CONCORD COMMUNICATIONS INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549

FORM 10-K

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

For the fiscal year ended December 31, 2001

OR

[ ] 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 0-23067

CONCORD COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)

MASSACHUSETTS 04-2710876
(State of incorporation) (IRS Employer Identification Number)

600 NICKERSON ROAD
MARLBOROUGH, MASSACHUSETTS 01752
(508) 460-4646
(Address and telephone number of principal executive offices)

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)

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 [X] No [ ]

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

The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sale price of the Company's common stock on
March 4, 2002, as reported on the Nasdaq National Market was approximately
$359,916,664.

The number of shares outstanding of Common Stock as of March 4, 2002 was
16,961,200.

DOCUMENTS INCORPORATED BY REFERENCE

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PART I

This document contains forward-looking statements. Any statements contained
herein that do not describe historical facts are forward-looking statements.
Concord makes such forward-looking statements under the provisions of the "safe
harbor" section of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements contained herein are based on current expectations,
but are subject to a number of risks and uncertainties. Concord's actual future
results may differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but are not limited
to, the factors discussed elsewhere in this Form 10-K under the heading "Factors
That Could Affect Future Results."

ITEM 1. BUSINESS

INTRODUCTION

Concord develops, markets and supports the eHealth(TM) Suite of scalable
information technology (IT) infrastructure fault and performance management
software solutions. eHealth(TM) integrates fault and performance management of
the applications, systems and networks that comprise today's IT infrastructure.
Concord's solutions are designed to optimize the performance and availability of
IT infrastructures on which enterprises, managed service providers and
telecommunication carriers depend for their day-to-day business and operational
success. Concord was organized as a Massachusetts corporation in 1980 under the
name Concord Data Systems, Inc., and changed its name to Concord Communications,
Inc. in 1986 and its headquarters are located in Marlborough, Massachusetts.

Over the last few years there has been a significant change in the way
companies use information technology to conduct business. The advent of
cost-effective, universal connectivity enables a more effective way to offer
high quality service to business customers. These services, ranging from on-line
banking and point of sales credit authorization to managed application or
location/co-location services, are referred to as IT services. The ability to
provide fast, easy to access, and high availability IT services has become a
differentiator for many successful businesses. Concord's products are designed
to enable businesses to optimize the availability and performance of their IT
systems by providing an end-to-end view across the application software,
systems, and networks comprising the IT infrastructure.

Over 2600 customers, including enterprises, managed service providers and
telecommunication carriers use our eHealth(TM) fault and performance management
software to manage their IT infrastructures. eHealth(TM) enables our customers
to reduce down time, manage the usage of current resources, and limit the need
for incremental IT personnel as their business IT infrastructures expand.
Concord's eHealth(TM) Suite software enables managed service provider and
telecommunication carrier customers to monitor compliance with service level
agreements and to introduce new services for their customers.

Our eHealth(TM) Suite is designed to fit the needs of both enterprises
providing IT services and the managed service providers and telecommunication
carriers on which enterprises rely. These service providers use the eHealth(TM)
Suite to help ensure the quality of services such as network and bandwidth
services (carriers), Web hosting, data center/co-location services, internet
service providers (ISPs), managed service providers (MSPs) and outsourcing
services.

Concord's software is a single-vendor solution that combines real time
fault information with performance data. The eHealth(TM) Suite enables our
customers to detect faults as they happen, as well as identify and resolve
subtle variations in performance that may signify potential outages before
problems occur. Our eHealth(TM) software presents information on network
devices, client and server systems and applications using a flexible graphical
user interface. The information collected from those components can be
associated with the business services they impact. When faults and performance
degradations are detected, eHealth(TM) notifies IT operations staff via email,
page, or console alarm, isolates the sources of delay, and enables the
automation of corrective action to resolve problems. Using the customizable
MyHealth Web-based interface, IT operators can tailor their own view of business
services. MyHealth enables users to select particular infrastructure components
and combine them for an end-to-end view of the business service. These results
are displayed, on

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our eHealth(TM) Live Status(TM) diagram, in a unique organization-centric or
customer-centric view by business organization.

Concord's target markets include enterprises, managed service providers and
telecommunication carriers. Concord markets to these potential customers through
our own sales force, sales agents, value-added resellers, distributors, network
service providers, telecommunication carriers, and orginial equipment
manufacturers (OEMs). As of December 31, 2001, Concord had more than 2,600
customers operating in and serving a variety of industries. In 2001, enterprise
customers comprised 56% of revenue and managed service providers and
telecommunication carriers comprised 46% of revenue.

THE CONCORD SOLUTION

Concord provides a single-vendor solution to manage the IT infrastructure
in real-time with historical context. Concord's eHealth(TM) Suite is a family of
automated, scaleable, Web-based management solutions for critical applications,
systems, and networks. eHealth(TM) helps users manage the availability of the IT
infrastructure by (i) detecting faults and potential outages, (ii) notifying IT
operations staff of problems, (iii) isolating sources of delay, (iv) enabling
the automation of corrective action, and (v) providing data analysis and reports
of both real-time status and historical reports that track changing conditions
over time.

Our solution is capable of data collection, consolidation, analysis and
reporting for up to 80,000 elements by a single console. Furthermore, our
distributed architecture allows configurations, viewable from a single console
that supports collection and reporting of up to 1,000,000 data elements. In
addition, our self-managing distributed systems and application management
agents can work autonomously on any number of systems.

Concord's eHealth(TM) Suite of software products provides organizations
with the following benefits:

(i) Implementation -- provides embedded intelligence, detailed
knowledge, and automated analysis for over 450 different types of devices,
enabling solutions to be up and running within hours or days rather than
weeks, months, or even years;

(ii) Detection of faults before they occur -- combines real-time
management with historical context to detect developing problem conditions
that have been pervasive, or that differ from normal behavior, in order to
alert IT operators to problems before services are impacted;

(iii) Trap reception -- allows the receipt and analysis of traps,
faults, and events coming from applications, systems and networks, creating
an ability to respond to changing IT priorities and environments;

(iv) Business view of service management -- enables association of
organizations and business processes with the underlying infrastructure
components -- applications, systems and networks -- on which they depend;

(v) Predictive and real-time analysis -- provides information about
the availability and response time of critical applications and services so
that IT management can adjust capacities in a proactive manner to comply
with service level agreements; and

(vi) Alignment of management operations with customer business
goals -- provides a view into the end-to-end performance and availability
of the end-user customer environment so that enterprises, carriers or
managed service providers can deliver services based on their business
needs.

In providing these benefits, Concord's eHealth(TM) product family
incorporates the following features:

AUTOMATED SOLUTION. Concord's products are designed to provide solutions
for fully automated fault, availability, and performance management.
Installation can be accomplished in a few hours for most products, and for
certain products, installation can occur remotely, over the Web. Once installed,
our products provide real-time information and also historical reports on
critical areas such as (i) trends and changes for application response times,
system and network availability and capacity; (ii) situations that may give rise
to potential delays or failures in services and processes; and (iii) exceptions
analysis for identifying deviations from specified performance and service
levels.

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SCALEABLE, SOFTWARE-ONLY SOLUTION. The eHealth(TM) product family is
designed to simplify management of the various network devices, client and
server operating systems, hardware platforms, technologies, and applications
that typically comprise today's IT infrastructures. Our products are scaleable,
in order to meet the demands for management as an organization's IT
infrastructure expands. Our eHealth(TM) solution provides managers with the
ability to purchase add-on software licenses or additional agent software as
needed.

MULTI-LEVEL REPORTING. Concord's eHealth(TM) product family generates a
package of graphical reports that provide information and analyses on a variety
of pre-configured parameters. Information is provided for use at multiple levels
of management, from a general overview of capacity, availability and response
time for chief information officers -- to analyses of specific transactions,
client and server components, hardware equipment components, bandwidth
components and network services.

BROAD TECHNOLOGY COVERAGE. Our eHealth(TM) product family provides
management across a spectrum of industry standard applications like Microsoft
Exchange and Information Internet Server; open source Apache; Lotus Notes; ERP
systems from SAP, Baan and Peoplesoft; industry standard operating systems like
UNIX, Microsoft Windows NT and Windows 2001, and Linux; and industry standard
networking technologies like ATM, Frame Relay and IP.

PRODUCTS AND TECHNOLOGY

The eHealth(TM) Suite of products is composed of the eHealth(TM) console, a
centralized console and repository where information gathered from throughout
the infrastructure is consolidated and analyzed; technology-area solution sets
that contain products pertaining to applications, systems and networks
management; and a number of cross-technology, suite-wide products that operate
across all technology areas.

EHEALTH(TM) CONSOLE -- This solution provides IT personnel with a
centralized view of faults, availability and performance across applications,
systems and networks. The eHealth console combines a customizable graphical user
interface with an engine for collecting data, an industry standard relational
database, data analysis algorithms, and flexible reporting capabilities. This
combination enables our eHealth console to collect and analyze data and provide
on-demand or scheduled reporting which can be viewed on the console or accessed
via standard Web-based browsers. The eHealth console also provides an interface
for administration and configuration tasks such as associating business
organizations or processes with underlying resources and scheduling reports.
Different technology license keys enable the eHealth console to collect, analyze
and report on information from different technology areas including
applications, systems, networks, and application service response. eHealth
console can discover and report on more than 450 different types of networks,
systems, and application devices and information; new types of devices can be
added. Its historical reports include: Top-N-Reporting, which helps to identify
trouble spots; At-A-Glance Reporting, which enables users to examine critical
resources; and Trend Reporting, which provides tools to build custom reports.
The MyHealth interface allows users to tailor their own views of business
services, selecting from reports on a particular component such as the network,
or combining reports across the network, systems, and application components for
an end-to-end view of a business service.

EHEALTH(TM) LIVE HEALTH(TM) -- This solution provides access -- with its
features such as eHealth Live Status diagram, Live Exceptions analysis engine
and browser, and Live Trend application -- to real-time performance and
availability management for problem diagnosis. The eHealth Live Status diagram
is a customizable high-level business overview of the current status of key
elements in the IT environment. Live Exceptions browser gives a detailed list of
alarms. Both of them show the performance alarms and hard faults (generated by
Concord's eHealth Live Health - Fault Manager product) in our eHealth console.
They identify who is at risk for an outage or service degradation by delivering
correlated impact analysis organized by customers, services, technologies, and
regions. Our Live Health solution automatically notifies IT personnel about the
alarms via e-mail or pager or by forwarding alarms to a network management
system or by invoking user-specified action. With Live Trend, IT personnel can
monitor performance patterns of their internet infrastructure. Live Health uses
historical data collection to establish context to raw data. Live Health covers
customers' entire IT infrastructures -- applications, systems, and networks. It
is designed to provide out of the box profiles that detect "brownouts" and
service delays without configuring complicated rules. By using the

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data collected by Concord's eHealth Suite products, our eHealth Live Health
solution provides real-time management and historical analysis with no
additional network traffic or overhead. It also provides the flexibility to
monitor customers' e-business delivery systems at user-defined intervals on
specified days, and to "un-monitor" them depending on the users' needs.

EHEALTH(TM) LIVE HEALTH(TM) -- FAULT MANAGER -- This solution provides IT
personnel access to real-time fault management across applications, systems and
networks for problem diagnosis. Analysis algorithms process traps and create a
low number of intelligent alarms; thus, reducing noise and displaying alarms
indicating important problems. Alarms resulting from traps can be associated to
elements managed by eHealth Suite, permitting IT personnel to review current and
historical information. Our eHealth Live Health -- Fault Manager solution uses
the features of our eHealth Live Health solution set; the eHealth Live Status
diagram, combined with this Fault Manager solution, highlights customers'
business topology with current alarm status and is a navigation point to review
current and historical reports while the eHealth Live Health browser shows
details of alarms that result from our Fault Manager solution's trap analysis
algorithms.

EHEALTH(TM) -- NETWORK -- This solution set helps IT personnel manage
performance and optimize availability of key network resources including LANs,
WANs, Frame Relay, ATM, Quality of Service (QoS), Wireless LAN, DSL, VoIP, cable
technologies and Remote Access Equipment. It also integrates with technologies
and operational support systems (OSS) from Lucent, Newbridge and Cisco's VPN
Solutions Center and NetFlow products. Our eHealth -- Network technology license
key enables the eHealth console to automatically discover, collect information
from, analyze, and report on network resources enabling network managers to
track performance, plan capacity, and detect sources of service delay across
their networks. Another product in this category, Traffic Accountant, works with
RMON2 probes and Cisco NetFlow routers to track network traffic and report
resource consumption by users, business units, regions, or applications, thus
enabling network managers to allocate network usage costs back to individual
departments or users. Reports from the eHealth -- Network solution set allow
network managers to understand service levels, proactively address potential
network failures, manage bandwidth and capacity, watch for security violations,
and understand the usage patterns of the network and the network's various
elements.

EHEALTH(TM) -- SYSTEM -- This solution provides IT personnel compiled
information and analysis about their business-critical workstations and servers.
Our eHealth -- System solution is designed to enable IT personnel to deliver
scalable performance optimization, analyze performance in detail, and
proactively detect system "brownouts." Our eHealth -- System solution provides
information about key performance metrics, including CPU, memory, disk,
availability, and line utilization, in an easy-to-understand format for
historical trend analysis, capacity planning, performance tuning, and
service-level management. Our eHealth -- System solution collects system
information from our eHealth SystemEDGE(TM) agents and other third party agents
residing on NT, LINUX or UNIX systems, and stores that information in the
eHealth Suite database. From the eHealth console, IT personnel can perform
analysis on numerous combinations of metrics and time periods. eHealth -- System
information is also delivered to Concord's eHealth Live Health application for
real-time detection of system faults, potential outages, and delays.

EHEALTH(TM) -- RESPONSE -- This solution enables IT personnel to measure
end-user response, detect performance degradations, maintain service levels, and
manage application performance and availability. The information is stored in
the eHealth database and reports are available within the eHealth Suite to help
IT personnel proactively manage application performance and availability.
Application data provided using eHealth -- Response, in conjunction with server
and network data, enables eHealth Suite to provide comprehensive performance and
availability management across customers' applications and their complete
infrastructures. Our eHealth -- Response solution captures application
information from eHealth -- Response agents that perform observational
monitoring as well as active performance and availability testing. Observational
monitoring collects application performance information from end users in a
non-intrusive, observational manner; it occurs at the client desktop and
measures the actual experience of the end user. Active testing can take place at
the desktop, server, or router, providing performance and availability data from
these strategic locations in customers' infrastructures based on executing
repeatable, scheduled application tests. From the eHealth console, IT personnel
can perform analysis on numerous combinations of response metrics

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and time periods. eHealth -- Response information is also delivered to the
eHealth -- Live Health product for real-time detection of degrading performance,
service level breaches, and declining availability.

EHEALTH(TM) -- APPLICATION INSIGHT -- This solution delivers aggregated
information and analyses for business-critical applications, such as Microsoft
Exchange and SQL Server, Oracle, and CheckPoint. Our eHealth -- Application
Insight solution works by collecting vital application metrics from eHealth
application insight modules residing on application servers. This information is
brought back to the eHealth console, where real-time analysis takes place. This
data is also stored inside the eHealth database, enabling IT personnel to run
analyses on various combinations of metrics and time periods. This information
is presented on the eHealth console in reports for historical trend analysis,
capacity planning, performance tuning, troubleshooting, and service-level
management. Our eHealth -- Application Insight solution also delivers data to
our eHealth Live Health application for the real-time analysis and detection of
application faults, trouble spots and areas of delays. eHealth Live Health
baselines customers' business applications to identify normal behavior patterns
based on critical performance metrics.

EHEALTH(TM) -- SPV DISTRIBUTED -- This solution provides an end-to-end
service management tool that allows managed service providers and
telecommunication carriers to manage large networks and speed customers' time to
market. Our solution supports multiple vendors' equipment within our workflow
and reporting structure, which is designed to enable service providers and
carriers to evolve their network and services without affecting operational
support. With eHealth -- SPV Distributed, Concord's distributed architecture
allows these businesses to support the growing network in large, complex
implementations.

CUSTOMER SERVICE

Concord's post-sales support organization is responsible for providing
ongoing technical support and training for our customers. For an annual fee, a
customer receives telephone, email and web-based support, as well as updated
product releases. We offer support coverage 24 hours a day, seven days a week to
customers for an additional fee. We offer a web-based tool, Service Express,
which enables customers to find, via our website, answers to questions and
solutions to technical support issues. We also provide a toll-free customer
support line to all customers. Support personnel are on call to answer the
technical support calls and generally provide same-day responses to questions
that cannot be resolved during the initial call. All calls are logged, opened,
tracked, and closed with regular updates to the customer, our sales teams and
our executive management team. As of December 31, 2001, we employed 45 technical
post-sales support personnel, 5 inside sales representatives and one
administrative customer service person. In addition, we also had 43 professional
service and training personnel who provide services to our customers on a
fee-for-service basis.

SALES AND MARKETING

Concord markets our products in the United States to large and medium-sized
organizations, as well as service providers, including telecommunication
carriers, ISPs, MSPs, systems integrators and outsourcers primarily through a
direct sales force, sales agents and through value added resellers (VARs).
Internationally, Concord markets primarily through distributors. Additionally,
we have entered into joint marketing and joint development arrangements with a
number of companies.

As of December 31, 2001, Concord had 25 North America sales teams, each
comprised of one direct sales person and one or two technical support people
targeting the following four regions: East, Central, West and Federal. We had 12
international sales teams, also comprised of one direct sales person and one or
two technical support people, targeting the following three geographic regions:
Europe, Middle East and Africa (EMEA); Asia/Pacific; and Latin America. In
addition, we employed 26 inside sales and technical management individuals who
support both the North America and International sales teams. No single customer
accounted for more than 10% of Concord's revenue during the last three years.

As of December 31, 2001, we had relationships with 61 North American VARs
and 78 international distributors. It is the responsibility of each sales team
to manage all sales within its geographic territory by signing up, training, and
managing sales agents, VARs, distributors, network service providers and
outsourcers, as well as selling directly to customers. Concord generates sales
leads through seminars, trade shows, Internet

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postings, press articles, referrals, mass mailings and cold calling as well as
through relationships with sales agents, distributors, VARs, network service
providers and outsourcers.

As of December 31, 2001, Concord had relationships with over 500
telecommunication carriers and managed service providers. These service
providers offer our products as part of their service offerings. As of December
31, 2001, we also had joint marketing and development partners that work with
our direct sales force, including Alcatel SA, Aprisma Management Technologies,
Cap Gemini Ernst & Young, Cisco Systems, Inc., Hewlett-Packard Co., KPMG
Consulting, Lucent Technologies, Inc., Micromuse, Inc., Nortel Networks Corp.,
Orchestream Holdings PLC, Riversoft and Siemens AG. We also have a professional
services referral program aimed at our key network-consulting partners. Under
this program, Concord will provide professional services through these partners
directly to our customers.

As of December 31, 2001, Concord employed 52 marketing personnel who
position, promote and market our products. These individuals are engaged in a
variety of activities, including direct marketing, public relations, tradeshows,
advertising, Internet postings, and seminars. As of December 31, 2001, we
employed 130 sales personnel.

PRODUCT DEVELOPMENT

We believe that our future success depends in large part on our success in
enhancing existing products and developing new products that maintain
technological competitiveness and deliver value to existing and new customers.
We have made and intend to continue to make substantial investments in product
development. Extensive product development input is obtained through customers
and our monitoring of end user needs and changes in the marketplace.

Concord introduced the initial version of our Network Health product
focused at the LAN and WAN environments in the first quarter of 1995. During
1996, we introduced three additional versions of our Network Health
software -- Frame Relay, Router/Switch and Traffic Accountant. During 1997, we
introduced two additional versions of Network Health software -- Server and
Service Level Reporting. During 1998, we introduced two additional versions of
our Network Health product -- ATM and Remote Access. During 1999, we introduced
one additional version of our Network Health product -- Response, which is now
incorporated into our Application Health product. During 2000, we introduced our
eHealth(TM) Suite that offers performance, capacity and availability management
across applications, systems, and networks. The introduction of the eHealth(TM)
Suite is the result of the integration of the products of Empire Technologies,
Inc. and FirstSense Software, Inc. which we acquired in 1999 and 2000,
respectively, into our eHealth(TM) product: Systems and Application Management
from Empire and Application Response Management, from FirstSense. During 2000,
we also introduced our first fault management application, Live Health(TM),
which detects and reports performance and availability faults in real time. The
eHealth(TM) historical database provides the Live Health(TM) application the
historical context to reduce fault notifications and to detect performance
brownouts as well as hard faults. During 2001, we introduced our second fault
management solution, eHealth(TM) Live Health(TM) -- Fault Manager, which
combines embedded intelligence and analysis algorithms to create a low number of
intelligence alarms; this enables IT personnel to focus on taking corrective
action rather than researching potential issues. During 2001, we also introduced
our real-time display tool, Live Status(TM), which provides individual users an
overview of the business topology of the IT infrastructure. We are now
developing a new distributed infrastructure with a focus on large-scale
installations and ease of administration. The introduction of new technologies
like DSL, VoIP, VPN, SAN, Wireless, and others round out the end-to-end solution
set.

Concord's total expenses for research and development were $24.0 million,
$21.1 million and $14.4 million in 2001, 2000 and 1999, respectively. We
anticipate that we will continue to commit substantial resources to research and
development in the future and that product development expenses may increase in
absolute dollars in future periods. To date, our development efforts have not
resulted in any capitalized software development costs. As of December 31, 2001,
our product development organization consisted of 132 people.

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COMPETITION

The market for Concord's products is highly competitive and subject to
rapid technological and competitive landscape changes. Although we have
experienced limited competition to date from products with comparable
capabilities, we expect competition to increase in the future. Further
development by our principal competitors, and acquisitions of smaller companies
by large established vendors and the integration of their products may be the
main source of future competition for us. We currently compete principally on
the basis of: (i) providing the market an integrated fault, performance, and
availability solution for applications, systems and networks, as a single
vendor; (ii) the automated, scaleable, ease of use, and cost effective nature of
our products; and (iii) our experience gained from years of interaction with
customers. While we believe that we currently compete favorably overall with
respect to these factors, there can be no assurance that we will be able to
continue to do so.

We compete or may compete directly or indirectly with the following
categories of companies:

(i) report toolset vendors;

(ii) fault management software vendors;

(iii) application performance software vendors;

(iv) enterprise management software, framework and platform providers;

(v) large, well established management framework companies that have
developed network management platforms;

(vi) developers of network element management solutions; and

(vii) probe vendors.

Additional competitors, including large networking or telecommunication
equipment manufacturers, telecommunication service providers, and computer
hardware and software companies, may enter this market, thereby further
intensifying competition. Additionally, there can be no assurance that one or
more of our customers may not attempt to develop competing products internally
or that one or more of the companies we have developed relationships with, such
as the network management platform developers and probe vendors, will not try to
develop one or more products that compete more directly with our products.

Many of our current and prospective competitors have significantly greater
financial, sales and marketing, technical and other resources than Concord. As a
result, these competitors may be able to devote greater resources than Concord
to the development, promotion, sale and support of their products. Moreover,
these companies may introduce additional products that are competitive with or
better than Concord's products or may enter into strategic relationships to
offer better products than those currently offered. There can be no assurance
that our products would effectively compete with such new products. In addition
to the risk that other products will be developed, current and prospective
competitors may be able to market, sell and support their products more
effectively.

To remain competitive, we must continue to invest in research and
development, sales and marketing, and customer service and support. In addition,
as we enter new markets and utilize different distribution channels, the
technical requirements and levels and bases of competition may be different than
those experienced in our current market. There can be no assurance that we will
be able to successfully compete against either current or potential competitors
in the future.

PROPRIETARY RIGHTS

Our success depends significantly upon our proprietary technology. We rely
on a combination of patent, copyright, trademark and trade secret laws,
non-disclosure agreements, and other contractual provisions to establish,
maintain, and protect our proprietary rights; however, use of contractual,
statutory and common law protections of our proprietary technologies offers only
limited protection.

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We have ten issued U.S. patents and seven pending U.S. patent applications,
and various foreign counterparts. We cannot ensure that patents will issue from
our pending applications or from any future applications or that, if issued, any
claims allowed will be sufficiently broad to protect our technology. In
addition, we cannot ensure that any patents that have been or may be issued will
not be challenged, invalidated or circumvented, or that any rights granted by
those patents would protect our proprietary rights. Failure of any patents to
protect our technology may make it easier for our competitors to offer
equivalent or superior technology.

We also have sought to protect our intellectual property through the use of
copyright, trademark, and trade secret laws registered or applied for
registration for certain trademarks, and will continue to evaluate the
registration of additional trademarks as appropriate. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our products or services, or to obtain and use information that we regard as
proprietary. Third parties may also independently develop similar technology
without breach of our proprietary rights.

In addition, the laws of some foreign countries do not protect proprietary
rights to as great an extent as do the laws of the United States. In addition,
many of our products are licensed under end user license agreements (also known
as shrinkwrap licenses) that are not signed by licensees. The law governing the
enforceability of shrinkwrap license agreements is not settled in most
jurisdictions. There can be no guarantee that we would achieve success in
enforcing one or more shrinkwrap license agreements if we sought to do so in a
court of law.

REVENUE BY GEOGRAPHIC REGION

The following table presents Concord's revenue by major geographic regions
(in thousands):

No one country, except the United States, accounts for greater than 10% of total
revenues.

EMPLOYEES

As of December 31, 2001, we had a total of 471 employees, all but 49 of
whom were based in the United States. Of the total, 132 were in research and
development, 94 were in customer service, 130 were in sales, 52 were in
marketing, 30 were in operations and information technology and 33 were in
finance, human resources and administration. Our future performance depends in
part, upon the continued service of our key engineering, technical support and
sales personnel. Competition for such personnel can be intense and there can be
no assurance that we will be successful in attracting or retaining such
personnel in the future. Except for two employees in Brazil, none of our
employees are represented by a labor union or are subject to a collective
bargaining agreement. We have not experienced any work stoppages and consider
our relations with our employees to be good.

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FACTORS THAT COULD AFFECT FUTURE RESULTS

References in these risk factors to "we," "our," the "Company," and "us"
refer to Concord Communications, Inc., a Massachusetts corporation. Any
investment in our common stock involves a high degree of risk. If any of the
following risks actually occur, our business, results of operations and
financial condition would likely suffer.

This Annual Report on Form 10-K contains forward-looking statements. Any
statements contained in this document that do not describe historical facts are
forward-looking statements. Concord makes such forward-looking statements under
the provisions of the "safe harbor" section of the Private Securities Litigation
Reform Act of 1995. In particular, statements contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations, which
are not historical facts (including, but not limited to, statements concerning:
the plans and objectives of management; increases in sales and marketing,
research and development, customer support and service, and general and
administrative expenses; expectations regarding increased competition and
Concord's ability to compete successfully; sustenance of revenue growth both
domestically and internationally; the size, scope and description of Concord's
target customer market; future product development, including but not limited to
anticipated expense levels to fund product development, acquisitions and the
integration of acquired companies; and our expected liquidity and capital
resources) constitute forward-looking statements. Forward-looking statements
contained herein are based on current expectations, but are subject to a number
of risks and uncertainties. Concord's actual future results may differ
significantly from those stated in any forward-looking statements. Factors that
may cause such differences include, but are not limited to, the factors
discussed below.

OUR FUTURE OPERATING RESULTS ARE UNCERTAIN.

Prior to 2001, we marketed and sold our products primarily in the
performance management market. In 2001, our product functionality was expanded
to include both fault and performance management features to penetrate the fault
management market. Accordingly, we have a limited operating history in this
expanded market upon which we can evaluate our business. As currently developed,
our product is an integrated fault and performance management tool that manages
applications, systems and networks. The integrated fault and performance market
is highly competitive and rapidly evolving. Additionally, many of our
competitors in this new market have a longer operating history and greater
resources. Our limited operating history and the uncertain economic climate
makes the prediction of future results of operations difficult or impossible.
Our prospects must be considered in light of the risks, costs, and difficulties
frequently encountered by emerging companies operating in the highly competitive
software industry.

THE MARKET FOR INTEGRATED FAULT AND PERFORMANCE MANAGEMENT SOFTWARE IS EMERGING.

The market for our integrated fault and performance solution is in an early
stage of development. Although the rapid expansion and increasing complexity of
computer applications, systems, and networks in recent years has increased the
demand for fault and performance management software products, the awareness of,
and the need for, an integrated fault and performance solution is a recent
development. Because the market for this solution is only beginning to develop,
it is difficult to assess:

- the size of this market;

- the appropriate features and prices for products to address this market;

- the optimal distribution strategy; and

- the competitive environment that will develop.

The development of this market and our growth will depend significantly
upon the desire and success of telecommunication carriers, managed services
providers, and enterprises to integrate fault and performance management for
their applications, systems, and networks. Moreover, it will depend on the
willingness of telecommunication carriers, managed service providers, systems
integrators, and outsourcers to integrate fault and performance management
software into their product and service offerings. The market for integrated

9

fault and performance management software may not grow or we may fail to assess
and address the needs of this market.

THE MARKET FOR OUR PRODUCTS IS INTENSELY COMPETITIVE.

The market for our products is new, intensely competitive, rapidly
evolving, and subject to technological change. Our current and future
competitors include:

- report toolset vendors;

- fault management software vendors;

- application performance software vendors;

- enterprise management software, framework and platform providers;

- large, well established management framework companies that have
developed network management platforms;

- developers of network element management solutions;

- probe vendors.

We expect competition to persist, increase, and intensify in the future
with possible price competition developing in our markets. Many of our current
and potential competitors have longer operating histories and significantly
greater financial, technical and marketing resources and name recognition than
us. We do not believe our market will support a large number of competitors and
their products. If we do not provide products that achieve success in our market
in the short term, we could suffer an insurmountable loss in market share and
brand name acceptance. We cannot ensure that we will compete effectively with
current and future competitors.

THE MARKET FOR PERFORMANCE AND FAULT MANAGEMENT OF SOFTWARE APPLICATIONS,
SYSTEMS AND NETWORKS IS BECOMING INCREASINGLY TARGETED BY LARGER COMPANIES WITH
SUBSTANTIALLY GREATER RESOURCES.

A considerable portion of our revenue is generated from sales of products
that manage both the fault and performance aspects of software applications and
systems. This market is very competitive and we are in direct competition with
larger companies with substantially greater resources. These larger companies
are able to devote considerable resources to the development of competitive
products and the creation and maintenance of direct and indirect sales channels.
The continued presence of these larger companies in this market may impact our
ability to retain or increase our market share.

MARKET ACCEPTANCE OF OUR EHEALTH(TM) PRODUCT FAMILY IS CRITICAL TO OUR SUCCESS.

We currently derive substantial product revenues from our eHealth(TM)
product family, and we expect that revenues from these products will continue to
account for almost all of our product revenues in the foreseeable future. Broad
market acceptance of these products is critical to our future success. We cannot
ensure that market acceptance of our eHealth(TM) Suite of products will increase
or even remain at current levels. Factors that may affect the market acceptance
of our integrated solution include:

- the availability and price of competing solutions, products and
technologies; and

- the success of our sales efforts and those of our marketing partners.

Moreover, if demand for integrated fault and performance management
software products increases, we anticipate that our competitors will introduce
additional competitive products and new competitors could enter our market and
offer alternative products resulting in decreased market acceptance of our
products.

10

WE MAY NEED FUTURE CAPITAL FUNDING.

We plan to continue to expend substantial funds on the continued
development, marketing, and sale of the eHealth(TM) product family. We cannot
ensure that our existing capital resources, the proceeds from our initial public
offering during October 1997, and any funds that may be generated from future
operations together will be sufficient to finance our future operations or that
other sources of funding will be available on terms acceptable to us, if at all.
In addition, future sales of substantial amounts of our securities in the public
market could adversely affect prevailing market prices and could impair our
future ability to raise capital through the sale of our securities.

WE MUST INTRODUCE PRODUCT ENHANCEMENTS AND NEW PRODUCTS ON A TIMELY BASIS.

Because of rapid technological change in the software industry and
potential changes in the IT infrastructure, fault and performance management
software market, and changes in industry standards, the life cycle of versions
of our eHealth(TM) products is difficult to estimate. We cannot ensure that:

- we will successfully develop and market enhancements to our eHealth(TM)
products or successfully develop new products that respond to
technological changes, evolving industry standards or customer
requirements;

- we will not experience difficulties that could delay or prevent the
successful development, introduction and sale of such enhancements or new
products; or

- such enhancements or new products will adequately address the
requirements of the marketplace and achieve market acceptance.

THE NEED FOR OUR PRODUCTS MAY DECREASE IF MANUFACTURERS INCORPORATE OUR PRODUCT
FEATURES INTO THEIR PRODUCT OFFERINGS.

Our products manage the performance of computer applications, systems, and
networks. Presently, manufacturers of both hardware and software have not
implemented these management functions into their products in any significant
manner. These products typically include, but are not limited to, operating
systems, workstations, network devices, and software. If manufacturers begin to
incorporate these management functions into their products it may decrease the
value of our products and have a substantial impact on our business.

WE CANNOT ENSURE THAT OUR REVENUES WILL GROW OR THAT WE WILL BE PROFITABLE.

As a company, we have expended considerable resources to develop innovative
products that have enabled us to penetrate new markets both in the United States
and internationally. As a result of these efforts, we achieved revenue growth
and profitability for the fiscal years ended 2000, 1999, and 1998. However, as
the worldwide economy weakened in 2001, our revenues did not grow at expected
levels. We operated at a net loss and we cannot ensure that we can generate
revenue growth on a quarterly or annual basis, or that we can achieve or sustain
any revenue growth in the future. Our annual revenue in 2002 may be lower than
our annual revenue in 2001.

In an effort to return to profitability, we have reduced our operating
expenses for 2001 and plan to continue to limit operating expenses for 2002.
However, competition in the marketplace may require us to increase our operating
expenses in the future in order to:

- fund higher levels of research and development;

- increase our sales and marketing efforts;

- develop new distribution channels;

- broaden our customer support capabilities; and

- expand our administrative resources in anticipation of future growth.

11

To the extent that increases in our expenses precede or are not followed by
increased revenue, our profitability will continue to suffer. Our revenue must
grow substantially in order for us to become profitable on a quarterly or annual
basis. In addition, in view of the rapidly evolving nature of our business and
markets and our limited operating history in our current market, we believe that
one should not rely on period-to-period comparisons of our financial results as
an indication of our future performance.

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.

We are likely to experience significant fluctuations in our quarterly
operating results caused by many factors, including, but not limited to:

- changes in the demand for our products by customers or group of
customers;

- the timing, composition, and size of orders from our customers, including
the tendency for significant bookings to occur in the last month of each
fiscal quarter;

- our customers' spending patterns and budgetary resources for fault and
performance management software solutions;

- the success of our new customer generation activities;

- introductions or enhancements of products, or delays in the introductions
or enhancements of products, by us or our competitors;

- changes in our pricing policies or those of our competitors;

- changes in the distribution channels through which products are sold;

- our success in anticipating and effectively adapting to developing
markets and rapidly changing technologies;

- our success in attracting, retaining, and motivating qualified personnel;

- changes in the features and functions of products sold by us and our
competitors;

- the publication of opinions about us and our products, or our competitors
and their products, by industry analysts or others;

- changes in general economic conditions; and

- geopolitical conditions in the world.

Though our services revenue has been increasing as a percentage of total
revenues, we do not have a significant ongoing revenue stream that may mitigate
quarterly fluctuations in operating results, as do other software companies with
a longer history of operations. Increases in our revenues will also depend on
our successful implementation of our distribution strategy as we attempt to
expand our channels of distribution. Due to the buying patterns of certain of
our customers and also to our own sales incentive programs focused on annual
sales goals, revenues in our fourth quarter could be higher than revenues in our
first quarter of the following year. There also may be other factors, such as
seasonality and the timing of receipt and delivery of orders within a fiscal
quarter, that significantly affect our quarterly results, which are difficult to
predict given our limited operating history.

Our quarterly sales and operating results depend generally on:

- the volume and timing of orders within the quarter;

- the tendency of sales to occur late in fiscal quarters; and

- our fulfillment of orders received within the quarter.

A significant portion of our product sales occurs in the final month of
each fiscal quarter. Any delay in the shipment of products prior to the end of
the quarter may result in decreased revenues for the quarter.

12

Additionally, intense competition and budgetary constraints placed upon our
customers typically increase during the final month of a fiscal quarter and may
adversely affect the revenues for that quarter.

In addition, our expense levels are based in part on our expectations of
future orders and sales, which are extremely difficult to predict. A substantial
portion of our operating expenses is related to personnel, facilities, and sales
and marketing programs. Accordingly, we may not be able to adjust our fixed
expenses quickly enough to address any significant shortfall in demand for our
products in relation to our expectations.

Due to all of the foregoing factors, we believe that our quarterly
operating results are likely to vary significantly in the future. Therefore, in
some future quarter our results of operations may fall below the expectations of
securities analysts and investors. In such event, the trading price of our
common stock would likely suffer.

THE IMPACT OF THE RECENT TERRORIST ATTACKS AND THE RISK OF FUTURE TERRORIST
ATTACKS MAY ADVERSELY IMPACT OUR REVENUE.

The tragic events of September 11, 2001 impacted our sales to companies in
the New York City area and our sales to the United States government. These
markets have not yet recovered from the events of September 11, 2001 and it is
impossible to determine when, and if, they will recover. Sales in the New York
City area and sales to the United States government are a significant source of
revenue for us and our business may be adversely affected as these areas
recover. Additionally, recent terrorist warnings, both in the United States and
internationally, suggest the possibility of future terrorist attacks. As we sell
products both in the United States and internationally, the occurrence of future
terrorist attacks may adversely affect our business.

OUR SUCCESS IS DEPENDENT UPON SALES TO TELECOMMUNICATION CARRIERS, SERVICE
PROVIDERS, AND ENTERPRISE CUSTOMERS.

We derive and likely will continue to derive a significant portion of our
revenues from the sales of our products to telecommunication carriers, service
providers, and enterprise customers. These markets worldwide have suffered from
a turbulent economy during 2000 and 2001, turbulence that has been exacerbated
by the tragic events of September 11, 2001 and their aftermath. Concord has been
negatively affected by the downturn in capital spending within this market. The
volume of sales of our products and services to telecommunication carriers,
service providers, and enterprise customers may increase slower than we expect
or may decrease.

OUR COMMON STOCK PRICE COULD EXPERIENCE SIGNIFICANT VOLATILITY.

The market price of our common stock may be highly volatile and could be
subject to wide fluctuations in response to:

- variations in results of operations;

- announcements of technological innovations or new products by us or our
competitors;

- changes in financial estimates by securities analysts; or

- other events or factors.

In addition, the financial markets have experienced significant price and
volume fluctuations that have particularly affected the market prices of equity
securities of many high technology companies and that often have been unrelated
to the operating performance of such companies or have resulted from the failure
of the operating results of such companies to meet market expectations in a
particular quarter. Broad market fluctuations or any failure of our operating
results in a particular quarter to meet market expectations may adversely affect
the market price of our common stock leading to an increased risk of securities
class action litigation. Such litigation could result in substantial costs and a
diversion of our attention and resources.

13

OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE. OUR SUCCESS DEPENDS UPON
MAINTENANCE OF STANDARD PROTOCOLS.

The software industry is characterized by:

- rapid technological change;

- frequent introductions of new products;

- changes in customer demands; and

- evolving industry standards.

The introduction of products embodying new technologies and the emergence
of new industry standards can render existing products and integrated solutions
obsolete and unmarketable. Our eHealth(TM) -- Network product's analysis and
reporting, as well as the quality of its reports, depends upon its utilization
of the industry-standard Simple Network Management Protocol (SNMP) and the data
resident in conventional Management Information Bases (MIBs). Any change in
these industry standards, the development of vendor-specific proprietary MIB
technology, or the emergence of new network technologies could affect the
compatibility of our eHealth(TM) -- Network products with these devices, which
in turn could affect its analysis and generation of comprehensive reports or the
quality of the reports. Similarly, our Live Health(TM) -- Fault Manager product
receives only SNMP traps from failing devices, systems, and applications. Any
change in these industry standards could hinder the effectiveness of this
product. Furthermore, although our eHealth(TM) Suite of products currently runs
on industry-standard UNIX operating systems and Windows NT, any significant
change in industry-standard operating systems could affect the demand for, or
the pricing of, our products and solutions.

WE RELY ON STRATEGIC PARTNERS AND OTHER EVOLVING DISTRIBUTION CHANNELS.

Our distribution strategy is to develop multiple distribution channels,
including sales through:

- strategic marketing partners;

- value added resellers;

- system integrators;

- telecommunication carriers;

- original equipment manufacturers ("OEMs"); and

- independent software vendors and international distributors.

We have developed a number of these relationships and intend to continue to
develop new "channel partner" relationships. Our success will depend in large
part on our development of these additional distribution relationships and on
the performance and success of these third parties, particularly
telecommunication carriers and other network service providers. We sell our
products in the United States through both direct sales to customers and
indirect sales to customers through our channel partners. Internationally, we
sell our products almost exclusively through indirect sales via our channel
partners. Our international channel partners are located in Europe, the Middle
East, Africa, Asia, and North and South America and are subject to local laws,
regulations, and customs that may make it difficult to accurately assess the
potential revenue that can be generated from a certain market. Our success
depends upon our ability to attract and retain valuable channel partners and to
accurately assess the size and vitality of the markets in which our products are
sold. While we have implemented policies and procedures to achieve this, we
cannot predict the extent to which we are able to attract and retain valuable
channel partners. Additionally, our channel partners may not be successful in
marketing and selling our products. We may:

- fail to attract important and effective channel partners;

- fail to penetrate our targeted market segments through the use of channel
partners; or

14

- lose any of our channel partners, as a result of competitive products
offered by other companies, or products developed internally by these
channel partners or otherwise.

WE MAY FAIL TO MANAGE SUCCESSFULLY OUR GROWTH.

We have experienced significant growth in our sales and operations
personnel; our products have become increasingly complex; and our product
distribution channels are being developed and expanded. Our growth, coupled with
the rapid evolution of our markets, has placed, and is likely to continue to
place, significant strains on our administrative, operational, and financial
resources and increase demands on our internal systems, procedures, and controls
that may affect the overall profitability of the company.

OUR SUCCESS DEPENDS ON OUR RETENTION OF KEY PERSONNEL.

Our performance depends substantially on the performance of our key
technical and senior management personnel. We may lose the services of any of
such persons. We do not maintain key person life insurance policies on any of
our employees. Our success depends on our continuing ability to identify, hire,
train, motivate, and retain highly qualified management, technical, and sales
and marketing personnel. We experience intense competition for such personnel
and are constantly exploring new avenues for attracting and retaining key
personnel. However, we cannot ensure that we will successfully attract,
assimilate, or retain highly qualified technical, managerial or sales and
marketing personnel in the future.

OUR FAILURE TO EXPAND INTO INTERNATIONAL MARKETS COULD HARM OUR BUSINESS.

We intend to continue to expand our operations outside of the United States
and enter additional international markets, primarily through the establishment
of channel partner arrangements. We expect to commit additional time and
development resources to customizing our products and services for selected
international markets and to developing international sales and support
channels. We cannot ensure that such efforts will be successful.

We face certain difficulties and risks inherent in doing business
internationally, including, but not limited to:

- costs of customizing products and services for international markets;

- dependence on independent resellers;

- multiple and conflicting regulations;

- exchange controls;

- longer payment cycles;

- unexpected changes in regulatory requirements;

- import and export restrictions and tariffs;

- difficulties in staffing and managing international operations;

- greater difficulty or delay in accounts receivable collection;

- potentially adverse tax consequences;

- the burden of complying with a variety of laws outside the United States;

- the impact of possible recessionary environments in economies outside the
United States;

- political and economic instability; and

- exposure to foreign currency fluctuations.

Our successful expansion into certain countries will require additional
modification of our products, particularly national language support. Presently,
virtually all of our current export sales are denominated in

15

United States dollars. To the extent that international sales do continue to be
denominated in U.S. dollars, an increase in the value of the United States
dollar relative to other currencies could make our products and services more
expensive and, therefore, potentially less competitive in international markets.
In certain European Union countries, however, we have introduced pricing in
Euros in 2002. To the extent that future international sales are denominated in
foreign currency, our operating results will be subject to risks associated with
foreign currency fluctuation. Additionally, as we increase our international
sales, seasonal fluctuations in revenue generation resulting from lower sales
that typically occur during the summer months in Europe and other parts of the
world may affect our total revenues.

OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS MAY HARM OUR COMPETITIVE
POSITION.

Our success depends significantly upon our proprietary technology. We rely
on a combination of patent, copyright, trademark and trade secret laws,
non-disclosure agreements, and other contractual provisions to establish,
maintain, and protect our proprietary rights. These means afford only limited
protection.

We have ten issued and seven pending U.S. patents, and various foreign
counterparts. We cannot ensure that patents will issue from our pending
applications or from any future applications or that, if issued, any claims
allowed will be sufficiently broad to protect our technology. In addition, we
cannot ensure that any patents that have been or may be issued will not be
challenged, invalidated or circumvented, or that any rights granted by those
patents would protect our proprietary rights. Failure of any patents to protect
our technology may make it easier for our competitors to offer equivalent or
superior technology.

We have sought also to protect our intellectual property through the use of
copyright, trademark, and trade secret laws. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
products or services, or to obtain and use information that we regard as
proprietary. Third parties may also independently develop similar technology
without breach of our proprietary rights.

In addition, the laws of some foreign countries do not protect proprietary
rights to as great an extent as do the laws of the United States. In addition,
many of our products are licensed under end user license agreements (also known
as "shrinkwrap" licenses) that are not signed by licensees. The law governing
the enforceability of shrinkwrap license agreements is not settled in most
jurisdictions. There can be no guarantee that we would achieve success in
enforcing one or more shrinkwrap license agreements if we sought to do so in a
court of law.

WE LICENSE CERTAIN TECHNOLOGIES FROM THIRD PARTIES.

We license from third parties, generally on a non-exclusive basis, certain
technologies used in our products. The termination of any such licenses, or the
failure of the third-party licensors to adequately maintain or update their
products, could result in delay in our shipment of certain of our products while
we seek to implement technology offered by alternative sources, and any required
replacement licenses could prove costly. While it may be necessary or desirable
in the future to obtain other licenses relating to one or more of our products
or relating to current or future technologies, we cannot ensure that we will be
successful in doing so on commercially reasonable terms or at all.

INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS WOULD HARM OUR BUSINESS.

Although we do not believe that we are infringing upon the intellectual
property rights of others, claims of infringement are becoming increasingly
common as the software industry develops legal protections for software
products. Litigation may be necessary to protect our proprietary technology, and
third parties may assert infringement claims against us with respect to their
proprietary rights. Any claims or litigation can be time-consuming and expensive
regardless of their merit. Infringement claims against us can cause product
release delays, require us to redesign our products, or require us to enter into
royalty or license agreements, which agreements may not be available on terms
acceptable to us or at all.

16

PRODUCT DEFECTS COULD RESULT IN THE LOSS OF OR DELAY IN MARKET ACCEPTANCE OF OUR
PRODUCTS.

As a result of their complexity, software products may contain undetected
errors or failures when first introduced or as new versions are released. We
cannot ensure that, despite testing by us and testing and use by current and
potential customers, errors will not be found in new products we ship or, if
discovered, that we will successfully correct such errors in a timely manner or
at all. The occurrence of errors and failures in our products could result in
loss of, or delay in, market acceptance of our products, and alleviating such
errors and failures could require significant expenditure of capital and other
resources by us.

WE MAY NOT HAVE SUFFICIENT PROTECTION AGAINST PRODUCT LIABILITY CLAIMS.

Because our products are used by our customers to identify and predict
current and future application, system, and network problems and to avoid
failures of the network to support critical business functions, design defects,
software errors, misuse of our products, incorrect data from network elements,
or other potential problems, within or out of our control, may arise from the
use of our products and could result in financial or other damages to our
customers. While we do not maintain product liability insurance, our license
agreements with our customers typically contain provisions designed to limit our
exposure to potential claims as well as any liabilities arising from such
claims. As a matter of practice, our license agreements limit our liability in
regards to product liability claims, and in many agreements, our maximum
liability for product liability claims is limited to the equivalent of the cost
of the products licensed under that agreement. However, any litigation or
similar procedure related to a product liability claim may require considerable
resources to be expended that could adversely affect the business and decrease
future revenue.

ITEM 2. PROPERTIES

Concord's corporate office and principal facilities are located in
Marlborough, Massachusetts. In March 2000 we signed a 7-year operating lease for
our principal operating facilities. Aggregate rental payments under the lease
will be $18.8 million. This facility accommodates finance, administration and
operations, research and development, customer support, marketing and sales
management. We also lease, on a short-term basis, sales office space in Atlanta,
GA; Dallas, TX; Plymouth, MI; Seattle, WA; Vienna, VA; England, France, the
Netherlands, Spain, Australia, Hong Kong, Japan, Singapore, Mexico and Brazil.

ITEM 3. LEGAL PROCEEDINGS

Concord is not a party to any litigation that we believe could have a
material adverse effect on our business, results of operations or financial
condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2001.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

PRICE RANGE OF COMMON STOCK

Concord affected its initial public offering on October 24, 1997 at a price
of $14.00 per share. Since that date, Concord's Common Stock has traded on the
Nasdaq National Market under the symbol CCRD. The

17

following table sets forth, for the period indicated, the high and low sales
prices for the Common Stock, all as reported by the Nasdaq National Market.

As of March 4, 2002, Concord had approximately 7,027 holders of our common
stock.

DIVIDEND POLICY

We currently anticipate that we will retain all future earnings for use in
our business and we do not anticipate that we will pay any cash dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of our Board of Directors and will depend upon, among other things,
future earnings, operations, capital requirements and the general financial
condition of the Company, general business conditions and contractual
restrictions on payment of dividends, if any.

USE OF PROCEEDS

On October 16, 1997, Concord commenced an initial public offering ("IPO")
of 2,900,000 shares of common stock, par value $0.01 per share, pursuant to the
Company's final prospectus dated October 15, 1997 (the "Prospectus"). The
Prospectus was contained in the Company's Registration Statement on Form S-1,
which was declared effective by the Securities and Exchange Commission (SEC File
No. 333-33227) on October 15, 1997. Of the 2,900,000 shares of common stock
registered, 2,300,000 shares were offered and sold by the Company and 600,000
shares were offered and sold by certain stockholders of the Company. As part of
the IPO, the Company granted the several underwriters an overallotment option to
purchase up to an additional 435,000 shares of common stock (the "Underwriters'
Option"). The IPO closed on October 21, 1997 upon the sale of 2,900,000 shares
of Common Stock to the underwriters. The managing underwriters for the IPO were
Nationsbanc Montgomery Securities Inc., BancAmerica Roberston Stephens and
Wessels, Arnold and Henderson, L.L.C (the "Representatives"). On October 24,
1997, the Representatives, on behalf of the several underwriters, exercised the
Underwriters' Option, purchasing 435,000 additional shares of Common Stock from
the Company. The aggregate offering price of the IPO to the public was
$40,600,000 (exclusive of the Underwriters' Option), with proceeds to the
Company and selling shareholders, after deduction of the underwriting discount,
of $29,946,000 (before deducting offering expenses payable by the Company) and
$7,812,000 respectively. The aggregate offering price of the Underwriters'
Option exercised was $6,090,000, with proceeds to the Company, after deduction
of the underwriting discount, of $5,663,700

18

(before deducting offering expenses payable by the Company). The aggregate
amount of expenses incurred by the Company in connection with the issuance and
distribution of the shares of Common Stock offered and sold in the IPO were
approximately $3.6 million, including $2.7 million in underwriting discounts and
commissions and $950,000 in other offering expenses.

None of the expenses paid by the Company in connection with the IPO or the
exercise of the Underwriters' Option was paid, directly or indirectly, to
directors, officers, persons owning ten percent or more of the Company's equity
securities, or affiliates of the Company.

The net proceeds to the Company from the IPO, after deducting underwriting
discounts and commissions and other offering expenses were approximately $34.7
million. To date, the Company has not utilized any of the net proceeds from the
IPO. The Company has invested all such net proceeds primarily in US treasury
obligations and other interest bearing investment grade securities. None of the
net proceeds from the IPO was used to pay, directly or indirectly, directors,
officers, persons owning ten percent or more of the Company's equity securities,
or affiliates of the Company.

ISSUANCE OF SECURITIES

On October 29, 1999, the Company completed a merger with Empire
Technologies, Inc. Concord issued an aggregate of 815,248 shares of Concord
common stock to the stockholders of Empire in the merger in a private placement
transaction pursuant to Section 4(2) under the Securities Act of 1933. A Form
S-3 Registration Statement to cover the resale of the securities issued in this
merger was declared effective by the Securities and Exchange Commission.

On February 4, 2000, the Company completed a merger with FirstSense
Software, Inc. The Company issued an aggregate of 1,940,000 shares of Concord
common stock to the stockholders of FirstSense in the merger in a private
placement transaction pursuant to Section 4(2) under the Securities Act of 1933.
A Form S-3 Registration Statement to cover the resale of the securities issued
in the merger was declared effective by the Securities and Exchange Commission.

19

ITEM 6. SELECTED FINANCIAL DATA

- ---------------

(1) Pro forma information assumes that the earnings from Empire Technologies,
Inc., an acquired Subchapter S-Corporation accounted for as a pooling of
interests, were taxed at the Company's effective tax rate.

20

21

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Concord develops, markets and supports the eHealth(TM) Suite of scalable
information technology (IT) infrastructure fault and performance management
software solutions. eHealth(TM) integrates fault and performance management of
the systems, applications and networks that comprise today's IT infrastructure.
Concord's solutions optimize the performance and availability of IT
infrastructures on which enterprises, managed service providers and
telecommunication carriers depend for their day-to-day business and operational
success. Concord's software solutions monitor fault conditions throughout the
infrastructure in real time; test availability and responsiveness of critical
services; collect, consolidate, normalize and analyze a high volume of data from
the IT infrastructure; alert IT personnel to faults and potential outages,
maximize uptime of the IT infrastructure and automatically execute corrective
action to restore availability, if desired.

Concord does not provide forecasts of its future financial performance.
From time to time, however, the information provided by Concord or statements
made by our employees may contain forward-looking statements. In particular,
some statements contained in Concord's Form 10-K for the fiscal year ended
December 31, 2001, are not historical statements (including, but not limited to,
statements concerning the plan and objectives of management; increases in
revenue (domestically and internationally); increases in sales and marketing,
research and development and general and administrative expenses (domestically
and internationally), Concord's ability to use deferred tax assets, Concord's
success in competing in international markets, Concord's expected future
profitability and Concord's expected liquidity and capital resources). This
document contains forward-looking statements. Any statements contained herein
that do not describe historical facts are forward-looking statements. The
Company makes such forward-looking statements under the provisions of the "safe
harbor" section of the Private Securities Litigation Reform Act of 1995.

The forward-looking statements contained herein are based on current
expectations but are subject to a number of risks and uncertainties. The facts
that could cause actual results to differ materially from current expectations
include the following: risks of intellectual property rights and litigation,
risks in technology development and commercialization, risks in product
development and market acceptance of and demand for the Company's products,
risks of downturns in economic conditions generally, and in the software,
networking and telecommunications industries specifically, risks associated with
competition and competitive pricing pressures, risks associated with
international sales, risks associated with the Company's recent acquisitions and
other risks detailed in the Company's filings with the Securities and Exchange
Commission.

On February 4, 2000, the Company completed its acquisition of all of the
capital stock of FirstSense Software, Inc., a Delaware corporation (FirstSense).
The Company accounted for the transaction as a pooling of interests in
accordance with Accounting Principles Board (APB) Opinion No. 16, Business
Combinations. As required by APB Opinion No. 16, the Company restated all of its
financial statements to reflect the combined results of both entities for all
periods presented. All transactions between the two companies have been
eliminated in the combined results. FirstSense is a provider of applications
performance and service level management software designed for distributed
applications, including packaged, custom and e-business applications.

IMPACT OF THE SEPTEMBER 11, 2001 TERRORIST ATTACKS

The terrorist attacks of September 11, 2001 had an adverse impact on our
business as license and services revenue from both the New York City area and
the United States government decreased following the attacks. These areas are a
significant source of revenue for us and we are unable to determine when the
local economies will recover. We are currently unable to quantify the effect of
the September 11, 2001 terrorist attacks on our business. Our daily operations
(excluding sales operations) were not materially impacted by the terrorist
attacks.

CRITICAL ACCOUNTING POLICIES

In December 2001, the SEC requested that all registrants list their three
to five most "critical accounting policies" in the Management Discussion and
Analysis section of their Annual Report on Form 10-K. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the

22

company's financial condition and results and requires management's most
difficult, subjective or complex judgements, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
believe that the following three accounting policies fit this definition:
Revenue Recognition, Accounts Receivable and Accounting for Income Taxes.

REVENUE RECOGNITION POLICY

We recognize revenue from the sale of software licenses when persuasive
evidence of an arrangement exists, the product has been delivered, the fee is
fixed and determinable and collection of the resulting receivable is reasonably
assured. Delivery generally occurs when product is delivered to a common carrier
and the delivery terms are FOB Concord. All revenues generated from our
worldwide operations are approved at our corporate headquarters, located in the
United States.

At the time of the transaction, we assess whether the fee associated with
our revenue transaction is fixed and determinable and whether or not collection
is reasonably assured. We assess whether the fee is fixed and determinable based
on the payment terms associated with the transaction. If a significant portion
of a fee is due after our normal payment terms, which are usually 30 to 60 days
from invoice date, we account for the fee as not being fixed and determinable.
In these cases, we usually recognize revenue upon receipt of cash.

We assess collection based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
We do not request collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and usually recognize
revenue upon receipt of cash.

For all sales, we use either a purchase order or signed license agreement
as evidence of an arrangement. Sales through our resellers are usually evidenced
by a master agreement governing the relationship together with purchase orders
on a transaction-by-transaction basis.

For arrangements with multiple obligations (for example, undelivered
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method based on the fair value of the
undelivered elements. This means that we defer revenue from the fee arrangement
equivalent to the fair values of the undelivered elements. We determine fair
values for ongoing maintenance and support obligations using our internal
pricing policies for maintenance and by referencing the prices at which we have
sold separate maintenance contract renewals to our customers. We determine fair
values of services, such as training or consulting, by referencing the prices at
which we have separately sold comparable services to our customers.

Our arrangements do not generally include clauses involving acceptance of
our products by our customers. However, if an arrangement includes an acceptance
provision, revenue recognition occurs upon the earlier of receipt of a written
customer acceptance or expiration of the acceptance period.

ACCOUNTS RECEIVABLE POLICY

We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customer's current credit worthiness,
as determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based on a percentage of our accounts receivable, our
historical experience and any specific customer collection issues that we have
identified. While such credit losses have historically been within our
expectations and appropriate reserves have been established, we cannot guarantee
that we will continue to experience the same credit loss rates that we have
experienced in the past.

ACCOUNTING FOR INCOME TAXES POLICY

As part of the process of preparing our consolidated financial statements
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. To do this, we estimate our actual current tax liabilities,
while also assessing temporary differences resulting from differing treatment of
items, such as deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and
23

liabilities, which are included within our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will be recovered from
future taxable income. To the extent we believe that recovery is not likely, we
must establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.

Significant management judgement is required in determining our provision
for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $18.4 million as of December 31, 2001, due to
uncertainties related to our ability to utilize some of our deferred tax assets,
primarily consisting of the utilization of certain net operating loss
carryforwards from prior years. We are unsure whether we will have sufficient
future taxable income to allow us to use these net operating losses, before they
expire. The valuation allowance is based on our estimates of taxable income by
jurisdiction in which we operate and the period over which our deferred tax
assets will be recoverable. In the event that actual results differ from these
estimates or we adjust these estimates in future periods we may need to
establish an additional valuation. Establishing new or additional valuation
allowances could materially adversely impact our financial position and results
of operations.

Our net deferred tax assets as of December 31, 2001 were $3.5 million, net
of a valuation allowance of $18.4 million.

The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles generally accepted
in the United States, with no need for management's judgement in their
application. There are also areas in which the exercise of management's
judgement in selecting an available alternative would not produce a materially
different result. See our audited consolidated financial statements and notes
thereto which begin on page F-1 of this Annual Report on Form 10-K and which
contain accounting policies and other disclosures required by generally accepted
accounting principles.

24

RESULTS OF OPERATIONS

The following table sets forth, for the period indicated, certain financial
data as percentages of Concord's total revenue. All prior-period financial
statements have been restated to reflect the acquisitions of Empire
Technologies, Inc. and FirstSense Software, Inc. (see Note 3 to financial
statements).

REVENUES

Concord's revenues consist of software license revenues and service
revenues. Software license revenues are recognized in accordance with the
American Institute of Certified Public Accountants' Statement of Position (SOP)
97-2, Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP
97-2, Software Revenue Recognition with Respect to Certain Transactions. Under
SOP 97-2, software license revenues are recognized upon execution of a contract
and delivery of software, provided that the license fee is fixed and
determinable, no significant production, modification or customization of the
software is required and collection is considered probable by management.
Revenues under multiple-element arrangements, which typically include software
products and maintenance sold together, are allocated to each element using the
residual method in accordance with SOP 98-9. Service revenues are recognized as
the services are performed. Maintenance revenues are derived from customer
support agreements generally entered into in connection with initial license
sales and subsequent renewals. Maintenance revenues are recognized ratably over
the term of the maintenance period. Payments for maintenance fees are generally
made in advance.

TOTAL REVENUES

Total revenues were $88.0 million, $91.5 million and $68.8 million in 2001,
2000 and 1999, respectively, representing a decrease of 3.8% from 2000 to 2001
and an increase of 32.9% from 1999 to 2000.

25

LICENSE REVENUES

Concord's license revenues are derived from the licensing of software
products. License revenues were $54.4 million, $69.5 million and $53.9 million
in 2001, 2000 and 1999, respectively, representing a decrease of 21.7% from 2000
to 2001 and an increase of 28.8% from 1999 to 2000. License revenues accounted
for 61.8%, 75.9% and 78.4% of total revenues in 2001, 2000 and 1999,
respectively. The decrease in license revenues in absolute dollars from 2000 to
2001 is due, to some extent, from the events of September 11, 2001 and the
general slowdown of the economy in the United States and abroad which negatively
affected IT infrastructure spending. The increase in license revenues in
absolute dollars from 1999 to 2000 resulted from increased penetration of the
international markets, sales to new customers and additional sales to existing
customers for new products. The decrease in license revenues as a percent of
total revenues from 2000 to 2001 was the result of the decline of license
revenue combined with a significant increase in service revenues, consisting
mainly of maintenance revenues. The decrease in license revenues as a percent of
total revenues from 1999 to 2000 was due to a slower growth in license revenues
versus an increase in the growth of service revenues. There were no material
price increases for products during 2001.

SERVICE REVENUES

Concord's service revenues consist of fees for maintenance, training and
professional services. Service revenues were $33.6 million, $22.0 million and
$14.9 million in 2001, 2000 and 1999, respectively, representing increases of
52.5% from 2000 to 2001 and 47.8% from 1999 to 2000. Service revenues accounted
for 38.2%, 24.1% and 21.6% of total revenues in 2001, 2000 and 1999,
respectively. The increase in service revenues was mainly due to a significant
increase in maintenance revenue which is generated from new and renewed
maintenance contracts. An increase in the number of the Company's customers and
the resulting demand for these services further helped drive the increase in
service revenue from 2000 to 2001 and from 1999 to 2000. At December 31, 2001,
Concord had over 2,600 customers worldwide.

INTERNATIONAL REVENUES

Concord recognized $33.2 million, $29.5 million and $13.9 million of
revenues from international locations in 2001, 2000 and 1999, representing
37.8%, 32.2% and 20.2% of total revenues, respectively. Our revenues from
international locations were primarily generated from customers located in
Europe. Revenues from customers located in Europe accounted for 22.9%, 18.9% and
13.2% of total revenues in 2001, 2000 and 1999, respectively. The continued
increase in revenues from international locations as a percentage of total
revenues is primarily the result of Concord's expansion of its operations
outside the United States, which has included both the hiring of additional
personnel as well as the establishment of additional reseller relationships. We
believe that continued growth and profitability will require further expansion
of our sales, marketing and customer service functions in international markets.
We expect to commit additional time and development resources to customizing our
products and services for selected international markets.

COST OF REVENUES

Cost of revenues includes expenses associated with royalty costs,
production, fulfillment and product documentation, along with personnel costs
associated with providing customer support in connection with maintenance,
training and professional services contracts. Royalty costs are composed of
third party software costs. Cost of revenues were $17.8 million, $13.1 million
and $8.5 million in 2001, 2000 and 1999, respectively, representing increases of
36.0% from 2000 to 2001 and 54.1% from 1999 to 2000. Cost of revenues accounted
for 20.3%, 14.3% and 12.4% of total revenues in 2001, 2000 and 1999,
respectively, resulting in gross margins of 79.7%, 85.7% and 87.6% in each
respective period. The increase in cost of revenues, as well as the decrease in
the gross margin percentages, was primarily the result of a shift in the revenue
mix from license to service revenues as well as an increase in customer support
spending associated with service revenue to be more responsive to growing
customer needs. We expect to decrease our cost of revenues as a percentage of
total revenues; however, this will depend upon our royalty costs and our revenue
growth, among other factors. Accordingly, there can be no assurance that we will
be successful in decreasing our cost of revenues either on an absolute basis or
as a percentage of total revenues.
26

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses consist primarily of personnel costs
associated with software development. Research and development expenses were
$24.0 million, $21.1 million and $14.4 million in 2001, 2000 and 1999,
respectively, representing an increase of 13.6% from 2000 to 2001 and 46.2% from
1999 to 2000. Research and development expenses accounted for 27.2%, 23.1% and
21.0% of total revenues in 2001, 2000 and 1999, respectively. Increases in our
research and development costs were primarily due to higher compensation
expenses associated with software developers and development support personnel,
as well as associated benefits and facilities costs. Headcount in research and
development was 132, 128 and 97 people in 2001, 2000 and 1999 respectively. We
anticipate that we will continue to commit substantial resources to research and
development in the future and that product development expenses may increase in
absolute dollars in future periods; however, we intend to decrease our research
and development expenses as a percentage of total revenues. Our ability to
decrease these expenses as a percentage of revenue will depend upon our revenue
growth, among other factors. Accordingly, there can be no assurance that we will
be successful in decreasing our cost of revenues either on an absolute basis or
as a percentage of total revenues.

SALES AND MARKETING EXPENSES

Sales and marketing expenses consist primarily of salaries, commissions to
sales personnel and agents, travel, tradeshow participation, public relations
and other promotional expenses. Sales and marketing expenses were $51.0 million,
$43.0 million and $29.4 million in 2001, 2000 and 1999, respectively,
representing increases of 18.7% from 2000 to 2001 and 46.0% from 1999 to 2000.
Sales and marketing expenses accounted for 58.0%, 47.0% and 42.8% of total
revenues in 2001, 2000 and 1999, respectively. The increase in absolute dollars
was primarily the result of increased headcount needed to build the direct sales
force along with strong channel partners to penetrate the market. Additionally,
the costs to market a multi-product, multi-market solution set are higher than
the single-product, single-market solution sold in prior years. Headcount in
sales and marketing was 182, 163 and 134 people in 2001, 2000 and 1999
respectively. We anticipate that we will continue to commit substantial
resources to sales and marketing in the future and that sales and marketing
expenses may increase in absolute dollars in future periods; however, we intend
to decrease our sales and marketing expenses as a percentage of total revenues.
Our ability to decrease these expenses as a percentage of revenue will depend
upon our revenue growth, among other factors. Accordingly, there can be no
assurance that we will be successful in decreasing our cost of revenues either
on an absolute basis or as a percentage of total revenues.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses consist primarily of salaries for
financial, accounting, legal, administrative and management personnel. General
and administrative expenses were $8.7 million, $8.1 million and $5.3 million in
2001, 2000 and 1999, respectively, representing increases of 7.2% from 2000 to
2001 and 52.0% from 1999 to 2000. General and administrative expenses accounted
for 9.9%, 8.9% and 7.8% of total revenues in 2001, 2000 and 1999, respectively.
From 2000 to 2001, the increase in absolute dollars is attributable to increased
administrative fees such as legal fees and accounting costs necessary to support
the growth of our international operations. From 1999 to 2000, the increase in
absolute dollars is due mainly to the increase in personnel and an increase in
administrative costs and bad debt expenses. Headcount in general and
administrative was 33, 44 and 37 people in 2001, 2000 and 1999 respectively. We
expect to decrease these expenses as a percentage of revenue; this will
ultimately depend upon our revenue growth, among other factors. Accordingly,
there can be no assurance that we will be successful in decreasing our cost of
revenues either on an absolute basis or as a percentage of total revenues.

ASSET IMPAIRMENT CHARGE

Concord acquired a $3 million interest in Broadband Investment Group
(Broadband) in September 2000 in exchange for our products and services. In
November 2000, Broadband publicly announced that it was ceasing operations and
liquidating its remaining assets following its inability to raise additional
capital due to unfavorable market conditions. As a result, Concord recorded a
charge of approximately $2.3 million to write
27

off its investment in Broadband. The remainder of the carrying value of our
Broadband investment was reversed against the related deferred revenue for
services not yet rendered.

STOCK-BASED COMPENSATION

Stock-based compensation relates to the issuance of stock options with
exercise prices below the deemed fair value of the Company's common stock at the
date of grant. The Company recorded a reversal of deferred stock-based
compensation of approximately $949,000 and $1.2 million related to the
forfeiture of unvested stock options and restricted stock in 2001 and 2000
respectively. Deferred stock-based compensation represents the difference
between the stock option exercise price and the deemed fair value of the
Company's common stock at the date of grant and is reported as deferred
compensation, a component of stockholders' equity (deficit). Deferred
stock-based compensation is amortized through charges to operations over the
vesting period of the options, which is generally four years. Stock-based
compensation was approximately $320,000, $812,000 and $3 million in 2001, 2000
and 1999 respectively.

ACQUISITION-RELATED CHARGES

Acquisition-related charges incurred in 2000 included accounting, legal and
investment banking fees associated with the acquisition of FirstSense. Similar
charges were incurred in 1999 for the acquisition of Empire Technologies, Inc.
These acquisition-related charges were approximately $4.3 million and $551,000
in 2000 and 1999, respectively, and they accounted for 4.7% and 0.8% of total
revenues in 2000 and 1999, respectively.

OTHER INCOME, NET

Other income consists of interest earned on funds available for investment
net of interest expense in connection with the financing of capital equipment in
1999. Concord realized net other income of $3.2 million, $3.1 million and $3.0
million, respectively, in 2001, 2000 and 1999.

INCOME TAXES

In 2001, the Company did not provide for domestic federal income taxes as a
result of the net loss incurred. The Company did provide approximately $446,000
primarily related to foreign taxes resulting from the profitability of certain
of the Company's foreign operations. In 2000, the difference between the
expected combined federal and state tax rate of approximately 40% and Concord's
effective tax rate relates primarily to the use of currently generated tax
credits, favorable tax rates on international sales and previously unrecognized
net operating loss carryforwards, partially offset by non-deductible acquisition
costs. The 1999 effective tax rate approximates the combined statutory rate.

EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT

The Company recognized an extraordinary loss of $216,000 (net of the
related tax benefit of $72,000) in 2000 related to the early extinguishment of
certain debt that the Company assumed as a part of the First-Sense acquisition.

LIQUIDITY AND CAPITAL RESOURCES

Concord has financed its operations primarily through the sale of equity
securities and a credit line for equipment purchases. Concord had working
capital of $49.0 million at December 31, 2001.

Net cash provided by operating activities was $5.7 million, $8.7 million
and $11.5 million in 2001, 2000 and 1999, respectively. Cash, cash equivalents
and marketable securities was $68.3 million, $63.3 million and $63.6 million at
December 31, 2001, 2000 and 1999, respectively. Accounts receivable decreased
$3.5 million from 2000 to 2001 due to lower license revenue. Deferred revenue
increased from 2000 to 2001 by $4.7 million due to an increase of the Company's
installed base; $2.7 million of this increase came from deferred

28

maintenance contracts and $2.0 million was the result of service and software
license sales with remaining contingencies such as completion of services and
credit worthiness.

Investing activities consisted of the acquisition of property and
equipment, most notably computer and networking equipment to support the
corporate infrastructure, and also investments in marketable securities. Concord
manages its market risk on its marketable securities by selecting investment
grade securities with the highest credit ratings with relatively short duration
that trade in highly liquid markets.

Financing activities consisted primarily of the issuance of common stock
from the exercise of options during 2001, 2000 and 1999 and from the repayments
in 2000 of borrowings on a subordinated debt financing by FirstSense.

Pursuant to the Tax Reform Act of 1986, the utilization of net operating
loss (NOL) carryforwards for tax purposes may be subject to an annual limitation
if a cumulative change of ownership of more than 50% occurs over a three-year
period. As a result of the Company's 1995 preferred stock financings, such a
change in ownership occurred. As a result of this ownership change, the use of
the NOL carryforwards generated prior to the ownership change will be limited.
The Company has determined that its initial public offering did not cause
another ownership change. As a result of the Company's ownership change
described above, the utilization of certain of the Company's NOL carryforwards
is limited to only $330,000 per year. The substantial majority of the Company's
NOL carryforwards generated prior to the ownership change will expire before
they can be used. As of December 31, 2001, the Company has determined that
approximately $2,309,000 of these NOL carryforwards will become unrestricted
prior to their expiration. The remainder of the Company's previous NOLs
generated prior to the change in ownership will expire prior to becoming
unrestricted and have been written off against the valuation allowance. In
addition, the utilization of approximately $15.7 million of NOL carryforwards
that were acquired as a result of the FirstSense acquisition is also restricted
as a result of a prior ownership change of FirstSense. Utilization of the
FirstSense NOL carryforwards is limited to $4.3 million per year.

The Company has deferred tax assets of approximately $21.9 million, the
largest component of which represents NOL carryforwards and research and
development credits. The Company has partially reserved for these deferred tax
assets by recording a valuation allowance of $18.4 million. The resulting net
deferred tax asset is based on the Company's estimate of NOL carryforwards it
expects to use in the next two years; all other tax assets have been fully
reserved. Pursuant to paragraphs 20 to 25 of SFAS No. 109, the Company
considered both positive and negative evidence in assessing the need for a
valuation allowance at December 31, 2000 and 2001. The factors that weighed most
heavily on the Company's decision to record a valuation allowance were (i) the
substantial restrictions on the use of ce