UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington DC 20549

Form 10-K

Commission file number 0-23067

CONCORD COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

400 Nickerson Road

Marlborough, Massachusetts 01752

(508) 460-4646

(Address and telephone number 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

(Title of class)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

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

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2):     Yes þ          No o

      The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing sale price of the registrant’s common stock on June 30, 2004, as reported on the NASDAQ National Market was approximately $208,801,000

      The number of shares outstanding of Common Stock as of March 11, 2005 was 18,494,361.

DOCUMENTS INCORPORATED BY REFERENCE

TABLE OF CONTENTS

PART I

      This document contains forward-looking statements. Any statements contained herein that do not describe historical facts are forward-looking statements. Concord Communications, Inc. (“Concord”) makes such forward-looking statements under the provisions of the “safe harbor” provided in Section 21E of the Securities Exchange Act of 1934. The forward-looking statements contained herein are based on current expectations, but are subject to a number of risks and uncertainties. Concord’s actual future results may differ significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed elsewhere in this Form 10-K under the heading “Factors That Could Affect Future Results.”

Overview and Recent Acquisitions

      Concord provides a Business Service Management (“BSM”) software solution to enterprises and service providers. Concord’s software solution, the eHealth® Suite,

      On February 22, 2005, we completed the acquisition of Aprisma Holdings, Inc. Prior to its acquisition by Concord, Aprisma Holdings, Inc. was a privately held software company owned by Gores Technology Group and its operating subsidiary, Aprisma Management Technologies, Inc. (“Aprisma”). The purchase price was $93.0 million, which payment was adjusted by (i) the amount of net debt owing by Aprisma to certain of its lenders at the time of closing (which debt will be paid off by Concord) and (ii) certain payment obligations owing by Aprisma under its equity participation plan. Concord’s cash payment to acquire Aprisma on February 22, 2005 was approximately $82.4 million. The acquisition was completed in the first quarter of 2005 and will be accounted for under the purchase method of accounting in the three months ended March 31, 2005 (see Note 14 of the Notes to Consolidated Financial Statements).

      Aprisma’s SPECTRUM® software manages the availability of IT infrastructures and the business services that rely on them. Concord believes that strategically combining the two companies’ complementary technologies will enable Concord to expand its ability to deliver a new generation of intelligent BSM software that maps IT services to business processes, measures the actual end-use experience, and manages the entire IT infrastructure. Aprisma, which profitably generated approxmately $43.8 million in 2004 revenues, will operate as a business within Concord.

      On January 5, 2005, we completed the acquisition of privately held Vitel Software, Incorporated. Vitel’s software enables enterprises and service providers to manage the performance of voice networks and messaging systems that are either internet protocol-based, time division multiplexing-based, or include a hybrid of both. In addition, Concord’s eHealth for Voice provides a unified view into the performance of voice networks built on equipment from multiple vendors such as market leaders Avaya, Cisco, and Nortel Networks. The purchase price was $4.1 million, including $0.1 million in direct costs of acquisition and was substantially paid in cash during the three months ending March 31, 2005. The acquisition will be accounted for under the purchase method of accounting in the three months ending March 31, 2005. (see Note 14 of the Notes to Consolidated Financial Statements).

      On July 17, 2003, we completed the acquisition of privately held netViz. netViz’s software enables users to visualize business processes and allows them to map relationships within the supporting technology infrastructure through data-driven icons. Consideration for the acquisition totaled $10.3 million, including transaction costs of $0.3 million. The consideration paid to netViz’s stockholders consisted of $5.0 million in cash paid at closing and $5.0 million of our common stock. (see Note 2 of the Notes to Consolidated Financial Statements).

      We were organized as a Massachusetts corporation in 1980 under the name Concord Data Systems, Inc., and changed our name to Concord Communications, Inc. in 1986. Our principal executive offices are located at 400 Nickerson Road, Marlboro, Massachusetts 01752 and our telephone number is 508-460-4646. Our web site is http://www.concord.com/. We make available, free of charge, through our website, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished as soon as reasonably practicable after we have filed them with the Securities and Exchange Commission. The information posted on our web site is not incorporated into this Annual Report. The public can also obtain access to such reports at the Securities and Exchange Commission’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC’s website which is http://www.sec.gov/.

Business Service Management Market

      Business process automation has resulted in tremendous increases in productivity and profitability, but has also presented new business challenges. For one, maintaining the availability and performance of business services has become more critical. Specifically, Line of Business (“LOB”) and IT managers require knowledge of the following metrics to understand how IT relates to business services provided:

      Business Service Management (“BSM”) solutions provide knowledge about availability, performance and service capacity. These solutions link IT services to business needs. They help detect problems before end users are impacted. They enable IT managers and their business counterparts to speak a common language. They also help IT managers and the LOB manage their portfolio of IT services.

      Using solutions to holistically view business services, rather than narrowly view the infrastructure and application components, helps companies reduce costs and increase revenue by maintaining higher availability and better performance of business services. The core benefits of BSM include:

General

      Concord develops, markets and supports a BSM software solution, the eHealth® Suite. The eHealth Suite of products is designed for three main functions: map, measure, and manage.

Market Segments Served

      Specific business market segments that we target are enterprises across a number of key verticals and service providers.

      We market to our customers through a direct sales force, sales agents, value-added resellers, distributors, managed service providers and telecommunication carriers. As of December 31, 2004, we had over 3,000 eHealth customer accounts operating in and serving a broad variety of industries. Additionally, we had several thousand netViz customers, also with a broad industry vertical mix. One North American telecommunications customer accounted for 10.1% of revenues in 2004 and no individual customer or reseller accounted for more than 10% of revenues in 2003 and 2002.

The eHealth® Solution

      Our eHealth® Suite software is automated, scalable, web-based management software for business-critical applications, systems, and networks. We work to incorporate the following distinctive features into our software:

      Easy to Deploy and Manage. Often, our software can be installed quickly. Once installed, our products have logical drilldowns and their use is intuitive. Our reporting provides easy to understand metrics with information about critical areas of the infrastructure and related services. The eHealth® Suite is designed to simplify management of the heterogeneous mix of network devices, client and server operating systems, hardware platforms, technologies, and applications that typically comprise today’s IT infrastructures.

      Wide Technology Coverage. eHealth® embeds algorithms, intelligence, knowledge, and analysis for hundreds of different devices and many applications. This saves customers enormous amounts of time in collecting detailed data from various devices. It also quickly enables management across a broad spectrum of industry standard applications like Microsoft Exchange and Information Internet Server; open source Apache; CRM systems from Siebel; application services like Citrix; industry standard operating systems like UNIX, Microsoft Windows NT and Windows 2000, and Linux; and industry standard networking technologies such as ATM, Frame Relay, VoIP, Quality of Service (“QoS”), DSL, cable, and wireless.

      Flexible Reporting. eHealth can generate many types of reports for multiple levels of management. For example, chief information officers can get a general overview of application availability and performance while technical personnel can get detailed reports about specific transactions, client and server components, hardware equipment components, bandwidth components and network services.

      Highly Scalable. eHealth is scaleable to meet the demands of management as an organization’s IT infrastructure expands. Add-on software licenses or additional agent software can be purchased as a customer grows and expands. As expansion occurs, eHealth is capable of data collection, analysis, and reporting for up to 80,000 elements by a single console. Our distributed architecture allows configurations, viewable from a single console that supports collection and reporting of up to 1,000,000 elements.

Products and Technology

      eHealth contains three solution sets designed to manage applications, servers and networks. eHealth® also contains a number of suite-wide products that operate across applications, networks and servers such as the Business Service Console and Live Health.

eHealth® E2E Console

      eHealth® E2E console is the centerpiece of the eHealth Suite. It provides a centralized view of availability and performance data across applications, systems and networks. It is a graphical user interface for end-users and administrators that combines an efficient engine for collecting data, an industry standard database, and flexible reporting capabilities. It analyzes collected information, along with the raw data, and stores the information in the database. This analysis and information is available via the console, and it is also accessible through a web based user interface or through scheduled reports.

eHealth® for Applications

      This solution enables IT personnel to manage the availability and performance of applications through the following methods:

      Using the methods described for application management, IT personnel can analyze the historical availability and performance of applications. IT personnel can also analyze the availability and performance through our eHealth® Live Health product for real-time detection of degrading performance and declining availability.

      eHealth® for Systems — provides information about servers and systems. It also enables IT personnel to manage the performance and availability of these devices and collects metrics such as available memory and disk space from Concord’s and other third-party agents. The information is stored in the database. Comprehensive analysis is then performed on various combinations of metrics and time periods. The information is also delivered to Concord’s eHealth® Live Health application for real-time detection of system failures, potential outages, and delays.

      eHealth® for Networks — manages the performance and availability of key network devices such as LANs, WANs, Frame Relay, ATM, QoS, Wireless LAN, DSL, VoIP, cable technologies and Remote Ac-

cess Equipment. This product discovers, analyzes, and reports on network resources. This allows network managers to track performance, plan capacity, and detect sources of service delay. This permits network managers to understand service levels, proactively address potential network failures, manage bandwidth and capacity, watch for security violations, and understand the usage patterns of the network and the network’s various elements. It integrates with operational support systems (“OSS”) from Lucent, Newbridge, Hewlett-Packard, Micromuse, and Cisco’s VPN Solutions Center.

eHealth® — Suite Wide Solutions

Sales and Marketing

      We sell our products in the United States through a direct sales force, sales agents, and value added resellers (“VARs”). Internationally we sell primarily through distributors.

      As of December 31, 2004, we had 30 North America sales teams, each composed of one direct sales person and a shared regional resource pool of technical pre-sales people. The North America sales teams rolled up into 8 regions targeting the following four divisions: East, Central, West, and Federal Government. We had 25 international sales teams, also composed of one direct sales person and three shared regional resource pools of technical pre-sales people. The international sales teams rolled up into 7 regions targeting the following three geographic divisions: Europe, Middle East and Africa; Asia/ Pacific; and Latin America. In addition, we employed 25 inside sales, technical and management individuals who support both the North America and International sales teams. As of December 31, 2004, we employed 125 sales personnel.

      In 2004, we had relationships with 11 North American VARs and 64 international VARs. It is the responsibility of each sales team to manage all sales within its geographic territory by managing sales agents, VARs, distributors, network service providers and outsourcers, as well as selling directly to customers. In 2003, we introduced the Concord Authorized Reseller (“CAR”) program, which provides for a fixed annual fee, product, services, and sales training to our VARs and distributors. This program was set up to improve the ability of the indirect channel to better penetrate international markets, such as Europe and the Asia/ Pacific region.

      Additionally, we had relationships with 228 telecommunication carriers and managed service providers. These carriers and service providers offer our products as part of their service offerings. As of December 31, 2004, we also had relationships with development partners that work with our direct sales force, including Alcatel SA, Cap Gemini Ernst & Young, Cisco Systems, Inc., Dimension Data, Hewlett-Packard Co., KPMG Consulting, Juniper Networks, Inc., Nortel Networks Corp., and Siemens AG. We also have a professional services referral program aimed at our key network-consulting partners. Under this program, we will provide professional services through these partners directly to our customers.

      We generate sales leads through seminars, trade shows, internet postings, press articles, referrals, mass mailings and cold calling as well as through relationships with sales agents, distributors, VARs, network service providers and outsourcers. As of December 31, 2004, we employed 34 marketing personnel who position, promote, and market our products. These individuals are engaged in a variety of activities, including direct marketing, public relations, tradeshows, advertising, internet postings, and seminars.

Customer Service

      Our post-sales support organization is responsible for providing ongoing technical support, professional service and training for our customers. For an annual maintenance fee, a customer receives telephone, email, and web-based support, as well as updated product releases. We offer support coverage 24 hours a day, seven days a week to customers for an additional annual fee. We offer a web-based tool, Service Express, which enables customers to find, via our website, answers to questions and solutions to technical support issues. We also provide a toll-free customer support line to all customers via our call center located in the United States and Australia. In early 2003, we opened a call center in Australia in order to improve our ability to support our customers and resellers in the Asia-Pacific region. Support personnel are on call to answer the technical support calls and generally provide same-day responses to questions that cannot be resolved during the initial call. All calls are logged, opened, tracked, and closed with regular updates to the customer, our sales teams, and our executive management team.

      As of December 31, 2004, we employed 42 technical post-sales support personnel and 4 inside sales representatives. In addition, we had 48 professional service and training personnel who provide services to our customers on a fee-for-service basis.

Research and Product Development

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

      During 2002, we introduced a new distributed infrastructure with a focus on large-scale installations and ease of administration. The introductions of new technologies like DSL, VPN, SAN, wireless, and others rounded out the end-to-end solution set in that same year. During 2003, we integrated the Oracle database software into our products, which enabled us to replace the Ingres database with the Oracle product. We now offer one single database solution to our customers. We also added significant enhancements to our wireless offerings and introduced our VoIP product. In 2004, we developed and released the Business Services Console, supplementing our current E2E Console, by providing our customers’ senior managers with a top-level view of key IT business services.

      Research and product development expenses, excluding in process research & development (“IPRD”) expenses, were $25.2 million, $22.8 million and $21.9 million in 2004, 2003 and 2002, respectively, representing 23.7%, 21.9% and 23.3% of total revenues for those 3 years. IPRD expenses were $0.1 million, $1.0 and $0 in 2004, 2003 and 2002, respectively, representing 0.1%, 1.0% and 0.0% of total revenues for those 3 years. IPRD in 2004 relates to the licensing of components of Tavve’s technology, which will become redundant with the acquisition of Aprisma, as this acquired company has similar technology.

      We anticipate that we will continue to commit substantial resources to research and development in the future and that product development expenses may increase in absolute dollars in future periods. To date, our development efforts have not resulted in any capitalized software development costs. As of December 31, 2004, our product development organization consisted of 116 people.

License and Service Revenues

      Our revenues are generated from license revenues and service revenues. License revenues represent fees earned from licensing our software. License revenues accounted for 47.1%, 52.1% and 54.6% of total revenues in 2004, 2003 and 2002, respectively. Concord’s service revenues consist of fees for maintenance, training and professional services. Service revenues accounted for 52.9% 47.9% and 45.4% of total revenues in 2004, 2003 and 2002, respectively. See “Results of Operations” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations for a more complete discussion of license and service revenues.

Competition

      We compete with the following types of companies:

      Additional competitors, including large networking or telecommunication equipment manufacturers, telecommunications service providers, and computer hardware and software companies, may enter this market. In addition, one or more of our customers may develop competing products internally, or one or more of the companies we have developed relationships with, such as the network management platform developers and probe vendors, may develop products that compete more directly with our products.

      Many of our current and prospective competitors have significantly greater financial, sales and marketing, technical and other resources than we do. As a result, these competitors may be able to devote greater resources than us to the development, promotion, sale, and support of their products. Moreover, these companies may introduce additional products that are competitive with or better than our products or may enter into strategic relationships to offer better products than those we currently offer. Our products may not effectively compete with such new products. In addition to the risk that other products will be developed, current and prospective competitors may be able to market, sell and support their products more effectively.

Intellectual Property and Other Proprietary Rights

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

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

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

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

Revenue by Geographic region

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

      Revenues are assigned to a country and geographic region based upon the location of our salespeople, which is generally the same as the country and geographic location of the customer. No one country, except the United States, accounted for greater than 10% of total revenues in 2004 and 2002. No one country, except the United States and the United Kingdom, accounted for greater than 10% of total revenues in 2003.

Business Segment Data

      Enterprise customers comprised 54.4%, 55.0% and 57.8% of revenues in 2004, 2003 and 2002, respectively. Managed service providers and telecommunication carriers comprised 45.6%, 45.0% and 42.2% of revenues in 2004, 2003 and 2002, respectively. See Note 13 of Notes to Consolidated Financial Statements for information regarding revenue and profitability by segment. Also see “Results of Operations” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations for a more complete discussion of segment revenues and profitability.

Employees

      As of December 31, 2004, we had a total of 443 employees, all but 59 of whom were based in the United States. Of the total, 116 were in research and development, 94 were in customer service, 125 were in sales, 34 were in marketing, 35 were in operations and information technology, and 39 were in finance, human resources and administration. Our future performance depends in part, upon the continued service of our key engineering, technical support, and sales personnel. Competition for such personnel can be intense and we cannot assure that we will be successful in attracting or retaining such personnel in the future. None of our employees are represented by a labor union; however, in France, our employees are represented by workers’ councils or other representational organizations. We have not experienced any work stoppages and believe that our employee relations are good.

FACTORS THAT COULD AFFECT FUTURE RESULTS

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

      This document contains forward-looking statements. Any statements contained in this document that do not describe historical facts are forward-looking statements. Concord makes such forward-looking statements under the provisions of the “safe harbor” provided in Section 21E of the Securities Exchange Act of 1934. In particular, statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are not historical facts (including, but not limited to, statements concerning: the plans and objectives of management; increases in absolute dollars or decreases as a percentage of revenues in sales and marketing, research and development, customer support and service, and general and administrative expenses; expectations regarding increased competition and Concord’s ability to compete successfully; sustenance of revenue growth both domestically and internationally; the size, scope and description of Concord’s target customer market; future product development, including but not limited to anticipated expense levels to fund product development, acquisitions and the integration of acquired companies; and our expected liquidity and capital resources) constitute forward-looking statements. Forward-looking statements contained herein are based on current expectations, but are subject to a number of risks and uncertainties. Concord’s actual future results may differ significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below.

      We offer a Business Service Management (“BSM”) software solution to enterprise customers, managed service providers, and telecommunication carriers. This software, the eHealth® Suite, maps information technology (“IT”) services to business needs, measures the actual end user experience, and manages application, system and network infrastructures. We have a limited operating history in the BSM market upon which we can evaluate our business. This market is highly competitive, rapidly evolving, and targeted by many competitors with longer operating histories in the BSM market and greater resources. Our limited operating history, intense competition in the market, and an uncertain economic climate make the accurate prediction of future results of operations difficult or impossible.

      In addition to marketing and selling the eHealth® Suite in the BSM market, we acquired Aprisma in February 2005, a privately held software company, that also provides a software solution for the BSM market. Aprisma’s Spectrum® software manages the health and performance of networks and the business services that rely on them, including performing root cause analysis, event correlation, service modeling, and topological discovery and display. While we intend to provide a solution for the BSM market that maximizes the functionality of both the eHealth® Suite and Spectrum® software, our limited operating history marketing and selling this integrated solution, the risks associated with integrating both the companies and the software products, and intense competition in the market make it difficult to predict our future results of operations.

      In addition to sales of our eHealth® Suite, we will continue to sell netViz® products, which enable customers to visualize business processes and map relationships within the supporting technology infrastructure through data-driven icons. On January 5, 2005, Concord acquired Vitel, a provider of voice performance management solutions, which enables enterprises and service providers to manage the performance of next-generation IP and legacy voice network and messaging systems, including voice mail, from multiple vendors. We have a limited operating history in the product markets of netViz and Vitel, which makes the accurate prediction of future results of operations difficult or impossible.

      Our future operating results must be considered in light of these factors.

      On July 15, 2003, we acquired netViz Corporation and on January 5, 2005, we acquired Vitel Software, Inc. The acquisition of these companies provides us the opportunities to extend our capabilities in the data driven icon and voice network performance and management markets. However, we may fail to:

      On February 22, 2005, we acquired Aprisma Management Technologies, Inc. The acquisition of Aprisma will enable us to expand our ability to deliver a new generation of intelligent BSM software that maps information technology services to business processes, measures the actual end-user experience, and manages the entire IT infrastructure. The achievement of our financial and strategic goals from this acquisition depends on the successful integration of the two companies and our failure to successfully integrate could adversely affect our business. We must integrate our operations, people, and technology. However, we may fail to:

      We have expended considerable resources to the research and development of new technologies and new or improved product features that have enabled us to retain existing customers and penetrate new markets both in the United States and internationally. Despite this expenditure of resources, we cannot ensure that we

can generate revenue growth on a quarterly or annual basis, or that we can achieve or sustain any revenue growth in the future.

      In an effort to again achieve and maintain profitability and adequately fund research and development, we continue to work to reduce our operating expenses while maintaining funding for product development. However, competition in the marketplace may require us to increase our operating expenses in the future in order to:

      To the extent that increases in our operating expenses precede or are not followed by increased revenues, our goal of attaining profitability will be at risk.

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

      Though our service revenues have been increasing as a percentage of total revenues, we do not have a significant ongoing revenue stream that may mitigate quarterly fluctuations in operating results.

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

      In connection with the sale of the Notes, we have incurred $86.25 million of indebtedness. As a result of this indebtedness, our interest payment obligations have increased. The degree to which we are now leveraged could adversely affect our ability to obtain further financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will be dependent upon our future performance, which may be subject to the financial, business and other factors affecting our operations, many of which are beyond our control.

      A higher level of indebtedness increases the risk that we may default on our debt obligations. We cannot assure that we will be able to generate sufficient cash flow to pay the interest on our debt or that future working capital, borrowings or equity financing will be available to pay or refinance such debt. If we are unable to generate sufficient cash flow to pay the interest on our debt, we may have to delay or curtail our research and development programs. The level of our indebtedness among other things, could:

      We derive and likely will continue to derive a significant portion of our revenues from the sales of our products to telecommunication carriers and managed service providers. We expect that revenue from telecommunication carriers and managed service providers will be 40% to 50% of total revenues. Despite our expectations, these markets have been negatively affected by a general weakness in capital spending; making future results difficult to predict. The volume of sales of our products and services to telecommunication carriers and managed service providers may increase at a slower rate than we expect or our sales to these customers may decrease.

      The market is in an early stage of development. Targeting this market is central to the development and marketing of our products, but this market is emerging, and it is difficult to assess:

      Presently, this market is very competitive and we are in direct competition with larger companies that have substantially greater resources to fund the development of competitive products and the creation and

maintenance of direct and indirect sales channels. The rapidly evolving BSM market and the continued presence of larger companies in this market may impact our ability to retain or increase our market share.

      We license from third parties, generally on a non-exclusive basis, certain technologies used in our products. The incorporation of third party technology is an important component of our product development and an increase in royalty costs associated with our distribution of third party technologies could impact our business. Additionally, the termination of any such licenses, or the failure of third-party licensors to adequately maintain or update their products, could result in delay in shipment of certain of our products while we seek to implement technology offered by alternative sources, and any required replacement licenses and associated royalties could prove costly and impact our business.

      While it may be necessary or desirable in the future to obtain other licenses relating to one or more of our products or relating to current or future technologies, we cannot ensure that we will be successful in doing so on commercially reasonable terms or at all.

      We sell software in the BSM market to help companies effectively manage their applications, systems, and networks. We offer availability and performance products to manage the IT infrastructure, and therefore compete both with companies that market comprehensive products to manage the IT infrastructure and with companies that market products for particular segments of the IT infrastructure (e.g., applications and networks). The markets for our products are intensely competitive and rapidly evolving. Our competitors include:

      We expect competition to persist, increase, and intensify in the future, which will likely result in price competition within our market. If we do not provide products that achieve success in our market in the short term, or lower our prices to compete more effectively, we could suffer an insurmountable loss in market share and brand name acceptance. We cannot ensure that we will compete effectively with current and future competitors.

      We currently derive significant revenues from the sale of eHealth® Suite products and services, and we expect that revenues from these products and services will continue to account for a significant portion of our revenues in the foreseeable future. Broad market acceptance of these products and services is critical to our future success. We cannot ensure that market acceptance of our eHealth® Suite products and services will increase or even remain at current levels. Factors that may affect the market acceptance of our products and services include:

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

      As a result of the acquisition of Aprisma on February 22, 2005 we will market and sell Spectrum® products and services, from which we expect to derive significant revenue. Broad market acceptance of these products and services is critical to our future success. We cannot ensure that market acceptance of Spectrum® products and services will increase or even remain at current levels. Factors that may affect the market acceptance of our products and services include:

      Moreover, if demand increases for software products that provide root cause analysis, event correlation, service modeling, and topological discovery and display, we anticipate that our competitors will introduce additional competitive products and services and new competitors could enter our market and offer alternative products and services resulting in decreased market acceptance of our products and services.

      We market and sell netViz products and services. Our revenue is derived primarily from the sale of eHealth Suite products and services, but revenue derived from the sale of netViz products and services constitutes an important component of our quarterly and annual results. Market acceptance of the netViz products and services is critical to our future success. We cannot ensure that market acceptance of netViz products and services will increase or even remain at current levels. Factors that may affect the market acceptance of netViz products and services include:

      Moreover, if demand for data-driven visualization products increases, we anticipate increased competition in the market from existing and new competitors that could enter our market and offer alternative products resulting in decreased market acceptance of our products.

      We plan to continue to expend substantial funds on the continued development, marketing, and sale of our products. We have approximately $159.5 million in short term investments (cash, cash equivalents and marketable securities), excluding restricted cash totaling $0.1 million as of December 31, 2004, which was reduced by approximately $82.4 million on February 22, 2005 due to the acquisition of Aprisma. However, we cannot ensure that our existing capital resources and any funds that may be generated from future operations together will be sufficient to finance our future operations or that other sources of funding will be available on terms acceptable to us, if at all. In addition, future sales of substantial amounts of our securities in the public market could adversely affect prevailing market prices and could impair our future ability to raise capital through the sale of our securities.

      Because of rapid technological change in the software industry, potential changes in the architecture of the IT infrastructure, changes in the software markets in which our product and services are sold, and changes in industry standards, the market acceptance of updated versions of our products is difficult to estimate. We cannot ensure that:

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

      International tensions, exacerbated by the war in Iraq and the war against global terrorism, contribute to an uncertain political and economic climate, both in the United States and globally, which may affect our

ability to generate revenue on a predictable basis. As we sell products both in the United States and internationally, the threat of future terrorist attacks may adversely affect our business.

      We currently outsource, on a limited basis, development and testing of certain software products to locations in Europe and Asia. Our efforts to outsource development and testing of software may be adversely affected by various factors, including: geopolitical instability, political conditions in countries where our development and testing activities occur, increased costs associated with outsourcing, relationships with independent contractors performing such product development and testing, and the enforceability of legal arrangements by which we protect our intellectual property rights in connection with these activities. The occurrence of any event that would adversely affect our outsourcing of development and testing of software may have an impact on our business.

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

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

      The software industry is characterized by:

      The introduction of products embodying new technologies and the emergence of new industry standards can render existing products and integrated product solutions obsolete and unmarketable. While we actively work to develop products that operate with standard protocols, any change in industry standards or the emergence of new network technologies could affect the compatibility of our products, which in turn could affect the demand for, or the pricing of, our products and services.

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

      We have focused on identifying and developing our key distribution partners worldwide to maximize the success of our indirect sales. Our success will depend in large part on our development of these distribution relationships and on the performance and success of other third parties that distribute our products and services, particularly telecommunication carriers and other network service providers. We sell our products and services in the United States through both direct sales to customers and indirect sales to customers through our channel partners. Outside the United States, we sell our products and services primarily through indirect sales via our channel partners, but direct sales to customers have been increasing as we have expanded our sales personnel in our markets. Our international channel partners are located in Europe, the Middle East, Africa, Asia, and North and South America and are subject to local laws, regulations, and customs that may make it difficult to accurately assess the potential revenues that can be generated from a certain market. Our success depends upon our ability to attract and retain valuable channel partners and to accurately assess the size and vitality of the markets in which our products and services are sold. While we have implemented policies and procedures to achieve this, we cannot predict the extent to which we are able to attract and retain financially stable, motivated channel partners. Additionally, our channel partners may not be successful in marketing and selling our products and services. We may:

      We have experienced employee turnover in our sales and operations personnel. Our products and services have become increasingly complex, and our distribution channels are being developed and expanded. The rapid evolution of our markets and the increasing complexity of our products and services have placed, and are likely to continue to place, significant strains on our administrative, operational, and financial resources and increase demands on our internal systems, procedures, and controls that may impact our ability to grow our business.

      Our performance depends substantially on the performance of our key technical, senior management, and sales and marketing personnel. We may lose the services of any of such persons. We experience intense competition for such personnel and are constantly exploring new avenues for attracting and retaining key personnel. However, we cannot ensure that we will successfully attract, assimilate, or retain highly qualified technical, managerial or sales and marketing personnel in the future.

      We intend to continue to expand our operations outside of the United States and enter additional international markets, primarily through the continued establishment and maintenance of channel partner arrangements. As mentioned above, we have concentrated recently on developing more focused relationships with fewer key distributors. We expect to commit additional time and development resources to customizing our products and services for selected international markets and to developing international sales and support channels. We cannot ensure that such efforts will be successful.

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

      Our successful expansion into certain countries will require additional modification of our products and services, particularly national language support. Presently, the majority of our current export sales are denominated in United States dollars. To the extent that international sales continue to be denominated in United States dollars, an increase in the value of the United States dollar relative to other currencies could make our products and services more expensive and, therefore, potentially less competitive in international markets. In certain European Union countries, however, we have introduced pricing in Euros. While we do maintain a foreign currency-hedging program on accounts receivable, to the extent that future international sales are denominated in foreign currency, our operating results will be subject to risks associated with foreign currency fluctuation. Additionally, as we increase our international sales, seasonal fluctuations in revenue generation resulting from lower sales that typically occur during the summer months in Europe and other parts of the world may affect our total revenues.

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

      We cannot ensure that patents will issue from our pending applications or from any future applications or that, if issued, any claims allowed will be sufficiently broad to protect our technology. In addition, we cannot ensure that any patents that have been or may be issued will not be challenged, invalidated or circumvented, or

that any rights granted by those patents would protect our proprietary rights. Failure of any patents to protect our technology may make it easier for our competitors to offer equivalent or superior technology.

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

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

Patent Infringement Litigation, including patent infringement litigation with Micromuse, Inc., could adversely affect our business.

      We acquired Aprisma Management Technologies, Inc. (“Aprisma”) in February 2005. Aprisma is engaged in patent infringement suits with Micromuse, Inc. Aprisma filed a complaint for patent infringement against Micromuse, Inc. in the U.S. District Court for the District of New Hampshire in December 2002, and Micromuse, Inc. filed a complaint for patent infringement against Aprisma in the United States District Court for the Southern District of New York in January 2005. Both cases remain pending, with trials presently unscheduled.

      We will vigorously protect our intellectual property, but patent litigation, with or without merit, could be time-consuming and expensive to litigate or settle and could divert managements attention from focusing on the core business. We cannot ensure that we will prevail in either suit. An adverse decision in either suit could materially affect our business by: (i) impairing our ability to market, sell, and distribute our products, (ii) incurring a substantial financial exposure in the form of patent infringement damages, (iii) incurring royalty costs to secure a license to continue marketing, selling, and distributing our products, if any such license is available, (iv) losing rights to company patents, and (v) requiring significant investment to costly, non-infringing technology, if possible.

      Any of these results would increase our expenses and could decrease the functionality of our products, which would make our products less attractive to our current or potential customers. We have agreed in some of our customer agreements, and may agree in the future, to indemnify other parties for any expenses or liabilities resulting from claimed infringements of the proprietary rights of third parties. If we are required to make payments pursuant to these indemnification agreements, it could have an adverse effect on our business, results of operations and financial condition.

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

      Because our products are used by our customers to identify and predict current and future application, system, and network problems and to avoid failures of the IT infrastructure to support critical business functions, design defects, software errors, misuse of our products, incorrect data from network elements, or other potential problems, within or out of our control, may arise from the use of our products and could result in financial or other damages to our customers. Our license agreements with our customers typically contain provisions designed to limit our exposure to potential claims as well as any liabilities arising from such claims.

As a matter of practice, our license agreements limit our liability in regards to product liability claims, and in many agreements, our maximum liability for product liability claims is limited to the equivalent of the cost of the products licensed under that agreement. However, any litigation or similar procedure related to a product liability claim may require considerable resources to be expended that could adversely affect our business and financial condition and decrease future revenues.

      Our financial statements are prepared in conformity with United States Generally Accepted Accounting Principles (“U.S. GAAP”). A change in U.S. GAAP could significantly impact our reported financial results and could retroactively affect prior reporting periods. Our accounting policies that have been, or may be, affected by changes in U.S. GAAP include:

      Changes in U.S. GAAP in these areas or others may have a significant impact on our business.

      Arthur Andersen LLP served as our independent auditors until June 10, 2002. On June 10, 2002, we dismissed Arthur Andersen LLP and on June 11, 2002, we retained PricewaterhouseCoopers LLP as our independent auditors. On June  15, 2002, Arthur Andersen LLP was found guilty on federal obstruction of justice charges arising from the government’s investigation of Enron Corporation. Following this conviction, on August 31, 2002, Arthur Andersen LLP ceased operations and can no longer reissue its audit reports or provide its consent to include its audit reports in financial reports filed with the Securities and Exchange Commission (“SEC”). Accordingly, Arthur Andersen LLP has not performed any procedures in connection with the preparation and filing of this report. Events arising out of the indictment and conviction will likely preclude Arthur Andersen LLP from satisfying any claims arising from the provision of auditing services to us, including claims that may arise out of Arthur Andersen LLP’s audit of financial statements incorporated by reference in this quarterly report.

      SEC rules require us to present historical audited financial statements in various SEC filings, along with consents from Arthur Andersen LLP to include its audit report in those filings. In light of the cessation of Arthur Andersen LLP’s SEC practice, we will not be able to obtain the consent of Arthur Andersen LLP for the inclusion of its audit report in our relevant current and future filings. The SEC has provided regulatory relief designed to allow companies that file reports with the SEC to dispense with the requirement to file a consent of Arthur Andersen LLP in certain circumstances, but purchasers of securities sold under our registration statements, which were not filed with the consent of Arthur Andersen LLP for the inclusion of its audit report will not be able to file suit against Arthur Andersen LLP pursuant to Section 11(a)(4) of the Securities Act and therefore their right of recovery under that section may be limited as a result of the lack of our ability to obtain the consent of Arthur Andersen LLP. If the SEC ceases to accept financial statements from a prior period audited by Arthur Andersen LLP for which Arthur Andersen LLP will not reissue an audit report prior to the date on which our periodic reports are due, our ability to make timely filings with the SEC and access the capital markets could be impaired. In that case, we would not be able to make timely filings with the SEC or access the public capital markets unless another independent accounting firm were able to audit the financial statements originally audited by Arthur Andersen LLP.

      Our corporate headquarters and principal facilities are located in approximately 142,400 square feet of office space in Marlborough, Massachusetts under lease arrangements that expire in August 2007. These principal facilities accommodate our finance, administration and operations, research and development, customer support, marketing, and sales departments. We also lease office space in Atlanta, GA and

Gaithersburg, MD. In addition, we lease sales office space in Dallas, TX; Plymouth, MI; Spokan, WA; Bellevue, WA; Tyson, VA; Morrisville, NC; Gold River, CA; Bay Area, CA; Mesa, AZ; United Kingdom; France; Germany; the Netherlands; Spain; Sweden; Australia; Hong Kong; Japan; Singapore; Mexico; South Korea and China. We believe that our current facilities are adequate for our needs through the next twelve months and that, should it be needed, suitable additional or substitute space will be available to accommodate expansion of our operations on commercially reasonable terms, although there can be no assurance in this regard.

      Our reportable segments are determined by customer type: managed service providers/telecommunication carriers and enterprise. We evaluate segment performance based on revenue only. Accordingly, all of our facilities are used by each of our operating segments.

      On April 30, 2004, we received a letter from LMS Technology Distributions SDN BHD (“LMS”) of Malaysia that demands that we reimburse LMS for approximately $4.65 million in alleged losses arising out of our purported wrongful termination of a Concord Authorized Reseller Agreement (the “CAR Agreement”) with LMS. We dispute that the CAR Agreement was wrongfully terminated or that LMS is owed any of the amounts claimed, and we intend to defend vigorously against the demand. It is not possible to predict or determine the outcome of these demands or to provide ranges of losses that may arise, if any.

      In November 2003, Concord received notice from a former sales employee in France, stating that he was wrongfully dismissed in July 2003. The former employee filed a wrongful termination lawsuit against Concord claiming approximately $0.4 million in damages. In January 2005, the Labor Court of Poissy issued its decision on the former employees unfair dismissal and failure to pay commissions claims. The court found that we did not fulfill our obligations as required by French law and awarded the former employee approximately $12,000. Accordingly, Concord has accrued a liability of $12,000 at December 31, 2004.

      On December 6, 2002, Aprisma filed a complaint for patent infringement against Micromuse, Inc. in the U. S. District Court for the District of New Hampshire. This case remains pending, with a trial presently unscheduled. This case involves Aprisma’s claim that Micromuse’s systems management products, including NetcoolÒ products such as Netcool/OMNIbus, Impact and Precision infringe the following U.S. Patents: 5,436,909; 5,504,921; 5,777,549; 5,696,486; 5,768,501; and 6,064,304. Aprisma seeks injunctive relief and damages based on Micromuse’s infringement. Micromuse has denied infringement, and has alleged that the asserted patents are invalid and are unenforceable. On January 11, 2005, following a two-day hearing, the Court issued a Memorandum and Order in which it adopted the proposed claim construction of the seven disputed claim terms at issue offered by Aprisma. Based on the Court’s claim construction ruling, the parties filed summary judgment motions on the issue of infringement, for which they are awaiting a hearing.

      On January 26, 2005, Aprisma was named as a defendant in litigation filed in the Southern District of New York alleging patent infringement of various U.S. patents allegedly owned by Micromuse. This case remains pending, with a trial presently unscheduled. This case involves Micromuse’s claim that Aprisma’s SNMP support products, the SPECTRUM Assurance Server, the SPECTRUM Alarm Monitor, Gateways and MPLS Manager products infringe the following U.S. Patents: 6,192,034; 6,219,648; 6,330,598; 6,687,335; 6,763,333; 5,936,547; and 6,766,375. Micromuse seeks declaratory, injunctive relief and damages for Aprisma’s alleged infringement. On March 8, 2005, Aprisma filed a Motion to Dismiss or Transfer the Complaint to the District of New Hampshire. This Motion remains pending. We believe the allegations in this suit are without merit and we intend to vigorously defend against them.

      No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2004.

PART II

      Our Common Stock trades on the NASDAQ National Market under the symbol “CCRD”. The following table sets forth, for the periods indicated, the high and low intraday sales prices for the Common Stock, all as reported by the NASDAQ National Market.

Price Range of Common Stock

As of March 10, 2005, we had approximately 281 holders of record of our common stock. This number does not include beneficial owners holding shares of our Common Stock through nominee names.

Dividend Policy

      We did not declare or pay any cash dividends on our capital stock during the fiscal years ended 2004 or 2003. We currently anticipate that we will retain all future earnings for use in our business and we do not anticipate that we will pay any cash dividends in the foreseeable future. The payment of any future dividends will be at the discretion of our Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, our general financial condition, general business conditions and contractual restrictions on the payment of dividends, if any.

Use of Proceeds

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

incurred by Concord in connection with the issuance and distribution of the shares of Common Stock offered and sold in the IPO were approximately $3.6 million, including $2.7 million in underwriting discounts and commissions and $950,000 in other offering expenses.

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

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

      The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes to those statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. The selected financial data as of and for each of the five fiscal years in the period ended December 31, 2004 have been derived from our audited consolidated financial statements. The historical results are not necessarily indicative of the operating results to be expected in the future.

      Concord adopted Statement of Financial Accounting Standards (“SFAS”) No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of January 1, 2003. The adoption of SFAS No. 145 retroactively changes guidance related to the reporting of gains and losses from extinguishment of debt as extraordinary items. The effect of SFAS No. 145 on our consolidated statement of operations data for the five years ended December 31, 2004 is for amounts previously recorded as “Extraordinary loss on early extinguishment of debt” to instead be recorded as a component of “Other income, net”. We have reclassified extraordinary loss of $0.22 million, net of tax benefit of $0.07 million, for the year ended December 31, 2000. There were no extraordinary items in the years ended December 31, 2004, 2003, 2002 and 2001.

      You should read the following discussion together with our Consolidated Financial Statements and related Notes to Consolidated Financial Statements that are included elsewhere in this Report. The following discussion contains forward-looking statements that reflect plans, estimates, trends and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See “Factors That Could Affect Future Results” herein.

Overview

      We are a software company that provides a solution to enterprise customers, managed service providers and telecommunication carriers. Our solution, the eHealth® Suite of products, maps IT services to business needs, measures the actual end user experience and manages application, system and network infrastructure. Our software simplifies the management of the underlying technology and infrastructure required to deliver business services.

      We sell our products worldwide through a direct sales force, channel partners, and other resellers. We have sales offices in 13 countries, including the United States and we have customers in 63 countries.

      For the fiscal year ended December 31, 2004, we increased our revenue while reducing profitability year over year. Our total revenues are generated from license revenue and service revenue. In 2004, total revenues were $106.2 million, up 2% from $104.1 million in 2003. Our diluted loss per share was $0.03 per share in 2004. Our diluted income per share was $0.42 per share in fiscal 2003. We generated $0.1 million in operating cash during the year and finished 2004 with $159.5 million of cash, cash equivalents, and marketable securities.

      After benefiting from an economic recovery which started in the second quarter of 2002 and continued throughout 2003, we encountered sales and marketing execution issues in the first quarter of 2004, which negatively affected our licenses revenues in that quarter and slowed our growth for the year. We have replaced sales personnel in many of the underperforming areas. Internal initiatives implemented in the third quarter of 2004, such as targeted marketing programs and specific sales incentives, helped improve our effectiveness in the second half of 2004.

      Last year, we made several major improvements to our eHealth Suite, which allow IT managers to map IT services to business processes and deliver an executive view of key performance indicators. We introduced the Business Service Console, a product that provides executives a single view into an organization’s IT infrastructure. In addition, we continued to increase our penetration into our installed base; most of our license revenue came from existing customers returning to buy new eHealth® capabilities. Finally, we hired a new Executive Vice President of Field Operations and Professional Services to lead us in our next phase of growth.

      In October 2004, Concord consummated an offer to purchase any and all outstanding options to purchase shares of its common stock with an exercise price per share of $25.00 or more granted under its 1997 Stock Plan (the “Option Repurchase”). In connection with the Option Repurchase, Concord incurred compensation expense of $3.3 million, excluding fees and expenses, in the three-month period ended December 31, 2004. The compensation expense was distributed as follows: $0.2 millions in cost of service revenues, $1.3 millions in research and development expenses, $0.5 million in sales and marketing expenses, and $1.3 million in general and administrative expenses. The option purchase price was determined to be the weighted average fair market value as calculated by the Black-Scholes option-pricing model. Substantially all eligible option holders elected to tender their options to Concord pursuant to the terms and conditions of the Option Repurchase. We purchased a total of 965,242 options pursuant to the terms and conditions of the Option Repurchase. These shares were returned to the pool of options available for new grants under the 1997 Stock Plan.

      On January 5, 2005, we completed the acquisition of privately held Vitel Corporation. Vitel’s software enables enterprises and service providers to manage the performance of next-generation IP and legacy voice networks and messaging systems, including voice mail, from multiple vendors such as market leaders Avaya and Nortel Networks. The purchase price was at $4.1 million, including direct costs of the acquisition of $0.1 million, and was paid in cash. The acquisition will be accounted for under the purchase method of

accounting in the three months ending March 31, 2005. (See Note 14 of the Notes to Consolidated Financial Statements).

      On February 22, 2005, we acquired Aprisma, a privately held software company owned by Gores Technology Group. Aprisma’s SPECTRUM® software manages the health and performance of networks and the business services that rely on them, including performing root cause analysis, fault management, event correlation, service modeling, and topological discovery and display. These technologies are critical to managing the availability of IT infrastructures and related business services. The purchase price was $93.0 million, which payment was adjusted by (i) the amount of net debt owing by Aprisma to certain of its lenders at the time of closing (which debt will be paid off by Concord) and (ii) certain payment obligations owing by Aprisma under its equity participation plan. Concord’s cash payment to acquire Aprisma on February 22, 2005 was approximately $82.4 million. The acquisition will be accounted for under the purchase method of accounting in the three months ending March 31, 2005. (See Note 14 of the Notes to Consolidated Financial Statements).

Management’s Outlook

      In the coming year, our first goal is to integrate the acquired technologies of Aprisma and Vitel.

      These acquisitions are considered important as they will significantly increase the breadth of products that Concord brings to market. Combined, this will provide Concord with an expanded solution set, which can address the needs of customers to get BSM solutions from a single vendor. We expect this expanded solution set will increase our average sale price to new customers as these customers will purchase an increased number of products from Concord.

      Our second goal is to strengthen sales of new and enhanced products to current and new markets. To accomplish this, we are planning several new product releases, expanding our presence in the traditional enterprise voice network market and positioning ourselves in the wireless market as more applications migrate to 2.5 and 3G environments. This will be challenging as these markets have the potential to be very large; the technology in many cases will be unfamiliar to us and there will be many competitors focused on these markets as well.

      Metrics that we are tracking to measure success in this area include:

      Our third goal is to achieve profitability by increasing revenues while continuing to closely manage our expenses. The 2004 combined revenues of Concord and Aprisma were approximately $150.0 million.

Achieving profitability will be challenging for several reasons. Achieving profitability requires that we become more efficient by increasing our license revenues while maintaining or decreasing our operating expenses. We monitor a certain number of metrics internally to gauge our success in this area such as:

Trends and Uncertainties

      Key trends and related uncertainties include:

Critical Accounting Policies, Significant Estimates and Judgments

      The accompanying 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 generally accepted accounting principles in the United States (“US GAAP”). The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. US GAAP requires us to make estimates and judgments in several areas. If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements. See our audited consolidated financial statements and notes thereto of this Annual Report on Form 10-K and which contain accounting policies and other disclosures required by US GAAP.

      We believe that the policies, significant estimates and judgments discussed below are the most critical to our financial statements and the understanding of our financial condition and results of operations because their application places the most significant demands on management’s judgment.

      Our revenues consist of software license revenues and service revenues. Software license revenues are recognized in accordance with the American Institute of Certified Public Accountants’ Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with respect to Certain Transactions. Software license revenues are recognized when persuasive evidence of an arrangement exists and delivery of the software has occurred, provided that the license fee is fixed or determinable, collection is considered reasonably assured and no customer acceptance clauses exist. If an arrangement includes an acceptance provision, revenue recognition occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period. If an arrangement includes a right of return for the possibility that the software does not meet published specifications during the warranty period, which is typically 90 days, revenue is recognized upon shipment if all other criteria are met as our product is mature and we have not experienced returns of our products. If the fee is determined not to be fixed or determinable, revenue is recognized when the fees become due. If collection is not considered reasonably assured, revenue is recognized upon the receipt of cash. Revenues under multiple-element arrangements, which typically include software products, services, maintenance and sometimes undelivered specified software upgrades sold together, are allocated to each element using the residual method in accordance with SOP 98-9. Under the residual method, the fair value of the undelivered elements is deferred and subsequently recognized when these elements are delivered; the remainder of the arrangement consideration is allocated to the software. We have established sufficient vendor specific objective evidence for professional services, training, maintenance, customer support services and specified software upgrades based on the price charged when these elements are sold separately. Accordingly, software license revenues are recognized under the residual method in arrangements in which software is licensed with professional services, training, maintenance, customer support services and specified software upgrades.

      Service revenues include professional services, training, and maintenance and customer support fees. Professional services are not essential to the functionality of the other elements in an arrangement and are accounted for separately. Service revenues are recognized as the services are performed, provided evidence of an arrangement exists, fees are fixed or determinable, and collection is considered reasonably assured.

      Maintenance revenues, a component of service revenues, are derived from customer support agreements generally entered into in connection with initial license sales and subsequent renewals. Maintenance fees include the right to unspecified upgrades on a when-and-if-available basis and ongoing technical support. Maintenance revenues are recognized ratably over the term of the maintenance period. Payments for maintenance fees are generally made in advance and are included in deferred revenue.

      We license our software to end-users and resellers. Decisions regarding revenue recognition are centralized at our corporate headquarters, located in the United States. Our arrangements with customers do not generally include provisions involving acceptance of our products by our customers. However, if a customer arrangement includes an acceptance provision, revenue recognition occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period. With respect to revenues from our channel partners and other resellers, we recognize revenue upon delivery of our software to the channel partner or reseller. We do not offer any right of return, price protection or similar rights to our channel partners and other resellers.

      For all sales, in the absence of a signed license agreement, we use either a purchase order or purchase order equivalent as evidence of an arrangement. If a signed license agreement is obtained, we use either the license agreement or the license agreement and a purchase order as evidence of an arrangement. Sales to resellers are usually evidenced by a master agreement governing the relationship together with purchase orders on a transaction-by-transaction basis.

      Delivery generally occurs when product is delivered to a common carrier and the delivery terms are FOB Concord. The costs of shipping and handling related to the delivery of the product is included in revenue. In the case of arrangements with resellers, revenue is recognized upon delivery to the reseller. Most of these arrangements involve a sell-through by the reseller to an end user. For a reseller, evidence usually comes in the form of a purchase order typically identifying the end-user.

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

      We assess collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue upon receipt of cash. Concord’s channel partners and other resellers are responsible to Concord upon delivery.

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

      The majority of our sales transactions are completed using standard terms and conditions; however, there are agreements that contain non-standard terms and conditions. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple obligations arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, how the price should be allocated among the deliverable elements and when to recognize the revenue for each element. Changes in the allocation of the sales price between deliverable elements might impact the timing of revenue recognition, but would not change the total revenue recognized for the transaction.

      We record our trade accounts receivable at the invoiced amount; these accounts do not bear interest. We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based on our historical experience and any specific customer collection issues that we have identified. We review our allowance for doubtful accounts on a monthly basis. We review all past due balances over 60 days individually for collectability. We charge account balances against the allowance when we feel it is probable the receivable will not be recovered. We do not have any off-balance-sheet credit exposure to our customers.

      While credit losses have historically been within our expectations and the appropriate reserves have been established, we cannot guarantee that we will continue to experience the same credit loss rates that we have experienced in the past. Thus, if the financial condition of our customers were to deteriorate, our actual losses may exceed our estimates, and additional allowances would be required.

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

likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. To the extent we reverse any portion of the valuation allowance, we must recognize a benefit within the tax provision in the statement of operations or to additional paid-in capital for the benefit of deductions for stock option exercises.

      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 not placed any reserve on our deferred tax assets by recording a valuation allowance. The resulting net deferred tax asset of $14.0 million at December 31, 2004 is based on our estimate that future taxable income we expect to generate will be sufficient to realize the net deferred asset. In the event the actual results differ from the estimates or we adjust these estimates in future periods, we may need to establish another valuation allowance. Establishing new or additional valuation allowances could materially adversely impact our financial position and results of operations.

      The purchase price of businesses acquired accounted for as purchase business combinations, is allocated to the tangible and intangible assets acquired based on their estimated fair values with any amount in excess of such allocations designated as goodwill, in accordance with SFAS No. 141, Business Combinations. Our accounting for acquisitions involves significant judgments and estimates regarding primarily, but not limited to: the fair value of acquired intangible assets, which are based on projections of future revenues and cash flows, assumptions regarding discount factors, royalty rates, tax rates, amortization methodologies and related useful lives, as well as the fair value of other acquired assets and assumed liabilities, including potential contingencies and deferred income taxes. The valuation of purchased intangibles is based upon estimates of the future performance and cash flows from the acquired business. If different assumptions are used, it could materially impact the purchase price allocations and our financial position and results of operations. Our identifiable assets are generally amortized at the greater of (a) the ratio that current revenues bear to the total of current and anticipated future revenues or (b) the straight-line method over their respective remaining useful lives.

      We completed our acquisition of netViz on July 13, 2003, which was accounted for under the purchase method of accounting and resulted in recording significant goodwill and other intangible asset balances. The purchase price of netViz has been allocated to the assets acquired and liabilities assumed at their estimated fair values on the date of acquisition, as determined by management and, with respect to the identifiable intangible assets, an appraisal. The values of the completed technology, reseller relationships, maintenance relationships, contractor agreements and trade name/trademarks of netViz were determined using the income approach. The income approach requires a projection of revenues and expenses specifically attributed to the intangible assets. The discounted cash flow (“DCF”) method is then applied to the potential income streams after making necessary adjustments with respect to such factors as the wasting nature of the identifiable intangible assets and the allowance of a fair return on the net tangible assets and other intangible assets employed. There are several variations on the income approach, including the relief-from-royalty method, the avoided cost method, and the lost profits method.

      The relief-from-royalty method was used to value the trade name/trademarks of netViz. The relief-from-royalty method is used to estimate the cost savings that accrue to the owner of the intangible assets that would otherwise have to pay royalties or licensee fees on revenues earned through the use of the asset. The royalty rate used in the analysis is based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Typically, revenue is projected over the expected remaining useful life of the intangible asset. The market-derived royalty rate is then applied to estimate the royalty savings. The key assumptions used in valuing the trade name/trademarks of netViz are as follows: royalty rate 1%, discount rate 21%, tax rate 40% and estimated average economic life of 3 years.

      The avoided cost method was used to value the reseller relationships and contractor agreements of netViz. The avoided cost method considers the concept of avoided cost as an indicator of value. The avoided cost method is appropriate for estimating the fair value of an asset where reliable data for sales of comparable property are not available and where the property does not directly produce an income stream. The key assumptions used in valuing the reseller relationships of netViz are as follows: tax rate 40% and estimated average economic life of 5 years. The key assumptions used in valuing the contractor agreements of netViz are as follows: tax rate 40% and estimated average economic life of 4 years.

      The completed technology (software) of netViz was valued using the income approach without variation. The key assumptions used in valuing the completed technology of netViz are as follows: discount rate 21%, tax rate 40% and estimated life of 4 years. The key assumptions used in valuing the maintenance relationships of netViz are as follows: discount rate 21%, tax rate 40% and estimated average economic life of 5 years.

      We completed our acquisition of Vitel on January 5, 2005. The values of the completed technology (software), reseller relationships, and maintenance relationships for Vitel were determined using the income approach.

      The relief-from-royalty method was used to value the completed technology. The key assumptions used in valuing the completed technology of Vitel are as follows: royalty rate 5%, discount rate 18.5%, tax rate 40% and estimated average economic life of 5 years.

      The maintenance relationships of Vitel were valued using the income approach without variation. The key assumptions used in valuing the maintenance relationships of Vitel are as follows: discount rate 18.5%, tax rate 40% and estimated average economic life of 6 years.

      The avoided cost method was used to value the reseller relationship of Vitel. The key assumptions used in valuing the reseller relationships of Vitel are as follows: tax rate 40% and estimated average economic life of 5 years.

      We completed our acquisition of Aprisma on February 22, 2005. We are still in the process of performing our allocation of purchase price and valuation of identifiable intangibles, but we expect to assign a significant portion of the purchase price to identifiable intangibles and goodwill.

      We have also completed our accounting of the license agreement with Tavve whereby Concord licensed components of Tavve’s technology. Our accounting for the Tavve license as in-process research & development involved significant judgments and estimates regarding primarily, but not limited to: assessing if the acquired technology has reached technological feasibility and if the acquired technology has no alternative future use.

      Technological feasibility is established when either of two sets of criteria is met:

      Upon acquiring the licensed components of Tavve’s technology, Concord did not have a completed product design and did not have a working model, as defined. In addition, the purchased source code has no alternative future use, i.e., Concord will not use the source code for any other purpose than described above. The detailed program design for the integration of Tavve’s technology into Concord eHealth® Suite of products has not been completed. The acquisition of Aprisma eliminates our need for this technology, which will now become redundant.

      We have significant long-lived tangible and intangible assets and goodwill, which are susceptible to valuation adjustments as a result of changes in various factors or conditions. The long-lived tangible assets are fixed assets, which are depreciated over their estimated useful lives. The long-lived intangible assets are

completed technology (software), reseller relationships, maintenance relationships and trade name/trademarks, which are amortized at the greater of (a) the ratio that current revenues bear to the total of current and anticipated future revenues or (b) the straight line method over their respective remaining useful lives; and contractor agreements, which are being amortized using the straight-line method over their useful lives. Goodwill is not amortized.

      At each quarter-end, the carrying value of the completed technology (software) is compared to its net realizable value (“NRV”). NRV is the estimated future gross revenues from products that incorporate the software reduced by the estimated future costs of disposal. If NRV is less than the carrying value, the excess is written-off and the then current NRV becomes the new carrying value of the software. We assess the potential impairment of other identifiable intangible assets and fixed assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important, which could trigger an impairment of such assets, include the following:

      Future adverse changes in these or other unforeseeable factors could result in an impairment charge that would impact future results of operations and financial position in the reporting period identified.

      Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, or SFAS 142 requires goodwill acquired as a result of a purchase method business combination to be tested for impairment using a two-step process. The first step compares the fair value of the reporting unit with the unit’s carrying value, including goodwill. When the carrying value of the reporting unit is greater than fair value, the unit’s goodwill may be impaired, and the second step must be completed to measure the amount of the goodwill impairment charge, if any. In the second step, the implied fair value of the reporting unit’s goodwill is compared with the carrying amount of the unit’s goodwill. If the carrying amount is greater than the implied fair value, the carrying value of the goodwill must be written down to its implied fair value. Goodwill is required to be tested for impairment at least annually, or more frequently when events and circumstances occur indicating that the recorded goodwill might be impaired. We perform the annual assessment at June 30 of each fiscal year.

      As of June 30, 2004, we performed our annual test for impairment on the carrying value of goodwill of our MSP/ TC and Enterprise reporting units. We compared the fair value of each reporting unit to which goodwill has been allocated to its book value and determined that no impairment existed at that date.

      Factors we consider important, which could trigger an impairment of goodwill, include the following:

      Future adverse changes in these or other unforeseeable factors could result in an impairment charge that would impact future results of operations and financial position in the reporting period identified.

      Significant judgments and estimates are involved in determining the useful lives of our intangible assets, determining what reporting units exist and assessing when events or circumstances would require an interim impairment analysis of goodwill or other long-lived assets to be performed. Changes in events or circumstances, including but not limited to technological advances or competition which could result in shorter useful

lives, additional reporting units which may require alternative methods of estimating fair value, or economic or market conditions which may affect previous assumptions and estimates, could have a significant impact on our results of operations or financial position through accelerated amortization expense or impairment charges.

Results of Operations

      The following table sets forth, for the periods indicated, certain financial data as percentages of Concord’s total revenues.

Total Revenues

      Concord’s total revenues are generated from license revenue and service revenue. License revenues are derived from the licensing of software products. Service revenues consist of fees for maintenance, training and professional services.

License Revenues

      Concord’s license revenues are derived from the licensing of software products.

      Fiscal 2004 compared to fiscal 2003: The decrease in license revenues in absolute dollars from 2003 to 2004 was due to a decrease in large sales transactions with European service providers, mainly in Germany and the UK. This decrease was partially offset by $2.4 million in license revenues generated by netViz, a company which was acquired by Concord in July 2003.

      Fiscal 2003 compared to fiscal 2002: The increase in license revenues in absolute dollars from 2002 to 2003 was due to an increase in sales to European service providers and to the license revenues generated by netViz, a company acquired in 2003. The increase in sales to European service providers was driven by the increased demand for outsourced services by European enterprises, which in turn, are using these services to reduce their operational costs. NetViz contributed over $1.0 million of the license revenues in 2003 while increased sales to European service providers comprise the majority of the balance of the increase.

      The continuing decrease of license revenues as a percent of total revenues from 2003 to 2004 and from 2002 to 2003 was the result of a significant increase in service revenues during the same periods, consisting primarily of maintenance revenue increases. Our large customer installed base that continues to renew their annual maintenance contracts drives this trend.

New eHealth customer accounts

      License revenues are partially dependent on our ability to sell to new eHealth customer accounts. New eHealth customer accounts represent the number of new customer accounts that purchase software from the Concord eHealth® Suite of products. NetViz new customer accounts are excluded from this count as these products are not considered key drivers of our primary business. Due to the nature of netViz® products, customers that purchase netViz® products do not generate significant revenue for the initial or subsequent purchase.

      License revenues are partially dependent on our ability to sell to new customer accounts. License revenues can also be dependent on the number of transactions over $100,000 that we are able to close during the period.

      Fiscal 2004 compared to fiscal 2003: The decrease in the number of sales to new eHealth customer accounts from 2003 to 2004 was due, primarily, to sales and marketing execution issues in the first quarter of 2004. Our sales teams focused their efforts mainly on our large install base in the first two quarters of 2004. Internal initiatives implemented in the third quarter of 2004, such as targeted marketing programs and specific sales incentives, helped improve our effectiveness at winning new eHealth customer accounts in the third and fourth quarters of 2004. The decrease in the number of transactions greater than $100,000 in 2004 was driven by a decrease in transactions generated by our indirect channel.

      Fiscal 2003 compared to fiscal 2002: The decrease in the number of sales to new customer accounts from 2002 to 2003 is due primarily, to an increase in repeat sales to our customer base driven by the release of new functionality that continues to appeal to our existing customer base. The slight increase in the number of transactions greater than $100,000 is due primarily to the investment in the solution selling training of our sales force; this training provides a business-focused approach to the sales process.

      There were no material price increases for products during 2004, 2003, or 2002. Inflation did not have a significant impact on our revenues or income during 2004, 2003 or 2002.

Service Revenues

      Concord’s service revenues consist of fees for maintenance, training and professional services.

      Fiscal 2004 compared to fiscal 2003: The increase in service revenues from 2003 to 2004 was due mainly to an increase in maintenance revenues, which are generated from new and renewed maintenance contracts, and the maintenance generated by netViz. Service revenues generated by netViz contributed approximately $1.8 million of the increase. Increased service revenues from new and renewed maintenance contracts, driven by our large install base, comprised the balance of the increase.

      Fiscal 2003 compared to fiscal 2002: The increase in service revenues, from 2002 to 2003, was due to a significant increase in maintenance revenues, which are generated from new and renewed maintenance contracts, and the maintenance generated by netViz. NetViz contributed over $0.6 million in service revenue in 2003 while increased service revenues from new and renewed maintenance contracts primarily comprised the balance of the increase.

      Maintenance revenues represent fees earned by granting our customers rights to technical support, software product upgrades, and maintenance patches during the support period, which is usually one year. The majority of our license customers purchase maintenance upon the initial licensing of our software. In addition, the majority of these customers renew their maintenance agreements annually. An increase in the number of

our customers and the resulting demand for these services further helped drive the increase in service revenues from 2003 to 2004 and from 2002 to 2003.

Direct and Indirect Revenues

      Concord markets its products in the United States primarily through a direct sales force. Internationally, Concord markets primarily through indirect channels, which include channel partners and other resellers.

      Fiscal 2004 compared to fiscal 2003: The increase of direct sales in 2004 in both absolute dollars and percentage of revenue is due to improved performance by the domestic sales force due to our continued investment in sales training as well as large deals with domestic service providers. The decrease in indirect sales for the same period is due to lower sales in Europe and Asia. Sales execution issues in Asia in the first quarter of 2004 explain in part this decrease. We have since replaced sales personnel in that region.

      Fiscal 2003 compared to fiscal 2002: The increase of indirect sales is primarily driven by increased sales in Europe, which are usually done through resellers. In 2003, we introduced the Concord Authorized Reseller (CAR) program, which provides, for a fixed annual fee, product, services, and sales training to our VARs and distributors. This training had a positive impact in 2003 on the ability of the indirect channel to better penetrate international markets, such as Europe.

International Revenues

      Concord has twelve international subsidiaries and five international branch offices. Concord has customers in 63 countries.

      Fiscal 2004 compared to fiscal 2003: The decrease in international revenues in both absolute dollars and percentage of revenues for 2004 was due mainly to strong demand by European managed service providers in Germany and the UK in 2003. Sales to these segments in Europe were lower in 2004 as demand for our products was not as robust as compared to the corresponding prior year periods. Sales in specific countries and

regions can be affected by large transactions and can lead to unpredictable buying patterns. This variability can lead to fluctuations in revenues between regions.

      Fiscal 2003 compared to fiscal 2002: The increase in international revenues as a percentage of total revenues was driven primarily by strong demand by European service providers, manly due to several specific large transactions in 2003.

      The increase in international revenues as a percentage of total revenues is primarily the result of Concord’s expansion of its operations outside the United States, which has included both the hiring of additional personnel as well as the establishment of additional reseller relationships.

      Although international revenues decreased year over year, we expect revenue from international customers will continue to be approximately 30% to 50% of total revenues. We continue to commit additional time, training, and development resources to customizing our products and services for selected international markets and this will improve our ability to meet our international sales targets. We believe that continued growth and profitability will require further expansion of our sales, marketing and customer service functions in international markets. However, there can be no assurance that we will be successful in meeting this estimate.

Segment Revenues

      Concord’s reportable segments are determined by customer type: managed service providers/telecommunication carriers (“MSP/ TC”) and enterprise.

      Fiscal 2004 compared to fiscal 2003: The increase in MSP/ TC revenue in absolute dollars and as a percentage of total revenue, from 2003 to 2004 was driven by several large telecommunication carriers’ orders in the US. The increase in enterprise revenues in absolute dollars was due to an increase in demand for our products from repeat sales to existing customers.

      Fiscal 2003 compared to fiscal 2002: The increase in MSP/ TC revenue in absolute dollars and as a percentage of total revenues from 2002 to 2003 was driven primarily by increased sales to European based MSP/ TC customers. The increase in enterprise revenues in absolute dollars was due to an increase in demand for our products from new customers and repeat sales to existing customers.

      We expect that MSP/ TC revenue will continue to be approximately 40% to 50% of total revenues; however, there can be no assurance that we will be successful in meeting this estimate.

Revenues Recognized in Connection With Third Party Software.

      Concord bundles third party software in some of its products when it determines that bundling such software is cost-effective or increases the effectiveness of Concord’s products. In some instances, Concord has determined that it can be cost prohibitive to develop such software applications, especially if such applications are already available in the marketplace. In addition, bundling third party software allows Concord, in certain instances, to accelerate the delivery of increased functionality within a short timeframe.

      Revenues generated by Concord products that included third party software were:

      Fiscal 2004 compared to fiscal 2003: The increase of revenues from third party software in 2004 as compared to 2003 in both absolute dollars and percentage of total revenues was mostly driven by increased demand for Oracle® database software that is integrated into our product offering. Demand for the Oracle® database product is also driven by the transition of our large installed base from the Ingres database to the Oracle® database.

      Fiscal 2003 compared to fiscal 2002: In 2002, we integrated the Oracle® database software into our product offering; this enabled us to replace the Ingres database with the Oracle® product and to offer one single database solution to our customers. In the first quarter of 2003, we repackaged some of our product offerings to increase the value proposition of some components of the eHealth Suite; this repackaging, which included the Oracle database in some instances, resulted in new products with a higher average selling price. This repackage resulted in higher revenues recognized in connection with third party software.

Cost of Revenues

      Cost of revenues includes cost of license revenues and cost of service revenues.

Cost of License Revenues

      Cost of license revenues includes expenses associated with royalty fees, production, fulfillment of orders, product documentation and amortization expense associated with the completed technology intangible asset. Royalty costs are composed of third party software costs. The amortization expense is related to the acquisition of netViz.

      Fiscal 2004 compared to fiscal 2003: The increase of cost of license revenues in absolute dollars is driven mainly by higher royalty costs, which are fees paid to third party software companies.

      Fiscal 2003 compared to fiscal 2002: The increase of cost of license revenues in absolute dollars is driven by amortization expense and higher royalty costs. The factors contributed approximately 21% and 56%, respectively, of the increase in cost of license revenues.

Expenses Recognized in Connection With Third Party Software.

      Royalty costs are comprised of third party software costs. Costs associated with revenues generated by Concord products that included third party software were:

      Fiscal 2004 compared to fiscal 2003: The increase in royalty costs was mostly driven by increased demand for Oracle® database software that is integrated into our product offering. Demand for the Oracle® database product is also driven by the transition of our large installed base from the Ingres database to the Oracle®database. In 2002, we integrated the Oracle® database software into our product offering; this enabled us to replace the Ingres database we used previously with the Oracle® product and to offer one single database solution to our customers. As our installed base has grown, the number of products under maintenance, which includes third party software, has also increased. Third party maintenance charges are usually based on the number of sold units.

      Fiscal 2003 compared to fiscal 2002: The increase in royalty costs is mostly driven by the cost of distribution of the Oracle database and the related maintenance costs.

Cost of Service Revenues

      Cost of service revenues includes the personnel costs associated with providing customer support in connection with maintenance, training and professional service contracts.

      Fiscal 2004 compared to fiscal 2003: The increase in absolute dollars and percentage of revenues was driven by supporting a growing base of service customers in the US, which resulted in an increase in personnel and related costs in servicing those customers.

      Fiscal 2003 compared to fiscal 2002: The increase in absolute dollars is attributable to the costs associated with the opening, in the first quarter of 2003, of a technical support call center in Australia, which is servicing our customers in the Asia-Pacific region.

      The decrease of the cost of service revenues as a percentage of revenue from 2002 to 2003 is mainly attributable to investments made in our information technology infrastructure, which have improved the productivity of the service organization.

Gross Profit

      Total gross profit includes gross profit from license revenues and gross profit from service revenues.

      Fiscal 2004 compared to fiscal 2003: The increase in total gross profit, in absolute dollars, is driven by the increase of total revenues, while the decrease of the gross profit percentage is driven by the increase in royalty and a full year of amortization expenses related to the netViz acquisition.

      Fiscal 2003 compared to fiscal 2002: The increase in total gross profit, in absolute dollars is driven by the increase of total revenues. The decrease of the gross profit percentage is driven by the increase in royalty costs.

      We expect to increase our gross profit in absolute dollars; however, this will depend upon our revenue growth, among other factors. Accordingly, there can be no assurance that we will be successful in increasing our gross profit on an absolute basis of total revenues.

Research and Development Expenses

      Research and development expenses consist primarily of personnel costs associated with software development.