METASOLV INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2002

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

For the transition period from to

COMMISSION FILE NUMBER 0-17920

METASOLV, INC.

(Exact name of registrant as specified in its charter)

Delaware		75-2912166
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

5560 Tennyson Parkway

Plano, Texas 75024

(Address of principal executive offices)

Registrant’s telephone number, including area code: (972) 403-8300

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 ¨

As of September 30, 2002, there were 37,711,296 shares of the registrant’s common stock outstanding.

METASOLV, INC.

INDEX

		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets – September 30, 2002 and December 31, 2001	3

	Condensed Consolidated Statements of Operations – For the Three Months and the Nine Months Ended September 30, 2002 and 2001	4

	Condensed Consolidated Statements of Cash Flows – For the Nine Months Ended September 30, 2002 and 2001	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	30

Item 2.	Changes in Securities and Use of Proceeds	30

Item 3.	Defaults Upon Senior Securities	30

Item 4.	Submission of Matters to a Vote of Security Holder	30

Item 5.	Other Information	30

Item 6.	Exhibits and Reports on Form 8-K	30

SIGNATURES		31

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

METASOLV, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

	September 30, 2002			December 31, 2001
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	60,984		$	80,658
Marketable securities		10,041			56,919
Trade accounts receivable, less allowance for doubtful accounts of $4,099 in 2002 and $3,171 in 2001		18,392			12,913
Unbilled receivables		1,848			617
Prepaid expenses		3,492			2,095
Deferred taxes		12,663			4,254
Other current assets		5,987			1,768

Total current assets		113,407			159,224

Property and equipment, net		18,079			16,586
Goodwill		—			6,375
Intangible assets		7,842			4,615
Deferred tax assets and other assets		2,203			1,217

Total assets	$	141,531		$	188,017


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,533		$	3,663
Accrued expenses		19,031			13,679
Deferred revenue		9,995			9,114

Total current liabilities		32,559			26,456

Deferred income taxes		—			388

Stockholders’ equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued or outstanding		—			—
Common stock, $.005 par value, 100,000,000 shares authorized, shares issued and outstanding: 37,711,296 in 2002, and 37,422,649 in 2001		189			187
Additional paid-in capital		143,783			139,750
Deferred compensation		(81	)		(154	)
Accumulated other comprehensive income		(543	)		125
Retained earnings (accumulated deficit)		(34,376	)		21,265

Total stockholders’ equity		108,972			161,173

Total liabilities and stockholders’ equity	$	141,531		$	188,017

See Notes to Condensed Consolidated Financial Statements

METASOLV, INC.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
	(Unaudited)						(Unaudited)
Revenues:
License	$	6,376		$	12,111		$	21,453		$	60,855
Service⁽¹⁾		14,684			11,985			46,205			41,244

Total revenues		21,060			24,096			67,658			102,099

Cost of revenues:
License		271			299			590			6,060
Amortization and impairment of intangible assets		9,105			963			14,120			963
Service⁽¹⁾		8,804			5,045			24,111			20,609

Total cost of revenues		18,180			6,307			38,821			27,632

Gross profit		2,880			17,789			28,837			74,467

Operating expenses:
Research and development		8,002			7,708			26,459			24,140
Sales and marketing		7,027			5,727			22,329			22,058
General and administrative		3,619			5,279			10,948			17,195
In-process research and development write-off		—			2,940			4,060			2,940
Restructuring and other costs		3,195			3,142			5,982			3,142
Goodwill impairment		28,742			—			28,742			—

Total operating expenses		50,585			24,796			98,520			69,475

Income (loss) from operations		(47,705	)		(7,007	)		(69,683	)		4,992
Interest and other income, net		478			1,191			1,472			4,618
Loss on investments		—			(3,429	)		—			(3,429	)

Income (loss) before taxes		(47,227	)		(9,245	)		(68,211	)		6,181
Income tax expense (benefit)		(4,574	)		(2,841	)		(12,571	)		2,943

Net income (loss)	$	(42,653	)	$	(6,404	)	$	(55,640	)	$	3,238

Earnings (loss) per share of common stock:
Basic	$	(1.13	)	$	(0.17	)	$	(1.48	)	$	0.09
Diluted	$	(1.13	)	$	(0.17	)	$	(1.48	)	$	0.08
Weighted average shares outstanding:
Basic		37,765			37,127			37,621			36,515
Diluted		37,765			37,127			37,621			39,653

⁽¹⁾

In January 2002, the Company adopted a FASB staff position regarding the income statement classification of reimbursements received for “out-of-pocket” expenses incurred. Service revenues related to this change were approximately $477,800 in the third quarter of 2002 and approximately $1,642,700 for the first nine months of 2002. The third quarter and first nine months of 2001 have been reclassified to present amounts previously shown net on a comparable basis by increasing service revenues and service cost of revenues by approximately $462,900 and $1,964,100, respectively.

See Notes to Condensed Consolidated Financial Statements

METASOLV, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

	Nine Months Ended September 30,
	2002			2001
	(Unaudited)
Cash Flows from Operating Activities:
Net income (loss)	$	(55,640	)	$	3,238
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Goodwill impairment		28,742			—
Amortization and impairment of intangible assets		14,120			963
Depreciation and amortization		4,337			2,933
Stock compensation		73			233
Loss on asset disposal		1,145			70
Deferred tax benefit		(10,342	)		(2,657	)
Tax benefit for disqualifying dispositions		3,142			182
Loss on investments		—			3,429
Purchased in-process research and development		4,060			2,940
Changes in operating assets and liabilities (net of effect of acquisition):
Accounts receivable, net		(5,479	)		11,723
Unbilled receivables		(1,231	)		770
Other assets		(5,057	)		2,528
Accounts payable and accrued expenses		(2,627	)		(2,107	)
Deferred revenue		(3,213	)		(14,100	)

Net cash provided by (used in) operating activities		(27,970	)		10,145

Cash Flows From Investing Activities:
Purchase of property and equipment		(3,213	)		(5,749	)
Purchase of marketable securities		(20,783	)		(40,551	)
Proceeds from sale of marketable securities		67,558			73,947
Increase in restricted cash		—			(2,000	)
Acquisition of Lat45 Information Systems		—			(6,779	)
Acquisition of Nortel Networks’ OSS Software Assets		(35,594	)		—

Net cash provided by investing activities		7,968			18,868

Cash Flows from Financing Activities:
Proceeds from common stock transactions		894			3,234
Purchase of treasury stock		(1	)		(1,591	)

Net cash provided by financing activities		893			1,643

Effect of exchange rate changes on cash		(565	)		—

Increase (decrease) in cash and cash equivalents		(19,674	)		30,656
Cash and cash equivalents, beginning of period		80,658			93,695

Cash and cash equivalents, end of period	$	60,984		$	124,351

See Notes to Condensed Consolidated Financial Statements

METASOLV, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Basis of Presentation

These unaudited condensed consolidated financial statements reflect all adjustments (consisting only of those of a normal recurring nature), which are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2001, contained in the Company’s Annual Report to Stockholders and Form 10-K filed with the Securities and Exchange Commission. Operating results for the nine months ended September 30, 2002, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2002.

Note 2. Revenue Recognition

The Company records revenue in accordance with Statement of Position (SOP) 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. SOP 98-9 amends SOP 97-2 to require recognition of revenue using the “residual method” when there is vendor-specific objective evidence of the fair values of all undelivered elements in a multiple-element arrangement that is not accounted for using long-term contract accounting. Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements.

Note 3. Earnings Per Share

Following is a reconciliation of the weighted average shares used to compute basic and diluted earnings per share (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2002	2001	2002	2001
Weighted average common shares outstanding	37,765	37,127	37,621	36,515
Effect of dilutive securities:
Options	—	—	—	3,138

Weighted average common and common equivalent shares outstanding	37,765	37,127	37,621	39,653

Securities that were not included in the computation of diluted earnings per share because their effect was antidilutive consist of options to purchase the following shares of common stock (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2002	2001	2002	2001
Antidilutive stock options	8,832	7,216	8,832	1,500

Note 4. Acquisition

On February 1, 2002, the Company completed the acquisition of certain OSS assets from Nortel Networks. With this acquisition, the Company extended its product portfolio by adding a leading carrier-class service activation product and several point solutions that allow communications service providers to efficiently manage and deliver differentiated services for Internet Protocol (IP), data, and wireless communications. As a result of the acquisition, the Company now offers a comprehensive suite of OSS solutions available for wireless, IP, data, and traditional networks and services. The purchase price was $35 million in cash, plus the assumption of certain liabilities of the business.

The asset purchase agreement provides for the reduction of the cash purchase price by $3 million, which was used to cover the cost related to the issuance of stock options and retention bonuses to key employees. This cash payment has been treated as a reduction of the purchase price. In addition, direct transaction costs were approximately $4.6 million.

We accounted for the acquisition as a business combination using the purchase method of accounting, as required by Statements of Financial Accounting Standards No. 141, “Business Combinations,” and No. 142 “Goodwill and Other Intangible Assets.” The financial results of the February 2002 acquisition have been included with those of the Company effective February 2, 2002.

The total purchase price was allocated to tangible assets and liabilities based on their respective estimated fair values as of the closing date of the transaction. The tangible assets were inventoried and evaluated by an independent third party, and do not differ materially from the net book value in the historical financial statements of Nortel Networks. Based on an evaluation by an independent third party, we allocated the excess of the purchase price over the fair value of the net tangible assets acquired to identifiable intangible assets, including customer arrangements, the core technology related to the products, and in-process research and development costs, with the remainder being allocated to goodwill which will be deductible for tax purposes over the next fifteen years. In addition, deferred taxes have been recognized for the difference between the book and tax basis of certain intangible assets.

A summary of the allocation of the purchase price follows (in thousands):

Cash paid to Nortel Networks upon closing	$	35,000
Less retention fund		(3,000	)
Less cash for vacation liabilities assumed		(1,037	)
Estimated transaction costs		4,631

Total purchase price	$	35,594


Allocation of the purchase price:
Tangible assets acquired	$	3,761
Liabilities assumed		(11,948	)

Net tangible assets acquired		(8,187	)


In-process research and development		4,060
Developed technology, including patents		12,236
Customer contracts		5,118

Net identifiable intangible assets acquired		21,414

Goodwill		22,367

Total purchase price	$	35,594

The $4.1 million allocated to in-process research and development costs was charged to expense upon closing on February 1, 2002. The developed technology will be amortized over its useful life of two years and the customer contracts will be amortized over their useful life of three years.

The following summary, which was prepared on a pro forma basis, reflects the results of operations for nine-month periods ended September 30, 2002 and 2001, as if the February 2002 acquisition had occurred at the beginning of the respective periods. The table includes the impact of certain adjustments, including the adjustment of interest income, intangible asset amortization, and the Company’s income tax benefit, but does not include a charge for in-process research and development (in thousands except per share data):

	Nine Months Ended September 30,
	2002			2001
Revenues	$	69,605		$	155,235
Net loss	$	(54,642	)	$	(21,114	)
Basic and diluted loss per share	$	(1.45	)	$	(0.58	)
Basic and diluted shares outstanding		37,621			36,515

Note 5. Segment Information

The Company operates in a single operating segment: communications software and related services. Revenue information regarding operations for different products and services is as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2002		2001		2002		2001
Software license fees	$	6,376	$	12,111	$	21,453	$	60,855
Professional services		5,097		3,464		16,236		14,349
Post-contract customer support		9,587		8,521		29,969		26,895

Total revenues	$	21,060	$	24,096	$	67,658	$	102,099

Note 6. Restructuring and Other Costs

In the third quarter of 2001, the Company recorded a pre-tax restructuring charge of $3.1 million. The charge consisted of $2.0 million for a reduction in force of approximately 100 positions, which was completed by the end of 2001, and approximately $1.0 million for lease commitments for certain field offices being closed and approximately $0.1 million in related fixed asset write-downs.

In the first quarter of 2002, the Company recorded a pre-tax restructuring charge of $2.8 million. This charge consisted of $1.4 million for a reduction in force of approximately 100 positions, approximately $1.2 million for write-down of assets and approximately $0.2 million for the closing of remote offices. This restructuring program was implemented to align costs with expected market conditions.

In the third quarter of 2002, the Company recorded pre-tax restructuring charge of $3.2 million. This charge consisted of $2.6 million for a reduction in force of approximately 100 positions, $1.0 million for lease commitments for certain field offices being closed, and approximately $0.6 million of related asset write-downs, partially offset by a $1.0 million non recurring adjustment to accrued royalties.

The following table summarizes the status of the restructuring actions (in thousands):

	Employee Severance			Exit Cost			Intangibles & Other			Total
Balance at December 31, 2001	$	—		$	1,006		$	—		$	1,006
Restructuring charges 1Q, 2002		1,428			1,359			—			2,787
Restructuring charges 3Q, 2002		2,616			1,583			(1,004	)		3,195
Amounts utilized in 2002		(2,273	)		(2,057	)		1,004			(3,326	)

Balance at September 30, 2002	$	1,771		$	1,891		$	—		$	3,662

Note 7. Impairment of Goodwill and Intangible Assets

The Company is required to assess the value of enterprise-level goodwill under the provisions of Statement of Financial Accounting Standards No. 142. The Company is one reporting unit, as defined by the standard. As outlined in the authoritative literature, the assessment of whether enterprise goodwill has been impaired is based on the Company’s estimate of the fair value of the reporting unit using a model which considers both a discounted future cash flow analysis and market capitalization data.

During the three months ended September 30, 2002, the market capitalization of the Company fell to a level well below its book value. The decline in the market capitalization indicated that a potential reduction in the value of enterprise goodwill existed; therefore, management performed an interim valuation based on estimated future cash flows as of July 31, 2002. This valuation indicated that an impairment of enterprise goodwill existed as of July 31, 2002. Accordingly, the Company recorded a charge of $28.7 million to eliminate the enterprise goodwill.

The changes in the carrying value of goodwill during the nine months ended September 30, 2002, are as follows:

Balance at of December 31, 2001	$	6,375
Purchase of assets from Nortel Networks		21,706
Purchase price adjustments		661
Impairment charge		(28,742	)

Balance at September 30, 2002	$	—

In the third quarter of 2002, the Company reassessed the value of intangible assets and as a result reduced the value of these assets and recorded a non-cash charge of $7.2 million. The revaluation of intangible assets consisted of a reduction in the value of technology rights acquired in each of the acquisitions.

Note 8. Comprehensive Income (loss)

The components of comprehensive income (loss) were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
Net income (loss)	$	(42,653	)	$	(6,404	)	$	(55,640	)	$	3,238
Unrealized gains (losses) on securities		1			91			(103	)		179
Foreign currency translation adjustments		(562	)		8,521			(565	)		2

Comprehensive income (loss)	$	(43,214	)	$	(6,313	)	$	(56,308	)	$	3,419

Note 9. Income Tax Benefit

Under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“FAS 109”), deferred tax assets and liabilities are determined based on the difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. FAS 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. The write-down of the goodwill and revaluation of intangible assets generated an increase in the Company’s deferred tax benefits. Based upon the available evidence, which includes the Company’s recent operating performance and projections

for the future near term performance, the Company has provided a valuation allowance of approximately 50% of its net deferred tax assets. The Company intends to evaluate the realizability of the deferred tax assets on a quarterly basis. Any future changes will be reflected as a component of income tax expense.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Overview

We are a leading global provider of operations support systems (OSS) software solutions that help communications providers manage their networks and services. Our products automate key communications management processes, from network planning and engineering to operations and customer care. Our products enable communications providers to increase revenue and reduce costs through more efficient management of network resources, quick deployment of communication services, and delivery of superior customer service. We derive substantially all of our revenue from the sale of software licenses, related professional services, and support of our software to communications services providers.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, contingencies, restructuring costs and other special charges. Actual results may differ from these estimates. The reported financial results are impacted significantly by judgments, assumptions and estimates used in the preparation of the financial statements.

Terms and conditions for our licensing and professional services agreements are typically covered by signed orders that reference our master agreement with the customer. Our sales for a given period typically involve large financial commitments from a relatively small number of customers. Accordingly, delays in the completion of sales during a quarter may negatively impact revenues in that quarter. Consistent with industry practice, we sometimes agree to bill our license fees in more than one installment over extended periods. When installments extend beyond six months, amounts not due immediately are deferred and recorded as revenue when payments are due, assuming all revenue recognition criteria have been met.

We generally recognize license revenues when our customer has signed a license agreement, we have delivered the software product, product acceptance is not subject to express conditions, the fees are fixed or determinable and we consider collection to be probable. We allocate the agreed fees for multiple products and services licensed or sold in a single transaction among the products and services using the “residual method” as required by SOP 98-9, deferring the fair value of the undelivered elements and recognizing the residual amount of the fees as revenue upon delivery of the software license. On occasion we may enter into a license agreement with a customer requiring development of additional software functions or services necessary for the software’s performance of specified functions. For those agreements, we recognize revenue for the entire arrangement on a percentage-of-completion basis as the development services are provided. We generally recognize service revenues as the services are performed. We recognize revenues from maintenance agreements ratably over the maintenance period, usually one year.

Our software products are priced to meet the needs of our target market segments, which include large facility-based incumbent service providers and wireless and IP service providers. We charge a base price for core products, coupled with additional license fees for add-on modules. In addition, we typically scale our license pricing based on the extent of our customers’ usage as measured by the number of users of our product, the number of our customers’ subscribers, or the size of the network our product helps manage. We sell additional license capacity for our products when our customers’ usage of our product exceeds earlier license limits. Annual maintenance and support contracts are priced as a percentage of the license fee for the product being maintained. For a new customer, our initial sale of licenses and associated services, including maintenance and support, generally ranges from several hundred thousand to several million dollars.

Service revenues consist principally of software implementations, upgrades and configurations, and customer training, as well as software maintenance agreements that include both customer support and the right to product updates. We use our own employees and subcontract with system integrator partners to provide consulting services to our customers. We primarily offer and expect to continue to offer the majority of our services on an hourly basis. We also offer fixed-price consulting packages, primarily for repeatable solutions.

We recognize revenue only in cases where we believe collection is probable. In situations where collection is doubtful or when we have indications that a customer is facing financial difficulty, we recognize revenue as cash payments are

received. In addition, for customers not on the cash basis of accounting, we maintain an allowance for doubtful accounts based upon the expected collectibility of accounts receivable. We regularly review the adequacy of our allowance for doubtful accounts through identification of specific receivables where it is expected that payment will not be received in addition to establishing a general reserve policy that is applied to all amounts that are not specifically identified. If there is a deterioration of a major customer’s credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected. The allowance for doubtful accounts reflects our best estimate as of the reporting date. Changes may occur in the future that may cause us to reassess the collectibility of amounts and at which time we may need to reduce or provide additional allowances in excess of that currently provided.

Acquisitions

On February 1, 2002, we acquired certain OSS assets from Nortel Networks. With this acquisition, we extended our product portfolio by adding a leading carrier-class service activation product and several point solutions that allow communications service providers to efficiently manage and deliver differentiated services for Internet Protocol (IP), data, and wireless communications. As a result of the acquisition, we now offer a more comprehensive suite of OSS solutions for wireless, IP, data, and traditional networks and services. The acquisition also strengthens the worldwide scope of our product sales and services through an established presence in Europe. We acquired these assets for $35 million in cash and the assumption of certain liabilities. Our financial results include revenues and costs of the acquired business effective February 2, 2002.

Results of Operations

The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain line items in our statements of operations:

	Three Months Ended September 30,				Nine months Ended September 30,
	2002		2001		2002		2001		Percentage Dollar Change
	(Unaudited)				(Unaudited)
Revenues:
License	30	%	50	%	32	%	60	%	(65	)%
Service	70	%	50	%	68	%	40	%	12	%

Total revenues	100	%	100	%	100	%	100	%	(34	)%
Cost of revenues:
License	1	%	1	%	1	%	6	%	(90	)%
Amortization and impairments of intangible assets	43	%	4	%	21	%	1	%	nm
Service	42	%	21	%	36	%	20	%	17	%

Total cost of revenues	86	%	26	%	57	%	27	%	40	%

Gross profit	14	%	74	%	43	%	73	%	(61	)%
Operating expenses:
Research and development	38	%	32	%	39	%	24	%	10	%
Sales and marketing	33	%	24	%	33	%	22	%	1	%
General and administrative	17	%	22	%	16	%	17	%	(36	)%
In-process R&D write-off	—		12	%	6	%	3	%	38	%
Restructuring and other costs	15	%	13	%	9	%	3	%	90	%
Goodwill impairment	136	%	—		42	%	—		nm

Total operating expenses	240	%	103	%	146	%	68	%	42	%

Income (loss) from operations	(227	)%	(29	)%	(103	)%	5	%	nm
Interest and other income, net	2	%	5	%	2	%	5	%	68	%
Loss on investments	—		(14	)%	0	%	(3	)%	nm

Income (loss) before taxes	(224	)%	(38	)%	(101	)%	6	%	nm
Income tax expense (benefit)	(22	)%	(12	)%	(19	)%	3	%	nm

Net income (loss)	(203	)%	(27	)%	(82	)%	3	%	nm

nm= not meaningful

Revenues

Total revenues decreased 13% to $21.1 million in the quarter ended September 30, 2002, from $24.1 million in the quarter ended September 30, 2001. For the first nine months of 2002, total revenues decreased 34% to $67.7 million from $102.1 million in the first nine months of 2001. The decreases in both the three and nine months resulted from a decline in license sales, partially offset by an increase in service revenue. Approximately 58% of our revenues for the nine months ended September 30, 2002, were derived from MetaSolv Solution products, and approximately 42% were derived from products acquired from Nortel Networks.

License fees. License fee revenues declined 47% to $6.4 million in the quarter ended September 30, 2002, from $12.1 million in the quarter ended September 30, 2001. For the first nine months of 2002, license revenues decreased 65% to $21.5 million from $60.9 million in the first nine months of 2001. The sharp decline in license revenue in both the quarter

and year-to-date periods resulted primarily from fewer sales to new customers and fewer follow-on sales of capacity licenses and add-on functionality to existing customers. The decline in revenue between the year-to-date periods includes an 82% reduction in revenue from MetaSolv Solution products, partially offset by revenues from the addition of acquired products.

We believe that the decline in license revenues is the result of the protracted downturn in the telecommunications industry, and related decreases in capital expenditures by service providers. We expect these weak market conditions to continue in the near-term. Ultimately, we believe that market conditions for communications providers will improve and their capital spending will increase. As market conditions improve, we believe our extensive product portfolio will position us well to extend deployments at existing customers with new products and product extensions, and to initiate deployments at new customers, resulting in an increase in license revenues.

Services. Revenues from services increased 23% to $14.7 million in the quarter ended September 30, 2002, from $12.0 million in the quarter ended September 30, 2001. For the first nine months of 2002, service revenues increased 12% to $46.2 million from $41.2 million in the first nine months of 2001. The increases in the quarter and year-to-date periods were due to consulting and maintenance service revenues attributable to our recently acquired products.

Consulting and education service revenues increased 47% to $5.1 million in the quarter ended September 30, 2002, from $3.5 million in the quarter ended September 30, 2001. For the first nine months of 2002, consulting and education service revenues increased 14% to $16.2 million, from $14.3 million in the first nine months of 2001. The increase in consulting and education revenues resulted from fewer, but larger, services engagements. The larger project size reflects the scope of engagements primarily at tier one and two tier customers, while the lower number of overall projects reflects fewer new customer implementations.

Our future consulting and education service revenue will continue to be influenced by the number and size of license sales requiring implementations, and our customers’ spending for enhancements and integrations that make their businesses more efficient. We are marketing longer services engagements to key customers to help them use our products most efficiently, and we expect these longer engagements to provide more stability in our consulting revenues.

Post-contract customer support, or maintenance revenues, increased approximately 12% to $9.6 million in the quarter ended September 30, 2002, from $8.5 million in the quarter ended September 30, 2001. The increase in maintenance revenue was primarily due to the inclusion of customer support for our newly acquired products, partially offset by a 33% decline in MetaSolv Solution maintenance revenue compared to the year-ago period. The decline in same-product maintenance revenue resulted primarily from financial difficulties at some of our smaller customers. The newly acquired products represented approximately 40% of our total maintenance revenue in the most recent fiscal quarter. For the first nine months of 2002, maintenance revenues increased 11% to $30.0 million, from $26.9 million in the first nine months of 2001, also primarily due to inclusion of customers of our newly acquired products.

Concentration of Revenues. As of September 30, 2002, our active customer list includes more than 150 communications service providers worldwide. During the quarter ended September 30, 2002, our top ten customers represented 43% of our total revenue. No single customer accounted for 10% or more of revenue during the quarter ended September 30, 2002. Our largest receivable balance for a single customer, or reseller, as of September 30, 2002, was 36% of total receivables. In any given quarter we generally derive a significant portion of our revenue from a small number of relatively large sales. We believe that the loss of any one of these customers would not seriously harm our overall business or financial condition, but our inability to consummate one or more substantial sales in any future period could seriously harm our operating results for that period.

International Revenues. During the quarter ended September 30, 2002, we recognized $8.5 million in revenues from sources outside the United States compared to $5.9 million in the year-ago quarter, representing 40% and 25% of revenue in each period, respectively.

In the nine months ended September 30, 2002, international revenues were $25.9 million, or 38% of total revenues, compared to $23.5 million, or 23% of total revenues in the first nine months of 2001.

We expect our international revenues to increase as a percentage of our total revenue due to our local sales and support infrastructure in both Europe and Latin America, and to our February 2002 acquisition that brought an established European base of customers.

Cost of Revenues

License Costs. License costs consist primarily of royalties for third party software that is embedded in our products. License costs were $0.3 million in the quarter ended September 30, 2002, and $0.3 million in the quarter ended September 30, 2001, representing 4% and 2% of license revenue in each period, respectively. The increase in license cost as a percentage of revenue in the quarter ended September 30, 2002, was due to higher royalties owed for third party licenses sold in conjunction with some of our products acquired this year from Nortel Networks.

For the nine months ended September 30, 2002, license costs were $0.6 million, compared to $6.1 million for the nine months ended September 30, 2001, representing 3% and 10% of license revenues during each period, respectively. The decrease in license costs in the nine months, in dollars and as a percentage of license revenue, is primarily due to the elimination of royalty expense for use of third party e-commerce software. In 2001, we replaced a royalty-based agreement with a one-time payment for a perpetual license. We plan to continue the use of third party software where its functionality enhances or is necessary to provide an advantage for our customers.

Amortization and Impairment of Intangible Assets. For the quarter ended September 30, 2002, cost of revenues includes a $1.9 million charge for amortization of intangible assets acquired from both Nortel Networks and Lat45 Information Systems Inc., and a $7.2 million charge for impairment of our intangible assets. This compares to a $1.0 million charge for amortization of intangible assets in the year-ago quarter, related to acquired technology rights and customer contracts purchased from Lat45. The increase in amortization expense is due to the purchase of developed OSS software technology rights and contracts from Nortel Networks in February of 2002.

In the third quarter of 2002, we reassessed the value of our intangible assets and as a result reduced the value of these assets and recorded a non-cash charge of $7.2 million. The revaluation of intangible assets consisted of a reduction in the value of technology rights acquired in each of the acquisitions.

For the nine months ended September 30, 2002, cost of revenues includes a $6.9 million charge for amortization of intangible assets compared to a $1.0 million charge for amortization for technology rights and customer contracts for the first nine months of 2001 and the $7.2 million charge for the intangible asset revaluation. We expect amortization expense related to intangible assets to decline in future periods due to the recent revaluation.

The value assigned to intangible assets is amortized over the estimated useful life of the assets using the greater of straight-line or the ratio that current gross revenues related to those assets bears to the total current and anticipated future gross revenues related to those assets. The estimated useful lives of these assets range from nine months to thirty-nine months.

Service Costs. Service costs consist of expenses to provide consulting, training and maintenance services. These costs include compensation and related expenses for employees, and fees for third party consultants who provide services for our customers under subcontractor arrangements.

Service costs were $8.8 million in the quarter ended September 30, 2002, up from $5.0 million in the quarter ended September 30, 2001, representing 60% and 42% of service revenues in each period, respectively. The increase in service costs in the most recent quarter resulted primarily from additional customer support for our newly acquired products and customers. The increase in service costs as a percentage of service revenues was primarily due to a higher level of software engineering effort for specific customers. We record engineering effort that is specific to a customer contract as a cost of revenue, whereas engineering effort towards general product releases is normally recorded as development expense. We expect this higher level of customer-specific engineering to continue in future periods as we work to adapt our software to provide customers with competitive advantages in their unique operating environments.

For the nine months ended September 30, 2002, service costs were $24.1 million, compared to $20.6 million in the year-ago period, representing 52% and 50% of service revenues, respectively. Service costs increased in the most recent nine months primarily due to increased customer and product support costs related to our new products. Service margins improved in the most recent nine months due to a higher proportion of maintenance revenue.

Operating Expenses

Research and Development Expenses. Research and development expenses consist primarily of costs related to our staff of software developers, contracted development costs and the associated infrastructure costs required to support product development. Product research and development expenses increased 4% to $8.0 million for the quarter ended September 30, 2002, from $7.7 million for the quarter ended September 30, 2001, representing 38% and 32% of revenue in each period, respectively. The increase in research and development expense between these periods was primarily due to development expense related to the products acquired from Nortel Networks. As a percentage of revenue, the increase in research and development expenses was primarily due to the 13% decline in revenue as well as the 4% increase in spending for development of future products.

For the nine months ended September 30, 2002, research and development expenses increased 10% to $26.5 million from $24.1 million in the quarter ended September 30, 2001, representing 39% and 24% of total revenues in each period, respectively. The increase in expenses for the nine months was primarily due to additional resources to develop our new products and was partially offset by lower contracted development expenses. Research and development expenses increased as a percentage of revenues for the nine months due to the increased personnel costs acquired in the February acquisition, coupled with the decline in revenues.

During the most recent quarter, our research and development investments were focused on new products and enhancements to address next-generation communications networks, including wireless mobility technologies and user-group defined product enhancements. Specific enhancements include improved integration between our existing products and also with major CRM, billing, and service assurance systems, so that communications providers can more quickly realize business efficiencies using MetaSolv products. We are also developing products and enhancements to address the needs of our customers, including network inventory and billing reconciliation, and extending functionality for IP management.

We expect to continue a relatively large future investment in product development as we further enhance our integrated, modular suite of products to address emerging communications technologies. The modular structure of our products allows communications service providers to implement product functionality in phases, depending on their needs, to realize near-term value and to maximize opportunities for longer-term benefits from an integrated OSS system.

Our product development methodology generally establishes technological feasibility near the end of the development process, when we have a working model. Costs incurred after the development of a working model and prior to product release are insignificant. Accordingly, we have not capitalized any software development costs.

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salary, commission, travel, trade show and other related expenses required to sell our software. Sales and marketing expenses increased 23% to $7.0 million for the quarter ended September 30, 2002, from $5.7 million for the quarter ended September 30, 2001, representing 33% and 24% of revenue in each period, respectively. The higher sales and marketing expense in the most recent fiscal quarter was primarily due to our increased sales presence in Europe.

For the nine months ended September 30, 2002, sales and marketing expenses increased slightly to $22.3 million from $22.1 million in the quarter ended September 30, 2001, representing 33% and 22% of revenue in each period, respectively. Major changes in sales and marketing expenses between these two periods include a 53% reduction in commission expense related to lower revenues, partially offset by a 35% staff increase related to marketing and selling support for our new products and a strengthened sales force in Europe and South America.

General and Administrative Expenses. General and administrative expenses consist of costs related to information systems infrastructure, facilities, finance and accounting, legal, human resources and corporate management not directly allocated to other departments. General and administrative expenses decreased 31% to $3.6 million in the quarter ended September 30, 2002, from $5.3 million for the quarter ended September 30, 2001, representing 17% and 22% of revenue in each period, respectively. For the nine months ended September 30, 2002, general and administrative expenses decreased 36% to $10.9 million, compared to $17.2 million in the year-ago period, representing to 16% and 17% of revenues in each period, respectively. The decreases in general and administrative expenses in both the quarter and year-to-date periods were primarily due to a reduction in bad debt expense. Staffing in general and administrative functions remained relatively unchanged between the periods, despite the acquisition of new products and expansion into new geographic locations.

Restructuring and Other Costs. Restructuring and other costs in the quarter ended September 30, 2002, totaled $3.2 million. This was comprised of $2.6 million for severance obligations related to a reduction in force of approximately 100 positions, and $1.6 million for facilities consolidation, partially offset by a $1.0 million non recurring adjustment to accrued royalties.

During the three months ended September 30, 2002, we adopted a plan to consolidate our headquarters facilities and to implement additional restructuring actions, including the closure of two international offices. We expect to complete these actions during the fourth quarter of 2002 and expect an additional restructuring charge related to exit activities of between $5.0 and $6.0 million.

We expect these restructuring actions to yield approximately $12 million in annual cost savings. We will continue to align costs with expectations for future revenues and market conditions, and may take future restructuring actions to better position our company for profitable growth.

In-Process Research and Development. In connection with our acquisition of certain OSS assets from Nortel Networks, we recorded a pre-tax charge of $4.1 million for acquired in-process research and development (IPR&D) during the quarter ended March 31, 2002. At the date of the acquisition, the IPR&D projects had not yet reached technological feasibility and had no alternative future uses. The projects generally included enhancements and upgrades to existing technology, enhanced communication among systems, introduction of new functionality and the development of new technology primarily for integration purposes. The value of the IPR&D was calculated using a discounted cash flow analysis of the anticipated income stream of the related product sales. The projected net cash flows were computed using a discount rate of 18% for the IPR&D project. It is anticipated that the remaining costs to complete the projects at September 30, 2002, will be approximately $0.5 million and project release dates will range from fourth quarter 2002 through the first half of 2003. If these projects are not successfully developed, future revenues and profitability may be adversely affected, and the value of intangible assets acquired may become further impaired. Our financial results in the quarter and year-to-date periods ended September 30, 2001, included $2.9 million of IPR&D costs related to our Lat45 acquisition.

Goodwill Impairment. The Company is required to assess the value of enterprise-level goodwill under the provisions of Statement of Financial Accounting Standards No. 142. The Company is one reporting unit, as defined by the Standard. As outlined in the authoritative literature, the assessment of whether enterprise goodwill has been impaired is based on the Company’s estimate of the fair value of the reporting unit using a model that considers both a discounted future cash flow analysis and market capitalization data.

During the three months ended September 30, 2002, the market capitalization of the Company fell to a level well below its book value. The decline in the market capitalization indicated that a potential reduction in the value of enterprise goodwill existed; therefore, management performed an interim valuation as of July 31, 2002. This valuation indicated that an impairment of enterprise goodwill existed as of July 31, 2002. Accordingly, the Company recorded a charge of $28.7 million to eliminate the enterprise goodwill.

Interest and Other Income, Net

Interest and other income, net, was $0.5 million in the quarter ended September 30, 2002, compared to $1.2 million in the quarter ended September 30, 2001. For the nine months ended September 30, 2002, interest and other income, net, was $1.5 million, compared to $4.6 million in the year-ago period. The decrease in interest and other income in the quarter and year-to-date periods was primarily due to the decline in cash and marketable securities balances upon which we receive interest income, and lower interest rates earned on invested balances.

Income Tax Expense (Benefit)

We recorded an income tax benefit of $4.6 million in the quarter ended September 30, 2002, and $12.6 million for the first nine months of 2002, due to losses before taxes of $47.2 million and $68.2 million, respectively. For the quarter ended September 30, 2001, we recorded a tax benefit of $2.8 million. In the year-to-date period ended September 30, 2001, we recorded tax expense of $2.9 million, related to the taxable income generated during that period.

The effective tax benefit rate for the quarter ended September 30, 2002, was 9.7%, compared to the 30.7% tax rate reported for the third quarter of 2001. The effective tax rate in the most recent fiscal quarter differs from the federal statutory rate due to our recording a valuation allowance against certain tax benefits.

Under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“FAS 109”), deferred tax assets and liabilities are determined based on the difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. FAS 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. The write-down of the goodwill and revaluation of intangible assets generated an increase in deferred tax benefits. Based upon the available evidence, which includes our recent operating performance and projections for the future near term performance, we have provided a valuation allowance of approximately 50% against our net deferred tax assets. We intend to evaluate the realizability of the deferred tax assets on a quarterly basis. Any future changes will be reflected as a component of income tax expense.

Net Income (Loss)

Our net loss for the quarter ended September 30, 2002, was $42.7 million, or $1.13 per share of common stock. This compares to a net loss of $6.4 million for the quarter ended September 30, 2001, or $0.17 per diluted share. For the nine months ended September 30, 2002, our net loss was $55.6 million, or $1.48 per share, compared to net income of $3.2 million, or $0.08 per diluted share, for the nine months ended September 30, 2001.

Liquidity and Capital Resources

At September 30, 2002, our primary sources of liquidity were $71.0 million in cash and marketable securities, representing 50% of total assets. Total cash and marketable securities decreased $66.6 million from $137.6 million at the end of 2001. This decrease was primarily attributable to the February 2002 acquisition ($35.6 million), cash used in operations ($28.0 million), and capital expenditures ($3.2 million).

Cash used in operating activities during the nine months ended September 30, 2002, was $28.0 million, compared to $10.1 million generated from operations during the equivalent period in 2001. The $28.0 million cash used this year is primarily comprised of our $55.6 million net loss adjusted for the impairment of acquired goodwill and intangible assets of $35.9 million, and other non-cash items including: an increase of $17.6 million in non-cash working capital and a $10.3 million increase in deferred tax benefits which were partially offset by $11.3 million in depreciation and amortization expense, and $4.1 million purchased in-process research and development expense.

Accounts receivable (net) increased from $12.9 million at the end of 2001 to $18.4 million at September 30, 2002. The $5.5 million increase resulted primarily from the 9.8% increase in revenues in the third quarter of 2002 compared to the fourth quarter of 2001, and nonlinear order activity during the third quarter of 2002.

Accounts payable and accrued expenses at September 30, 2002, totaled $22.6 million, compared to $17.3 million at December 30, 2001. The $5.3 million increase during the first nine months of 2002 primarily relates to our increase in accrued restructuring expenses of $2.7 million.

Net cash from investing activities was $8.0 million in the nine months ended September 30, 2002, comprised of the net sale of $47.1 million in marketable securities, partially offset by $35.6 million in acquisition-related cash outflows and $3.2 million in capital expenditures primarily for computing hardware and software and leasehold improvements for our new employees and offices. We have no unusual capital commitments at September 30, 2002, and our principal commitments consist of obligations under operating leases.

Net cash provided from financing activities consisted of $0.9 million in proceeds from employee stock option programs.

We believe that our cash flows generated by operations, together with current cash and marketable securities balances, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. From time to time, we evaluate potential acquisitions and other strategic relationships with complementary businesses, products and technologies. Should cash balances be insufficient to complete an acquisition or otherwise meet our business objectives, we may seek to sell additional equity or debt securities. The decision to sell additional equity or debt securities could be made at any time and could result in additional dilution to our stockholders.

New Accounting Standards

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used and establishes new standards on the recognition of certain identifiable intangible assets separate from goodwill for all business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead be tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values. We adopted the provisions of SFAS No. 141 effective July 1, 2001, and adopted SFAS No. 142 effective January 1, 2002.

Under SFAS No. 142, we are required to perform transitional impairment tests for our goodwill as of the date of adoption. Step one of the transitional goodwill impairment test, which compares the fair values of our reporting units to their respective carrying values, was completed by June 30, 2002, and no impairment was indicated as of January 1, 2002. The Company is required to assess the value of enterprise-level goodwill under the provisions of Statement of Financial Accounting Standards No. 142. The Company is one reporting unit, as defined by the standard. As outlined in the authoritative literature, the assessment of whether enterprise goodwill has been impaired is based on the Company’s estimate of the fair value of the reporting unit using a model which considers both a discounted future cash flow analysis and market capitalization data.

During the three months ended September 30, 2002, the market capitalization of the Company fell to a level well below its book value. The decline in the market capitalization indicated that a potential reduction in the value of enterprise goodwill existed; therefore, management performed an interim valuation as of July 31, 2002. This valuation indicated that an impairment of enterprise goodwill existed as of July 31, 2002. Accordingly, the Company recorded a charge of $28.7 million to eliminate the enterprise goodwill.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation requirements of discontinued operations to include more disposal transactions. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, relative to discontinued operations. SFAS No. 144 is effective for fiscal years beginning after December 31, 2001. The impact of its adoption did not have a material impact on our results of operations or financial position.

In November 2001, the FASB issued a staff announcement regarding the income statement characterization of reimbursements received for “out-of-pocket” expenses incurred. This announcement indicated that the FASB believes that reimbursements received for out-of-pocket expenses should be characterized as revenue in the income statement, where the service provider is the primary obligor with respect to purchasing goods and services from third parties, has supplier discretion and assumes credit risk for the transaction. The announcement is effective for financial reporting periods beginning after December 15, 2001. Upon application of the statement, comparative financial statements for prior periods have been reclassified. In January 2002, the Company adopted the FASB staff position regarding the income statement classification of reimbursements received for “out-of-pocket” expenses incurred. The third quarter and first nine months of 2001 have been reclassified to present amounts previously shown net on a comparable basis by increasing service revenues and service cost of revenues by approximately $462,900 and $1,964,100, respectively. Service revenues related to this change were approximately $477,800 in the third quarter of 2002 and approximately $1,642,700 for the first nine months of 2002.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This pronouncement addresses the financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Under SFAS No. 146, liabilities for costs associated with an exit or disposal activity are to be recognized when the liability is incurred. Under EITF Issue No. 94-3, liabilities related to exit or disposal activities were recognized when an entity committed to an exit plan. In addition, SFAS No. 146 establishes that the objective for the initial measurement of the liability is fair value. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We are currently evaluating the impact this pronouncement will have on our future consolidated financial results but do not believe it will be material.

Certain Factors That May Affect Future Results

We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The following section describes some, but not all, of these risks and uncertainties that we believe may adversely affect our business, financial conditions or results of operations. There are additional risks and uncertainties that we do not presently know, or that we currently view as immaterial, that may also impair our business operations. This report is qualified in its entirety by these risks. You should carefully consider the risks described below before making an investment decision. If any of the following risks actually occur, they could materially harm our business, financial condition, or results of operations. In that case, the trading price of our common stock could decline.

OUR QUARTERLY OPERATING RESULTS CAN VARY SIGNIFICANTLY AND MAY CAUSE OUR STOCK PRICE TO FLUCTUATE.

Our quarterly operating results can vary significantly and are difficult to predict. As a result, we believe that period-to-period comparisons of our results of operations are not a good indication of our future performance. It is likely that in some future quarter or quarters our operating results will be below the expectations of public market analysts or investors. In such an event, the market price of our common stock may decline significantly. A number of factors are likely to cause our quarterly results to vary, including:

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The overall level of demand for communications services by consumers and businesses and its effect on demand for our products and services by our customers;

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Our customers’ willingness to buy, rather than build, order processing, management and fulfillment software, network and service planning, activation, network mediation, and service assurance software;

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The timing of individual software orders, particularly those of our major customers involving large license fees that would materially affect our revenue in a given quarter;

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The introduction of new communications services and our ability to react quickly compared to our competitors;

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Our ability to manage costs, including costs related to professional services and support services;

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The utilization rate of our professional services employees and the extent to which we use third party subcontractors to provide consulting services;

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Costs related to possible acquisitions of other businesses;

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Our ability to collect outstanding accounts receivable from very large product licenses;

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Innovation and introduction of new technologies, products and services in the communications and information technology industries;

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Costs related to the expansion of our operations;

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We may be required to defer recognition of revenue for a significant period of time after entering into a contract due to undelivered products, extended payment terms, or product acceptance; and

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Changes in services and license revenue as a percentage of total revenue, as license revenue typically has a higher gross margin than services revenue.

We forecast the volume and timing of orders for our operational planning, but these forecasts are based on many factors and subjective judgments, and we cannot assure their accuracy. We have hired and trained a large number of personnel in core areas, including product development and professional services, based on our forecast of future revenues. As a result, significant portions of our operating expenses are fixed in the short term. Therefore, failure to generate revenue according to our expectations in a particular quarter could have an immediate negative effect on results for that quarter.

Our quarterly revenue is dependent, in part, upon orders booked and delivered during that quarter. We expect that our sales will continue to involve large financial commitments from a relatively small number of customers. As a result, the cancellation, deferral, or failure to complete the sale of even a small number of licenses for our products and related services may cause our revenues to fall below expectations. Accordingly, delays in the completion of sales near the end of a quarter could cause quarterly revenue to fall substantially short of anticipated levels. Significant sales may also occur earlier than expected, which could cause operating results for later quarters to compare unfavorably with operating results from earlier quarters.

Some contracts for software licenses may not qualify for revenue recognition upon product delivery. Revenue may be deferred when there are significant elements required under the contract that have not been completed, there are express conditions relating to product acceptance, there are deferred payment terms, or when collection is not considered probable. A higher concentration of large telecom service providers and larger, more complex agreements may increase the frequency and amount of these deferrals. With these uncertainties we may not be able to predict accurately when revenue from these contracts will be recognized.

THE COMMUNICATIONS MARKET IS CHANGING RAPIDLY, AND FAILURE TO ANTICIPATE AND REACT TO THE RAPID CHANGE COULD RESULT IN LOSS OF CUSTOMERS OR WASTEFUL SPENDING.

Over the last decade, the market for communications products and services has been characterized by rapid technological developments, evolving industry standards, dramatic changes in the regulatory environment, emerging companies and frequent new product and service introductions. Our future success depends largely on our ability to enhance our existing products and services and to introduce new products and services that are capable of adapting to changing technologies, industry standards, regulatory changes and customer preferences. If we are unable to successfully respond to these changes or do not respond in a timely or cost-effective way, our sales could decline and our costs for developing competitive products could increase.

New technologies, services or standards could require significant changes in our business model, development of new products or provision of additional services. New products and services may be expensive to develop and may result in our encountering new competitors in the marketplace. Furthermore, if the overall market for order processing, management and fulfillment software grows more slowly than we anticipate, or if our products and services fail in any respect to achieve market acceptance, our revenues would be lower than we anticipate and operating results and financial condition could be materially adversely affected.

THE COMMUNICATIONS INDUSTRY IS EXPERIENCING CONSOLIDATION, WHICH MAY REDUCE THE NUMBER OF POTENTIAL CUSTOMERS FOR OUR SOFTWARE.

The communications industry and in particular our customers have experienced significant consolidation. In the future, there may be fewer potential customers requiring operations support systems and related services, increasing the level of competition in the industry. In addition, larger, consolidated communications companies have strengthened their purchasing power, which could create pressure on the prices we charge and the margins we realize. These companies are also striving to streamline their operations by combining different communications systems and the related operations support systems into one system, reducing the number of vendors needed. Although we have sought to address this situation by continuing to market our products and services to new customers and by working with existing customers to provide products and services that they need to remain competitive, we cannot be certain that we will not lose additional customers as a result of industry consolidation.

CONSOLIDATIONS IN THE TELECOMMUNICATIONS INDUSTRY OR SLOWDOWN IN TELECOMMUNICATIONS SPENDING COULD HARM OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We have derived substantially all of our revenues from sales of products and related services to the telecommunications industry. The global telecommunications industry is currently experiencing a very challenging period during which business activity has contracted. Since early 2001, we and a number of other companies have been impacted by reduced spending by telecommunications carriers and equipment manufacturers. Slowdowns in spending often cause delays in sales and installations and could cause cancellations of current or planned projects, any of which could harm our financial results in a particular period.

OUR CUSTOMERS’ FINANCIAL WEAKNESS, THEIR INABILITY TO OBTAIN FINANCING, AND THE RECENT DOWNTURN IN THE COMMUNICATIONS INDUSTRY MAY LEAD TO LOWER SALES AND DECREASED PROFITABILITY.

Many of our customers are small to medium sized competitive communications service providers with limited operating histories. Many of these customers are not profitable and highly dependent on private sources of venture capital to fund their operations. Many competitive communications service providers are currently unable to obtain sufficient funds to continue expansion of their businesses. At the same time, many communications companies are encountering significant difficulties in achieving their business plans and financial projections. In recent months several of our customers ceased their business operations and a significant number of our customers initiated bankruptcy proceedings. It is possible that this downturn in the communications industry could continue for an indefinite period of time. The downturn in the communications industry and the inability of many communications companies to raise capital have resulted in a decrease in the number of potential customers that are capable of purchasing our software, a delay by some of our existing customers in purchasing additional products, decreases in our customer’s operating budgets relating to our software maintenance services, delays in payments by existing customers, or failure to pay for our products. If our customers are unable to obtain adequate financing, sales of our software could suffer. If we fail to increase revenue related to our software, our operating results and financial condition would be adversely affected. In addition, adverse market conditions and limitations on the ability of our current customers to obtain adequate financing could adversely affect our ability to collect outstanding accounts receivable resulting in increased bad debt losses and a decrease in our overall profitability. Decreases in our customers’ operating budgets relating to software maintenance services could adversely affect our maintenance revenues and profitability. Any of our current customers who cease to be viable business operations would no longer be a source of maintenance revenue or revenue from sales of additional software or services products, and this could adversely affect our financial results.

WE RELY ON A LIMITED NUMBER OF CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUE.

A significant portion of revenue each quarter is derived from a relatively small number of large sales. As consolidation in the telecommunications industry continues, our reliance on a limited number of customers for a significant portion of our revenue may increase. The amount of revenue we derive from a specific customer is likely to vary from period to period, and a major customer in one period may not produce significant additional revenue in a subsequent period. For both the nine months ended September 30, 2002 and the year ended December 31, 2001, our top ten customers accounted for 36% of our total revenues, with no single customer accounting for more than 6% of total revenue. However, to the extent that any major customer terminates its relationship with us, our revenue could be adversely affected. While we believe that the loss of any single customer would not seriously harm our overall business or financial condition, our inability to consummate one or more substantial sales in any future period could seriously harm our operating results for that period.

COMPETITION FROM LARGER, BETTER CAPITALIZED OR EMERGING COMPETITORS FOR THE COMMUNICATIONS PRODUCTS AND SERVICES THAT WE OFFER COULD RESULT IN PRICE REDUCTIONS, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE.

Competition in the communications products market is intense. Although we compete against other companies selling communications software and services, the in-house development efforts of our customers may also result in our making fewer sales. We expect competition to persist in the future. We cannot be certain that we can compete successfully with existing or new competitors, and increased competition could result in price reductions, reduced gross margins and loss of market share.

Competitors vary in size and scope of products and services offered. We encounter direct competition from several vendors, including Astracon, Cramer Systems, Eftia OSS Solutions, GE Smallworld, Granite Systems, Syndesis, Telcordia Technology, and Wisor Telecom. Additionally, we compete with OSS solutions sold by large equipment vendors such as ADC Telecommunications. We also compete with systems integrators and with the information technology departments of large communications service providers. Finally, we are aware of communications service providers, software developers, and smaller entrepreneurial companies that are focusing significant resources on developing and marketing products and services that will compete with us. We anticipate continued long-term growth in the communications industry and the entrance of new competitors in the order processing, management and fulfillment software markets. We believe that the market for our products and services will remain intensely competitive.

Some of our current competitors have longer operating histories, a larger customer base, greater brand recognition and greater financial, technical, marketing and other resources than we do. This may place us at a disadvantage in responding to our competitors’ pricing strategies, technological advances, advertising campaigns, strategic alliances and other initiatives. In addition, many of our competitors have well-established relationships with our current and potential customers and have extensive knowledge of our industry. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote more resources to the development, promotion and sale of their products and services than we can. To the extent that our competitors offer customized products that are competitive with our more standardized product offerings, our competitors may have a substantial competitive advantage, which may cause us to lower our prices and realize lower margins.

Current and potential competitors also have established or may establish cooperative relationships among themselves or with others to increase their ability to address customer needs. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. In addition, some of our competitors may develop products and services that are superior to, or have greater market acceptance than, the products and related services that we offer.

IF THE INTERNET OR BROADBAND COMMUNICATION SERVICES GROWTH SLOWS, DEMAND FOR OUR PRODUCTS MAY FALL.

Our success depends heavily on the continued acceptance of the Internet as a medium of commerce and communication and the growth of broadband communication services. The growth of the Internet has driven changes in the public communications network and has given rise to the growth of the next-generation service providers who are our customers. If use of the Internet or broadband communication services does not continue to grow or grows more slowly than expected, the market for software that manages communications over the Internet may not develop and our sales would be adversely affected. Consumers and businesses may reject the Internet as a viable commercial medium for a number of reasons, including potentially inadequate network infrastructure, slow development of technologies, insufficient commercial support, and security or privacy concerns. The Internet infrastructure may not be able to support the demands placed on it by increased usage and bandwidth requirements. In addition, delays in the development or adoption of new standards and protocols, increased levels of Internet activity, or increased government regulation, could cause the Internet to lose its viability as a commercial medium. Even if the required infrastructure, standards, protocols or complementary products, services or facilities are developed, we may incur substantial expense adapting our solutions to changing or emerging technologies.

CHANGES IN COMMUNICATIONS REGULATION COULD ADVERSELY AFFECT OUR CUSTOMERS AND MAY LEAD TO LOWER SALES.

Our customers are subject to extensive regulation as communications service providers. Changes in legislation or regulation that adversely affect our existing and potential customers could lead them to spend less on order processing, management and fulfillment software, which would reduce our revenues and could seriously affect our business and financial condition.

IF WE FAIL TO ACCURATELY ESTIMATE THE RESOURCES NECESSARY TO COMPLETE ANY FIXED-PRICE CONTRACT, IF WE FAIL TO MEET OUR PERFORMANCE OBLIGATIONS, OR IF WE FAIL TO ANTICIPATE COSTS ASSOCIATED WITH PARTICULAR SALES OR SUPPORT CONTRACTS, WE MAY BE REQUIRED TO ABSORB COST OVERRUNS AND WE MAY SUFFER LOSSES ON PROJECTS.

In addition to time and materials contracts, we have periodically entered into fixed-price contracts for software implementation, and we may do so in the future. These fixed-price contracts involve risks because they require us to absorb possible cost overruns. Our failure to accurately estimate the resources required for a project or our failure to complete our contractual obligations in a manner consistent with the project plan would likely cause us to have lower margins or to suffer a loss on such a project, which would negatively impact our operating results. Also, in some instances our sales and support contracts may require us to provide software functionality that we have procured from third party vendors. The cost of this third party functionality may impact our margins, and we could fail to accurately anticipate or manage these costs. On occasion we have been asked or required to commit unanticipated additional resources or funds to complete projects or fulfill sales and support contracts. Our acquisitions of Lat45 Information Systems Inc. in July 2001, and certain OSS assets from Nortel Networks in February 2002, and associated customer obligations, may intensify these risks.

IN ORDER TO GENERATE INCREASED REVENUE, WE NEED TO EXPAND OUR SALES AND DISTRIBUTION CAPABILITIES.

We must expand our direct and indirect sales operations to increase market awareness of our products and to generate increased revenue. We cannot be certain that we will be successful in these efforts. Our products and services require a sophisticated sales effort targeted at the senior management of our prospective customers. New hires will require training and take time to achieve full productivity. We cannot be certain that our recent hires will become as productive as necessary or that we will be able to hire enough qualified individuals in the future. As the telecommunications service provider market consolidates, there may be an increased tendency on the part of the remaining service providers to purchase through large systems integrators and third-party resellers. We are working to expand our relationships with systems integrators and other partners to expand our indirect sales channels. Failure to expand these sales channels could adversely affect our revenues and operating results. In addition, we will need to manage potential conflicts between our direct sales force and third party reselling efforts.

WE DEPEND ON CERTAIN KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL COULD AFFECT OUR ABILITY TO COMPETE.

We believe that our success will depend on the continued employment of our senior management team and key technical personnel. This dependence is particularly important to our business because personal relationships are a critical element of obtaining and maintaining business contacts with our customers. Our senior management team and key technical personnel would be very difficult to replace and the loss of any of these key employees could seriously harm our business.

OUR ABILITY TO ATTRACT, TRAIN AND RETAIN QUALIFIED EMPLOYEES IS CRUCIAL TO RESULTS OF OPERATIONS AND FUTURE GROWTH.

As a company focused on the development, sale and delivery of software products and related services, our personnel are our most valued assets. Our future success depends in large part on our ability to hire, train and retain software developers, systems architects, project managers, communications business process experts, systems analysts, trainers, writers, consultants and sales and marketing professionals of various experience levels. Competition for skilled personnel is intense. Any inability to hire, train and retain a sufficient number of qualified employees could hinder the growth of our business.

OUR FUTURE SUCCESS DEPENDS ON OUR CONTINUED USE OF STRATEGIC RELATIONSHIPS TO IMPLEMENT AND SELL OUR PRODUCTS.

We have entered into relationships with third party systems integrators and hardware platform and software applications developers. We rely on these third parties to assist our customers and to lend expertise in large scale, multi-system implementation and integration projects, including overall program management and development of custom interfaces for our product. Should these third parties go out of business or choose not to provide these services, we may be forced to develop those capabilities internally, incurring significant expense and adversely affecting our operating margins. In addition, we have derived and anticipate that we will continue to derive a significant portion of our revenues from customers that have established relationships with our marketing and platform alliances. We could lose sales opportunities if we fail to work effectively with these parties or fail to grow our base of marketing and platform alliances.

THE EXPANSION OF OUR PRODUCTS WITH NEW FUNCTIONALITY AND TO NEW CUSTOMER MARKETS MAY BE DIFFICULT AND COSTLY.

We plan to invest significant resources and management attention to expanding our products by adding new functionality and to expanding our customer base by targeting customers in markets that we have not previously served. We cannot be sure that expanding the footprint of our products or selling our products into new markets will generate acceptable financial results due to uncertainties inherent in entering new markets and in our ability to execute our plans. Costs associated with our product and market expansions may be more costly than we anticipate, and demand for our new products and in new customer markets may be lower than we expect.

FOR SOME OF OUR PRODUCTS WE RELY ON SOFTWARE AND OTHER INTELLECTUAL PROPERTY THAT WE HAVE LICENSED FROM THIRD PARTY DEVELOPERS TO PERFORM KEY FUNCTIONS.

Some of our products contain software and other intellectual property that we license from third parties, including software that is integrated with internally developed software and used in our products to perform key functions. We could

lose the right to use this software and intellectual property or it could be made available to us only on commercially unreasonable terms. We could fail to accurately recognize or anticipate the impact of the costs of procuring this third party intellectual property. Although we believe that alternative software and intellectual property is available from other third party suppliers, the loss of or inability to maintain any of these licenses or the inability of the third parties to enhance in a timely and cost-effective manner their products in response to changing customer needs, industry standards or technological developments could result in delays or reductions in product shipments by us until equivalent software could be developed internally or identified, licensed and integrated, which would harm our business.

OUR INTERNATIONAL OPERATIONS MAY BE DIFFICULT AND COSTLY.

We intend to continue to devote significant management and financial resources to our international expansion. In particular, we will have to continue to attract experienced management, technical, sales, marketing and support personnel for our international offices. Competition for skilled people in these areas is intense and we may be unable to attract qualified staff. International expansion may be more difficult or take longer than we anticipate, especially due to cultural differences, language barriers, and currency exchange risks. Additionally, communications infrastructure in foreign countries may be different from the communications infrastructure in the United States. Our ability to successfully penetrate these markets is uncertain. If our international operations are unsuccessful, our expenses could increase at a greater rate than our revenues, and our operating results could be adversely affected.

Moreover, international operations are subject to a variety of additional risks that could adversely affect our operating results and financial condition. These risks include the following:

•

Longer payment cycles;

•

Problems in collecting accounts receivable;

•

The impact of recessions in economies outside the United States;

•

Unexpected changes in regulatory requirements;

•

Variable and changing communications industry regulations;

•

Trade barriers and barriers to foreign investment, in some cases specifically applicable to the communications industry;

•

Barriers to the repatriation of capital or profits;

•

Political instability or changes in government policy;

•

Restrictions on the import and export of certain technologies;

•

Lower protection for intellectual property rights;

•

Seasonal reductions in business activity during the summer months, particularly in Europe;

•

Potentially adverse tax consequences;

•

Increases in tariffs, duties, price controls or other restrictions on foreign currencies;

•

Requirements of a locally domiciled business entity;

•

Regional variations in adoption and growth of new technologies served by our products; and

•

Potential impact on the above factors of the failure, success, or variability between countries of acceptance of the Euro monetary unit, and other European Union initiatives.

WE HAVE ACQUIRED OTHER BUSINESSES AND WE MAY MAKE ADDITIONAL ACQUISITIONS OR ENGAGE IN JOINT BUSINESS VENTURES THAT COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS.

We have acquired other businesses and may make additional acquisitions, or engage in joint business ventures in the future that may be difficult to integrate, disrupt our business, dilute stockholder value, complicate our management tasks and affect our operating results. In July 2001 we completed the acquisition of Lat45 Information Systems Inc., a developer of geospatial software for planning, design and management of communications networks, and in February 2002 we completed the acquisition of certain OSS assets from Nortel Networks that added service activation and other products to our product portfolio. Acquisitions and investments in businesses involve significant risks, and our failure to successfully manage acquisitions or joint business ventures could seriously harm our business. Our past acquisitions and potential future acquisitions or joint business ventures create numerous risks and uncertainties including:

•

Risk that the industry may develop in a different direction than anticipated and that the technologies we acquire will not prove to be those needed to be successful in the industry;

•

Potential difficulties in completing in-process research and development projects;

•

Difficulty integrating new businesses and operations in an efficient and effective manner;

•

Risk that we have inaccurately evaluated or forecasted the benefits, opportunities, liabilities, or costs of the acquired businesses;

•

Risk of our customers or customers of the acquired businesses deferring purchase decisions as they evaluate the impact of the acquisition on our future product strategy;

•

Risk that we may not properly determine or account for risks and benefits under acquired customer contracts;

•

Potential loss of key employees of the acquired businesses;

•

Risk that we will be unable to integrate the products and corporate cultures of the acquired business;

•

Risk of diverting the attention of senior management from the operation of our business;

•

Risk of entering new markets in which we have limited experience;

•

Risk of increased costs related to expansion and compensation of indirect sales channels;

•

Risk of increased costs related to royalties for third party products that may be included with our own software products and services; and

•

Future revenues and profits from acquisitions and investments may fail to achieve expectations.

Our inability to successfully integrate acquisitions or to otherwise manage business growth effectively could have a material adverse effect on our results of operations and financial condition. Also, our existing stockholders may be diluted if we finance the acquisitions by issuing equity securities.

THE VALUE OF OUR ASSETS MAY BECOME IMPAIRED.

Should our marketing and sales plan not materialize in the near term, the realization of our intangible assets could be severely and negatively impacted. The accompanying consolidated financial statements contained in this report have been prepared based on management’s estimates of realizability, and these estimates may change in the future due to unforeseen changes in our results or market conditions.

During the quarter ended September 30, 2002, we recorded impairment charges of $28.7 million for goodwill and $7.2 million for other acquired intangible assets.

FUTURE SALES OF OUR COMMON STOCK WOULD BE DILUTIVE TO OUR STOCKHOLDERS AND COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.

We cannot predict the effect, if any, that future sales of our common stock by us, or the availability of shares of our common stock for future sale, will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of our common stock (including shares issued upon the exercise of stock options), or the perception that such sales could occur, may materially and adversely affect prevailing market prices for common stock.

OUR FAILURE TO MEET CUSTOMER EXPECTATIONS OR DELIVER ERROR-FREE SOFTWARE COULD RESULT IN LOSSES AND NEGATIVE PUBLICITY.

The complexity of our products and the potential for undetected software errors increase the risk of claims and claim-related costs. Due to the mission-critical nature of order processing, management and fulfillment software, undetected software errors are of particular concern. The implementation of our products, which we accomplish through our professional services division and with our partners, typically involves working with sophisticated software, computing and communications systems. If our software contains undetected errors or we fail to meet our customers’ expectations or project milestones in a timely manner, we could experience:

•

Delayed or lost revenues and market share due to adverse customer reaction;

•

Loss of existing customers;

•

Negative publicity regarding us and our products, which could adversely affect our ability to attract new customers;

•

Expenses associated with providing additional products and customer support, engineering and other resources to a customer at a reduced charge or at no charge;

•

Claims for substantial damages against us, regardless of our responsibility for any failure;

•

Increased insurance costs; and

•

Diversion of development and management time and resources.

Our licenses with customers generally contain provisions designed to limit our exposure to potential claims, such as disclaimers of warranties and limitations on liability for special, consequential and incidental damages. In addition, our license agreements usually cap the amounts recoverable for damages to the amounts paid by the licensee to us for the product or services giving rise to the damages. However, we cannot be sure that these contractual provisions will protect us from additional liability. Furthermore, our general liability insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims, or the insurer may disclaim coverage as to any future claim. The successful assertion of any large claim against us could adversely affect our operating results and financial condition.

OUR LIMITED ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY MAY ADVERSELY AFFECT OUR ABILITY TO COMPETE, AND WE MAY BE FOUND TO INFRINGE ON THE PROPRIETARY RIGHTS OF OTHERS.

Our success depends in part on our proprietary software technology. We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect our technology. We cannot guarantee that the steps we have taken to assess and protect our proprietary rights will be adequate to deter misappropriation of our intellectual property, and we may not be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. If third parties infringe or misappropriate our copyrights, trademarks, trade secrets or other proprietary information, our business could be seriously harmed. In addition, although we believe that our proprietary rights do not infringe on the intellectual property rights of others, other parties may assert infringement claims against us or claim that we have violated their intellectual property rights. These risks may be increased by the addition of intellectual property assets through business or product acquisitions. Claims against us, either successful or unsuccessful, could result in significant legal and other costs and may be a distraction to management. We currently focus on intellectual property protection within the

United States. Protection of intellectual property outside of the United States will sometimes require additional filings with local patent, trademark, or copyright offices, as well as the implementation of contractual or license terms different from those used in the United States. Protection of intellectual property in many foreign countries is weaker and less reliable than in the United States. As our business expands into foreign countries, costs and risks associated with protecting our intellectual property abroad will increase. We also may choose to forgo the costs and related benefits of certain intellectual property benefits in some of these jurisdictions.

OUR STOCK PRICE HAS BEEN AND MAY REMAIN VOLATILE, WHICH EXPOSES US TO THE RISK OF SECURITIES LITIGATION.

The trading price of our common stock has in the past and may in the future be subject to wide fluctuations in response to factors such as the following:

•

Revenue or results of operations in any quarter failing to meet the expectations, published or otherwise, of the investment community;

•

Announcements of technological innovations by us or our competitors;

•

Acquisitions of new products or significant customers or other significant transactions by us or our competitors;

•

Developments with respect to our patents, copyrights or other proprietary rights of our competitors;

•

Changes in recommendations or financial estimates by securities analysts;

•

Rumors or dissemination of false and/or unofficial information;

•

Changes in management;

•

Stock transactions by our management or businesses with whom we have a relationship;

•

Conditions and trends in the software and communications industries;

•

Adoption of new accounting standards affecting the software industry; and

•

General market conditions, including geopolitical events.

Fluctuations in the price of our common stock may expose us to the risk of securities lawsuits. Defending against such lawsuits could result in substantial costs and divert management’s attention and resources. In addition, any settlement or adverse determination of these lawsuits could subject us to significant liabilities.

PROVISIONS OF OUR CHARTER DOCUMENTS, DELAWARE LAW, AND OUR STOCKHOLDER RIGHTS PLAN COULD DISCOURAGE A TAKEOVER YOU MAY CONSIDER FAVORABLE OR THE REMOVAL OF OUR CURRENT MANAGEMENT.

Some provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that you may consider favorable or the removal of our current management. These provisions:

•

Authorize the issuance of “blank check” preferred stock;

•

Provide for a classified board of directors with staggered, three-year terms;

•

Prohibit cumulative voting in the election of directors;

•

Prohibit our stockholders from acting by written consent without the approval of our board of directors;

•

Limit the persons who may call special meetings of stockholders; and

•

Establish advance notice requirements for nominations for election to the board of directors or for proposing matters to be approved by stockholders at stockholder meetings.

Delaware law may also discourage, delay or prevent someone from acquiring or merging with us. In addition, purchase rights distributed under our stockholder rights plan will cause substantial dilution to any person or group attempting to acquire us without conditioning the offer on our redemption of the rights. As a result, our stock price may decrease and you might not receive a change of control premium over the then-current market price of the common stock.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risks principally relates to changes in interest rates that may affect our fixed income investments. Our excess cash is invested in debt securities issued by U.S. government agencies and corporate debt securities. We place our investments with high quality issuers and limit our credit exposure by restricting the amount of securities that may be placed with any single issuer. Our general policy is to limit the risk of principal loss and assure the safety of invested funds by limiting market and credit risk. All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. At September 30, 2002, the weighted average pre-tax interest rate on the investment portfolio is approximately 1.8%. Market risk related to these investments can be estimated by measuring the impact of a near-term adverse movement of 10% in short-term market interest rates. If these rates average 10% more in 2002 than in 2001, there would be no material adverse impact on our results of operations or financial position.

Our exposure to adverse movements in foreign exchange rates is increasing as we continue to expand in the international markets. At the present time, we do not hedge our foreign currency exposure, nor do we use derivative financial instruments for speculative trading purposes. During the quarter ended September 30, 2002, there was a substantial weakening in the Brazilian real against the U.S. dollar of about 27% and a weakening of 4% in the Canadian dollar against the U.S. dollar, that when combined with our balance sheet exposure, contributed to a reduction in equity of approximately $562,000.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s chief executive officer and the chief financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report. Based on such evaluation, such officers have concluded that the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company required to be included in the Company’s periodic filings.

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

No change from that reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

Item 2. Changes in Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

10.1		Employment Agreement dated July 3, 2002, between MetaSolv Software, Inc. and Phillip C. Thrasher.
10.2		Indemnification Agreement dated July 3, 2002, between MetaSolv, Inc. and Phillip C. Thrasher.

(b)

Reports on Form 8-K.

(i)

Current report on Form 8-K of MetaSolv, Inc. dated July 3, 2002, reporting the filing of a press release.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: November 13, 2002

METASOLV, INC.

/s/ Glenn A. Etherington

Glenn A. Etherington

Chief Financial Officer

Duly Authorized Officer on behalf of the Registrant

(c)

Exhibits

10.1		Employment Agreement dated July 3, 2002, between MetaSolv Software, Inc. and Phillip C. Thrasher.
10.2		Indemnification Agreement dated July 3, 2002, between MetaSolv, Inc. and Phillip C. Thrasher.

(d)

Reports on Form 8-K.

(ii)

Current report on Form 8-K of MetaSolv, Inc. dated July 3, 2002, reporting the filing of a press release.

Certifications

I, James P. Janicki, Chief Executive Officer, certify that:

I have reviewed the quarterly report for the period ended September 30, 2002 on Form 10-Q of MetaSolv, Inc.;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period this quarterly report is prepared;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors:

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


11/13/2002				/s/ James P. Janicki
Date				James P. Janicki Chief Executive Officer

I, Glenn A. Etherington, Chief Financial Officer, certify that:

I have reviewed the quarterly report for the period ended September 30, 2002 on Form 10-Q of MetaSolv, Inc.;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors:

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


11/13/2002				/s/ Glenn A. Etherington
Date				Glenn A. Etherington Chief Financial Officer

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