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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE

SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2002

Commission file number 0-26376

ON TECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

880 Winter Street, Building 4, Waltham, Massachusetts 02451-1449

(781) 487-3300

(Address and telephone of principal executive offices)

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

Indicate by check mark whether 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. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): YES ¨    NO x

The aggregate market value of voting Common Stock held by non-affiliates of the registrant was $31,436,150, based on the closing price of the registrant’s Common Stock ($1.80) on June 28, 2002 (the last business day of the registrant’s most recently completed second quarter), as reported by the NASDAQ National Market.

The number of shares of Common Stock, $0.01 par value, outstanding as of March 24, 2002 was 23,819,594.

DOCUMENTS INCORPORATED BY REFERENCE

Certain of the information required by Part II, Items 5 and 9 and Part III, Items 10, 11, 12 and 13 of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated by reference from specified portions of the Registrant’s definitive Proxy Statement for the Company’s 2003 Annual Meeting of Stockholders scheduled for May 15, 2003.

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ON TECHNOLOGY CORPORATION

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002

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Note: ON Technology, the ON Technology Logo, ON iCommand, ON Command, ON Command CCM, CCM, TURN IT ON, ON Command Remote, and ON Command Discovery are either registered trademarks or trademarks of ON Technology Corporation in the United States, European Union, Australia, Canada, and/or other countries. Other products and company names mentioned herein may be trademarks of their respective owners.

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IMPORTANT INFORMATION REGARDING FORWARD LOOKING STATEMENTS

The Company’s prospects are subject to certain uncertainties and risks. This Annual Report on Form 10-K and the documents incorporated in it by reference contain certain forward-looking statements within the meaning of the Federal Securities Laws regarding the Company’s plans, objectives, expectations and intentions. Readers can identify these statements by words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “may,” and “will” or similar words. You should read statements that contain these words carefully. They may discuss the Company’s future expectations, contain projections of the Company’s future results of operations or financial condition or state other forward-looking information, and may involve known and unknown risks over which the Company or management has no control. Readers should not place undue reliance on forward-looking statements. The Company cannot guarantee any future results, levels of activity, performance or achievements. Moreover, the Company assumes no obligation to update forward-looking statements or update the reasons actual results could differ materially from those anticipated in forward-looking statements, except as required by law. READERS SHOULD PAY PARTICULAR ATTENTION TO THE CONSIDERATIONS DESCRIBED IN THE SECTION OF THIS REPORT ENTITLED “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS.” This section of this Annual Report identifies important factors that may cause actual results to differ materially from the expectations described in the Company’s forward-looking statements. Readers should also carefully review the risk factors described in the other documents the Company files from time to time with the Securities and Exchange Commission.

Part I

Item 1.     Business

THE COMPANY

ON Technology Corporation is a leading provider of enterprise infrastructure management solutions that enable large and geographically-distributed organizations to optimize the flexibility, reliability, and security of their IT infrastructures, while simultaneously reducing operational costs.

Our open and scalable solutions are used to remotely manage a wide range of computing systems and devices over both wired and wireless networks, including corporate networks and the Internet. Typical managed devices include desktops, mobile PCs, PDAs/handhelds, servers, retail Point-of-Sale (POS) terminals, banking workstations, Internet kiosks, and other vertically-specialized devices.

Customers leverage our solutions to manage a range of functions in the lifecycle of their devices, such as initial provisioning, operating system and application deployment, ongoing application and security updates, disaster recovery, and de-provisioning.

As of December 31, 2002, we had licensed our software to over 825 customers worldwide, including ABC National Television Sales, Canon, Carnival Cruise Lines, Credit Suisse, DaimlerChrysler, Kaiser Permanente, New York Life, OfficeMax, Pfizer, Staples, SunTrust Banks, Swiss International Air Lines, The Home Depot,

T-Systems, and Volvo.

The Company was incorporated in Delaware in 1985. Its corporate headquarters is located at 880 Winter Street, Waltham, Massachusetts 02451-1449. The telephone number is 781-487-3300. The Company’s website is www.on.com.

INDUSTRY BACKGROUND

The evolution of enterprise computing from centralized, mainframe-based computing to distributed multi-platform computing (e.g., Windows, Linux, Unix, Pocket PC, etc.), combined with a highly dynamic and competitive global business environment, has created a number of critical challenges for enterprise IT organizations and service providers:

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Traditionally, IT tasks such as software installation, configuration and troubleshooting have been handled via “sneakernet”—for example, by physically sending skilled IT technicians to remote locations such as branch offices, factories, retail stores, or bank branches. This time-consuming approach not only raises operational costs, but also significantly decreases IT service quality, resulting in reduced end-user productivity. For example, Gartner estimates that mobile and remote users can experience up to 10 times more downtime per incident than in-office users; Gartner also estimates that it costs up to 50 percent more to perform a software upgrade for mobile and remote users than for corporate users. In retail environments, reduced IT response times and correspondingly higher downtime can have even more serious repercussions such as lost customers and lost revenue.

Industry analysts estimate the market for worldwide enterprise system management was $13.5 billion in 2001 and projects this market will increase to $23.9 million by 2005. ON participates in many segments within this market and may expand to other segments in the future.

THE ON SOLUTION

Our products are designed to reduce operational costs while increasing the flexibility, reliability and security of business-critical applications, and enhancing both IT and end-user productivity.

This is accomplished by simplifying and automating existing, manual IT processes, and transforming them into unattended operations that can be performed on multiple systems simultaneously—across the enterprise and across all types of devices and networks—in a dynamic and adaptive manner.

In addition, our solutions allow IT organizations to efficiently track detailed hardware and software configuration information in standard SQL databases, and access management information and functions via intuitive, point-and-click, graphical interfaces. Our products are based on an open, scalable, standards-based and extensible architecture, providing maximum flexibility and ease-of-integration with existing IT environments.

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ON Command CCM^®, our traditional solution for Windows-based systems and devices, is typically used to “push” software across corporate LANs and WANs to hundreds or thousands of users from centralized servers.

ON iCommand^™ builds upon the field-proven robustness of ON Command CCM while extending its capabilities, through the use of its new Java-based agent and server technology, to non-Windows platforms such as Linux for the first time, while adding enhanced capabilities for mobile and remote users, including users connected over the Internet. ON iCommand also includes a new Web-based administrative console, as well as an enhanced “self-service IT” module that further reduces IT load by allowing users to install and configure optional software in a controlled manner, from the convenience of their Web browsers, without requiring direct involvement by IT personnel. In early 2003, ON plans to add support for managing additional platforms such as Pocket PC, Sun Solaris, HP-UX, and Mac OS X.

ON Command Remote^™ is a remote control program for Help Desk professionals and service providers that is integrated with ON iCommand and ON Command CCM. ON Command Remote allows technicians to view remote screens and operate remote keyboards, without leaving their consoles, in order to remotely diagnose problems and reconfigure devices.

ON Command Discovery^™ is a network inventory program that identifies which software and hardware assets are present, where they are located, how they are configured, and when any changes are made to them. The program also provides software usage information and Web-based reporting, and is integrated with ON iCommand and ON Command CCM.

Key differentiating attributes of ON’s management offering include:

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BUSINESS STRATEGY

The Company believes that its management solution offers opportunities for long-term growth because there is a real and growing need for our solutions and our product currently has technological advantages over the products offered by the Company’s principal competitors. Our objective is to be the leading provider of enterprise infrastructure management solutions that address the problems faced by IT organizations responsible for managing PC’s, servers and related devices such as handhelds. Key elements of our strategy include:

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SALES AND MARKETING

The Company’s enterprise sales effort focuses on key accounts where the opportunity exists for volume sales and/or long-term, repeat business. Through the enterprise sales program, the Company is building relationships in which its knowledge of the customer’s needs translates into purchasing advantages and maximized support. Regular visits to the customer’s site provide the Company’s account managers with valuable feedback for technology development, future upgrades and service enhancements. As of March 1, 2003, the Company had 37 account managers worldwide—13 in the Unites States and 24 throughout Europe. The Company has established a US direct sales and support office in Waltham, Massachusetts; and additionally has a presence in Arizona, California, Georgia, Illinois, Maryland, New Jersey, Pennsylvania, Texas, and Ontario, Canada. European direct sales and support offices are located in England, Germany, Austria, Holland, and Switzerland. Our direct sales organization is complemented by an indirect sales that includes regional resellers as well as global partners such as Dell, IBM Global Services, Fujitsu, Getronics, EDS, Volvo IT and Siemens.

CUSTOMERS

The Company markets its products primarily to large and medium-size corporate, government and institutional customers. For the twelve months ended December 31, 2002, 2001 and 2000, two customers accounted for $6.2 million (17.8%), $4.3 million (17.7%), and $6.3 million (23.9%) of total revenue, respectively. Of these amounts, hardware sales to one European customer accounted for $2.3 million, $2.1 million and $3.3 million, respectively.

Due to the expected cessation of hardware sales, the Company believes it is less likely to have customers representing ten percent of revenue in the future.

Revenue from direct and indirect license sales for the year ended December 31, 2002, accounted for 69% and 31%, respectively, of total license revenue, and revenue from North America and from Europe and the rest of the world accounted for 27% and 73%, respectively of total revenue for the same period.

CUSTOMER SUPPORT, TRAINING AND PROFESSIONAL SERVICES

The Company employs professional technical support staff in Waltham, Massachusetts and Starnberg, Germany to support customers via telephone hotline, electronic mail, and on-site visits. Customers that subscribe to our maintenance program have access to our technical support staff and are entitled to receive software updates, on a when-and-if available basis. The Company also conducts training classes to facilitate the implementation and administration of its products, which are available either at the Company’s offices or at customers’ sites.

RESEARCH AND DEVELOPMENT

Our research and development organization is responsible for the design, development, release and ongoing maintenance and support of our products. The organization currently includes 77 employees with 39 employees

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dedicated to software development, quality assurance, documentation, and project management functions and another 38 responsible for providing customer consulting, training and product support. When appropriate, we also utilize third parties to expand the capacity and technical expertise of our internal research and development personnel, as well as license selected third-party technologies, which we believe shortens the time to market without compromising our competitive position.

In addition to maintaining our products, this department is responsible for the enhancement of product functionality, and for identifying complementary products as well as innovative new ideas for future products.

The Company’s research and development expenses were approximately $8.0 million, $8.0 million, and $9.8 million for the fiscal years December 31, 2002, 2001, and 2000, respectively. The Company’s practice is to expense all software development costs as incurred. We anticipate that we will continue to commit substantial resources to research and development.

COMPETITION

The market for the Company’s products is highly competitive, and the Company expects competition to continue to increase in the future. The Company believes that the principal competitive factors affecting the market for its products include brand name recognition, company reputation, performance, functionality, ease-of-use, breadth of product line, quality, customer support, adherence to industry standards, integration with third-party solutions and price.

As is the case in many segments of the software industry, the Company may encounter increasing price competition in the future. This could reduce average selling prices and, therefore, profit margins. Competitive pressures could result not only in sustained price reductions but also in a decline in sales volume, which could adversely affect the Company’s business, condition (financial or otherwise), prospects, results of operations and cash flows. There can be no assurance that the Company will continue to compete effectively against existing and potential competitors in its markets, many of whom have substantially greater financial, technical, marketing and support resources and name recognition than the Company.

The widespread inclusion of the functionality of the Company’s products as standard features of Microsoft operating systems software could render the Company’s products obsolete and unmarketable, particularly if the quality of such functionality were comparable to that of the Company’s products. If the Company were unable to develop new functionality or unique applications for its technology to replace successfully any obsolete products, the Company’s business, condition (financial or otherwise), prospects, results of operations and cash flows would be materially and adversely affected.

The market for our products is highly competitive and diverse. The technology for remote software management products can change rapidly. New products are frequently introduced and existing products are continually enhanced. Competitors vary in size and in the scope and breadth of the products and services offered.

The Company has faced competition from a number of sources, including:

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In addition, Microsoft has bundled new management capabilities in its Windows 2000 and Windows XP operating system that, in conjunction with its Systems Management Server (SMS) framework, directly compete with certain capabilities provided by ON solutions. Their latest version, SMS 2003 (code-named “Topaz”) is expected to be released during 2003 and includes additional capabilities that directly compete with capabilities provided by the ON management offering, including support for mobile and remote users as well as integration with Microsoft Acive Directory. Even if customers or potential customers find the functionality provided with Microsoft’s operating system software to be more limited than that of our software management products, they may elect to accept more limited functionality in lieu of purchasing additional software. Competition resulting from this type of bundling could lead to price reductions for our products, which would reduce our margins and correspondingly affect our business, quarterly and annual operating results and cash flows and financial condition.

Some of our current and many of our potential competitors have much greater financial, technical, marketing, and other resources than us. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer needs. They may also be able to devote greater resources to the development, promotion, and sale of their products than the Company can. The Company may not be able to compete successfully against current and future competitors. In addition, competitive pressures faced by the Company may materially adversely affect the Company’s business, operating results and cash flows, and financial condition.

OPERATIONS

The Company designs most of its product marketing and sales materials through the use of contracted services. Product orders are fulfilled directly by the Company. Sales and support calls are also handled directly by the Company.

INTELLECTUAL PROPERTY

Our success is heavily dependent upon our proprietary software technology. We rely on a combination of contractual rights, trademarks, trade secrets and copyright to establish and protect our proprietary rights in software.

We license certain database technology that is incorporated in our ON Command CCM and ON iCommand products on a non-exclusive, worldwide basis. Under the terms of our license agreement, we pay a fixed fee to the licensor regardless of units sold. The initial term of the agreement runs until December 2004 and maybe renewed each year thereafter with both parties consent. All fees related to the initial term of the agreement were paid by December 31, 2002. We also license ON Command Remote on an OEM basis from Funk Software, Inc. The initial term of the agreement expires in 2005 and is renewable annually unless terminated by either party. ON Command Discovery is powered by Centennial Discovery, which is supplied to ON Technology by Centennial UK Limited on a resale basis.

We are not aware that our products infringe on any proprietary rights of third parties. We expect that software product developers will increasingly be subject to infringement claims as the functionality of products

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overlaps or as new competition emerges. Any infringement claims, with or without merit, could be time consuming and costly to defend. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Factors That May Affect Future Results.”

EMPLOYEES

At December 31, 2002, the Company had 184 full-time employees and contract consultants. Competition for qualified management and technical personnel is intense in the software industry. The Company’s continued success will depend in part on its ability to attract and retain qualified personnel. None of the Company’s employees is represented by a labor union and the Company believes that its employee relations are good.

Item 2.     Properties

The Company leases office space in the following locations:

The Company also leases several other locations for use as sales offices on a short-term, renewable basis. The Company believes its facilities are adequate for its current needs and that adequate facilities for expansion, if required, are available.

Item 3.     Legal Proceedings

From time to time, the Company may be a party to litigation and claims incident to the ordinary course of its business. As of the date of this Annual Report on Form 10-K, there is no litigation pending against the Company that management believes would have a material adverse effect on the Company’s results of operations or financial position.

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, 2002.

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Part II

Item 5.     Market for Registrant’s Common Equity and Related Stockholder Matters

Price Range of Common Stock

The Company’s common stock is traded on the NASDAQ National Market under the symbol ONTC. The following table sets forth, for the period indicated, the closing sale prices for the common stock, all as reported by NASDAQ.

As of March 3, 2003, our transfer agent and brokerage service advised there were approximately 5,800 beneficial holders of the Company’s stock.

Dividend Policy

The Company has not declared or paid cash dividends on its common stock since 1992 when it converted from an S Corporation to a C Corporation. The Company currently intends to retain any earnings for use in developing and growing its business, and does not anticipate paying any cash dividends on its common stock for the foreseeable future.

Recent Sales of Unregistered Securities

On October 25, 2001, the Company closed a private placement of $5 million of common stock with four inter-related institutional investors. The Company issued 6,024,096 shares of common stock to the investors at a purchase price of $0.83 per share based on the prior day’s market close. Under the terms of the purchase agreement, the investors have the right to appoint one member of the Company’s Board of Directors and the Company had to use commercially reasonable efforts to take all actions reasonably required to register under the Securities Exchange Act of 1933, as amended, the shares of common stock acquired by the investors. All such shares were registered on February 5, 2002. The Company used the proceeds of the sale for sales expansion, marketing programs to improve product branding, and accelerating research and development efforts.

On December 18, 2000, the Company entered into exchange agreements with Castle Creek Technology Partners LLC and Marshall Capital Management Inc (the “Investors”) pursuant to which each Investor exchanged its initial warrant, issued in conjunction with a 1999 private placement, for a new warrant exercisable for 1,400,000 shares of common stock (each a “New Warrant” and, collectively, the “New Warrants”) and a contingent promissory note in the principal amount of $500 thousand (each a “Note” and, collectively, the “Notes”).

Each New Warrant had an exercise price of $0.01 per share, which was subject to certain adjustments. Each New Warrant would have expired after 5:00 p.m., Eastern Time on December 29, 2004.

As of December 31, 2002, all such warrants had been exercised.

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The principal amount of each Note was due and payable on December 31, 2001, unless the Company met certain conditions, principally with respect to its stock price (see Note 6 to the consolidated financial statements for a complete discussion).

As of December 31, 2001, the Company met all requirements and the Notes were cancelled.

All required registration statements have been filed and are currently effective.

Securities Authorized for Issuance Under Equity Compensation Plans.

The information required hereunder is incorporated by reference from the Company’s definitive Proxy Statement in the table under the caption “Equity Compensation Plan Information” filed in connection with the Company’s Annual Meeting of Stockholders to be held on May 15, 2003.

Item 6.     Selected Consolidated Financial Data

The following table sets forth selected financial data derived from the Consolidated Financial Statements of the Company. The data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and with Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Revenue information in the selected consolidated financial data shown below has been reclassified to enable a reader to identify revenue of the Company’s current operations. The Company’s core business products, acquired in 1997, are shown by category for the indicated periods. Revenue — MMI related to groupware revenue on the Company’s Meeting Maker product prior to its license to Meeting Maker, Inc. (“MMI”) on June 30, 2000. Revenue from product lines in the network management, security and scheduling areas that were either sold to Elron Software Inc. in 1998 or discontinued for Y2K concerns, have been grouped in other along with MMI license revenue received by the Company in 2000 and 2001.

No attempt has been made to allocate operating expenses in the same manner as revenue because the Company’s personnel worked on multiple projects across product lines and the Company believes any such allocation of expenditures would not be meaningful.

Effective January 1, 2002, the Company adopted EITF Issue 01-14, Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred (“EITF 01-14”). EITF 01-14 requires that reimbursements received for out-of-pocket expenses incurred be characterized as revenue in the statement of operations with offsetting costs recorded as costs of revenue. The Company’s out-of-pocket expenses generally include, but are not limited to, expenses related to airfare, mileage, hotel stays and out-of-town meals. Upon adoption of EITF 01-14, the Company reclassified all prior periods to conform to the current year presentation. As a result of adoption of EITF 01-14, the Company has included $163,000, $141,000 and $166,000 for the years ended December 31, 2002, 2001, and 2000, respectively, in service and maintenance revenue, with an equal amount in service and maintenance cost of revenues, for reimbursable out-of-pocket expenses. Information related to reimbursable out-of-pocket expenses for the years ended December 31, 1999 and 1998 is not available and, as a result, no reclassification was made for those years in the data shown below.

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The selected consolidated financial data below may not be comparable for all of the periods presented due to the facts discussed above.

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Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

ON Technology Corporation and its subsidiaries (“ON” or “We”) provide remote software management solutions for desktops, mobile PCs, handhelds, retail POS devices, and servers. Our traditional product, ON Command CCM^™, or CCM, is used by enterprise IT organizations and service providers to rapidly deliver business-critical software over corporate networks. Our products are designed to reduce operational costs while enhancing both IT productivity and end-user satisfaction.

In order to take advantage of the growing mobile workforce, we recently announced the introduction of our new java-based product, ON iCommand. This product will allow remote user computing devices to be managed over the Internet rather than requiring them to be linked periodically to a company’s network. We believe this will expand the overall available market for our products allowing for both incremental sales to existing customers as well as an increase in the number of sales prospects. For additional discussion of product offerings and features, see Item 1 Business.

In 2002, our revenue from North America and from Europe and the rest of the world accounted for 27% and 73%, respectively, of total revenue. Our significant international operations subject our operating results and balance sheet to foreign exchange exposure. The currencies in which we have exposure are principally the Euro, the Swiss Franc and the British Pound. As these currencies are not generally considered volatile, we have determined not to hedge our foreign currency exposures. The impacts of the strengthening Euro and Swiss Franc against the dollar in 2002, versus the exchange rates in effect at December 31, 2001, resulted in an increase in the our operating profit by approximately $200 thousand. For 2001, the Deutsche Mark (predecessor to the Euro) weakened while the British Pound strengthened against the dollar versus the exchange rates in effect in December 2000. As a result, our net operating loss was increased by approximately $200 thousand in 2001 compared with 2000. For 2000, both the Deutsche Mark and the British Pound weakened against the dollar based on the exchange rates in effect at December 31, 1999. This weakening increased our operating loss by approximately $600 thousand.

To reduce the effect of foreign exchange exposure on intercompany balances on our balance sheet, in 2002 we created a natural hedge by converting overseas cash into US dollars. As of December 31, 2002 we had an overseas investment in US dollars of approximately $4 million.

As a result of the sale of the Meeting Maker product by MMI in June 2001, royalty payments under a license agreement ceased. We recognized royalty revenue of $568 thousand and $236 thousand for the years ended December 31, 2001 and 2000, respectively, as other revenue in our consolidated statement of operations. There will be no future payments under this agreement.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to revenue recognition and bad debt reserve levels, income taxes and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 15 of this Form 10-K. We believe the following accounting policies are critical to an understanding of our consolidated financial statements and involve our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue in accordance with the American Institute of Certified Public Accountants’ (AICPA) Statement of Position (SOP) No. 97-2, Software Revenue Recognition, as amended by Statement of Position 98-9,

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Software Revenue Recognition with Respect to Certain Transactions, and Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. Software license revenue principally consists of revenue earned under perpetual software license agreements and is generally recognized upon delivery of the software, provided that the arrangement does not require significant modification or customization of the software, any services included in the arrangement are not considered essential to the functionality of the software, evidence of the arrangement exists, collection of the resulting receivable is reasonably assured, the fee is fixed or determinable, and vendor-specific objective evidence exists for all undelivered elements to allow allocation of the total fee to all delivered and undelivered elements of the arrangement.

Services and maintenance revenue primarily consists of fees for consulting services, training and support and maintenance services provided to end users. Consulting and training services are typically provided on a time and materials basis with revenue recognized as the services are performed. In the rare instances when fixed-fee consulting agreements are entered into, we recognize revenue using the percentage-of-completion method of accounting. In applying this method, we measure each arrangement’s percentage-of-completion by the ratio of labor hours incurred to date to estimated total labor hours to complete the project. We do not consider consulting and training services to be essential to the functionality of the other elements of the arrangement. Revenue related to maintenance and support arrangements is recognized ratably over the contract period.

We occasionally, at the request of a single customer, sell hardware, which is recorded within net CCM and related products revenue. Resold hardware revenue is typically recognized upon delivery, provided that evidence of the arrangement exists, the fees are fixed or determinable, and all other revenue recognition criteria have been met.

We may sell, under one contract or a series of related contracts, software licenses, related professional services and a maintenance and support arrangement. The total contract value is attributed first to the maintenance and support arrangement based on its fair value, equal to its stated list price as a fixed percentage of the related software product’s price or based on a stated renewal rate for subsequent periods of maintenance included in the contract. The total contract value is then attributed to the professional services we are committed to provide based on the related fair value, equal to the price charged when such services are sold separately. The remainder of the contract value is allocated to the software licenses, with the effect that discounts inherent in the total contract value are attributed to the software licenses.

Under our maintenance and support arrangements, we offer unspecified upgrades and enhancements on software products only on a when-and-if-available basis. Typically, we do not contract in advance for specified upgrades, enhancements or additional software products. In arrangements where we agree to provide additional products, specified upgrades or enhancements, we allocate revenue from the entire arrangement first to any undelivered elements including the specified future deliverables, professional services and the maintenance and support arrangement, based on the fee charged when products are sold separately. The remainder of the contract value is allocated to software licenses. We defer recognition of revenue allocated to the specified future deliverable until delivery has occurred and any remaining contractual terms relating to that element have been met. In situations where fair value does not exist for all elements to be delivered under the arrangement, we defer all revenue from the arrangement until the earlier of the date when all elements have been delivered or fair value exists for all undelivered elements. We do not offer rights of return to our customers. In situations where negotiated contracts require rights of return or contain acceptance criteria, we do not recognize revenue until all significant obligations have been delivered and accepted by the client.

We also sell products to resellers. There is generally no contractual right of return nor has the Company historically permitted returns notwithstanding the contractual arrangement. We typically do not ship products to resellers until an end user is identified, at which point we recognize revenue under the arrangement.

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We record a returns reserve based on historical experience where we granted a right of return, although we were not contractually obligated to do so. Material differences may result in the amount and timing of our revenue from any period if management makes judgments or uses estimates that prove to be materially different from actual experience.

At the time of a sale transaction, we assess whether the fee associated with our revenue transaction is fixed or determinable based on the payment terms associated with the transaction. If a significant portion of the fee is due after our normal payment terms, which are 30 to 90 days from the invoice date, we account for the fee as not being fixed or determinable. In these cases, we recognize revenue as the fees become due.

We assess collectibility based on a number of factors, including past transaction history with the customer and the credit worthiness of the customer by reviewing credit reports, as well as bank and trade references. We do not require collateral from our customers. If we determine that collection of the fee is not reasonably assured, we defer the fee and recognize revenue at the time collection become reasonably assured, which is generally upon receipt of cash. Significant judgments and estimates are involved in assessing the collectibility of customer transactions. Different assumptions could yield materially different results.

Accounts Receivable

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on historical write-off experience and management’s evaluation of the customers in the receivable portfolio. If collection is not deemed reasonably assured at the transaction date, revenue is deferred and typically recognized on a cash basis. While management believes the allowance is adequate, if the financial condition of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.

Accounting for Income Taxes

As part of the process of preparing our consolidated financial statements, management is required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves management estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets, which are included within our consolidated balance sheet. Management must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and if management does not believe we meet the more likely than not recoverability threshold, we must establish a valuation allowance for the amount deemed not likely to be realized. To the extent management establishes a valuation allowance or increases this allowance in a period, we must include a deferred tax provision in the consolidated statement of operations.

Significant management judgment 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 $22.7 million as of December 31, 2002, due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of U.S. net operating loss carryforwards before they expire. The valuation allowance is based on management’s 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 management adjusts these estimates in future periods, we may need to establish an additional valuation allowance, which could materially impact our financial position and results of operations.

The net deferred tax asset as of December 31, 2002 was $1.0 million, net of the aforementioned valuation allowance of $22.7 million, which relates to certain foreign deferred tax assets deemed more likely than not realizable.

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Results of Operations

The following table sets forth, for the years indicated, certain financial data as percentages of our total revenue:

Total Revenue (excluding MMI and Other).    The increase in consolidated revenue, excluding MMI and other, from $22.9 million in 2000 to $34.8 million in 2002 was the result of increased sales to new and existing customers. The Company did not have any significant revenue from either new product introductions nor unit price increases during these periods. During 2002, we added 240 new CCM license customers compared to 157 and 154 for 2001 and 2000, respectively. The average seat price for the CCM product, excluding large enterprise deals, was approximately $65 for 2002 and 2001 and $69 for 2000. For 2002, 2001, and 2000, CCM license revenue from indirect sales was 31%, 26%, and 31%, respectively. For 2003, the Company expects to increase channel contributions to at least 40% of CCM license revenue, with particular emphasis in the United States. To help accomplish this, in January 2003, the Company formed a business development group in the United States to add both local and national channel partners. For fiscal years 2002, 2001, and 2000, total international revenue from sales to international customers was 73%, 71%, and 65% of total revenue, respectively. We expect that international revenue will continue to constitute a significant portion of our total revenue in the future.

Net CCM and Related Products Revenue.    Net CCM and related products revenue is derived primarily from the licensing of software products. Net CCM and related products revenue increased $7.2 million, or 47%,

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from 2001 to 2002 due principally to a $4.7 million increase in CCM software license revenue and a $2.2 million increase in third party software product sales. The CCM software sales increase was the result of a 200% increase in seat licenses of CCM sold, due in large part to one enterprise deal in the United States in the first quarter of 2002. The third party software increase was primarily due to broad based sales growth in Europe. Net CCM and related products revenue decreased $885 thousand or 6% from 2000 to 2001 due principally to a decrease of approximately $1.2 million in low margin, pass-through hardware sales. CCM software license revenue in 2001 also declined $520 thousand or 5% from 2000 due to a decrease in overall per seat license fees resulting from an increase in enterprise-size deals with lower per seat license fees in the US during 2001. These decreases were partially offset by an $850 thousand increase in third party product license revenue. For 2002, 2001, and 2000, we sold $2.3 million, $2.1 million and $3.3 million, respectively, in low margin pass-through hardware sales to one European customer. We do not expect this revenue to continue. We expect to focus on enterprise size deals both in the United States and Europe. However, Europe is expected to generate a significant portion of its revenue from mid-size companies.

Service and Maintenance Revenue.    Our service and maintenance revenue consists of revenue derived from maintenance, training and professional services. For 2002, service and maintenance revenue increased $3.8 million over 2001. This increase was due to a $3.2 million increase in maintenance revenues due to the growing maintenance base as well as a $1.0 million increase in training revenue in Europe offset by a decrease in consulting revenue of $300 thousand. For 2001, this revenue increased $1.8 million over 2000. This increase was principally due to an increase in maintenance revenue of $1.5 million over 2000 due, in part, to the 197 thousand new license seats sold during 2001. As we expect continued growth in our installed base, we believe service and maintenance revenues will continue to grow for the foreseeable future.

Meeting Maker, Inc. (MMI).    Our MMI revenue consisted of product, maintenance, training, and professional services revenue associated with the Meeting Maker product. Revenue – MMI for 2000 consisted of revenue achieved during the first six months of the year under a management agreement entered into between MMI and us prior to its license to MMI. As a result of the product line sale to MMI, we do not anticipate any additional MMI revenue.

Other.    In 2001 and 2000, our other revenue consisted of a license fee associated with the licensing of the Company’s Meeting Maker technology to MMI. The increase in revenue in 2001 over 2000 results from MMI’s exercise of the buyout option under the licensing agreement. As a result of the product line sale to MMI, we do not anticipate any additional revenue from the Meeting Maker product line.

Cost of CCM and Related Product Revenue.    Cost of CCM and related product revenue consists primarily of expenses associated with production and fulfillment costs, costs of European hardware sales and royalty and license fees associated with products that are licensed from third party developers. For 2001 and 2002, these costs also included amortization expense for a third party license arrangement. In addition, through March of 2000, cost of CCM and related product revenue included the amortization of purchased technology. Cost of CCM and related product revenue, as a percentage of comparable revenue, was 18.2% in 2002, 20.9% in 2001 and 21.5% in 2000. In 2002, cost of CCM and related product revenue increased $902 thousand over 2001. This increase was due to a $700 thousand increase in third party software royalties due to the aforementioned $2.2 million in incremental sales. Additionally, we recorded a full year of amortization expense of approximately $200 thousand for a third party database product incorporated into the CCM technology in September 2001. In 2001, cost of CCM and related product revenue decreased by $290 thousand over 2000. A decrease in hardware sales resulted in lower costs of $1.1 million, which offset increased third party costs of approximately $1.0 million due to higher sales of third party software. Additional savings of $195 thousand were realized due to a reduction of our fulfillment costs resulting from personnel reductions in early 2001.

Cost of Service and Maintenance Revenue.    Cost of service and maintenance revenue consists primarily of expenses associated with direct consulting and training costs as well as costs of our help desk. Cost of service and maintenance revenue, as a percentage of comparable revenue, increased to approximately 23.2% in 2002

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from 14.2% 2001. Costs for 2000 were 15.6% of comparable revenue. For 2002, workforce utilization continued to increase costs classified as cost of service and maintenance revenue as the United States operation began to leverage itself with its service related revenue growth. Additionally, costs increased as a result of an increase in headcount and a new revenue-based incentive structure adopted in the United States for 2002. Costs, as a percentage of revenue, were lower in 2001 as a result of increased service and maintenance revenue generation in the US in the latter half of the year while related costs remained relatively fixed. Costs for 2000 reflected a refinement of the 1999 infrastructure put in place to support the increased utilization in both Europe and North America.

Cost of MMI revenue.    Cost of MMI revenue consisted primarily of expenses associated with product documentation, production and fulfillment costs associated with the Meeting Maker product. In 2000, costs were incurred during the first six months prior to the product’s license to MMI. In 2001, MMI exercised its buyout option under the license agreement. As a result of the product line sale to MMI, we do not anticipate any additional cost of MMI revenue in the future.

Sales and Marketing Expense.    Sales and marketing expense primarily consists of compensation paid to sales and marketing personnel, the costs of direct mail and telemarketing campaigns, and the costs of product trials requested by potential customers. Sales and marketing expense also includes the costs of public relations, trade shows, conferences, travel, and the telephone and information technology costs associated with sales activities. For 2002, sales and marketing expenses increased $1.2 million from 2001 and represented 39% of total revenue. Salary, travel and related costs for the sales department increased $1.7 million due to 16 new hires. This was partially offset by a $660 thousand decrease in sales consulting costs, principally in Europe, as these personnel were either terminated or were hired as employees during 2002. Additionally, marketing programs increased $252 thousand over 2001, principally as a result of management’s decision to increase the number of lead generating customer seminars in the US. In 2001, sales and marketing expense decreased $76 thousand over 2000 and represented 51% of total revenue (exclusive of MMI and Other revenue). Marketing expenditures decreased $730 thousand overall due to a decrease in consulting expenses of $470 thousand and personnel and other payroll related decreases of $325 thousand. These reductions were partially offset by an increase in promotional spending of $155 thousand, primarily as a result of the launch of the Site Manager product. Sales expenses during 2001 increased $660 thousand due to increased salaries of $232 thousand and increased sales consulting expense of $344 thousand, principally related to the full year impact in 2001 of the 15 new sales positions added in 2000 as well as telesales costs of $192 thousand associated with the Site Manager product. For 2003, we expect increased spending as we continue to add to our sales force worldwide.

Research and Development Expense.    Research and development expense includes costs associated with the development of new products, the enhancement of existing products, and costs associated with the development of new training and help desk programs. Related expenses also include certain information technology costs. For 2002, research and development costs were flat with 2001 at $8.0 million as the Company invested consistent amounts in product development. In 2001, research and development expenses decreased $1.8 million from 2000 levels. This decrease was due to a reduction in outside consulting costs of $1.5 million and reduced travel costs of $160 thousand as the Company completed various projects in 2000. For the foreseeable future, we expect the investment in research and development will be comparable, or modestly above, the 2002 and 2001 levels.

General and Administrative Expense.    General and administrative expense includes executive compensation, professional service fees, foreign operations, executive support costs, accounting operations, planning, investor relations, and business development activities. For 2002, general and administrative costs increased $454 thousand over 2001. The increase is primarily attributable to increased audit and tax costs of $300 thousand, mostly relating to overseas tax consulting, and $160 thousand increase in director and officer’s insurance costs. In 2001, general and administrative costs decreased by $2.0 million compared to 2000. This decrease was principally attributed to a decrease in bad debt charges of $1.7 million due primarily to the charge attributable to one major customer in 2000. Additionally, a decrease in non-cash compensation of $620 thousand

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and lower recruiting costs of $190 thousand were offset by $500 thousand in due diligence costs during 2001 incurred in response to two unsolicited acquisition inquiries. For 2003, we expect general and administrative expense will approximate 2002’s level of $5.0 million.

Interest Income, Net.    For 2002, interest income, net decreased by approximately $40 thousand. This decrease resulted from investment yields continuing to deteriorate during 2002. In 2001, interest income, net decreased by approximately $325 thousand from 2000 due both to lower average cash balances, resulting from $4.6 million in cash to fund operations and capital expenses, and a decrease in investment yields during 2001. We did not receive proceeds from our 2001 private placement until late October 2001.

Other Income (Loss), Net.    In 2002, other income, net of $743 thousand consisted primarily of foreign exchange gains of $900 thousand, due to the strengthening Euro’s impact on intercompany balances less a $190 thousand exchange loss on US dollar’s held in overseas subsidiaries. The principal amount of other income (loss) in 2001 relates to unrealized foreign exchange losses of $649 thousand, which is primarily due to revaluation of intercompany loans to foreign subsidiaries. The remaining amounts consisted of a net non-cash charge of $109 thousand resulting from valuation adjustments to the warrant liability (expense of $984 thousand) and the contingent promissory notes (income of $875 thousand) issued to two private institutional investors associated with the December 1999 financing. These valuation adjustments will not continue in the future due to both the forgiveness of the contingent notes as a result of the Company fulfilling certain defined obligations with respect to its stock performance and the warrant Exchange Agreements being amended to remove the provisions granting the warrant holders rights that rank higher than those of common shareholders in June of 2001, which permitted the warrants to be treated as equity instruments for future periods. Other income (loss) in 2000 consisted primarily of a non-cash gain resulting from net impact of valuation adjustments of $473 thousand from the aforementioned warrants and promissory notes, as well as, the net gain resulting from the MMI transaction of $458 thousand offset by unrealized foreign exchange losses of $196 thousand.

Income Taxes.    We operate legal entities in the United States, Germany, the United Kingdom and, as of April 2002, Switzerland. For 2002, 2001 and 2000, the percent of revenue from international operations was 73%, 71%, and 65%, respectively.

In part because the majority of revenue occurs overseas, several of these entities have been profitable while the US entity has continued to operate at a net loss. For 2002, the Company’s effective tax rate of 48% was higher than the statutory rates as the balance of German operating loss carryforwards was exhausted and the net operating losses in the United States could not be used to offset income in Germany and Switzerland. We had sufficient foreign operating loss carryforwards to offset the majority of our foreign income in 2001 and 2000. In 2001, a deferred tax asset was established for the value of intangibles relating to the 1997 acquisition of the German subsidiary. This deferred tax asset was reevaluated during 2002 upon completion of a tax audit. The deferred tax asset recorded at December 31, 2002 will be amortized over the next two years. The primary component of the tax expense in 2000 related to a provision for estimated German taxes relating to an ongoing routine tax examination. For 2003, the Company projects that it will incur a provision in excess of statutory rates as the United States legal entity is not projected to attain profitability until 2004.

Liquidity and Capital Resources

Through 2001, we funded our operations primarily through private and public placements of capital stock and the sale of certain product lines. During 2002, we funded our operations with cash generated from operations. At December 31, 2002, we had available cash and cash equivalents of $13.6 million, and working capital of $9.9 million. We also had restricted cash of $100 thousand at December 31, 2002 securing our Waltham, Massachusetts facility lease. As discussed above, the majority of our revenue is generated overseas. As a result, the majority of our cash is invested overseas, principally at one major financial institution. Our United States legal entity has several intercompany receivables from our European subsidiaries, which allows for the transfer of funds to the United States as needed.

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Net cash provided by (used in) operating activities for the years ended December 31, 2002, 2001, and 2000 was $2.5 million, ($3.7) million, and ($7.0) million, respectively. In 2002, net cash provided by operating activities consisted mainly of net income of $1.1 million adjusted for non-cash depreciation and amortization of $1.1 million and a non-cash credit of $1.0 million relating to the revaluation of intercompany balances, an increase in accounts receivable of $2.6 million, and increases in other liabilities and deferred revenue of $1.5 and $2.5 million, respectively. In 2001, net cash used in operating activities consisted mainly of a net loss of $5.6 million reduced by depreciation and amortization of $936 thousand, non-cash charges associated with revaluation of intercompany loans to foreign subsidiaries of $587 thousand and revaluation of both the warrant liability, prior to its reclassification to equity as a result of the amended Exchange Agreements, and notes payable of $109 thousand, net. This was further impacted by a $1.1 million increase in operating assets and liabilities. In 2000, net cash used in operating activities consisted mainly of a net loss of $9.4 million adjusted for an increase in receivable reserves of $1.8 million. This loss was further adjusted by $720 thousand in depreciation and amortization as well as deferred compensation expense of $614 thousand and increased for the non-cash gains of $458 thousand and $548 thousand resulting from the MMI transaction and the revaluation of our warrant liability in accordance with EITF 00-19, respectively.

Net cash provided by (used in) investing activities for the years ended December 31, 2002, 2001, and 2000 was $120 thousand, ($560) thousand, and ($1.8) million, respectively. In 2002, this cash was primarily the result of the a refund of $969 thousand of restricted cash securing our Waltham, Massachusetts facility lease offset by $840 thousand in computer and equipment purchases. For 2001, the use of cash was due to $278 thousand in computer and equipment purchases and $279 thousand in other assets relating to the long-term license of certain third party software. In 2000, this use was the deposit of $1.1 million of restricted cash to secure our Waltham, Massachusetts facility lease and the purchase of property and equipment of $803 thousand, which was then partially offset by a reduction in deposits. For 2003, we anticipate capital expenditures will approximate 2002 levels and will be funded from operating cash flows.

Net cash provided by financing activities for the years ended December 31, 2002, 2001, and 2001 was $336 thousand, $4.9 million, and $808 thousand, respectively. In 2002, this amount resulted from the exercise of stock options of $257 thousand and the sale of stock under our Employee Stock Purchase Plan of $77 thousand. The increase in 2001 was due principally to $4.9 million in net proceeds from our private placement of common stock in October 2001. In 2000, this amount resulted from the exercise of stock options of $678 thousand and the sale of stock under the Employee Stock Purchase Plan of $130 thousand.

We conduct our operations in leased facilities under operating leases expiring at various times through 2006. Additionally, we have acquired certain furniture and fixtures as well as computer equipment under certain operating leases. These leases also expire at various times through 2003.

The approximate minimum annual lease payments under the operating leases are as follows:

In 2002, we also purchased equipment under a capital lease of approximately $101 thousand. As of December 31, 2002, future payments due, including principal and interest, are $57 thousand in 2003 and $52 thousand in 2004.

We have entered into several software license agreements. We are required to pay royalties on all related sales based on a percentage of the sale, subject to certain minimum royalties per seat. For these agreements, no

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minimum royalties are payable unless a product is sold. In 2001, we entered into an agreement allowing for the incorporation of a third party database technology in our product. This agreement required payments aggregating approximately $692 thousand for unlimited use of the technology in our product for a period of approximately three years. All such payments were made in 2002 and 2001. We are amortizing the total cost of this royalty to cost of CCM and related products revenue over the life of the agreement resulting in amortization expense of $200 thousand and $77 thousand during the years ended December 31, 2002 and 2001, respectively. Total third party license fees and royalty expense included in the accompanying consolidated statement of operations for the years ended December 31, 2002, 2001, and 2000 was $2.4 million, $1.5 million, and $396 thousand, respectively.

In our normal course of business, we enter into arrangements that may provide certain guarantees to third parties. Such guarantees include, among others, assertions that our software does not infringe on the technology of others; that anyone we subcontract to perform services for customers will perform at an expected level; that our officers and directors are indemnified from certain events while serving in an official capacity; and that our software products perform to published specifications. For further details concerning our guarantees, please read Note 9 to the consolidated financial statements.

Management believes that our available cash resources, including cash and cash equivalents and cash we expect to generate from the sales of products and services, will be sufficient to finance presently anticipated operating results and working capital expenditure requirements at least through December 31, 2003. Our future liquidity is, however, dependent on a number of factors, including but not limited to, our ability to reach forecasted sales targets and to maintain current expense levels. There can be no assurance that we will not require additional capital resources during this period of time. If we do require additional capital resources, we may seek to sell equity or debt securities, secure a bank line of credit, or consider strategic alliances. The sale of equity or equity related securities could result in additional dilution to stockholders. There can be no assurance that additional financing, in any form, will be available at all or, if available, will be on terms acceptable to us.

Recent Accounting Pronouncements

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS 148”). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS 123, Accounting for Stock-Based Compensation. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both the annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transitional requirements of SFAS 148 are effective for all financial statements for fiscal years ending after December 15, 2002. The interim disclosure requirements are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. As the Company did not make a voluntary change to the fair value based method of accounting for stock-based employee compensation during 2002, the adoption of SFAS 148 did not have a material impact on the Company’s financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 (“FIN 45”). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. FIN 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 does not prescribe a specific approach for subsequently measuring the guarantor’s recognized liability over the term of the related guarantee. The disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods that end after December 15, 2002 and the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. The Company has various items that will be required to be accounted for in accordance with

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FIN 45. The Company has made the disclosures required by FIN 45 as of December 31, 2002 in Note 9 to the consolidated financial statements. The Company is evaluating its business practices related to future guarantees and other items to be accounted for under FIN 45 and has not yet determined to impact of FIN 45 on future results of operations or financial position.

In November 2002, the Emerging Issues Task Force of the FASB reached a consensus on Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). EITF 00-21 requires that for revenue arrangements with multiple deliverables, those deliverables be divided into separate units of accounting if the deliverables meet certain criteria as defined by EITF 00-21. Arrangement consideration is to be allocated among the separate units of accounting based on their relative fair values and revenue recognition decisions should be considered separately for each separate unit of accounting. EITF 00-21 is effective for all arrangements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. The Company is currently evaluating the scope of EITF 00-21 but management believes that the Company’s multiple element arrangements fall within the scope of SOP 97-2 and therefore, EITF 00-21 will not be applicable to the Company.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”). This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (“EITF 94-3”). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. EITF 94-3 allowed for an exit cost liability to be recognized at the date of an entity’s commitment to an exit plan. SFAS 146 also requires that liabilities recorded in connection with exit plans be initially measured at fair value. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of SFAS 146 will have a material impact on its financial position or results of operations.

For additional information concerning risks associated with the Company’s liquidity and capital resources see “Certain Factors That May Affect Future Results”.

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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Federal Securities Laws. In addition, from time to time, management may make forward-looking statements in press releases, in other public discussions and in other documents that we file with the Securities and Exchange Commission (including those documents incorporated by reference into this Annual Report on Form 10-K). The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for these statements. For this purpose, a forward-looking statement is any statement that is not a statement of historical fact. You can identify forward-looking statements by the words “may,” “believes,” “anticipates,” “plans,” “expects,” “estimates” and similar expressions. Our forward-looking statements are based on currently available information and management’s expectations of future results but necessarily involve certain assumptions. We caution readers that our assumptions involve substantial risks and uncertainties. Consequently, any forward-looking statement could turn out to be wrong. Many factors could cause actual results to differ materially from our expectations. Moreover, the Company assumes no obligation to update forward-looking statements or update the reasons actual results could differ materially from those anticipated in forward-looking statements, except as required by law. Below we describe some of the important factors that could affect our revenue or results of operations.

WE HAVE EXPERIENCED CASH FLOW DEFICITS IN THE PAST AND MAY EXPERIENCE CASH FLOW DEFICITS IN THE FUTURE.

For the fiscal year ended December 31, 2002, we had operating income of approximately $1.2 million. At December 31, 2002, the Company had an accumulative deficit of $71.7 million. Management’s 2003 operating plan forecasts that the Company will continue to be operationally profitable for the year. Based upon these assumptions, management believes the Company has sufficient cash to fund its operations during 2003. If the Company is unable to attain forecasted revenue levels and management is unsuccessful in controlling expenses, the Company may have to seek additional external equity or debt financing to continue its operations. There can be no assurance that we will be able to secure such external financing.

OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF GENERAL ECONOMIC AND BUSINESS CONDITIONS.

Our business is subject to the effects of general economic and business conditions. ON’s operating results have been affected by recent unfavorable economic conditions and reduced information technology spending. In addition, the continued fallout from the September 11 terrorist attacks, U.S. military action in Iraq and Afghanistan and the heavily publicized corporate transgressions and resulting investigations causing investor uncertainty about the integrity of US financial markets have added (or exacerbated) general economic, political and other uncertainties. If economic and market conditions do not improve and these uncertainties continue to exist, ON’s business, condition (financial or otherwise), prospects and results of operations could be adversely affected.

OUR SALES AND MARKETING REQUIRES SIGNIFICANT INVESTMENTS

Sales of products require significant up-front investments in marketing, technical and financial resources. We have adopted a sales and marketing strategy that relies significantly on a direct sales force, third-party resellers and in-house field service organization. This strategy requires significant investments in identifying and hiring qualified sales and technical personnel, ongoing product development, and expansion of an in-house field service organization. We have developed valuable marketing and service experience and expertise in Europe and, recently, in the United States. However, there can be no assurance that we will be able to continue to expand and apply such experience and expertise to our target market.

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WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM A RELATIVELY SMALL NUMBER OF CUSTOMERS

For the twelve months ended December 31, 2002, 2001 and 2000, two customers accounted for $6.2 million (17.8%), $4.3 million (17.7%), and $6.3 million (23.9%) of total revenue, respectively. It is possible that in the future other customers will account for a significant portion of ON’s total revenue. The loss of significant customers could have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations.

WE WILL NEED TO EXPAND OUR DISTRIBUTION CHANNELS IN ORDER TO DEVELOP OUR BUSINESS AND INCREASE REVENUE

We sell our products through our direct sales force and a number of distributors, and we provide maintenance and support services through our technical and customer support staff. We plan to continue to invest large amounts of resources in our direct sales force. In addition, management is committed to developing additional sales and marketing channels through value added resellers, system integrators, original equipment manufacturers and other channel partners. We may not be able to attract channel partners that will be able to market our products effectively, or that will be qualified to provide timely and cost-effective customer support and service. If we establish distribution through such indirect channels, our agreements with channel partners may not be exclusive. As a result, such channel partners may also carry competing product lines. If we do not establish and maintain such distribution relationships, this could materially adversely affect our business, condition (financial or otherwise), prospects and results of operations.

IF WE DO NOT RESPOND ADEQUATELY TO OUR INDUSTRY’S EVOLVING TECHNOLOGY STANDARDS, OR DO NOT CONTINUE TO MEET THE SOPHISTICATED NEEDS OF OUR CUSTOMERS, SALES OF OUR PRODUCTS MAY DECLINE

As a result of rapid technological change in our industry, product advances can quickly erode our position in existing markets or other markets that we may enter. The life cycles of our products are difficult to estimate. Our growth and future financial performance depend in part upon our ability to improve existing products and develop and introduce new products that keep pace with technological advances, meet changing customer needs and respond to competitive products. The introduction in early 2003 of our ON iCommand product is an example of our commitment to respond to these issues. Our product development efforts will continue to require substantial investments. We may not have sufficient resources to make the necessary investments.

We have experienced product development delays in the past and may experience delays in the future. Difficulties in product development could delay or prevent the successful introduction or marketing of new or improved products. Any such new or improved products, including the new ON iCommand product, may not achieve market acceptance. Our current or future products may not conform to industry requirements. Our ability to continue to enhance our current products to meet customer and market requirements will depend substantially on our ability to effectively manage this development effort, to attract and retain the required development personnel in Waltham, Massachusetts and Starnberg, Germany and to coordinate and manage geographically remote development efforts. If, for technological or other reasons, we are unable to develop and introduce new and improved products in a timely manner, our business, condition (financial or otherwise), prospects and results of operations could be adversely affected.

ERRORS IN OUR PRODUCTS COULD RESULT IN SIGNIFICANT COSTS TO US AND COULD IMPAIR OUR ABILITY TO SELL OUR PRODUCTS

Because our software products are complex, these products may contain errors that could be detected at any point in a product’s life cycle. In the past, we have discovered software errors in certain of our products and have experienced delays in shipment of our products during the period required to correct these errors. Despite testing by ON and by current and potential customers, errors in our products may be found in the future. Detection of such errors may result in, among other things, loss of, or delay in, market acceptance and sales of our products, diversion of development resources, injury to our reputation, or increased service and warranty costs. If any of these results were to occur, our business, condition (financial or otherwise), prospects and results of operations could be materially adversely affected.

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IN THE FUTURE, INCLUSION OF FUNCTIONS PROVIDED BY OUR PRODUCTS IN SYSTEM SOFTWARE AND APPLICATION SUITES MAY AFFECT OUR COMPETITIVE POSITION

In the future, vendors of operating system software and applications sold for a single price (generally referred to as application suites) may continue to enhance their products to include functions that are currently provided by our products. In addition, some vendors may bundle these products in their existing application suites at no additional charge. The widespread inclusion of the functions provided by our products as standard features of operating system software could render our products obsolete and unmarketable particularly if the quality of such functions were comparable to the functions offered by our products. Furthermore, even if the software functions provided as standard features by operating systems are more limited than those of our products, there is no assurance that a significant number of customers would not elect to accept such functions instead of purchasing additional software. If we were unable to develop new software products to further enhance operating systems and to successfully replace any obsolete products, our business, condition (financial or otherwise), prospects and results of operations could be materially adversely affected.

THE INTENSE COMPETITION IN THE MARKET FOR OUR PRODUCTS COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS

The market for our products is highly competitive, and we expect competition to continue to increase in the future. We believe that the principal competitive factors affecting the market for our products include brand name recognition, company reputation, performance, functionality, ease-of-use, breadth of product line, quality, customer support, adherence to industry standards, integration with third-party solutions and price.

As is the case in many segments of the software industry, we may encounter increasing price competition in the future. This could reduce average selling prices and, therefore, profit margins. Competitive pressures could result not only in sustained price reductions but also in a decline in sales volume, which could adversely affect our business, condition (financial or otherwise), prospects and results of operations. There can be no assurance that we will continue to compete effectively against existing and potential competitors in our markets, many of whom have substantially greater financial, technical, marketing and support resources and name recognition than we have.

The widespread inclusion of the functionality of our products as standard features of Microsoft operating systems software could render our products obsolete and unmarketable, particularly if the quality of such functionality were comparable to that of our products. If we were unable to develop new functionality or unique applications for our technology to successfully replace any obsolete products, our business, condition (financial or otherwise), prospects and results of operations could be materially adversely affected.

The market for our products is highly competitive and diverse. The technology for remote software management products can change rapidly. New products are frequently introduced and existing products are continually enhanced. Competitors vary in size and in the scope and breadth of the products and services offered. The Company has faced competition from a number of sources, including:

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In addition, Microsoft has bundled new management capabilities in its Windows 2000 and XP operating systems that, in conjunction with its Systems Management Server (SMS) framework, directly compete with capabilities provided by ON.

Their latest version, SMS 2003 (code-named “Topaz”) is expected to be released during 2003 and includes additional capabilities that directly compete with capabilities provided by the ON product offering, including support for mobile and remote users as well as integration with Microsoft Acive Directory. Even if the functionality provided with Microsoft’s operating system software were more limited than that of our software management products, customers or potential customers might elect to accept more limited functionality in lieu of purchasing additional software. Competition resulting from this type of bundling could lead to price reductions for our products, which would reduce our margins and correspondingly affect our business, condition (financial or otherwise), prospects and results of operations.

Some of our current and many of our potential competitors have much greater financial, technical, marketing, and other resources than we have. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer needs. They may also be able to devote greater resources to the development, promotion, and sale of their products than ON. The Company may not be able to compete successfully against current and future competitors. In addition, competitive pressures faced by the Company may materially adversely affect the Company’s business, condition (financial or otherwise), prospects and results of operations.

DUE TO THE TECHNOLOGICAL CHALLENGES ASSOCIATED WITH OUR CURRENT PRODUCTS, WE MAY NOT HAVE THE FINANCIAL RESOURCES NECESSARY TO CONDUCT THE BUSINESS AS PRESENTLY CONTEMPLATED

Based on management’s 2003 forecasts, product development, marketing and sales costs for our current products are approximately $2.15 million per month. Based on our existing cash and forecasted revenue, we believe that we have enough cash to fund these costs through 2003. There can be no assurance that our estimate of the marketing, sales and product development costs of our products or our revenue forecasts is correct, or that these costs will not exceed our available financial resources, or that we will be able to locate additional sources of financing, if and when needed.

OUR RELIANCE ON INTERNATIONAL REVENUE COULD ADVERSELY AFFECT OUR OPERATING RESULTS

For fiscal years 2002, 2001, and 2000, total international revenue from the Company’s foreign subsidiaries and other foreign sources was 73%, 71%, and 65% of total revenue, respectively. We expect that international revenue will continue to constitute a significant portion of our total revenue in the future. Accordingly, a significant percentage of our total revenue may be subject to the risks inherent in international sales, including the impact of fluctuating exchange rates, longer payment cycles, greater difficulty in protecting intellectual property, greater difficulty in accounts receivable collection, unexpected changes in legal and regulatory requirements, seasonality due to the slowdown of European business activity in the third quarter and tariffs and other trade barriers. There can be no assurance that these factors will not have a material adverse effect on our future international license revenue.

Our continued growth and profitability will require continued expansion of our international operations, particularly with continued expansion in Europe and initial inroads into Latin America and the Pacific Rim. Accordingly, we intend to expand our current international operations and enter additional international markets. Such expansion will require significant management attention and financial resources. We have only limited experience in developing local-language versions of our products and marketing and distributing our products

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internationally. We may not be able to successfully translate, market, sell and deliver our products internationally. If we are unable to expand our international operations successfully and in a timely manner, our business, condition (financial or otherwise), prospects and results of operations could be adversely affected.

AS OUR EXPANDING INTERNATIONAL OPERATIONS IN EUROPE AND ELSEWHERE ARE INCREASINGLY CONDUCTED IN CURRENCIES OTHER THAN THE U.S. DOLLAR, FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY EXCHANGE LOSSES

A large portion of our business is conducted in foreign currencies. Fluctuations in the value of foreign currencies relative to the U.S. dollar have caused and will continue to cause currency transaction gains and losses. We cannot predict the effect of exchange rate fluctuations upon future operating results. We may experience currency losses in the future. Although we have no current plans to do so, we may, in the future, implement a foreign exchange hedging program, consisting principally of purchases of forward-rate currency contracts. However, if undertaken, our hedging activities may not adequately protect us against the risks associated with foreign currency fluctuations.

FUTURE FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS DUE TO A NUMBER OF FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL, COULD ADVERSELY AFFECT OUR STOCK PRICE

Our quarterly operating results have varied significantly in the past and may vary significantly in the future depending upon a number of factors, many of which are beyond our control. These factors include, among others:

We have often recognized a substantial portion of our revenue in the last month or weeks of a quarter. As a result, license revenue in any quarter is substantially dependent on orders booked and shipped in the last month

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or weeks of that quarter. Due to the foregoing factors, quarterly revenue and operating results are not predictable with any significant degree of accuracy. In particular, the timing of revenue recognition can be affected by many factors, including the timing of contract execution and delivery. The timing between initial customer contact and fulfillment of criteria for revenue recognition can be lengthy and unpredictable, and revenue in any given quarter can be adversely affected as a result of such unpredictability.

OUR SALES CYCLE IS LONG AND UNPREDICTABLE, AND POTENTIAL DELAYS IN THE CYCLE MAKE OUR REVENUE SUSCEPTIBLE TO FLUCTUATIONS

The licensing of our software generally requires us to engage in a sales cycle that typically takes approximately four to nine months to complete. The length of the sales cycle may vary depending on a number of factors over which we may have little or no control, including the size of the transaction and the level of competition that we encounter in our selling activities. During the sales cycle, we typically provide a significant level of education to prospective customers regarding the use and benefits of our products and, in some cases, permit the potential customer to utilize an evaluation version of our software products. Any delay in the sales cycle of a large license or a number of smaller licenses could have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations.

SEASONAL TRENDS IN SALES OF OUR SOFTWARE PRODUCTS MAY AFFECT OUR QUARTERLY OPERATING RESULTS

Our business has experienced and is expected to continue to experience seasonality. Our revenue and operating results in our December quarter typically benefit from purchase decisions made by the large concentration of customers with calendar year-end budgeting requirements, and from the efforts of our sales force to meet fiscal year-end sales quotas. In addition, we are currently attempting to further expand our presence in international markets, including Europe. International revenue comprises a significant percentage of our total revenue, and we may experience additional variability in demand associated with seasonal buying patterns in such foreign markets.

ANY FUTURE ACQUISITIONS PRESENT RISKS WHICH COULD ADVERSELY AFFECT OUR BUSINESS

In the future, ON may evaluate and make acquisitions of, or large investments in, other businesses that offer products, services, and technologies that further our goal of providing enterprise desktop management software solutions to businesses or which complement our current business. Any future acquisitions or investments that we may evaluate or complete present risks commonly encountered with these types of transactions. The following are examples of such risks:

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The risks described above, either individually or in the aggregate, could materially adversely affect our business, operating results, and financial condition. Future acquisitions, if any, could provide for consideration to be paid in cash, shares of ON common stock, Company debt, or a combination of cash, ON common stock, and Company debt.

OUR ABILITY TO MANAGE GROWTH WILL AFFECT OUR ABILITY TO ACHIEVE AND MAINTAIN PROFITABILITY

Over the last 5 years, total CCM and related revenue has increased significantly from $11.3 million in fiscal 1998 to $34.8 million in fiscal 2002. If we achieve our future growth plans, such growth may burden our operating and financial systems. This burden will require significant senior management attention and will require the use of other ON resources. Our ability to compete effectively and to manage future growth (and our future operating results) will depend in part on our ability to implement and expand operational, customer support, and financial control systems and to expand, train, and manage our employees. We may not be able to augment or improve existing systems and controls or implement new systems and controls in response to future growth, if any. Any failure to do so could materially adversely affect our business, condition (financial or otherwise), prospects and results of operations.

OUR BUSINESS DEPENDS IN LARGE PART UPON THE PROTECTION OF OUR PROPRIETARY TECHNOLOGY, THE LOSS OF WHICH WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS

Our success is heavily dependent upon our proprietary software technology. We rely on a combination of contractual rights, trademarks, trade secrets and copyright to establish and protect our proprietary rights in software.

We use a printed “shrink-wrap” license for users of our products distributed through traditional distribution channels in order to protect our copyrights and trade secrets in those products. Since the licensee does not sign these shrink-wrap licenses, many authorities believe that they may not be enforceable under many state laws and the laws of many foreign jurisdictions. If such licenses were not enforceable, the user would not be bound by the license terms, including the terms that seek to protect our proprietary technology. If the printed shrink-wrap licenses prove to be unenforceable, this may have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations.

The laws of some foreign countries either do not protect our proprietary rights or offer only limited protection for those rights. Furthermore, in countries with a high incidence of software piracy, we may experience a higher rate of piracy of our products.

We have obtained registrations in the United States for the following trademarks: ON Technology, CCM, ON Command, and ON Command CCM. We have only obtained registration for the trademark ON Command CCM in the European Union and Australia and for ON Technology and ON Command in Canada. As a result, we may not be able to prevent a third party from using our trademarks in many foreign jurisdictions. We have not to date registered any of our copyrights.

There can be no assurance that the steps taken by ON to protect our proprietary software technology will be adequate. Lesser sensitivity by corporate, government or institutional users to avoiding infringement of propriety rights could have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations.

There has been substantial litigation in the software industry involving intellectual property rights of technology companies. We have not been involved in any such litigation. Although we do not believe that we are

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infringing the intellectual property rights of others, any involvement in this type of litigation may have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations. In addition, since we currently license, or may in the future license or acquire a portion of the software included in our products from third parties, our exposure to infringement actions may increase because we must rely upon these third parties for information as to the origin and ownership of any software. We generally obtain representations as to the origin and ownership of such acquired or licensed software and we generally obtain indemnification to cover any breach of such representations. However, there can be no assurance that these representations are accurate or that such indemnification will provide us with adequate compensation for a breach of these representations. In the future, we may need to initiate litigation to enforce and protect trade secrets and other intellectual property rights owned by us. We may also be subject to litigation to defend against claimed infringement of the rights of others or to determine the scope and validity of the proprietary rights of others. This litigation could be costly and cause diversion of management’s attention, either of which could have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations. Adverse rulings or findings in such litigation could result in the loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from third parties, or prevent us from manufacturing or selling our products. Any one of these items could have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations. Furthermore, there can be no assurance that any necessary licenses will be available to us on reasonable terms, or at all.

IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE TO USE OUR TECHNOLOGY OR TRADEMARKS AND THIS COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE OUR REVENUE AND INCREASE COSTS

We rely primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. Such laws provide only limited protection. Despite precautions that we take, it may be possible for unauthorized third parties to copy aspects of our current or future products or to obtain and use information that we regard as proprietary. In particular, we may provide our licensees with access to our data model and other proprietary information underlying our licensed applications. Such means of protecting our proprietary rights may not be adequate. Policing unauthorized use of software is difficult and, while we do not expect software piracy to be a persistent problem, some foreign laws do not protect our proprietary rights to the same extent as United States laws. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of resources, and could materially adversely affect our business, condition (financial or otherwise), prospects and results of operations.

THIRD PARTIES COULD ASSERT, FOR COMPETITIVE OR OTHER REASONS, THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS, AND SUCH CLAIMS COULD INJURE OUR REPUTATION, CONSUME TIME AND MONEY, AND ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS

While we are not aware that any of our software product offerings infringe the proprietary rights of third parties, third parties may claim infringement with respect to our current or future products. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the software industry grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements may not be available on acceptable terms, or at all. As a result, infringement claims could have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations.

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WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT COSTS TO US

Our license agreements with our customers typically contain provisions designed to limit exposure to potential product liability claims. Such limitation of liability provisions may, however, not be effective under the laws of certain jurisdictions. Although we have not experienced material product liability claims to date, the sale and support of our products entails the risk of such claims. We may be subject to such claims in the future. A material product liability claim could materially adversely affect our business, condition (financial or otherwise), prospects and results of operations.

OUR SENIOR MANAGEMENT AND OTHER KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND IF THEY CHOOSE TO LEAVE, IT COULD HARM OUR BUSINESS

Our success will depend to a significant extent on the continued service of our senior management and certain other key employees, including selected sales, consulting, technical and marketing personnel. While our employees are required to sign standard agreements concerning confidentiality and ownership of inventions and many of our employees are bound by an employment or non-competition agreement, enforcing these agreements may be difficult and costly, particularly with respect to provisions concerning non-competition. In addition, we do not generally maintain key man life insurance on any employee. The loss of the services of one or more of our executive officers or key employees or the decision of one or more such officers or employees to join a competitor or otherwise compete directly or indirectly with us could have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations.

WE WILL NEED TO RECRUIT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL TO SUCCESSFULLY GROW OUR BUSINESS

Our future success will likely depend in large part on our ability to attract and retain additional highly skilled technical, sales, management and marketing personnel. Competition for such personnel in the computer software industry is intense, and in the past we have experienced difficulty in recruiting qualified personnel. New employees generally require substantial training in the use of our products. We may not succeed in attracting and retaining such personnel. If we do not, our business, condition (financial or otherwise), prospects and results of operations could be materially adversely affected.

PROVISIONS IN OUR CHARTER DOCUMENTS AND IN DELAWARE LAW MAY DISCOURAGE POTENTIAL ACQUISITION BIDS FOR ON AND PREVENT CHANGES IN OUR MANAGEMENT WHICH OUR STOCKHOLDERS FAVOR

Certain provisions of ON’s charter documents eliminate the right of stockholders to act by written consent without a meeting and specify certain procedures for nominating directors and submitting proposals for consideration at stockholder meetings. Such provisions are intended to increase the likelihood of continuity and stability in the composition of the ON board of directors and in the policies set by the board. These provisions also discourage certain types of transactions, which may involve an actual or threatened change of control transaction. These provisions are designed to reduce the vulnerability of ON to an unsolicited acquisition proposal. As a result, these provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. These provisions are also intended to discourage certain tactics that may be used in proxy fights. However, they could have the effect of discouraging others from making tender offers for ON’s shares. As a result, these provisions may prevent the market price of ON common stock from reflecting the effects of actual or rumored takeover attempts. These provisions may also prevent changes in the management of ON.

ON’s board of directors has the authority to issue up to 2,000,000 shares of preferred stock in one or more series. The board of directors can fix the price, rights, preferences, privileges, and restrictions of such preferred stock without any further vote or action by ON’s stockholders. The issuance of preferred stock allows ON to have flexibility in connection with possible acquisitions and other corporate purposes. However, the issuance of shares of preferred stock may delay or prevent a change in control transaction without further action by the ON

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stockholders. As a result, the market price of the ON common stock and the voting and other rights of the holders of ON common stock may be adversely affected. The issuance of preferred stock may result in the loss of voting control to others. ON has no current plan to issue any shares of preferred stock.

ON is subject to the anti-takeover provisions of the Delaware General Corporation Law, which regulates corporate acquisitions. The Delaware law prevents certain Delaware corporations, including ON, from engaging, under certain circumstances, in a “business combination” with any “interested stockholder” for three years following the date that such stockholder became an interested stockholder. For purposes of Delaware law, a “business combination” includes, among other things, a merger or consolidation involving ON and the interested stockholder and the sale of more than 10% of ON’s assets. In general, Delaware law defines an “interested stockholder” as any entity or person beneficially owning 15% or more of the outstanding voting stock of a company and any entity or person affiliated with or controlling, or controlled by such entity or person. Under Delaware law, a Delaware corporation may “opt out” of the anti-takeover provisions. ON has not “opted out” of the anti-takeover provisions of Delaware law.

OUR STOCK WILL LIKELY BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS WHICH MAY PREVENT STOCKHOLDERS FROM RESELLING THEIR SHARES AT OR ABOVE THE PRICE AT WHICH THEY PURCHASED THEIR SHARES

In the past, the market price of our common stock has varied greatly and the volume of our common stock traded has fluctuated greatly as well. We expect such fluctuation to continue. The fluctuation results from a number of factors including:

In addition, the stock market may from time to time experience extreme price and volume fluctuations. Many technology companies, in particular, have experienced such fluctuations. Often, such fluctuations have been unrelated to the operating performance of the specific companies. The market price of our common stock may experience significant fluctuations in the future.

RISK OF DELISTING BY NASDAQ STOCK MARKET

Under rules adopted by the NASDAQ Stock Market, ON’s common stock is subject to possible delisting from the NASDAQ National Market if, among other requirements, the minimum bid price for the Company’s common stock falls below $1.00 for a period of 30 consecutive business days or if the Company’s stockholders’ equity falls below $10 million. An issuer failing to meet the minimum stockholders’ equity requirement can avoid delisting if it satisfies an alternative-listing standard that imposes, among other requirements, a minimum bid price of $3.00.

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As of December 31, 2002, ON’s stockholders’ equity was $10.2 million and the closing bid price of ON’s common stock on March 24, 2003 was $2.91. As a result, the Company is in compliance with current listing standards. If ON’s stockholders’ equity falls below $10 million and its stock falls below a minimum bid price of $3.00, ON’s common stock may be delisted unless ON takes affirmative action to increase its stockholders’ equity (such as by issuing securities in an equity financing). Delisting could have a material adverse effect on the price of ON’s common stock and on the level of liquidity currently available to the Company’s shareholders.

Item 7A.     Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to the impact of interest rate changes, foreign currency fluctuations, and investment changes.

Interest Rate Risk.    The Company’s exposure to market rate risk for changes in interest rates relates primarily to the Company’s cash equivalent investments. The Company has not used derivative financial instruments. The Company invests its excess cash in short-term floating rate instruments and senior secured floating rate loan funds, which carry a degree of interest rate risk. These instruments may produce less income than expected if interest rates fall.

Foreign Currency Risk.    International revenue from the Company’s foreign subsidiaries and other foreign sources for the year ended December 31, 2002 was approximately 73% of total revenue. International sales are made primarily from the Company’s subsidiary in Germany and are denominated in the local currency. Accordingly, the Company’s German and other foreign subsidiaries use its local currency as its functional currency. The Company is exposed to foreign currency exchange rate fluctuations as the financial results of its foreign subsidiary are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall profitability.

Investment Risk.    The Company may invest in the future in the equity instruments of privately held companies for business and strategic purposes. However, as of December 31, 2002, the Company holds no such material investments. For these non-quoted investments, the Company’s policy is to regularly review the assumptions underlying the operating performance and cash flow forecasts in assessing the carrying values. The Company identifies and records impairment losses on long-lived assets when events or circumstances indicate that such assets might be impaired.

Item 8.     Financial Statements and Supplementary Data

The Company’s consolidated financial statements are listed in the Index to Consolidated Financial Statements filed in Items 15(a)(i) as part of this Annual Report on Form 10-K.

Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

The information required hereunder is incorporated by reference from the Company’s definitive Proxy Statement under the section entitled “Ratification of PricewaterhouseCoopers LLP as the Company’s Independent Accountants” filed in connection with the Company’s Annual Meeting of Stockholders to be held on May 15, 2003.

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PART III

Item 10.     Directors and Executive Officers of the Registrant

The information required hereunder is incorporated by reference from the Company’s definitive Proxy Statement filed in connection with the Company’s Annual Meeting of Stockholders to be held on May 15, 2003.

Item 11.     Executive Compensation

The information required hereunder is incorporated by reference from the Company’s definitive Proxy Statement under the caption “Executive Compensation and Other Matters” filed in connection with the Company’s Annual Meeting of Stockholders to be held on May 15, 2003.

Item 12.     Security Ownership of Certain Beneficial Owners and Management

The information required hereunder is incorporated by reference from the Company’s definitive Proxy Statement under the caption “Security Ownership of Principal Stockholders and Management” and “Equity Compensation Plan Information” filed in connection with the Company’s Annual Meeting of Stockholders to be held on May 15, 2003.

Item 13.     Certain Relationship and Related Transactions

The information required hereunder is incorporated by reference from the Company’s Proxy Statement filed in connection with the Company’s Annual Meeting of Stockholders to be held on May 15, 2003.

Item 14.     Controls and Procedures

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PART IV

Item 15.     Exhibits, Financial Statements, Schedules and Reports on Form 8-K

(a) (1)    Consolidated Financial Statements:

Item 15(a) (2)

All schedules to the consolidated financial statements have been omitted, as the required information is either inapplicable or is included in the consolidated financial statements or notes thereto.

(a) (3)    Exhibits:    See Index to Exhibits on page 70. The Exhibits listed in the accompanying Index of Exhibits are filed or incorporated by reference as part of this Annual report on Form 10-K.

(b)         Reports on Form 8-K:    None

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of

ON Technology Corporation:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of ON Technology Corporation and its subsidiaries at December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The consolidated financial statements of ON Technology Corporation as of December 31, 2001 and for each of the two years in the period ended December 31, 2001, prior to the revisions discussed in Note 2, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those consolidated financial statements in their report dated January 28, 2002.

As described above, the consolidated financial statements of ON Technology Corporation as of December 31, 2001 and for each of the two years in the period ended December 31, 2001, were audited by other independent accountants who have ceased operations. As described in Note 2, these consolidated financial statements have been revised to reflect the adoption of Emerging Issues Task Force Issue 01-14, Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred. We have audited the adjustments described in Note 2 that were applied to revise the 2001 and 2000 consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 consolidated financial statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 consolidated financial statements taken as a whole.

/s/ PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts

February 6, 2003

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The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP. During the year ended December 31, 2002, ON Technology Corporation adopted the provisions of Emerging Issues Task Force Issue 01-14, Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred (“EITF 01-14”). As discussed in Note 2, ON Technology Corporation has reflected the impact of adopting EITF 01-14 on the 2001 and 2000 consolidated financial statements by revising certain revenue and cost of revenue amounts. The Arthur Andersen LLP report does not extend to these changes to the 2001 and 2000 consolidated financial statements. The adjustments to the 2001 and 2000 consolidated financial statements were reported on by PricewaterhouseCoopers LLP as stated in their report appearing herein.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders

of ON Technology Corporation and subsidiaries:

We have audited the accompanying consolidated balance sheets of ON Technology Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of ON Technology Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ON Technology Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP

Boston, Massachusetts

January 28, 2002

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ON TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEET

(amount in thousands, except share and per-share data)

The accompanying notes are an integral part of these consolidated financial statements

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ON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

(amount in thousands, except share and per-share data)