT) investments. We deliver a full range of solutions to ensure that customer information is securely managed and mobilized to the point of action, including enterprise and mobile databases, middleware, synchronization, encryption and device management software, and mobile messaging services.

During the fourth quarter of 2006 we expanded our reach by acquiring Mobile 365, a privately-held global provider of mobile messaging services and premium content delivery and value added services. Mobile 365 extends our Unwired Enterprise strategy with the addition of two new enterprise channels—leading mobile operators and content providers—and an extensive, operator-grade network with connections to approximately 700 mobile operators around the world. Through Mobile 365’s global footprint, Sybase enables enterprises to deliver data and applications to over 70% of the world’s mobile subscriber population. Mobile 365 operates as a separate business unit, renamed Sybase 365.

Our business is organized into three business segments: IPG, which principally focuses on enterprise class database servers, integration and development products; iAS, which provides mobile database and mobile enterprise solutions; and Sybase 365, which provides global services for mobile messaging interoperability and the management and distribution of mobile content. For further discussion of our business segments, see Consolidated Financial Statements, Note Ten — Segment and Geographical Information, Part II, Item 8.

Our Results

We recorded all time highs in revenue, operating income and net income for the three month and full year period ended December 31, 2007.

Total revenues were $1,026 million for 2007, compared to $876 million for 2006, and $819 million for 2005. The increase in total revenues from 2006 to 2007 was primarily due to the full year operations of Sybase 365 which added an incremental $118 million in messaging revenue to the yearly results, along with an increase of $26 million (3 percent) in IPG revenues and an increase of $13 million (8 percent) in iAS revenues.

The increase in iAS revenues from 2007 to 2006 was primarily driven by a 9 percent increase in license revenue and a 7 percent increase in service revenue. The growth in iAS license revenues was primarily attributed to a 16 percent increase in license revenues from our mobile and embedded database product, while the increase in service revenue was primarily attributable to an increase in technical support services revenue. Going forward, we believe our iAS revenues will be aided by momentum from our Unwired Enterprise initiative.

The increase in IPG revenues from 2007 to 2006 was primarily attributable to a 6 percent increase in license revenues and a 2 percent increase in service revenues. The overall increase in IPG license revenue was attributable to a 9 percent increase in database license revenues which is largely fueled by the momentum from our IQ analytics server.

We reported net income of $149 million for 2007, compared to net income of $95 million for 2006, and $86 million in 2005. Our 2007 operating income was $169 million (16 percent operating margin)

compared to $134 million (15 percent operating margin) in 2006. The increase in operating income was attributable to a $149 million increase in revenues partially offset by a $115 million increase in expenses. The overall increase in operating expenses was attributable to an increase of $116 million associated with the full year operation of the Sybase 365 business which was acquired in the fourth quarter of 2006.

Our overall financial position is strong. During 2007 we generated net cash from operating activities of $254 million, and had $735 million in cash, cash equivalents and cash investments at December 31, 2007. Our net cash flows from operations were the highest yearly amount in our history. Our days sales outstanding in accounts receivable was 75 days for the quarter ended December 31, 2007 compared to 77 days for the quarter ended December 31, 2006.

For a discussion of certain factors that may impact our business and financial results, see “Risk Factors — Future Operating Results,” above.

Business Trends

Overall, the IT spending patterns we are witnessing support our view that fiscally cautious customers generally are continuing to purchase products and services based on present needs as opposed to fulfilling anticipated future needs. We also see some indications that 2008 IT budgets may be constricted for certain companies in the financial services industry where we have a significant market share and presence. We have not noted a change in buying patterns to date for these customers and remain cautiously optimistic that our business with this sector will not be materially impacted.

Notwithstanding the above we continue to see a proliferation of enterprise data and greater customer willingness to invest resources on new data integration initiatives and analytic solutions. These solutions contributed to a year over year increases of 56 percent in license revenue from these products during 2007 compared to 2006. Our Replication Server product delivers operational data across complex and broadly distributed heterogeneous data infrastructures in near real time to ensure continuous data availability, operational synchronization and timely reporting. Our IQ product offers a highly optimized analytic engine specifically designed to deliver dramatically faster results for business intelligence, analytic and reporting solutions.

The overall environment for new sales of enterprise infrastructure software primarily sold by our IPG segment is limited by a maturing enterprise infrastructure software market which moderates the overall growth potential for this segment. We continue to maintain, however, a strong pipeline for enterprise infrastructure products especially continued high demand for our Adaptive Server® Enterprise (ASE) 15.0. During 2007 we added over 1200 new ASE customers.

With respect to the market for mobility and integration products primarily sold by our iAS segment, we believe these products are gaining market acceptance and will provide us with growth opportunities in the future. We believe that in 2008 we are supported by a strong product cycle with our refreshed iAnywhere product platform that will continue to drive growth in the iAS segment. We also see a growing pipeline associated with extending enterprise level data to handheld devices which we believe supports and validates our Unwired Enterprise initiative.

With respect to the market for messaging services sold by our Sybase 365 segment, we believe that our inter-carrier messaging business will see revenue growth driven by continuing growth in Short Messaging Services (SMS) and Multimedia Messaging Services (MMS) traffic levels and the acquisition of new carriers, especially in new territories. We also believe that enterprises, brands and content providers will focus more of their business towards mobile messaging as an inexpensive means of interacting with their customers on a real time basis. This in turn will drive further growth in the application messaging industry. To handle this demand, we plan to expand our data center capacity and disaster-recovery capabilities, add connectors from our new customers to our network and develop new services.

Moving forward we will continue to manage our operating margin, pursue synergies between our software and messaging businesses, and aggressively pursue our Unwired Enterprise initiative.

Critical Accounting Policies and Estimates

We prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP). These accounting principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of our financial statements. We also are required to make certain judgments that affect the reported amounts of revenues and expenses during each reporting period. We periodically evaluate our estimates and assumptions including those relating to software and mobile messaging revenue recognition, impairment of goodwill and intangible assets, valuation of investments without readily available markets and the classification of related impairments, the allowance for doubtful accounts, capitalized software, income taxes, stock-based compensation, purchase accounting, restructuring, and contingencies and liabilities. We base our estimates on historical experience and various other assumptions that we believe to be reasonable based on specific circumstances. Our management has reviewed the development, selection, and disclosure of these estimates with the Audit Committee of our Board of Directors. These estimates and assumptions form the basis for our judgments about the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. Further, changes in accounting and legal standards could adversely affect our future operating results (see “Risk Factors — Future Operating Results,” above). Our critical accounting policies include: software and mobile messaging revenue recognition, impairment of goodwill and other intangible assets, valuation of investments without readily available markets and classification of related impairments, allowance for doubtful accounts, capitalized software, income taxes, stock-based compensation, purchase accounting, restructuring and contingencies and liabilities, each of which are discussed below.

•		Revenue Recognition
		Revenue recognition rules for software and message services companies are very complex. We follow specific and detailed guidance in measuring revenue, although certain judgments affect the application of our revenue recognition policy. These judgments would include, for example, the determination of a customer’s creditworthiness, whether two separate transactions with a customer should be accounted for as a single transaction, reporting certain third party content delivery revenues gross as a principal versus net as an agent, or whether included software services are essential to the functionality of a product.

License and Service Revenues We recognize software revenue in accordance with Statement of Position (SOP) 97-2, “Software Revenue Recognition,” and SOP 98-9, and in certain instances in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” or SEC Staff Accounting Bulletin, or SAB, No. 104, “Revenue Recognition.” We license software under non-cancelable license agreements. License fee revenues are recognized when (a) a non-cancelable license agreement is in force, (b) the product has been delivered, (c) the license fee is fixed or determinable, and (d) collection is reasonably assured. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer and all other revenue recognition criteria have been met.

      Residual Method Accounting . In software arrangements that include multiple elements (e.g., license rights and technical support services), we allocate the total fees among each of the elements using the “residual” method of accounting. Under this method, revenue allocated to undelivered elements is based on vendor-specific objective evidence of fair value of such undelivered elements, and the residual revenue is allocated to the delivered elements. Vendor specific objective evidence of fair value for such undelivered elements is based upon the price we charge for such product or service when it is sold separately. We may modify our pricing practices in the future, which could result in changes to our vendor specific objective evidence of fair value for such undelivered elements. As a result, the timing of revenue recognition associated with multiple element arrangements could differ significantly from our historical results.

      Percentage of Completion Accounting . Fees from licenses sold together with consulting services are generally recognized upon shipment of the licenses, provided (i) the criteria described in subparagraphs (a) through (d) above are met, (ii) payment of the license fee is not dependent upon performance of the consulting services, and (iii) the consulting services are not essential to the functionality of the licensed software. If the services are essential to the functionality of the software, or performance of services is a condition to payment of license fees, both the software license and consulting fees are recognized under the “percentage of completion” method of accounting. We use labor hours to estimate the progress to completion. Under this method, we are required to estimate the number of total hours needed to complete a project, and revenues are recognized based on the percentage of total contract hours as they are completed while costs are recognized as incurred. Due to the complexity involved in the estimating process, revenues and profits recognized under the percentage of completion method of accounting are subject to revision as contract phases are actually completed. Historically, these revisions have not been material.

      Sublicense Revenues . We recognize sublicense fees as reported to us by our licensees. License fees for certain application development and data access tools are recognized upon direct shipment by us to the end user or upon direct shipment to the reseller for resale to the end user. If collection is not reasonably assured in advance, revenue is recognized only when sublicense fees are actually collected and all other revenue recognition criteria have been met.

      Service Revenues . Technical support revenues are recognized ratably over the term of the related support agreement, which in most cases is one year. Revenues from consulting services under time and materials contracts, and for education, are recognized as services are performed. Revenues from fixed price consulting agreements are generally recognized based on the proportional performance of the project, with performance measured based on hours of work performed.

Message Revenues We recognize message revenue in accordance with SAB No. 104, Emerging Issues Task Force No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”) and where applicable in accordance with EITF, No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent (“EITF 99-19”). We recognize revenue when (a) there is persuasive evidence of an arrangement; (b) the service has been provided to the customer; (c) the amount of the fees to be paid by the customer is fixed and determinable; and (d) the collection of the fees is reasonable assured.

		Our agreements with mobile operators and application providers to provide messaging data delivery and settlement services generally have an initial term of one year. We generate a significant portion of our message revenue from per message transaction fees and to a lesser extent, from revenue share agreements related to the delivery of third party content. We recognize revenue from transaction fees based upon the number of messages successfully processed by our platforms and delivered in accordance with the terms of our arrangements.
		In some instances third party content providers, and other enterprises enter into revenue sharing arrangements with us. Under a standard revenue sharing transaction we deliver content from a third party provider to the cell phone of a mobile operatior’s subscriber. Third party content includes, among other, ringtones, wallpapers, interactive games, competitions, directory inquiry services, and information services. The subscriber is invoiced by their mobile operator, who upon receipt of payment, remits a portion of the charge to us. Upon payment from the mobile operator, we remit payment to the third party content provider. In accordance with EITF 99-19, we have determined that we act as an agent under these revenue sharing arrangements and accordingly, record as revenue the net amount retained by us. The net amount retained by us reflects the gross amount billed to the operator less amounts due to the content provider.
•		Impairment of Goodwill, Non-amortizable Intangible Assets and Other Purchased Intangible Assets
		Goodwill and other non-amortizable intangible assets, such as tradenames, have generally resulted from our business combinations accounted for as purchases. We are required to test amounts recorded as goodwill or other non-amortizable intangible assets with indeterminate lives, at least annually for impairment. The review of goodwill and indeterminate lived intangibles for potential impairment is highly subjective and requires us to make numerous estimates, using a discounted cash flow model, to determine the fair values of our reporting units to which goodwill is assigned. For these purposes, our reporting units equate to our reported segments. See Note Ten to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference. If the estimated fair value of a reporting unit is determined to be less than its carrying value, we are required to perform an analysis similar to a purchase price allocation for an acquired business in order to determine the amount of goodwill impairment, if any. This analysis requires a valuation of certain other purchased intangible assets with determinate and indeterminate useful lives including in-process research and development, and developed technology. We performed our annual impairment analysis for each of our historical operating units (IPG, iAS, and SY365) and for each indeterminate lived intangible asset as of December 31, 2007. This analysis indicated that the estimated fair value of each reporting unit or indeterminate lived intangible exceeded its carrying value. Therefore, we were not required to recognize an impairment loss in 2007. As of December 31, 2007, our goodwill balance totaled $533.3 million and our other purchased intangibles totaled $7.1 million. Changes in our internal business structure, increases in the applicable discount rate, changes in our future revenue and expense forecasts, and certain other factors that directly impact the valuation of our reporting units could result in a future impairment charge.
		We also continue to separately review our other intangible assets (e.g., purchased technology, customer lists and covenants not to compete) for indications of impairment whenever events or changes in circumstances indicate the carrying amount of any such asset may not be recoverable. For these purposes, recoverability of these assets is measured by comparing their carrying values to the future undiscounted cash flows the assets are expected to generate. This methodology requires us to estimate future cash flows associated with certain assets or groups of assets. Changes in these estimates, technology obsolescence, customer terminations including message customers due to technology interoperability and other factors could result in impairment losses associated with other intangible assets. There were no indicators of impairment during 2007.

•		Valuation of Investments
		In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” (SFAS 115) management determines the appropriate classification of debt and equity securities at the time of purchase and re-evaluates such designation as of each balance sheet date. At December 31, 2007, we have classified all debt and equity securities as available-for-sale pursuant to SFAS 115. Such securities are recorded at fair value and unrealized holding gains and losses, net of the related tax effect, if any, are not reflected in earnings but are reported as a separate component of other comprehensive income (loss) until realized. Realized gains and losses are determined on the specific identification method and are reflected in income.
		On January 1, 2006 we adopted the FASB Staff positions FAS Nos. 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (the FSPs). The FSPs were issued on November 3, 2005 and nullified certain provisions of EITF No. 03-01 related to evaluating an other-than temporary impairment and clarified the accounting policies set forth in FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities .
		During 2006, we did not recognize impairment losses related to unrealized losses on debt securities as a charge to income as we believed that the decline in market value was due to changes in interest rates and not due to increased credit risk and we had the ability and intent to hold the securities until a recovery of fair value, which may be maturity.
		As of December 31, 2007, long-term cash investments totaling $36.6 million include six auction rate securities (ARS) with an aggregate par value of $28.9 million. As of December 31, 2007, the temporary impairment associated with three of these ARS representing an aggregate par value of $14.9 million and the other-than-temporary impairment associated with the remaining three ARS representing an aggregate par value of $14.0 million were not material.
		Our ARS are floating rate securities with longer-term maturities which are marketed by financial institutions with auction reset dates at 28 day intervals to provide short term liquidity. The underlying collateral of the ARS held by us consist primarily of commercial paper, debt instruments issued by governmental agencies and governmental sponsored entities, and similar assets. Certain of the ARS may have limited direct or indirect investments in mortgage or mortgage related securities. The credit ratings for five of the ARS were AAA and for one of the ARS was AA at the time of purchase. Beginning in August 2007 and into September 2007, each of the ARS auctions began to fail due to a lack of market for these securities. The failed auctions have resulted in higher interest rates being earned on these investments, but the investments currently lack short-term liquidity. We will not be able to access these funds until a future auction for the ARS investments is successful or until we sell the securities in a secondary market which currently does not exist. Based on our cash, cash equivalents and cash investment balances of $734.9 million and expected operating cash flows, we do not anticipate that the lack of liquidity for the ARS to adversely affect our ability to conduct business and believe we have the ability and intent to hold the temporarily impaired securities through the currently estimated recovery period. The fair values of the ARS as of December 31, 2007 are based on an estimation using a discounted cash flow model for each of the six ARS using credit related discount rates and term to recovery as key inputs. The determination if the security is other then temporarily impaired is based on a variety of factors including (i) the quality of the investments held by the trust/issuer; (ii) the financial condition of the credit rating of the trust, issuer, sponsors, and insurers; and, (iii) the frequency of the auction function failing. Changes in assumptions and other factors could result in additional realized and unrealized impairment losses.
		These securities are being analyzed each reporting period for changes in estimated fair values and temporary and other-than-temporary impairment factors. We expect additional impairment amounts may be recorded in future periods.

•		Allowance for Doubtful Accounts
		We maintain an allowance for doubtful accounts to reflect the expected non-collection of accounts receivable. In determining the amount of the allowance we consider our historical level of credit losses; judgments about the creditworthiness of significant customers; an assessment current economic and industry trends that might impact the level of credit losses in the future; and other factors. Our allowances have generally been adequate to cover our actual credit losses. However, since we cannot reliably predict future changes in the financial stability of our customers, we cannot guarantee that our allowance will continue to be adequate. For example, our allowance for doubtful accounts totaled $3.7 million at December 31, 2007. If our allowance for doubtful accounts, including identified specific customer matters, changed by 10% our allowance for doubtful accounts and operating results would change by $0.4 million.
•		Capitalized Software
		We capitalize certain software development costs after a product becomes technologically feasible and before its general release to customers. Our net capitalized software totaled $74.3 million at December 31, 2007. Significant judgment is required in determining when a product becomes “technologically feasible.” Capitalized development costs are then amortized over the product’s estimated life beginning upon general release of the product. Quarterly, we compare a product’s unamortized capitalized cost to the product’s net realizable value. To the extent unamortized capitalized cost exceeds net realizable value based on the product’s estimated future gross revenues (reduced by the estimated future costs of completing and selling the product) the excess is written off. This analysis requires us to estimate future gross revenues associated with certain products and the future costs of completing and selling certain products. Changes in these estimates could result in write-offs of capitalized software costs. See Note One to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.
•		Income Taxes — Estimates of Effective Tax Rates, Deferred Taxes and Valuation Allowance
		We use the asset and liability approach to account for income taxes. This methodology recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. We then record a valuation allowance to reduce deferred tax assets to an amount that likely will be realized. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If we determine in any period that we could realize a larger net deferred tax asset than the recorded amount, we would adjust the deferred tax asset and record a corresponding reduction to our income tax expense for the period. For example, during the quarter ending December 31 2007, management reduced its estimate of foreign subsidiaries’ earnings permanently reinvested. As a result of this change and other projected changes in the Company’s future US taxable income, management re-evaluated the need for valuation allowances for the Company’s US deferred tax assets. As a result of this re-evaluation, during the quarter ending December 31, 2007, the Company released approximately $27.6 million of valuation allowances relating to federal research tax credit and foreign tax credit carryforwards, of which $26.4 million reduced tax expense and approximately $1.2 million reduced goodwill.
		Conversely, if we determine that we would be unable to realize a portion of our recorded deferred tax asset, we would adjust the deferred tax asset and record a charge to income tax expense for the period. Significant judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Fluctuations between the actual outcomes of these future tax consequences (e.g., the income we earn within the United States) could materially impact our financial position or results of operations. See Note Eight to the Consolidated Financial Statements — Income Taxes, Part II, Item 8.
		Our effective tax rate is based on expected geographic income, statutory rates and enacted tax rules, including transfer pricing. We are required to exercise significant judgment in determining our effective rate and in evaluating various positions that apply to our worldwide operations. We believe that our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct business. It is possible, however, that these positions will be challenged which may have a significant impact on our effective tax rate.

		On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes: An Interpretation of FASB Statement No. 109, or FIN No. 48. FIN 48 prescribes a recognition and measurement threshold for a tax position taken or expected to be taken in a tax return. The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial position.
•		Accounting for Stock-Based Compensation Plans
		Prior to January 1, 2006, we accounted for our stock-based employee compensation plans under the measurement and recognition provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” Accordingly we were not required to record compensation expense when stock options were granted to eligible participants as long as the exercise price was not less than the fair market value of the stock when the option was granted. Prior to January 1, 2006, we generally recorded stock-based employee compensation relating to restricted stock grants. We recorded no compensation expense in connection with our Employee Stock Purchase Plan as the purchase price of the stock was not less than 85% of the lower of the fair market value of our common stock at the beginning of each offering period or at the end of each purchase period. In accordance with SFAS 123 and SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” we disclosed our pro forma net income or loss and net income or loss per share as if we had applied the fair value-based method in measuring compensation expense for our stock-based incentive programs.
		Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R), “Share-Based Payment,” using the modified prospective transition method. Under that transition method, compensation expense that we recognize beginning on that date includes: (a) period compensation expense for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, adjusted for estimated forfeitures, and (b) period compensation expense for all stock-based payments granted on or after January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Because we elected to use the modified prospective transition method, results for prior periods have not been restated.
		At December 31, 2007, there was $43.4 million of total unrecognized compensation cost before income tax benefit related to non-vested stock-based compensation arrangements granted under all equity compensation plans which we will amortize to expense in the future. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average period of 2.2 years.
		We estimate the fair value of options granted using the Black-Scholes option valuation model and the assumptions shown in Note Seven to the Consolidated Financial Statements — Stockholders’ Equity , Part II, Item 8. We estimated the expected term of options granted based on historical exercise patterns. Beginning in the second quarter of 2005 we estimated the volatility of our options and stock appreciation rights considering both the historical volatility of our stock over the average expected life of our options and the prices of publicly traded options, consistent with SFAS 123(R) and Securities and Exchange Commission Staff Accounting Bulletin No. 107. Prior to that, we estimated the volatility factors for stock options and stock appreciation rights considering the historical volatility of our stock over the most recent four year period which was approximately equal to the average expected life of our options. We base the risk-free interest rate that we use in the Black-Scholes option valuation model on the average of the 3 and 5 year treasury rates as published by the Federal Reserve. We have never paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model. SFAS 123(R) requires us to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and

		record share-based compensation expense only for those awards that are expected to vest. For purposes of calculating pro forma information under SFAS 123 for periods prior to 2006, we accounted for forfeitures as they occurred. We amortize the fair value on a ratable basis over the requisite service periods of the awards, which are generally the vesting periods.
		Changes in the subjective input assumptions can materially affect the fair value estimates determined under the Black-Scholes option valuation model. In the future, changes in the assumptions under the Black-Scholes valuation model or our election to use a different valuation model, could result in a significantly different impact on our net income or loss.
•		Purchase Accounting
		We have made estimates of the fair values of purchased intangible and other assets acquired in conjunction with our purchase of Mobile 365, Inc. as of November 8, 2006, and other acquired companies based primarily on appraisals from third parties and certain internally generated information.
		Purchased intangible assets, excluding goodwill, totaled $130.6 million at December 31, 2007. If the subsequent actual and updated projections of the underlying business activity are less as compared to the underlying assumptions and projections used to develop these values, then we could experience impairment losses, as described above. In addition, we have estimated the economic lives of certain of these assets and these lives were used to calculate depreciation and amortization expense. If our estimates of the economic lives change, then additional depreciation or amortization expense could be incurred on an annual basis. Historically, we have not made any changes in these areas. If the estimates of the economic lives of the definite-lived intangible assets acquired as part of our acquisition of Mobile 365 were reduced by one year, our 2007 amortization expense would increase by approximately $1.7 million.
•		Restructuring
		Historically, we have recorded significant accruals in connection with various restructuring activities. Our remaining restructuring accruals primarily relate to the estimated net costs to settle certain lease obligations based on analysis of independent real estate consultants. While we do not anticipate significant changes to these estimates in the future, the actual costs may differ from estimates. For example, if we are able to negotiate more affordable termination fees, if rental rates increase in the markets where the properties are located, or if we are able to locate suitable sublease tenants more quickly than expected, the actual costs could be lower than our estimates. In that case, we would reduce our restructuring accrual with a corresponding credit to cost of restructuring or goodwill. Alternatively, if we are unable to negotiate affordable termination fees, if rental rates decrease in the markets where the properties are located, or if it takes us longer than expected to find suitable sublease tenants, the actual costs could exceed our estimates See Note Thirteen to Consolidated Financial Statements —Restructuring Costs, Part II, Item 8.

• Contingencies and Liabilities

We are involved from time to time in various proceedings, lawsuits and claims involving our customers, products, intellectual property, stockholders and employees, among other parties. We routinely review the status of each significant matter and assess our potential financial exposure. When we reasonably determine that a loss associated with any of these matters is probable, and can reasonably estimate the loss, we record a reserve to provide for such loss contingencies. If we are unable to record a reserve because we are not able to estimate the amount of a potential loss in a matter, or if we determine that a loss is not probable, we are nevertheless required to disclose certain information regarding such matter if we determine that there is a reasonable possibility that a loss has been incurred. Because of the inherent uncertainties related to these types of matters, we base our loss reserves on the best information available at the time. As additional information becomes available, we may reevaluate our assessment regarding the probability of a matter or its expected loss. Our financial position, results of operations or cash flows could be materially and adversely affected by such revisions in our estimates. For further discussion of contingencies and liabilities, see “Risk Factors — Future Operating Results,” above.

We currently believe that the ultimate liability, if any, for any pending claims of any type (either alone or combined) will not materially affect our financial position, results of operations or cash flows. We also believe that we would be able to obtain any necessary licenses or other rights to disputed intellectual property rights on commercially reasonable terms. However, the ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on Sybase because of defense costs, negative publicity, diversion of management resources and other factors. Our inability to obtain necessary license or other legal rights, or litigation arising out of intellectual property claims could adversely affect our business.

Total license fees for 2007 increased $18.0 million (6 percent) from total license fees in 2006 (which had increased $35.1 million (12 percent) from 2005. The increase in license fees during 2007 was primarily attributable to a $8.2 million (9 percent) increase in iAS license fees and to a $14.4 million (6 percent) increase in IPG license fees. The increase in license fees during 2006 was primarily attributable to IPG license revenues.

The increase in iAS license fees during 2007 was primarily attributable to a $10.7 million (16 percent) increase in revenues from our mobile and embedded database products. The increase in iAS license fees during 2006 was related to device management and ESI’s mobile mail products.

The increase in IPG license fees was primarily attributable to a $17.2 million (71 percent) increase in our IQ analytics server product. The increase in IPG license fees during 2006 was primarily attributable to increases in license revenues associated with our Adaptive Server products and our ASE15.0 product released in the third quarter of 2005. We believe that the increasing acceptance of our IQ product and the Data Integration Suite will drive future revenue growth.

Segment license and service revenues include transactions between iAS and IPG, The most common instance relates to the sale of iAS products and services to third parties by IPG. In the case of such a transaction, IPG records the revenue on the sale with a corresponding inter-company expense on the transaction. iAS then records intercompany revenue and continues to bear the costs of providing the product or service. The excess of revenues over inter-company expense recognized by IPG is intended to reflect the costs incurred by IPG to complete the sales transaction. Total transactions between the segments (i.e., intercompany revenue and inter-company expense) are offset in “Eliminations.”

Total service revenues for 2007 (which include revenues from technical support, professional services, and education) increased $13.0 million (2 percent) from total service revenues in 2006 . This increase was due to a $4.9 million (7 percent) increase in iAS services and a $11.3 million (2 percent) increase in IPG services. This increase is offset by a $2.0 million (2 percent) decline in consulting revenues and a $1.5 million decline in advertising revenues. The increase in iAS service revenues was primarily due to a $3.4 million (10 percent) increase in iAS technical support revenues, largely related to the technical support revenues associated with device management products and mobile and embedded databases. The increase in IPG service revenues was primarily due to a $12.8 million (3 percent) increase in technical support revenues offset by a $2.0 million (2 percent) decline in professional services revenues.

Technical support revenues comprised 79 percent of total services revenues for 2007 and 78 percent in 2006. Total technical support revenue for 2007 increased $16.2 million (4 percent) from the 2006 total. The deferred revenue balance related to technical support contracts at the end of 2007 increased $16.2 million (9 percent) from 2006.

Services revenues other than technical support decreased 3 percent in 2007 from 2006. The decrease was primarily related to decreases in consulting services performed by IPG for the financial services industry offset by increased consulting services performed by iAS consulting related to unwired enterprise initiatives.

Messaging fees earned in 2007 were $136.5 million resulting from the acquisition of Mobile 365 in November 2006.  Messaging fees consist primarily of revenues earned from the provision of inter-carrier messaging (SMS and MMS), premium content delivery and settlement, and enterprise messaging services to wireless operators, brands, content providers and enterprises.

For a description of our technical support, consulting and education services, see “Business – Worldwide Services,” Part I, Item 1.

Geographical Revenues
(Dollars in millions)

		2007				Change				2006				Change				2005
North America		$	532.0				12	%		$	474.0				2	%		$	464.9
Percentage of total revenues			52	%							54	%							57	%
International:
EMEA (Europe, Middle East and Africa)		$	342.0				22	%		$	279.3				20	%		$	233.5
Percentage of total revenues			33	%							32	%							28	%
Intercontinental (Asia Pacific and Latin America)		$	151.5				23	%		$	122.9				2	%		$	120.3
Percentage of total revenues			15	%							14	%							15	%
Total Outside North America		$	493.5				23	%		$	402.2				14	%		$	353.8
Percentage of total revenues			48	%							46	%							43	%
Total revenues		$	1,025.5				17	%		$	876.2				7	%		$	818.7

North American revenues (United States, Canada and Mexico) for 2007 increased $58.0 million (12 percent) from 2006. The increase from 2006 was primarily due to a $38.9 million increase in messaging revenues, a $10.7 million (11 percent) increase in license revenues from products in the IPG segment and $9.0 million (20 percent) increase in license revenues from the iAS segment, offset by a $3.8 million (5 percent) decrease in consulting services. In 2006, the increase in North America revenues was primarily due to license revenues from products in the IPG segment offset by a decrease in consulting services.

EMEA (Europe, Middle East and Africa) revenues for 2007 increased $62.7 million (22 percent) from 2006. The increase was primarily due to an $63.8 million increase in messaging revenues and a $12.4 million (11 percent) increase in technical support fees, offset by an $10.5 million (13 percent) decline in license fees from our enterprise database products. The messaging revenues are attributable to our purchase of Mobile 365 in the fourth quarter of 2006. Increased revenues in France, Spain and Germany contributed most to the overall increase for 2007 and were primarily attributable to messaging revenues and growth in services in Germany and France. The increase in 2006 revenues compared to 2005 was due to an increase in license fees revenues from products in the IPG segment, the inclusion of our messaging revenues as a result of our fourth quarter purchase of Mobile 365 and an increase in technical support revenues.

Intercontinental (Asia Pacific and Latin America) revenues for 2007 increased $28.6 million (23 percent) from 2006. The increase was primarily due to a $15.6 million increase in messaging revenues, a $10.0 million (16 percent) increase in license revenues primarily from our IPG products and a $3.0 million (5 percent) increase in service revenues. The results of our operations in Asia Pacific contributed most significantly to the increased revenue. The increase in 2006 Intercontinental revenues compared to 2005 was due to an increase in license fees revenues from products in the IPG segment, the inclusion of our messaging revenues as a result of our fourth quarter purchase of Mobile 365, partially offset by a slight decline in license revenues from our iAS products.

In EMEA and the Intercontinental region, most revenues and expenses are denominated in local currencies. The cumulative impact of changes in foreign currency exchange rates from 2006 to 2007 resulted in a 3 percent increase in our revenues and a 2 percent increase in our operating expenses. The cumulative impact of changes in foreign currency exchange rates from 2005 to 2006 resulted in a 1 percent increase in our total revenues and a 1 percent increase in our total operating expenses. The change for both comparable periods was primarily due to the weakness of the U.S. dollar against certain European and Intercontinental currencies.

Our business and results of operations could be materially and adversely affected by fluctuations in foreign currency exchange rates, even though we take into account changes in exchange rates over time in our pricing strategy. Additionally, changes in foreign currency exchange rates, the strength of local economies, and the general volatility of worldwide software markets could result in a higher or lower proportion of international revenues as a percentage of total revenues in the future. For additional risks associated with currency fluctuation, see “Financial Risk Management – Foreign Exchange Risk,” below.

Cost of license fees

Cost of license fees consists primarily of product costs (media and documentation), amortization of capitalized software development costs and purchased technology, and third party royalty costs. The cost of license fees increased $2.6 million (15 percent) in 2007 over 2006, and decreased $1.1 million (15 percent) in 2006 over 2005. The 2007 increase was primarily due to a $1.9 million increase in the amortization of capitalized software development costs and a $1.1 million increase in royalties. The increase in the amortization of capitalized software development costs was primarily related to the development of ASE 15.0.2. The 2006 decrease was primarily due to a $1.8 million decrease in the amortization of purchased technology and other product cost declines partially offset by $1.4 million increase in the amortization of capitalized software development costs. The decline in amortization of purchased technology was due to a $2.8 million decrease in the amortization of purchased technology acquired in the 2000 Home Financial Network acquisition partially offset by increases due to the full year amortization of intangible developed technology assets related to the October 2005 Extended Systems purchase.

The amortization of purchased technology was $9.8 million, $10.1 million and $11.9 million in 2007, 2006 and 2005, respectively.

Amortization of capitalized software costs was $33.1 million, $31.2 million and $29.7 million in 2007, 2006 and 2005, respectively. In 2007, the increase in the amortization of capitalized software costs was primarily related to the ASE 15.0.2 product that began fully amortizing in the fourth quarter of 2006. In 2006, the increase in amortization of capitalized software costs was primarily related to certain products in the IPG segment that began fully amortizing in the last two quarters of 2005. See Note One to the Consolidated Financial Statements — Capitalized Software, Part II, Item 8.

Cost of services

Cost of services consists primarily of the fully burdened cost of our personnel who provide technical support, education and professional services and, to a lesser degree, services-related product costs (media and documentation). These costs increased $4.8 million (4 percent) in 2007 compared to 2006 and remained at 29 percent as a percentage of service in both 2007 and 2006. The increase was primarily due to a 4 percent increase in payroll and related costs associated with headcount increases offset by a slight decline in media costs. Cost of services decreased approximately 2 percent in 2006 from 2005.

Cost of messaging

Costs of messaging in 2007 were $82.6 million resulting from the acquisition of Mobile 365 in November 2006. Costs of messaging consist primarily of (1) fees payable to non-domestic wireless operators for delivering traffic into their networks; (2) fully burdened cost of personnel who manage and monitor messaging network datacenters; (3) depreciation, fees and other costs associated with the network datacenters; and (4) amortization of purchased technology used internally by the Sybase 365 segment. Cost of messaging increases as more messages are delivered internationally. The amortization of purchased technology was $3.8 million for the year ended December 31, 2007.

Sales and marketing

Sales and marketing expenses increased $3.7 million (1 percent) in 2007 from 2006 and were 26 percent and 30 percent of total revenues in 2007 and 2006, respectively. The increased expenses in 2007 were primarily due to the addition of Mobile 365 and sales commissions on higher revenues, partially offset by a reduction in payroll and related costs caused by a decrease in headcount and a decrease in certain allocated costs and a decrease in advertising costs. The decrease in sales and marketing expenses as a percentage of revenue was due to improved sales productivity and the inclusion of SY365 activities which generally have a lower sales and marketing cost structure. The 5 percent increase in sales and marketing expenses in 2006 compared to 2005 was primarily due to an increase in stock compensation expense as a result of the adoption of FAS123R in 2006, sales commissions on higher revenues and marketing programs.

Product development and engineering

Product development and engineering expenses (net of capitalized software development costs – see discussion below) increased $3.1 million (2 percent) in 2007 from 2006 and as a percentage of total revenue decreased to 15 percent in 2007 from 17 percent 2006. The increase in absolute dollars was primarily due to a $6.4 million increase in payroll and related expenses, partially offset by a $1.4 million increase in capitalized software costs related to labor costs and a $2.0 million decrease in certain allocated common expenses. We allocate various common costs, primarily certain telecommunications, IT infrastructure, and facilities related expenses to sales and marketing, product development and engineering and general and administrative expenses. The increase in payroll and related expenses was primarily due to the Mobile 365 acquisition completed in the fourth quarter of 2006.

The 8 percent increase in product development and engineering expenses in 2006 over 2005 was primarily due to an increase in payroll and related expenses due to headcount increases, an increase in stock compensation expenses related to the adoption of FAS123R in 2006, partially offset by a decrease in capitalized software.

We capitalize product development and engineering costs during the period between a product’s achievement of technological feasibility and its general availability. Our capitalized software costs in 2007 of $36.2 million included costs incurred for the development of the Adaptive Server Enterprise, IQ, Data Integration Suite, Workspace and eBanking. In 2006, our capitalized software costs of $37.5 million

included costs incurred for the development of Adaptive Server Enterprise, SQL Anywhere 10.0, EAS, Powerbuilder and Workspace.

We believe product development and engineering expenditures are essential to technology and product leadership and expect product development and engineering expenditures to continue to be significant, both in absolute dollars and as a percentage of total revenues.

General and administrative 

General and administrative expenses, which include IT, legal, business operations, finance, human resources and administrative functions, increased $23.2 million (22 percent) in 2007 compared to 2006 and increased as a percentage of total revenue to 13 percent in 2007 from 12 percent in 2006. The cause of the increase in absolute dollars was primarily due to the acquisition of Mobile 365 in the fourth quarter of 2006 and a slight increase in stock compensation expense. General and administrative expenses included stock-based compensation expense of $13.7 million and $12.9 million in 2007 and 2006, respectively.

The 5 percent increase in 2006 compared to 2005 was primarily due to an increase in stock-based compensation, the acquisition of Mobile 365 in the fourth quarter of 2006 and an increase in third party services.

Stock-based compensation expense

Stock-based compensation expense reflects non-cash compensation expense associated with restricted stock purchase rights granted to certain Sybase executives. Stock-based compensation expense in 2007 and 2006 also reflects employee stock options and stock appreciation rights accounted for under SFAS123R. (See Note Seven to the Consolidated Financial Statements – Stockholders’ Equity, Part II, Item 8). Stock-based compensation expense was included in costs and expenses as follows:

The increase in stock-based compensation expenses in 2006 resulted from the adoption of FAS123R in 2006. The increase in stock-based compensation expenses in 2007 and 2006 also resulted from the grant of certain performance-based restricted stock described more fully in Note Seven to the Consolidated Financial Statements and the assumption of stock options related to the Mobile 365 acquisition. If the performance targets, which relate to a combination of the growth of our revenues, cash flows, earnings and shareholder return over one to three year periods, are not met, the restricted stock will not vest, and all or a portion of the stock compensation expense related to these instruments will be reversed through the same expense categories detailed above. We currently anticipate that all criteria for vesting will be substantially accomplished.

Amortization of other purchased intangibles

Amortization of other purchased intangibles reflects the amortization of the established customer list associated with our acquisition in 2000 of Home Financial Network, Inc. the amortization of the established customer list and covenant not to compete associated with our acquisition of XcelleNet in 2004, the amortization of the established customer list and other intangible assets associated with our acquisition of Extended Systems in 2005 and the amortization of the developed existing technology and customer contracts and relationship assets associated with our acquisition of Mobile 365 in 2006. See

Note Four to Consolidated Financial Statements — Goodwill and Other Purchased Intangible Assets, Part II, Item 8.

Operating income in 2007 was $168.6 million compared to operating income of $133.8 million in 2006 and $121.9 million in 2005. The increase in the operating margin to 16 percent in 2007 compared to 15 percent in 2006 was primarily the result of the various factors discussed under “Revenues” and “Costs and Expenses” above.

The operating margin for the IPG segment was 22 percent for 2007 compared to 19 percent for 2006. The increase in operating income and margin in the IPG segment for 2007 compared to 2006 was primarily due to a 6 percent increase in license fees, a 3 percent increase in maintenance fees, a 2 percent decrease in lower margin consulting fees and reduced payroll and related costs associate with a 6 percent decrease in total IPG headcount.

The increase in operating income and margin in the IPG segment for 2006 compared to 2005 was primarily due to a 10 percent increase in license revenues and a decrease in the amortization of purchased technology partially offset by a slight increase in lower margin services.

The operating income for the iAS segment was 14 percent for 2007 compared to 10 percent for 2006. The increase in operating margin was to due a 9 percent increase in license fees, a 10 percent increase in maintenance fees and a lower increase in total expenses.

The decrease in operating income and margin for the iAS segment in 2006 compared to 2005 was primarily due to an increase in operating expenses and an increased amortization of purchased technologies and other intangibles, both related to the October 2005 acquisition of Extended Systems, offset by an increase in license fee technical support revenues.

Certain common costs and expenses are allocated to the various segments based on measurable drivers of expense. Unallocated expenses include stock-based compensation expense and other corporate expenditures or cost savings that are not specifically allocated to the segments including reversals or restructuring expenses associated with restructuring activities undertaken prior to 2003.

In 2007, interest income decreased $5.2 million from 2006. Interest income consists primarily of interest earned on our investments. The decrease is primarily due to lower cash balances due to the acquisition of Mobile 365 in the fourth quarter of 2006. The $13.0 million increase in interest income for 2006 compared to 2005 is due to the increase in the average cash balances invested and investment yields. Our invested cash balances increased primarily due to the full year investment of the net proceeds from our private offering of convertible subordinated notes in the first quarter of 2005 together with investing cash generated from operations during 2005 and 2006 offset by cash balance declines as a result of cash used in our stock repurchase program and for acquisitions. See “Consolidated Statements of Cash Flows,” Part II, Item 8.

Interest expense and other, net, primarily includes: interest expense on the convertible subordinated notes; amortization of deferred offering expenses associated with these notes; net gains and losses resulting from foreign currency transactions and the related hedging activities; the cost of hedging foreign currency exposures; bank fees; and gains from the disposition of certain real estate and investments. The increase in interest expense and other, net from 2007 compared to 2006 was primarily due to a decline in gains on disposition of cash investments in 2007.

The increase from 2006 compared to 2005 was primarily the result of the full year interest expense incurred on the convertible subordinated notes which bear an interest rate of 1.75 percent and the full year’s amortization of capitalized offering fees and expenses associated with the convertible subordinated notes.

In 2007 a provision for income taxes was recorded at a rate of approximately 22 percent of income before taxes. Our effective rate differed from the statutory federal rate of 35 percent primarily due to adjustments for the release of valuation allowances on deferred tax assets, the effect of lower effective foreign tax rates, the release of tax reserves upon the expiration of the statute of limitation relating to various exposure items; offset somewhat by the impact of state taxes, the addition of tax reserves relating primarily to foreign transfer pricing exposures and the increase in deferred taxes on foreign earnings permanently reinvested.

The Company records a deferred tax liability for US taxes expected to be incurred on its foreign subsidiaries’ earnings that are not considered to be permanently reinvested overseas. Prior to the quarter ending December 31, 2007, the Company had anticipated a certain amount of foreign earnings to not be permanently reinvested. During the quarter ending December 31, 2007, due to possible share repurchases or acquisitions, management concluded that a total of approximately $60 million of earnings

of a foreign subsidiary were not considered permanently reinvested. This change had the effect of increasing full year tax expense by approximately $13 million.

As discussed above, during the quarter ending December 31 2007, management increased its estimated US cash needs and reduced its estimate of foreign subsidiaries’ earnings permanently reinvested. As a result of this change and other projected changes in the Company’s future US taxable income, management re-evaluated the need for valuation allowances for the Company’s US deferred tax assets. As a result of this re-evaluation, during the quarter ending December 31, 2007, the Company released approximately $27.6 million of valuation allowances relating to federal research tax credit and foreign tax credit carryforwards, of which $26.4 million reduced tax expense and approximately $1.2 million reduced goodwill.

In 2006 a provision for income taxes was recorded at a rate of approximately 41 percent of income before taxes. Our effective rate differed from the statutory federal rate of 35 percent primarily due to adjustments for the impact of state taxes, the addition of tax reserves relating primarily to foreign transfer pricing exposures; offset somewhat by the effect of lower effective foreign tax rates, the release of tax reserves upon the expiration of the statute of limitation relating to various exposure items, and adjustments for the difference between estimated amounts recorded and actual liabilities resulting from the filing of prior years’ tax returns.

In 2005 a provision for income taxes was recorded at a rate of approximately 37 percent of income before taxes. Our effective rate differed from the statutory federal rate of 35 percent primarily due to adjustments for the impact of state taxes, the addition of tax reserves relating primarily to foreign transfer pricing exposures, tax on foreign subsidiaries’ earnings distributed under the Jobs Creation Act, and certain non-deductible executive compensation; offset somewhat by the release of tax reserves upon the expiration of the statute of limitation relating to various tax exposure items and adjustments for the difference between estimated amounts recorded and actual liabilities resulting from the filing of prior years’ tax returns.

We had a net deferred tax asset of $34 million at December 31, 2007. This deferred tax asset included a valuation allowance of $92 million. In order to realize our net deferred tax assets we must generate sufficient taxable income in future years in appropriate tax jurisdictions to obtain the recorded benefit from the reversal of temporary differences (i.e., between book and tax basis), and from tax credit carryforwards. Based on the plans and estimates we are using to manage the underlying business we believe that sufficient income will be earned in the future to realize these assets. The amount of the deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are reduced. Any such adjustments to the deferred tax assets would be charged to income in the period such adjustment was made. See Note Eight to the Consolidated Financial Statements — Income Taxes, Part II, Item 8.

In 2007 the increase in net income compared to 2006 was due to the various factors discussed above, primarily an increase in revenues, partially offset by an increase in both operating expenses and taxes.

In 2007, the slight increase in shares used for computing basic and diluted net income per share was primarily due to increases in shares re issued under employee stock option plans mostly offset by shares repurchased under our ongoing share repurchase program. During 2007 the shares acquired under our ongoing share repurchase plan exceeded the number of shares reissued under employee stock option plans by 4.1 million shares. The largest portion of which were repurchased in the fourth quarter. In 2006, the decrease in shares used for computing basic and diluted net income per share was due primarily to 2.7 million shares repurchased under our ongoing share repurchase program, partially offset by exercises of employee stock options. (Described in “Liquidity and Capital Resources,” below). See Consolidated Statements of Stockholders’ Equity, Part II, Item 8.

Shares that may be issued to holders of our convertible subordinated debt due to the appreciation of our stock price are included in the calculation of diluted earnings per share using the if converted method, if their inclusion is dilutive to earnings per share. Generally, such shares would be included in periods in which the average price of our common stock exceeds $25.22 per share, the initial conversion price. If some or all of such shares were included in our dilutive earnings per share calculation our diluted earnings per share amounts would be less. In the fourth quarter of 2007, the average of the high closing prices during a specified number of trading days exceeded the $25.22 threshold. As a result, approximately 0.5 million shares were assumed to be converted and included in the calculation of the fully diluted shares outstanding. This had less than a one penny impact on the diluted earnings per share. See Note Fifteen to Consolidated Financial Statements — Convertible Subordinated Notes, Part II, Item 8 .

The 2007 diluted earnings per share calculation also includes 0.4 million shares of performance based restricted Common Stock granted to certain executives and employees. This had less than a one penny impact on the diluted earnings per share.

Working Capital

The increase in working capital during 2007 was primarily due to cash flows from operations and investing activities of $254.0 million and $86.7 million respectively, offset by net cash flows used for financing activities of $112.6 million, including $166.7 million used to repurchase common stock and the reclassification of auction-rate securities with a par value of $28.9 million from current assets to long-term assets The decrease in working capital during 2006 is primarily due to the net cash payments for the Mobile 365 acquisition.

Cash Flow

Net cash provided by operating activities increased 18 percent in 2007 compared to 2006 primarily due to a $53.8 million increase in net income. This was partially offset by changes in non-cash expenses related to stock compensation expense, accounts receivable and prepaid taxes. Our days sales outstanding in accounts receivable was 75 days for the quarter ended December 31, 2007 compared to 77 days for the quarter ended December 31, 2006. During 2006 and to a lesser extent 2007, our days sales outstanding encountered upward pressure due to the nature of the Mobile 365 business including the recognition of certain revenues on a net basis, while the related amounts due to and due from wireless operators and content providers appear on the balance sheet on a gross basis We expect the Mobile 365 business to continue to cause such upward pressure on our days sales outstanding in the future. (See Note One to the Consolidated Financial Statements – Summary of Significant Accounting Policies, Message Revenues, Part II, Item 8).

Net cash provided by operating activities increased 26 percent in 2006 compared to 2005 primarily due to a $9.5 million increase in net income and a $20 million increase in non-cash expenses related to stock compensation expense. This was partially offset by changes in deferred tax assets and taxes payable. Our days sales outstanding in accounts receivable was 77 days for the quarter ended December 31, 2006 compared to 68 days for the quarter ended December 31, 2005. The increase in days sales outstanding at December 31, 2006 was primarily attributable to the Mobile 365 business purchased in the fourth quarter of 2006.

Net cash provided by investing activities increased $363.0 million from 2006 to 2007. The increase in net cash used for investing activities is primarily due to the liquidation of marketable securities to fund our acquisition of Mobile 365 in 2006. In 2006, $399.7 million was used in business combinations related primarily to the Mobile 365 acquisition as compared to $6.8 million used in business combinations related to the acquisition of CoboPlan in 2007.

Net cash used for financing activities increased $112.6 million in 2007 compared to a $328.6 million decrease in 2006. The increase in cash used for financing activities in 2007 in primarily due to purchases of treasury stock which increased $106.9 million in 2007 from 2006. In 2007, we repurchased $166.7 million under our Stock Repurchase Program compared to $59.8 million repurchased in 2006.

Our Board of Directors has authorized the repurchase of our outstanding Common Stock from time to time, subject to price and other conditions (Stock Repurchase Program). Through December 31, 2007, aggregate amounts authorized under the Stock Repurchase Program totaled $850 million. During 2007, we repurchased 6.6 million shares at a cost of $166.7 million. In 2006, we repurchased 2.7 million shares at a cost of $59.8 million and in 2005 we repurchased 2.0 million shares at a cost of $44.1 million.

Approximately $83.1 million remained in the Stock Repurchase Program at December 31, 2007. The average price per share of the shares repurchased under the Stock Repurchase Program during 2007 was $25.32, compared to $22.21 in 2006 and $21.54 in 2005.

The repurchase of the shares in conjunction with our convertible debt offering was not part of the Stock Repurchase Program.

We expect to fund expenditures for future capital requirements, liquidity and strategic operating programs, stock repurchases and semi-annual interest payments from a combination of available cash balances and internally generated funds.

We engage in global business operations and are therefore exposed to foreign currency fluctuations that can affect the overall value of the assets (including cash) and liabilities reflected on our balance sheet. For a further discussion of the effect of foreign currency fluctuations on our financial condition, see “Financial Risk Management – Foreign Exchange Risk,” below.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments that are comprised principally of taxable, short-term money market instruments with maturities of three months or less at the time of purchase and demand deposits with financial institutions. The increase in cash and cash equivalents together with cash investments during 2007 is due to increases in cash from operations partially offset by stock repurchases. Approximately 50 percent of the Company’s cash is held outside the U.S. by 39 different foreign entities controlled by the Company.  Most of this foreign cash either cannot be repatriated to the U.S. due to foreign governmental and regulatory controls and/or dividend restrictions based on local earnings and profits or would be subject to additional U.S. or foreign taxes when repatriated.

Short-term and Long-term Cash Investments and Auction-Rate Securities

Short-term and long-term cash investments consist principally of commercial paper, corporate bonds, U.S. and Canadian government obligations, and U.S. government sponsored enterprise obligations with maturities between 90 days and up to three years.

As of December 31, 2007, long-term cash investments totaling $36.6 million include six auction rate securities (ARS) with an aggregate par value of $28.9 million. As of December 31, 2007, the temporary impairment associated with three of these ARS representing an aggregate par value of $14.9 million and the other-than-temporary impairment associated with the remaining three ARS representing an aggregate par value of $14.0 million were not material.

Our ARS are floating rate securities with longer-term maturities which are marketed by financial institutions with auction reset dates at 28 day intervals to provide short term liquidity. The underlying collateral of the ARS held by us consist primarily of commercial paper, debt instruments issued by governmental agencies and governmental sponsored entities, and similar assets. Certain of the ARS may have limited direct or indirect investments in mortgage or mortgage related securities. The credit ratings for five of the ARS were AAA and for one of the ARS was AA at the time of purchase. Beginning in August 2007 and into September 2007, each of the ARS auctions began to fail due to a lack of market for these securities. The failed auctions have resulted in higher interest rates being earned on these investments, but the investments currently lack short-term liquidity. We will not be able to access these funds until a future auction for the ARS investments is successful or until we sell the securities in a secondary market which currently does not exist. Based on our cash, cash equivalents and cash investment balances of $734.9 million and expected operating cash flows, we do not anticipate that the lack of liquidity for the ARS to adversely affect our ability to conduct business and believe we have the ability and intent to hold the temporarily impaired securities through the currently estimated recovery period. The fair values of the ARS as of December 31, 2007 are based on an estimation using a discounted cash flow model for each of the six ARS using credit related discount rates and term to recovery as key inputs.

Historically, given the liquidity created by the auctions, ARS were presented as current assets under marketable securities on the company’s balance sheet. Given the failed auctions, the ARS are illiquid until there is a successful auction for them or a secondary market develops. Accordingly, the entire ARS related balance has been reclassified from current to non-current assets.

If uncertainties in the credit and capital markets continue, these markets deteriorate further or the debt insurers experience additional ratings downgrades we may incur additional unrealized losses in or impairments to (realized losses in) our investment portfolio, which could negatively affect our reported earnings. We expect that additional impairments may be recorded in future periods. We believe that based on our cash, cash equivalents and investment balances of $735 million at December 31, 2007 along with our expected future operating cash flows, that we have the ability and intent to hold the securities to estimated recovery.

Upon completion of our acquisition of Extended Systems Incorporated (ESI) in October 2005, we assumed the obligations under a sale-and-leaseback transaction completed by ESI in September 2003 related to ESI’s headquarters building and land in Boise, Idaho. The sale-and-leaseback is recorded as a financing transaction. Under the terms of the agreement we have an option to repurchase the building and land at any time before September 2013 at a price of $5.1 million. The gross proceeds received of $4.8 million are included in other long-term liabilities on our balance sheet at December 31, 2007.

As part of the agreement, ESI entered into a 10-year master lease for the building with annual lease payments, which are recorded as interest expense, equal to 9.2 percent of the sale price, or approximately $442,000. We are also obligated to pay all expenses associated with the building during our lease, including the costs of property taxes, insurance, operating expenses and restoration and other repairs. (See Note Six to Consolidated Financial Statements, Part II, Item 8).

As part of the 15-year capital lease agreement entered into for our Waterloo, Canada facility (see Note Six to Consolidated Financial Statements, Part II, Item 8), we entered into an agreement with the landlord to finance approximately $1.6 million of tenant improvements at an annual interest rate of 8.76%. The loan requires monthly payments of $18,496, which includes both principal and interest commencing October 2004 through October 2019.

On February 22, 2005, we issued through a private offering to qualified institutional buyers in the U.S. $460 million of convertible subordinated notes pursuant to exemptions from registration afforded by the Securities Act of 1933, as amended. These notes have an interest rate of 1.75 percent and are subordinated to all of our future senior indebtedness. The notes mature on February 22, 2025 unless earlier redeemed by us at our option, or converted or put to us at the option of the holders. Interest is payable semi-annually in arrears on February 22 and August 22 of each year, commencing on August 22, 2005. We have used approximately $125 million of the proceeds to repurchase 6.7 million shares of Sybase stock. We intend to use the remaining proceeds for working capital and general corporate purposes which may include the acquisition of businesses, products, product rights or technologies, strategic investments or additional purchases of our common stock. For purposes of determining the total principal and interest payment commitments above, we have assumed the notes will be held until the first day we may redeem the notes, March 1, 2010. See Note Fifteen to Consolidated Financial Statements, Part II, Item 8.

New Accounting Pronouncements
SFAS 157 , “Fair Value Measurements ”

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“FAS 157”). SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require or permit assets or liabilities to be measured at fair value. This standard does not expand the use of fair value in any new circumstances. The provisions of FAS 157 are effective for the fiscal year beginning January 1, 2008. We do not expect the adoption of FAS 157 will have material impact on our financial position, results of operations or cash flows.

SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“FAS 158”). FAS 158, requires the recognition of the overfunded or underfunded status of certain plans in the statement of financial position, recognition of changes in the funded status through other comprehensive income and requires the measurement of the funded status of a plan as of the date of the year-end financial statements. The recognition of the funded status of a plan is effective for our fiscal year ended December 31, 2006 and the required measurement date of the funded status is effective for our fiscal year ended December 31, 2008. The recognition of the funded status provision of FAS 158 had no material impact on our financial position, results of operations or cash flows. We do not expect the adoption of the measurement date provisions of FAS 158 will have material impact on our financial position, results of operations or cash flows.

SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
In February 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” ( FAS 159). FAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The standard’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. The standard requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires companies to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. The new standard does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FAS 157, “Fair Value Measurements,” and FAS 107, “Disclosures about Fair Value of Financial Instruments.” FAS 159 is effective for our fiscal year beginning January 1, 2008. We do not expect the adoption of FAS 159 will have material impact on our financial position, results of operations or cash flows.

SFAS 160 , “NonControlling Interests in Consolidated Financial Statements ”
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 160, “NonControlling Interests in Consolidated Financial Statements” FAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and deconsolidation of a subsidiary. The provisions of FAS 160 are effective for our fiscal year beginning January 1, 2009. We are currently evaluating the impact of the provisions of FAS 160.

SFAS 141(R) , “Business Combinations ” In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 141(R), “Business Combinations.” FAS 141(R) establishes principles and requirements for how an acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and, (c) determines what information to disclose to enable users of the financial statements

to evaluate the nature and financial effects of the business combination. The provisions of FAS 141(R) are effective for our fiscal year beginning January 1, 2009. We are currently evaluating the impact of the provisions of FAS 141(R).

See Note One to Consolidated Financial Statements – Recent Accounting Pronouncements, Part II, Item 8.

Financial Risk Management

Foreign Exchange Risk

The functional currency of our international operating subsidiaries is generally the local currency. We experience foreign exchange translation exposure on our net assets and liabilities denominated in currencies other than the U.S. dollar. The related foreign currency translation gains and losses from translating these amounts into U.S. dollars for subsidiaries that conduct their business in a currency other than the U.S. dollar, are reflected in “Accumulated other comprehensive income” under “Stockholders’ equity” on the balance sheet. Foreign currency transaction gains and losses, which historically have not been material, are included in interest expense and other, net in the consolidated statements of operations. As of December 31, 2007, we had identifiable net assets totaling $272.5 million associated with our EMEA operations and $115.0 million associated with our other operations .

As a global concern, we face exposure to movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have material adverse or beneficial impacts on our financial position and results of operations. Historically, our primary exposures have been related to sales and expenses in EMEA, Asia Pacific, and Latin America; intercompany sublicense fess, intercompany messaging revenues and expenses and other intercompany transactions which are denominated in a currency other than the functional currency of the subsidiary recording the transaction. In order to reduce the effect of foreign currency fluctuations, we utilize foreign currency forward exchange contracts (forward contracts) to hedge certain foreign currency transaction exposures. Specifically, we enter into forward contracts with a maturity of approximately 30 days to hedge against the foreign exchange exposure created by certain balances that are denominated in a currency other than the principal reporting currency of the entity recording the transaction. The gains and losses on the forward contracts are meant to mitigate the gains and losses on these outstanding foreign currency transactions. Although the impact of currency fluctuations on our financial results has generally been immaterial in the past, there can be no guarantee the impact of currency fluctuations related to our intercompany messaging revenues and expenses and other activities will not be material in the future.

We do not enter into forward contracts for trading purposes. All foreign currency transactions and all outstanding forward contracts are marked to market at the end of the period with unrealized gains and losses included in interest expense and other, net. Net foreign exchange transaction gains (losses) included in interest expense and other, net were $0.3 million, $0.3 million and ($1.0) million in 2007, 2006 and 2005, respectively. The unrealized gain (loss) on our outstanding forward contracts as of December 31, 2007 was immaterial to our consolidated financial statements. The tables below provide information about our forward contracts as of December 31, 2007 and 2006.

Interest Income Rate and Investment Level Risk

Our investments consist primarily of taxable short-term money market instruments and debt securities with maturities between 90 days and three years. We do not use derivative financial instruments in our investment portfolio. Based on our intentions regarding investments, we classify our investments as either held-to-maturity or available-for-sale. Held-to-maturity investments are reported on the balance sheet at amortized cost. Available-for-sale securities are reported at market value.

As a majority of our investments are classified as available-for-sale such securities are recorded at fair value and unrealized holding gains and losses, net of the related tax effect, if any, are not reflected in earnings but are reported as a separate component of other comprehensive income (loss) until realized. Declines in fair value judged to be other than temporary are reflected in earnings. Declines in fair value recorded as impairment losses in earnings have not been material in any reporting period. Realized gains and losses are determined on the specific identification method and are reflected in income.

Changes in the overall level of interest rates and investment levels affect our interest income that is generated from our investments. For 2007 total interest income was $33.5 million with investments yielding 4.80% on a worldwide basis on an investment portfolio that totaled $702.4 million on average. This interest rate level was up approximately 0.39 percent from 4.41 % for 2006. If interest rates fell by a similar amount (0.39 Percent) in 2008, our interest income would decline approximately $2.5 million assuming consistent investment levels.

The table below presents the cash, cash equivalents and cash investments and the related weighted average interest rates for our investment portfolio at December 31, 2007. The cash, cash equivalents and cash investments balances approximate fair value at December 31, 2007.

Default Risk

We place our investments with high quality credit issuers and, by policy, limit the amount of credit exposure with any one issuer. We mitigate default risk by investing in safe, high investment grade securities and by monitoring the credit rating of investment issuers. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity, with the exception of failed auction securities described elsewhere. We have no cash flow exposure due to rate changes for our investment portfolio, since all investments are made in securities with fixed interest rates.

Failed Auction Securities

A small proportion of our investment portfolio is held in Auction Rate Securities with credit ratings ranging from AA to AAA at the time of purchase. ARS are floating rate securities with long-term nominal maturities of 25 to 30 years which are marketed by financial institutions with auction reset dates at 28 day intervals to provide short term liquidity. The underlying collateral of the ARS held by us consist primarily of commercial paper, debt instruments issued by governmental agencies and governmental sponsored entities, and similar assets. Certain of the ARS may have limited direct or indirect investments in mortgage or mortgage related securities. Beginning in August and September 2007 each of the ARS auctions related to our investments began to fail. At December 31, 2007 we held approximately $28.9 million in ARS at cost for which the reset auctions have failed. The failed auctions have resulted in higher interest rates being earned on these investments, but the investments currently lack short-term liquidity. We will not be able to access these funds until a future auction for the ARS investments is successful or we sell the securities in a secondary market. Therefore, we have moved the balance sheet classification of these investments from short term to long term. Any future evaluations by the credit agencies could result in downgrades to the credit ratings of the ARS we hold. Based on our current cash,

investment balances and expected operating cash flows, we do not anticipate that the lack of short-term liquidity for the ARS to adversely affect our ability to conduct business. See Note Two to Consolidated Financial Statements, Part II, Item 8.

Interest Expense Rate Risk
Borrowings, which were at fixed rates, as of December 31, 2007 were $460 million. Interest expense was $11.6 million for 2007. Based on effective interest rates at December 31, 2007, a 50 basis point increase in interest rates of our borrowings subject to variable interest rate fluctuations would increase our interest expense by $2.3 million annually.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TABLE OF CONTENTS

		Page
Report of Management on Internal Controls over Financial Reporting		57
Report of Independent Registered Public Accounting Firm on Internal Controls over Financial Reporting		58
Report of Independent Registered Public Accounting Firm		59
Consolidated Balance Sheets as of December 31, 2007 and 2006		60
Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005		61
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005		62
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005		63
Notes to Consolidated Financial Statements		64

Report of Management on Internal Controls over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2007 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2007 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our internal control over financial reporting as of December 31, 2007 has been audited by Ernst & Young LLP, an independent registered public accounting firm, who expressed an unqualified opinion on the effectiveness of internal control over financial reporting as stated in their report which is included elsewhere herein.

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

The Board of Directors and Stockholders of Sybase, Inc.

We have audited Sybase, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Sybase, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Report of Management on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate

In our opinion, Sybase, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sybase, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007, and our report dated February 27, 2008 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

San Francisco, California
February 27, 2008

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Sybase, Inc.

We have audited the accompanying consolidated balance sheets of Sybase, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sybase, Inc. at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sybase, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2008 expressed an unqualified opinion thereon.

As discussed in Note One to the Notes to Consolidated Financial Statements, in fiscal 2006 Sybase, Inc. changed its method of accounting for stock-based compensation.

/s/ ERNST & YOUNG LLP

San Francisco, California
February 27, 2008