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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

TANGRAM ENTERPRISE SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)

          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.

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

          The number of outstanding shares of Common Stock, $0.01 par value per share, as of May 9, 2003 was 19,802,439.

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TANGRAM ENTERPRISE SOLUTIONS, INC.

INDEX

PART I.  FINANCIAL INFORMATION

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Tangram Enterprise Solutions, Inc.

Balance Sheets
(in thousands, except share amounts)

See accompanying notes.

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Tangram Enterprise Solutions, Inc.

Statements of Operations
(in thousands, except per share amounts)

See accompanying notes.

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Tangram Enterprise Solutions, Inc.

Statements of Cash Flows
(in thousands)

See accompanying notes.

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Tangram Enterprise Solutions, Inc

Notes to the Financial Statements
(Unaudited)

Note 1.  Organization and Description of Business

          Tangram Enterprise Solutions, Inc. (the “Company”) develops and markets lifecycle IT asset management software for large and midsize organizations across all industries, in both domestic and international markets.  IT asset management is the process of controlling hardware and software assets throughout their lifecycle — from procurement, through daily operations, through final disposal.  While asset management is primarily a business practice, it is supported by repository technology that consolidates diverse financial, contractual, ownership, and physical asset data.  Tangram’s core business strategy and operating philosophy focus on delivering world-class customer care, providing phased asset management solutions that are tailored to our customers’ evolving business needs, and maintaining a leading-edge technical position that results in long-term customer loyalty and sustained shareholder value.  The Company operates in the software industry, which is characterized by intense competition, rapid technological advances and evolving industry standards.  Factors that could affect the Company’s future operating results and cash flows and cause actual results to vary materially from expectations include, but are not limited to, dependence on an industry that is characterized by rapid technological changes, fluctuations in end-user demands, evolving industry standards, and risks associated with a market that is intensely competitive.  Failure by the Company to anticipate or respond adequately to technological developments in its industry, new competitive offerings or participants, changes in customer requirements or changes in industry standards could have a material adverse effect on the Company’s business and operating results.

          The Company’s common stock trades on OTC Bulletin Board under the symbol TESI.OB.  The Company is a partner company of Safeguard Scientifics, Inc. (NYSE: SFE) (“Safeguard”).  Safeguard is a technology operating company that creates long-term value by focusing on technology-related asset acquisitions that are developed through superior operations and management.  Safeguard acquires and develops companies in three areas: software, business and IT services, and emerging technologies.  Safeguard is the majority shareholder of the Company holding approximately 58% of the Company’s outstanding voting shares (assuming conversion of the Series F Convertible Preferred Stock).

Note 2.  Significant Accounting Policies

Basis of Presentation

          The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation of the statements have been included.  The interim operating results are not necessarily indicative of the results that may be expected for a full fiscal year.  The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  For further information, refer to the financial statements and accompanying footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

Revenue Recognition

          In October 1997, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 97-2 Software Revenue Recognition, as amended in March 1998 by SOP 98-4 and October 1998 by SOP 98-9.  These SOPs provide guidance on applying accounting principles generally accepted in the United States in recognizing revenue on software transactions.  The Company adopted SOP 97-2 for software transactions entered into beginning January 1, 1998.  Based on the current requirements of the SOPs, application of these statements did not have a material impact on the Company’s revenue recognition policies.  However, AcSEC is currently reviewing further modifications to the SOP with the objective of providing more definitive, detailed implementation guidelines. This guidance could lead to unanticipated changes in the Company’s operational and revenue recognition practices.

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          In December 1999, the Securities Exchange Commission (“SEC”) staff released Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition,” as amended by SAB No. 101A and SAB No. 101B, to provide guidance on the recognition, presentation and disclosure of revenue in financial statements.  SAB No. 101 explains the SEC staff’s general framework for revenue recognition, stating that certain criteria be met in order to recognize revenue.  SAB No. 101 also addresses gross versus net revenue presentation and financial statement and Management’s Discussion and Analysis disclosures related to revenue recognition.  In response to SAB No. 101, the Company undertook a review of its revenue recognition practices and determined its method of accounting for revenue to be in accordance with the provisions of SAB No. 101.

          The Company derives revenue from software licenses, post-contract customer support (PCS), and consulting services.  Licenses and products revenue include software license fees under perpetual and period licensing agreements and revenue from the sale of gateway and other products, which include both hardware and software.  Post-contract customer support includes telephone support, bug fixes, and rights to upgrades on a when-and-if available basis.  Consulting services consist primarily of implementation services performed on a time and material basis for the installation of the Company’s software products, database trigger services which create a mechanism for importing data from a third party system into the Company’s software products and on-site training services.  Revenue from software license agreements and product sales are recognized upon delivery, provided that all of the following conditions are met: a non-cancelable license agreement has been signed; the software has been delivered; no significant production, modification or customization of the software is required; the vendor’s fee is fixed or determinable; and collection of the resulting receivable is deemed probable.  In software arrangements that include rights to software products, specified upgrades or gateways, PCS, and/or other services, the Company allocates the total arrangement fee among each deliverable based on vendor-specific objective evidence.  Revenue from maintenance agreements are recognized ratably over the term of the maintenance period, generally one year.  Consulting and training services, which are not considered essential to the functionality of the software products, are recognized as the respective services are performed.

Impairment of Long-Lived Assets and Identifiable Intangible Assets

          The Company accounts for long-lived assets pursuant to Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.”  The Company evaluates its property and equipment,  certain intangible assets and other long-lived assets for impairment and assesses their recoverability based upon anticipated future cash flows.  If changes in circumstances lead Company management to believe that any of its long-lived assets may be impaired, the Company will (a) evaluate the extent to which the remaining book value of the asset is recoverable by comparing the future undiscounted cash flows estimated to be associated with the asset to the asset’s carrying amount and (b) write-down the carrying amount to market value or discounted cash flow value to the extent necessary.  As of March 31, 2003, management did not consider any of the Company’s long-lived assets to be impaired.

          Software development costs are accounted for in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.”  Costs associated with the planning and designing phase of software development, including coding and testing activities necessary to establish technological feasibility, are classified as product development and expensed as incurred.  Once technological feasibility has been determined, additional costs incurred in development, including coding, testing, and product quality assurance, are capitalized.

          SFAS No. 86 requires that at each balance sheet date, the unamortized capitalized costs of a computer software product be compared to the net realizable value of that product.  The amount by which the unamortized capitalized costs of a computer software product exceed the net realizable value of that asset shall be written off.  The net realizable value is determined based on the estimated future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product, including the costs of performing maintenance and customer support required to satisfy the Company’s responsibility set forth at the time of sale.  As of March 31, 2003, management did not consider any of the unamortized capitalized costs of computer software to be impaired.

          In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142.  SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment.

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          The Company adopted the provisions of SFAS No. 142 on its effective date, and as a result, the Company ceased amortization of goodwill on January 1, 2002.  In lieu of amortization, the Company was required to perform an initial impairment review of goodwill in 2002 and an annual impairment review thereafter.  The required initial benchmark evaluation and the annual impairment review were performed in January 2002 and 2003, respectively, resulting in no impairment in the value of the Company’s goodwill and any related intangibles.

Income taxes

          The Company utilizes the liability method of accounting for income taxes, as set forth in SFAS No. 109, “Accounting for Income Taxes.”  SFAS No. 109 prescribes an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements.  Deferred tax assets are recognized, net of any valuation allowance, for deductible temporary differences and operating loss and tax credit carryforwards.  A valuation allowance is provided when it is considered more likely than not that some or all of the deferred tax assets may not be realized.  As of March 31, 2003 and December 31, 2002, the Company had a valuation allowance against the entire net deferred tax asset.

Earnings Per Share

          In accordance with SFAS No. 128, “Earnings Per Share,” basic earnings per common share calculations are based on net earnings (loss) after preferred stock dividend requirements, if any, and the weighted-average number of common shares outstanding during each period.  Diluted earnings (loss) per common share also reflects the potential dilution that would occur assuming the exercise of stock options and other related effects.  Basic and diluted earnings per share are the same in 2003 and 2002 because the effect of inclusion of the exercise of stock options would be to reduce the loss per common share.  If the exercise of stock options were included, the weighted average number of common shares outstanding would have increased by 0 and 60,000 for the three month periods ended March 31, 2003 and 2002, respectively.

Impact of Recently Issued Accounting Standards

          In June 2002, the FASB approved for issuance SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  This Statement provides financial accounting and reporting guidance for costs associated with exit or disposal activities and nullifies EITF Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”  SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002.  The provisions of EITF Issue 94-3 continue to apply for an exit activity initiated under an exit plan that met the criteria in EITF Issue 94-3 before the initial application of SFAS No. 146.  Management believes the implementation of this standard will not have a material effect upon our financial statements.

          In January 2003, the EITF published EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” which requires companies to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting.  In applying EITF Issue 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria.  Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values.  EITF Issue 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003.  We are currently evaluating the impact the adoption of this issue will have on our results of operations and/or financial position.

          From time to time the Staff of the United States Securities and Exchange Commission communicates its interpretations of accounting rules and regulations.  The manner by which these views are communicated varies by topic.  While these communications represent the views of the Staff, they do not carry the authority of law or regulation.  Nonetheless, the practical effect of these communications is that changes in the Staff’s views from time to time can impact the accounting and reporting policies of public companies, including ours.

          We do not expect the adoption of other recently issued accounting pronouncements to have a significant impact on our results of operations, financial position, or cash flows.

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Note 3.  Long-Lived Assets and Identifiable Intangible Assets

          Long-lived assets and identifiable intangible assets consist of the following at March 31, 2003 and December 31, 2002 (in thousands):

          Acquired software technology and other intangibles are stated at cost.  Amortization is provided using the straight-line method over estimated useful lives of four and two years, respectively.

          Software development costs are accounted for in accordance with SFAS No. 86.  Research and development costs are comprised of the following as of March 31 (in thousands):

          Amortization of software development costs is provided on a product-by-product basis over the estimated economic life of the software, not to exceed three years, using the straight-line method.  Amortization commences when a product is available for general release to customers.  Included in cost of revenue is amortization of software development costs and acquired software technology of $443,000 and $579,000 in 2003 and 2002, respectively. 

Note 4.  Long-term Debt – Shareholders

          On February 13, 2003, the Company modified the terms of its $3 million unsecured revolving line of credit with Safeguard and its $1.2 million unsecured non-interest bearing Promissory Note to TBBH Investments Europe AG  (“TBBH”) (the successor in interest to Axial Technology Holding AG). 

          Under the terms of the new agreement, the Company issued to Safeguard Delaware, Inc. (“Safeguard Delaware”), a wholly owned subsidiary of Safeguard, a new $1.35 million unsecured, variable rate Revolving Note (the “Revolving Note”) and a $650,000 unsecured, variable rate Demand Note (the “Safeguard Demand Note”) (described below).  The Revolving Note and the Safeguard Demand Note replace the previously existing $3 million unsecured revolving line of credit, of which $1.3 million was outstanding at the time of replacement, provided to the Company by Safeguard.  Amounts outstanding under the Revolving Note bear interest at an annual rate equal to the prime rate of PNC Bank, N.A. plus one percent (1%), payable quarterly in arrears on the first business day of January, April, July and October.  The Company may from time to time borrow, repay and reborrow up to $1.35 million outstanding under the Revolving Note through February 13, 2004, at which time the Revolving Note may be renewed by Safeguard Delaware at its sole discretion.  Safeguard Delaware is required to notify the Company by November 13, 2003, whether or not Safeguard Delaware will renew the Revolving Note on February 13, 2004.  If Safeguard Delaware determines not to renew the Revolving Note, the Company will be required to pay all outstanding principal and accrued but unpaid interest by August 13, 2004.  Repayment of the Revolving Note may occur earlier in the case of a sale of all or substantially all of the assets of the Company, a business combination or upon the closing of a debt or equity offering in excess of $2.5 million.

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          Concurrent with the modification of the terms of the $3 million unsecured revolving line of credit with Safeguard, the Company has issued to TBBH a $1.2 million unsecured variable rate Demand Note (the “TBBH Demand Note”) in replacement of the existing $1.2 million unsecured non-interest bearing Promissory Note, of which $500,000 was due on February 13, 2003.  Amounts outstanding under both the $1.2 million TBBH Demand Note and the $650,000 Safeguard Demand Note bear interest at an annual rate equal to the announced prime rate of PNC Bank, N.A. plus one percent (1%), payable quarterly in arrears on the first business day of January, April, July and October.  However, interest shall accrue only on $500,000 of the principal of the TBBH Demand Note until the first anniversary of the date of the TBBH Demand Note and thereafter shall accrue interest on the entire outstanding principal.  All outstanding principal and accrued but unpaid interest on each of the Safeguard Demand Note and the TBBH Demand Note is due and payable six months after the date of demand by Safeguard and/or TBBH, however, such demand shall not occur earlier then February 13, 2004.  The Company is required to notify Safeguard or TBBH of the other party’s demand for payment.  Except for payments made on demand by only one lender (either Safeguard or TBBH), any payments on the Demand Notes shall be made pro rata as between Safeguard and TBBH.  The outstanding principal amount of the Demand Notes may be prepaid in whole or in part upon notice to Safeguard and TBBH at any time or from time to time without any prepayment penalty or premium; provided, however, that there are no amounts outstanding under the Revolving Note.  Repayment of the Demand Notes may occur earlier in the case of a sale of all or substantially all of the assets of the Company, a business combination or upon the closing of a debt or equity offering in excess of $2.5 million; provided, however, that any repayment will be applied first to the repayment of the then outstanding obligations under the Revolving Note and then to the repayment of the then outstanding obligations under the Demand Notes.

          The following table presents the carrying amounts and fair values of the Company’s debt instruments as of March 31, 2003 and December 31, 2002 (in thousands):

          On March 1, 2001, pursuant to an Asset Purchase Agreement dated February 13, 2001, the Company issued 3,000,000 shares of its common stock and $1.5 million in unsecured non-interest bearing Promissory Notes (“Notes”) to Axial Technology Holding AG (“Axial”).  The Notes required the payment of $300,000, $500,000, and $700,000 on the first, second, and third anniversaries, respectively, of the Asset Purchase Agreement.  The carrying amount of the Company’s notes due to Axial was established by discounting the expected future cash payment obligations using a current interest rate at which the Company could borrow for debt of similar size and maturity.  With respect to the first note payment due on March 1, 2002, the Company could elect to provide, in lieu of cash, a number of shares of its common stock equivalent in aggregate value to the amount of such cash payment, the value of each such share to be deemed equal to 80% of the average NASDAQ closing price during the 20 trading days immediately prior to the relevant note payment date.  On March 1, 2002, the Company issued 381,098 shares of its common stock in lieu of the first note payment.  Related to this transaction, the Company recognized on March 1, 2002 an interest charge of $46,800, reflecting the discount on common stock given in payment of the first installment of the note.  The remaining Notes were retired on February 13, 2003 in connection with the debt modifications described above.

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Note 5.  Equity Transactions

          Safeguard is the holder of all 3,000 shares of the Series F Convertible Preferred Stock (“Series F Shares”).  Under the terms of the Series F Shares, holders of the Series F Shares are entitled to a cumulative quarterly dividend, when and if declared by the Board, at a rate per share equal to 2% of the issuance price per quarter.  At March 31, 2003, dividends in arrears on the Series F Shares were approximately $545,000.

Note 6.  Stock-Based Compensation

          In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.”  FAS 148 amends FAS 123 “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, FAS 148 amends the disclosure requirements of FAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The additional disclosure requirements of FAS 148 are effective for fiscal years ending after December 15, 2002.  We have elected to continue to follow the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion No. 25 (or APB 25), “Accounting for Stock Issued to Employees,” to account for employee stock options.  Under APB 25, no compensation expense is recognized unless the exercise price of our employee stock options is less than the market price of the underlying stock on the date of grant.  We have not recorded such expenses in the periods presented because we grant options at the fair market value of the underlying stock on the date of grant.

          The Company has granted incentive and non-qualified stock options to employees and directors under three outstanding stock option plans: the 1988 Stock Option Plan (the “1988 Plan”), the Stock Option Plan for Directors (the “Directors’ Plan”), and the 1997 Equity Compensation Plan (the “1997 Plan”).

          The Company may no longer grant options under the 1988 Plan or the Directors’ Plan.  Through March 31, 2003, the Company had options outstanding under these plans of 501,800 shares (1988 Plan), 18,000 shares (Director’s Plan), and 1,173,500 (1997 Plan).  Under the plans, the Board of Directors determines the option exercise price on a per-grant basis, but the price shall not be less than fair market value on the date of grant. Generally, outstanding options vest over periods not exceeding 4 years after the date of grant and expire 10 years after the date of grant.  All options granted under the plans to date have been at prices that have been equal to fair market value at date of grant.  At March 31, 2003, the Company has approximately 2,485,200 shares of common stock reserved for future issuance under the plans.

          The following information regarding net loss and loss per share prepared in accordance with FAS 123 has been determined as if we had accounted for our employee stock options and employee stock plan under the fair value method prescribed by FAS 123. The resulting effect on net income and earnings per share pursuant to FAS 123 is not likely to be representative of the effects on net income and earnings per share pursuant to FAS 123 in future periods, due to subsequent periods including additional grants and periods of vesting. The fair value of options was estimated at the date of grant using a Black-Scholes option valuation model.

          The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  Option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not provide a reliable single measure of the fair value of our employee stock options.

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          The following assumptions were used by the Company to determine the fair value of stock options granted using the Black-Scholes option-pricing model:

          The per share weighted-average fair value under FAS 123 of all stock options issued by the Company during the three months ended March 31, 2003 and 2002 was $0.30 and $0.90, respectively.

          For purposes of disclosures pursuant to FAS 123 as amended by FAS 148, the estimated fair value of options is amortized to expense over the options’ vesting period.

          The following table illustrates the effect on reported net income and earnings per share if we had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation (in thousands, except per share amounts):

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          This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, among others, statements containing the words “believes,” “anticipates,” “estimates,” “expects,” and words of similar import.  Such statements are subject to certain risks and uncertainties, which include but are not limited to those important factors discussed in cautionary statements throughout the section below and those set forth in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 4, 2003, as amended, and are qualified in their entirety by those cautionary statements.

Overview

          Tangram develops and markets lifecycle information technology (“IT”) asset management (“ITAM”) software for large and mid-sized organizations across all industries, in both domestic and international markets.  Our ITAM product line consists of Asset Insight Ò and Enterprise Insight Ò, which together deliver the market’s first unified tool to manage physical, contractual, and financial IT asset data in a single repository for a comprehensive view of the enterprise.  ITAM is the process of controlling hardware and software assets throughout their lifecycle — from procurement, through daily operations, through final disposal.  While asset management is primarily a business practice, it is supported by repository technology that consolidates diverse financial, contractual, ownership, and physical asset data.  Our core business strategy and operating philosophy focus on delivering world-class customer care, providing phased asset management solutions that are tailored to our customers’ evolving business needs, and maintaining a leading-edge technical position that results in long-term customer loyalty and sustained shareholder value.  We are a partner company of Safeguard Scientifics, Inc. (NYSE:SFE) (“Safeguard”).  Safeguard is an operating company that creates long-term value by focusing on technology-related companies that are developed through superior operations and management support.  Safeguard is the majority shareholder of the Company, holding approximately 58% of the Company’s outstanding common shares (assuming the conversion of the Series F Convertible Preferred Stock).

          In 1996, we began focusing our business on the asset tracking market and the introduction and sale of our Asset Insight product.  Asset Insight, an information technology asset tracking product, allows businesses to track changes in their information technology asset base (including hardware and software), forward plan technology requirements, optimize end-user productivity, and calculate the cost of software and hardware upgrades.  In October 2000, we announced a strategic move to become a leader in the ITAM market.  This strategy allowed us to build upon our core Asset Insight tracking technology and expertise and expand into a steadily growing, multi-billion dollar market.  In support of this business strategy, we purchased the technology of Wyzdom Solutions, Inc. from Axial Technology Holding AG (“Axial”) in March 2001, providing the technological foundation for Tangram’s asset management offering, Enterprise Insight.  This lifecycle offering, which has been rebranded as a member of the Tangram family of solutions, allows business leaders to manage their information technology assets from initial planning and procurement through final disposal—ensuring information technology assets are maximized to cost-effectively support corporate objectives.  We continue to enhance our industry-leading asset tracking technology to ensure our customers can effectively manage new and emerging technologies, such as wireless and handheld personal digital assistant (PDA) devices.  These asset tracking features remain the foundation of every asset management initiative.  Additionally, in support of the commitment to make Asset Insight a fully web-enabled solution, all new features will be web-based, allowing our customers to access and analyze their diverse asset information directly from their web browsers.  In early February 2003, we released what we believe to be the market’s first and only fully unified ITAM solution.  This unified Insight solution automatically and seamlessly combines the physical IT asset information tracked by Asset Insight with the financial and contractual information managed by Enterprise Insight, delivering a single, holistic view of all enterprise IT assets from a common user interface, without the need for costly and difficult-to-implement data integrations.  Tangram’s unified Insight solution allows customers to more quickly, efficiently, and accurately tackle critical IT business issues, such as software license compliance, disaster recovery planning, loss prevention, and lease management.  As part of our lifecycle asset management offering, we are expanding our services offerings whereby we work closely with our customers to prioritize their asset management requirements, pinpointing the necessary process and technology changes and executing a phased asset management implementation plan that delivers significant value during each step of the deployment.  This tailored service covers specific disciplines, such as (i) software license management; (ii) enterprise moves, adds and changes; (iii) lease management, and (iv) procurement.  To further assist our customers in leveraging the extensive benefits of our solutions, we also offer a variety of deployment planning, strategic implementation, business process, best practices, and training services.

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          Our financial results reflect our growing dependence on revenue generated by sales of Asset Insight and our move into the ITAM market with the introduction of Enterprise Insight in July 2001.  As a result, various risks and uncertainties relating to the development of the ITAM business may cause our actual results to differ materially from the results contemplated.  Such uncertainties include: (i) our ability to sell Asset Insight and Enterprise Insight products to major accounts with full enterprise-wide deployment; (ii) encountering any unanticipated software errors or other technical problems that may arise in the future that could impact market acceptance of Enterprise Insight, (iii) the possibility of the introduction of superior competitive products; (iv) our ability to develop a sustainable stream of revenue from the sale of the Asset Insight and Enterprise Insight products; (v) our ability to recruit and retain key technical, sales, and marketing personnel; and (vi) our ability to secure adequate financing on reasonable terms or at all.  In addition, many companies have been addressing their ITAM needs for systems and applications internally and only recently have become aware of the benefits of third-party software products such as ours.  Our future financial performance will depend in large part on the continued growth in the number of businesses adopting third-party ITAM software products and their deployment of these products on an enterprise-wide basis and as such, there can be no assurance that we will be able to succeed or capitalize upon the opportunities in the ITAM market.

          We have been and will continue to be dependent on closing large ITAM product sales in a given quarter.  Our revenues in a given quarter could be adversely affected if we are unable to complete one or more large license agreements, if the completion of a large license agreement is delayed, or if the contract terms were to prevent us from recognizing revenue during that quarter.  In addition, when negotiating large software licenses, many customers time their negotiations at our quarter-end in an effort to improve their ability to negotiate more favorable pricing terms.  As a result, we recognize a substantial portion of our revenues in the last month or weeks of a quarter, and license revenues in a given quarter depend substantially on orders booked during the last month or weeks of a quarter.  We expect our reliance on these large transactions to continue for the foreseeable future.

          The license of our software generally requires us to engage in a sales cycle that typically takes approximately six to nine months to complete.  Since the beginning of the second quarter of 2002, however, we have experienced an extension of normal sales cycles as a result of increased vendor disarray and confusion in the ITAM market as certain ITAM vendors underwent consolidations and financial and regulatory issues.  As a result of this vendor upheaval, industry analysts advised organizations to temporarily postpone their decisions on IT asset repository solutions.  In turn, we believe many organizations have adopted a “wait and see” mentality—deferring their asset management purchasing decisions until there is more market stability and the final market impact can be determined.  In addition, the length of the sales cycle has varied due to factors over which we have little or no control, such as the size of the transaction, the internal activities of potential customers, and the level of competition that we encounter in selling our products.  As such, historically, we have experienced a certain degree of variability in our quarterly revenue and earnings patterns.  This variability is typically driven by significant events that include: (i) the timing of major enterprise-wide sales of our ITAM products; (ii) “one-time” payments from existing legacy customers for license expansion rights (required to install on a larger or an additional computer base); (iii) budgeting cycles of our potential customers; (iv) changes in the mix of software products and services sold; and (v) software defects and other product quality problems.  Additionally, maintenance renewals have accounted for a significant portion of our revenue; however, there can be no assurance that we will be able to sustain current renewal rates in the future.  Cancellations of licenses or maintenance contracts could reduce our revenues and harm our operating results.  In particular, our maintenance contracts with customers terminate on an annual basis.  Substantial cancellations of maintenance agreements, or a substantial failure to renew these contracts, would reduce our revenues and harm our operating results. 

Critical Accounting Policies

          The Company’s discussion and analysis of its financial conditions and results of operations are based upon its financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP).  The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  These estimates and assumptions are affected by management’s application of accounting policies.  Critical accounting policies, in which different judgments and estimates by our management could materially affect our reported condition and results of operations, include estimating the allowance for doubtful accounts, deferral of software cost, valuation of intangibles, deferred tax assets and revenue recognition.

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Allowance for Doubtful Accounts

          Our allowance for doubtful accounts relates to customer accounts receivable.  The allowance for doubtful accounts is an estimate prepared by management based on identification of the collectibility of specific accounts and the overall condition of the receivable portfolios.  We specifically analyze customer receivables, as well as analyze historical bad debts, customer credits, customer concentrations, customer credit-worthiness, current economic trends, and changes in customer payment terms, when evaluating the adequacy of the allowance for doubtful accounts.  If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.  Likewise, should we determine that we would be able to realize more of our receivables in the future than previously estimated, an adjustment to the allowance would increase income in the period such determination was made.  The allowance for doubtful accounts is reviewed on a quarterly basis and adjustments are recorded as deemed necessary.  Management believes that the current estimate of allowances for doubtful accounts recorded as of March 31, 2003, adequately covers any potential credit risks.

Deferred Software Costs

          We account for software development costs in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.”  Costs associated with the planning and designing phase of software development, including coding and testing activities necessary to establish technological feasibility, are classified as product development and expensed as incurred.  Once technological feasibility has been determined, additional costs incurred in development, including coding, testing, and product quality assurance, are capitalized.  Such capitalized costs are amortized on a product-by-product basis over the estimated economic life of the software, not to exceed three years, using the straight-line method.  Amortization commences when a product is available for general release to customers.  The market for our products is intensely competitive and diverse, and the technologies for our products can change rapidly.  New products may be introduced frequently and, historically, existing products have been continually enhanced.  As a result, the lifecycles of our products are difficult to estimate.  We periodically assess the remaining economic life of the software whenever events or changes in circumstances indicate that the product life has been shortened.  If we determine the remaining economic life of the software is too long, we will adjust the amortization prospectively to reflect the reduction in the remaining economic life of the software.

          SFAS No. 86 requires that, at each balance sheet date, the unamortized capitalized costs of a computer software product (including acquired software technology) be compared to the net realizable value of that product.  The amount by which the unamortized capitalized costs of a computer software product exceed the net realizable value of that asset are written off.  The net realizable value is determined based on the estimated future gross revenues from the software product reduced by the estimated future costs of completing and disposing of such product, including the costs of performing maintenance and providing customer support required to satisfy the Company’s responsibility set forth at the time of sale.  Had different assumptions or criteria been used to evaluate and measure the estimated future gross revenues and costs, our assessment of the potential impairment and the recoverability of the asset could have been materially different.

Valuation of Intangibles

          We assess the impairment of goodwill and other intangible assets annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  Factors that we consider important which could trigger an impairment review include: (i) significant under performance relative to historical or expected future operating results; (ii) significant changes in the manner or use of the acquired assets or the strategy for our overall business; (iii) significant negative industry trends; and (iv) economic trends or a decline in our stock price for a sustained period.

          If we determine that the carrying value of intangible assets, exclusive of identifiable goodwill, may not be recoverable based upon the existence of one or more of the above indicators of impairment, we assess the recoverability of the intangibles by determining whether the carrying value of the intangible assets can be recovered through undiscounted future operating cash flows.  The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate commensurate with the risk inherent in our current business model.  Had different assumptions or criteria been used to evaluate and measure the undiscounted future operating cash flows related to the intangible assets, our assessment of the potential impairment and the recoverability of the asset could have been materially different.  As of March 31, 2003, the carrying value of intangible assets, exclusive of identifiable goodwill, was zero.

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          In 2002, SFAS No. 142, “Goodwill and Other Intangible Assets,” became effective, and as a result, we ceased amortization of goodwill on January 1, 2002.  In lieu of amortization, we were required to perform an initial impairment review of goodwill in 2002 and an annual impairment review thereafter.  SFAS No. 142 requires us to test goodwill for impairment at a level referred to as a reporting unit.  We operate in a single industry and are engaged in the design and sale of a limited number of software products; therefore, we believe we meet the definition of a single reporting unit.  SFAS No. 142 requires that if the fair value of the reporting unit is less than its carrying amount, the goodwill is considered potentially impaired and a loss is recognized to the extent its carrying value exceeds its implied fair value.  To determine fair value, we used the quoted market price of our common stock.  The required initial benchmark evaluation and the annual impairment review were performed in January 2002 and 2003, respectively, resulting in no impairment in the value of the Company’s goodwill or any related intangibles.  Had different assumptions or criteria been used to evaluate and measure the impairment of goodwill under SFAS No. 142, our assessment of potential impairment could have been materially different.

Deferred Tax Assets

          We are required to estimate income taxes in each of the jurisdictions in which we operate.  This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.  These differences result in deferred tax assets and liabilities.  We must assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent that we believe recovery is not likely, we must establish a valuation allowance.  We provided a valuation allowance of $9.2 million against our entire net deferred tax asset as of March 31, 2003.  The valuation allowance was recorded given the losses we had incurred through March 31, 2003 and the uncertainties regarding our future operating profitability and taxable income.

Revenue Recognition

          Our revenues are derived from product licensing and services.  Services are comprised of maintenance, professional services, and training.  License fees are generally due upon the granting of the license.  We also provide ongoing maintenance services (post-contract customer support), which include technical support and product enhancements, for an annual fee based upon the current price of the product.  As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period.  Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates.

          Revenues from license agreements are recognized currently, provided that all of the following conditions are met: (i) a non-cancelable license agreement has been signed; (ii) the product has been delivered; (iii) the fee is fixed or determinable; (iv) there are no material uncertainties regarding customer acceptance; (v) collection of the resulting receivable is deemed probable and the risk of concession is deemed remote; and (vi) no other significant vendor obligations related to the software exist.  Generally, these criteria are met at the time of delivery.  Provision is made at the time the related revenue is recognized for estimated product returns, which historically have been immaterial.  We analyze historical returns, current economic trends, and changes in reseller and customer demands when evaluating the adequacy of provisions for sales returns.  At the time of the transaction, we determine whether the fee is fixed and determinable based on the terms of the agreement associated with the transaction.  If a significant portion of a fee is contingent on future events we will recognize revenue as the future events occur.  The Company assesses collectibility based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer.  If we determine that collection of the fee is not reasonably assured, we will defer the revenue and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.  For all sales, we generally use a binding purchase order or signed license agreement as evidence of an arrangement.  Revenue from products sold through indirect channels (“resellers”) is recognized upon shipment of the software, as long as evidence of an arrangement exists, collectibility is probable and the fee is fixed or determinable.  Revenue is recorded net of any discounts.  Our resellers do not have any rights of return beyond the standard warranty that runs concurrent with post-contract support services.

          Revenues from post-contract support services are recognized ratably over the term of the support period, generally one year.  Maintenance revenues, when and if bundled with license agreements, are unbundled using vendor-specific objective evidence.  Consulting revenues are primarily related to implementation services performed on a time and material basis under separate service agreements for the installation of our products.  Revenues from consulting and training services are recognized as the respective services are performed.

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Results of Operations

Revenue

          Licenses and products revenue for the three-month period ended March 31, 2003 decreased 50% to $644,000, from $1.3 million in the comparable period in 2002.  The softness in the overall IT spending environment due to the economic and geopolitical uncertainties that exist continued to challenge us in the first quarter of 2003.  Additionally, our sales engagement process requires our direct sales consultants to explore each organization’s asset management goals and business drivers prior to delivering a solution plan.  The time investment devoted to each sale opportunity coupled with our limited resources associated with a small direct domestic sales force have limited the number of active opportunities our sales consultants can effectively work.  Licenses and products revenue include the sales of our ITAM product line, which consists of Asset Insight and Enterprise Insight, and product upgrades and add-ons of AM:PM and our traditional mainframe product, Arbiter.  Asset Insight licenses and products revenue contributed $440,000, or 68% of total licenses and products revenue, in 2003 down from $1.1 million, or 84%, in 2002.  Revenue from Enterprise Insight contributed $104,000, or 16% of total licenses and products revenue, in 2003. There were no Enterprise Insight sales in the comparable period in 2002.  Revenue from AM:PM and our traditional mainframe products was $100,000, or 16% of total licenses and products revenue, in 2003 compared to $212,000 in 2002.  Because we have focused our efforts on our core ITAM offerings and away from automated software distribution and the traditional mainframe product lines, we expect little, if any, future AM:PM and Arbiter license revenue.

          Services revenue for the three-month period ended March 31, 2003 decreased 12% to $1.6 million in 2003 from $1.8 million in 2002.  Services revenue includes post-contract customer support (“PCS”) agreements, expert asset management consulting services, and training and support services not otherwise covered under maintenance agreements.  PCS includes telephone support, bug fixes, and rights to upgrades on a when-and-if available basis.  Consulting services consist primarily of implementation services performed on a time and material basis for the installation of our software products, best practices and implementation services, and on-site training services.  PCS revenue from sales of the ITAM product line was $1.2 million in 2003 and 2002.  AM:PM and Arbiter PCS revenue and maintenance decreased 27% to $272,000 in 2003 from $374,000 in 2002.  We expect the trend of declining AM:PM and Arbiter PCS revenue and maintenance renewals to continue for reasons noted above.  Our consulting services revenue decreased 52% to $118,000 in 2003 from $248,000 in 2002 reflecting the reduced spending environment that exists for IT products and services and lower revenue for new licenses and products in the past two quarters.  We are seeing an increased demand for our professional services as the result of existing customers preparing for the recent product release upgrade and the professional service component associated with two recent Enterprise Insight sales.  Current consulting services backlog (open customer POs for service but not yet scheduled by the customers) is $240,000.  A key part of our strategy will be the continued delivery of expert asset management services.  If we are unable to meet customers’ service requests with internal resources (due to limited capacity or business expertise), we will endeavor to partner with our resellers and other third-party service providers for additional support.  There can be no assurance that we will be able to effectively maintain this new focus on providing consulting services.  Our failure to implement solutions that address customers’ requirements and provide timely and cost-effective customer support and service could have a material adverse effect on our future business, operating results, and financial condition.

Cost of Revenue

          Cost of licenses and products includes the costs related to the distribution of licensed software products.  The principal materials and components used in our software products are CD-ROMs with documentation and occasionally hard copy installation guides.  We occasionally use third-party vendors to print user manuals, packaging and related materials.  All of the CD-ROM duplication is done at our distribution facility located in our corporate headquarters. Cost of licenses and products is relatively immaterial in relation to the associated revenue.  Cost of licenses and products was $13,000 for the three-month period ended March 31, 2003, and $16,000 in the comparable period in 2002.  Cost of licenses and products as a percentage of licenses and products revenue was 2% and 1% in 2003 and 2002, respectively.

          Cost of services reflects the cost of the direct labor force, including the associated personnel, travel and subsistence, and occupancy costs incurred in connection with providing consulting and maintenance services.  Cost of services for the three-month period ended March 31, 2003 decreased 37% to $281,000, down from $444,000 for the comparable period in 2002.  The overall decrease in cost of services is primarily the result of reduced travel related costs resulting from the lower consulting services revenue in 2003 and lower spending on personnel and related costs as well as reduced fixed and variable facilities cost resulting from last years restructuring initiatives.  During 2002, we effected a restructuring plan designed to reduce our cost structure by consolidating our development staff and closing a facility located in Malvern, Pennsylvania,

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downsizing our corporate facility, and reducing our workforce.  Because of the above-noted explanations, the cost of services as a percentage of services revenue in 2003 decreased to 17% from 24% in 2002.

          Software development costs are accounted for in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.”  We capitalize certain software development costs incurred to develop new software or to enhance our existing software.  Such capitalized costs are amortized on an individual product basis commencing when a product is generally available for release.  Costs incurred prior to the establishment of technological feasibility are charged to research and development expense.  Amortization of software development costs is provided on a product-by-product basis over the estimated economic life of the software, not to exceed three years, using the straight-line method.  In 2001, we expended $3.5 million for the acquisition of software technology in connection with the purchase of the Wyzdom technology.  Amortization of acquired software technology is provided using the straight-line method over an estimated useful life of four years.  For the three-month period ended March 31, 2003, amortization of software development costs and acquired software technology was $443,000 down from $579,000 in 2002.   We expect amortization of software development costs and acquired software technology to increase in the near future due to our release of Asset Insight v5 and Enterprise Insight v4 to customers in April 2003

Sales and Marketing

          Sales and marketing expenses consist principally of salaries, commissions, and benefits for sales, marketing, and channel support personnel, and the costs associated with product promotions and related travel.  Sales and marketing expenses for the three-month period ended March 31, 2003 decreased 36% to $820,000, down from $1.3 million in the comparable period in 2002, principally as a result of lower spending on personnel and related costs as well as reduced fixed and variable facilities costs resulting from last year’s restructuring initiatives noted above.  Sales and marketing expenses as a percentage of revenue improved to 36% for the three-month period ended March 31, 2003, from 41% in the comparable period in 2002.  As noted earlier, our sales engagement process requires our direct sales consultants to explore each customer organization’s asset management goals and business drivers prior to delivering a solution plan.  This process requires the efforts of experienced sales personnel, as well as specialized consulting professionals.  The time investment devoted to each sale opportunity coupled with a small direct domestic sales force has limited the number of active opportunities our sales consultants can effectively work.  In 2002, we started a process of evaluating every member of our direct sales force to determine whether they have the necessary skills.  We have taken action, and may be required to take further action, where necessary to upgrade or replace skill sets, as well as invest in a larger sales force, in order to generate higher levels of sales activity.  If we are unable to successfully expand our sales force or hire sales personnel in the future and train them in the use of our products, our business, operating results, and financial conditions could be harmed.

General and Administrative

          General and administrative expenses consist principally of salaries and benefit costs for administrative personnel, general operating costs, legal, accounting and other professional services.  General and administrative expenses for the three-month period ended March 31, 2003 decreased 24% to $453,000, down from $593,000 in the comparable period in 2002.  The reduction in costs in 2003 was primarily the result of lower spending on personnel and related costs as well as reduced fixed and variable facilities cost resulting from last year’s restructuring initiatives noted above, lower reserve charge for bad debts reflecting improved accounts receivable collections and lower revenue levels, offset in part by the higher governance cost associated with being a public company.  For the three-month period ended March 31, 2003, as a percentage of total revenue, general and administrative expenses was 20% as compared to 19% in 2002.

Research and Development

          Research and development expenses consist primarily of salaries and benefits for the software development and technical support staff and, to a lesser extent, costs associated with independent contractors.  Gross expenditures for research and development for the three-month period ended March 31, 2003 decreased 43% to $537,000 down from $946,000 in the comparable period in 2002.  As a percentage of revenue, research and development costs decreased to 24% in 2003, down from 30% in 2002. The reduction in costs in 2003 was primarily the result of lower spending on personnel and related costs as well as reduced fixed and variable facilities costs resulting from last years restructuring initiatives noted above.  In accordance with the provisions of SFAS No. 86, we capitalize certain software development costs incurred to develop new software or to enhance our existing software.  For the three-month period ended March 31, 2003, we capitalized and deferred development costs of $341,000, or 64% of gross research and development costs, compared to $460,000, or 49% of gross research and development costs, in 2002.  The higher deferral rate in 2003 is the result of the significant development and quality assurance

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efforts directed towards the completion and release of Asset Insight v5 and Enterprise Insight v4 during the three-month period ended March 31, 2003.  As a result of rapid technological change in the industry, our position in existing markets can be eroded rapidly by product advances.  The lifecycles of our products are difficult to estimate. Our growth and future financial performance depend in part upon our ability to improve existing products and develop and introduce new products that keep pace with technological advances, meet changing customer needs, and respond to competitive products.  If we cannot compete effectively in our markets by offering products that are comparable in functionality, ease of use, and price to those of our competitors, our revenues will decrease, and our operating results will be adversely affected.  Many of our current and potential competitors have substantially greater financial, technical, marketing, and other resources than we have.  As a result, they may be able to devote greater resources than we can to the development, promotion, and sale of their products and may be able to respond more quickly to new or emerging technologies and changes in customer needs.  As such, we will continue to commit substantial resources to research and development efforts in the future.

Depreciation and Amortization

          The following table provides a summary by category of the charges to depreciation and amortization (excluding deferred software development costs) for the three-month periods ended March 31, 2003 and 2002 (in thousands):

          Depreciation of property and equipment is provided using the straight-line method over estimated useful lives ranging from three to seven years. 

          Amortization of other intangibles associated with the purchase of the Wyzdom technology is provided using the straight-line method over an estimated useful life of two years.

          SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and intangible assets with indefinite useful lives to no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142.  The Company adopted the provisions of SFAS No. 142 on its effective date, and as a result, we ceased amortization of goodwill on January 1, 2002.  In lieu of amortization, we were required to perform an initial impairment review of goodwill in 2002 and an annual impairment review thereafter.  The required initial benchmark evaluation and the annual impairment review were performed in January 2002 and 2003, respectively, resulting in no impairment in the value of the Company’s goodwill.

          Amortization of software development costs (which includes amortization of acquired software technology) is provided on a product-by-product basis over the estimated economic life of the software, not to exceed three years, using the straight-line method.  In accordance with the provisions of SFAS No. 86, included in cost of revenue is amortization of software development costs of $443,000 and $579,000 in 2003 and 2002, respectively.

Other Expense, Net

          Other expense, net consists primarily of interest expense.  Interest expense, resulting principally from borrowing under our Revolving Note, the Safeguard Demand Note, and the TBBH Demand Note, decreased to $36,000 for the three-month period ended March 31, 2003, from $78,000 in the comparable period in 2002, due to reduced borrowings and a lower interest rate environment.  Included in the interest expense for 2003 is a realized gain of $2,000 associated with the movements in foreign currency exchange rates.

Provision for Income Taxes

          There was no provision for income taxes for the three-month periods ended March 31, 2003 and 2002 due to the net losses incurred.  At December 31, 2002, the Company had net operating loss carryforwards of approximately $29.3 million, which are available to offset future federal taxable income and expire in various amounts from 2003 through 2022. 

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Net Loss

          We have incurred substantial losses in recent years, and predicting our future operating results is difficult.  If we continue to incur losses, if our revenues continue to decline, or if our expenses increase without commensurate increases in revenues, our operating results will suffer and the price of our common stock may fall.  For the three-month period ended March 31, 2003, we incurred a net loss of $48,000, or $0.01 per share (after giving effect to preferred dividend), compared to a net loss of $485,000, or $0.02 per share (after giving effect to preferred dividend), in 2002.  Although we experienced a decrease in revenues for the three-month period ended March 31, 2003 when compared to 2002, as a result of the cost savings associated with our 2002 restructuring initiatives, we were able to decrease our net loss.

Impact of Recently Issued Accounting Standards

          In June 2002, the FASB approved for issuance SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  This Statement provides financial accounting and reporting guidance for costs associated with exit or disposal activities and nullifies EITF Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”  SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002.  The provisions of EITF Issue 94-3 continue to apply for an exit activity initiated under an exit plan that met the criteria in EITF Issue 94-3 before the initial application of SFAS No. 146.  Management believes the implementation of this standard will not have a material effect upon our financial statements.

          In January 2003, the EITF published EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” which requires companies to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting.  In applying EITF Issue 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria.  Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values.  EITF Issue 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003.  We are currently evaluating the impact the adoption of this issue will have on our results of operations and/or financial position.

          From time to time the Staff of the United States Securities and Exchange Commission communicates its interpretations of accounting rules and regulations.  The manner by which these views are communicated varies by topic.  While these communications represent the views of the Staff, they do not carry the authority of law or regulation.  Nonetheless, the practical effect of these communications is that changes in the Staff’s views from time to time can impact the accounting and reporting policies of public companies, including ours.

          We do not expect the adoption of other recently issued accounting pronouncements to have a significant impact on our results of operations, financial position, or cash flows.

Liquidity and Capital Resources

          As of March 31, 2003, we had $596,000 of cash on hand, $1.9 million in gross trade receivables, and $1.35 million of borrowing capacity on our revolving note with Safeguard.  In the past we have funded our operations through borrowings under a credit facility with Safeguard and cash generated from operations.  However, the recent trend of operating losses and inconsistent revenue trends may require us to seek other sources of capital.

          Our operating activities provided cash of $1.2 million for the three-month period ended March 31, 2003 and $174,000 during the comparable period in 2002.  Net cash provided by operating activities in 2003 consisted primarily of the net loss of $48,000, adjusted for $522,000 of non-cash charges to operations and the change in operating assets and liabilities.  Changes in operating assets and liabilities provided $704,000 in cash for the three-month period ended March 31, 2003 primarily related to the decrease in our accounts receivable balances.  Net cash provided by operating activities for the three-month period ended March 31, 2002 consisted primarily of the net loss of $421,000, adjusted for $807,000 of non-cash charges to operations and the change in operating assets and liabilities.  Changes in operating assets and liabilities used cash of $212,000 in the comparable period of 2002.

          Investing activities used cash of $350,000 and $451,000 in the three-month periods ended March 31, 2003 and 2002, respectively, principally representing capitalized software development costs.  In accordance with SFAS No. 86, we capitalized and deferred development costs of $341,000, or 62% of gross research and development costs, in 2003, and $460,000, or 48%

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of gross research and development costs, in 2002.  Net cash used in investing activities reflects our continued and ongoing investment associated with our commitment to develop, enhance, and improve our ITAM product line.  Our business is not capital asset intensive, and capital expenditures in any year normally would not be significant in relation to our overall financial position.  Generally, our capital expenditures relate to information technology hardware and software purchases.  Capital expenditures were approximately $9,000 for the three-month period ended March 31, 2003, as compared to $14,000 in the first three months of 2002.  We currently expect our capital expenditure requirements in 2003 to be in a range of $200,000 to $250,000.

          Financing activities used cash of $650,000 in the three-month period ended March 31, 2003.  As result of the improvements in our net cash performance from operating activities, we were able to reduce our borrowings under our Safeguard revolving note by $650,000 during the three-month period ended March 31, 2003.  There were no exercises of employee stock options due to our stock price level.

Contractual Obligations

          Our contractual obligations consist of non-cancelable operating leases for facilities and equipment, debt financing, and cumulative dividend requirements on the Series F Convertible Preferred Stock.  The following table summarizes our contractual obligations as of March 31, 2003 with management’s estimate of payments based upon existing contractual terms:

          We lease our corporate office facility and certain equipment under several non-cancelable operating lease agreements that expire at various times through 2005.  Our facility lease contains fixed rental increases over the life of the lease.  Net rental expense under these leases for the periods ended March 31, 2003 and 2002 totaled approximately $93,000 and $276,000, respectively.

          On February 13, 2003, we modified the terms of our $3 million unsecured revolving line of credit with Safeguard and our $1.2 million unsecured non-interest bearing Promissory Note to TBBH Investments Europe AG (“TBBH”) (the successor in interest to Axial Technology Holding AG). 

          Under the terms of the new agreement, we have issued to Safeguard Delaware, Inc. (“Safeguard Delaware”), a wholly owned subsidiary of Safeguard, a new $1.35 million unsecured, variable rate Revolving Note (the “Revolving Note”) and a $650,000 unsecured, variable rate Demand Note (the “Safeguard Demand Note”) (described below).  The Revolving Note and the Safeguard Demand Note replace the previously existing $3 million unsecured revolving line of credit, of which $1.3 million was outstanding at the time of replacement, provided to us by Safeguard.  Amounts outstanding under the Revolving Note bear interest at an annual rate equal to the prime rate of PNC Bank, N.A. plus 1%, payable quarterly in arrears on the first business day of January, April, July and October.  We may from time to time borrow, repay and reborrow up to $1.35 million outstanding under the Revolving Note through February 13, 2004, at which time the Revolving Note may be renewed by Safeguard Delaware at its sole discretion.  Safeguard Delaware is required to notify us by November 13, 2003 whether or not Safeguard Delaware will renew the Revolving Note on February 13, 2004.  If Safeguard Delaware determines not to renew the Revolving Note, we will be required to pay all outstanding principal and accrued but unpaid interest by August 13, 2004.  Repayment of the Revolving Note may occur earlier in the case of a sale of all or substantially all of our assets, a business combination or upon the closing of a debt or equity offering in excess of $2.5 million.

          Concurrent with the modification of the terms of the $3 million unsecured revolving line of credit with Safeguard, we issued to TBBH a $1.2 million unsecured variable rate Demand Note (the “TBBH Demand Note”) in replacement of the existing $1.2 million unsecured non-interest bearing Promissory Note, of which $500,000 was due on February 13, 2003.

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Amounts outstanding under both the $1.2 million TBBH Demand Note and the $650,000 Safeguard Demand Note bear interest at an annual rate equal to the announced prime rate of PNC Bank, N.A. plus 1%, payable quarterly in arrears on the first business day of January, April, July and October.  However, interest shall accrue only on $500,000 of the principal of the TBBH Demand Note until the first anniversary of the date of the TBBH Demand Note and thereafter shall accrue interest on the entire outstanding principal.  All outstanding principal and accrued but unpaid interest on each of the Safeguard Demand Note and the TBBH Demand Note is due and payable six months after the date of demand by Safeguard and/or TBBH, however, such demand shall not occur earlier than February 13, 2004.  We are required to notify Safeguard or TBBH of the other party’s demand for payment.  Except for payments made on demand by only one lender (either Safeguard or TBBH), any payments on the Demand Notes shall be made pro rata between Safeguard and TBBH.  The outstanding principal amount of the Demand Notes may be prepaid in whole or in part upon notice to Safeguard and TBBH at any time or from time to time without any prepayment penalty or premium, provided, however, that there are no amounts outstanding under the Revolving Note.  Repayment of the Demand Notes may occur earlier in the case of a sale of all or substantially all of our assets, a business combination or upon the closing of a debt or equity offering in excess of $2.5 million; provided, however, that any repayment will be applied first to the repayment of the then outstanding obligations under the Revolving Note and then to the repayment of the then outstanding obligations under the Demand Notes.

          Safeguard is the holder of all 3,000 shares of our Series F Convertible Preferred Stock (“Series F Shares”).  The Series F Shares are entitled to a cumulative quarterly dividend, when and if declared by the board, at a rate per share equal to 2% of the issuance price per quarter.  At March 31, 2003, dividends in arrears on the Series F Shares were approximately $545,000.

          As stated above, Safeguard has agreed to assist in funding our projected cash requirements by providing a $1.35 million line of credit, of which there are no borrowings as of May 9, 2003.  Although operating activities may provide cash in certain periods, we anticipate that our operating and investing activities may use additional cash.  Consequently, operations may require us to obtain additional equity or debt financing.  However, we have no present understanding, commitment, or agreement with respect to any such transaction.  Accordingly, there can be no assurance that we will have access to adequate debt or equity financing or that, if available, it will be under terms and conditions satisfactory to us or which may not be dilutive.

Risk Factors

          In addition to other information in this Quarterly Report on Form 10-Q, the following risk factors should be carefully considered in evaluating Tangram and our business because such factors currently may have a significant impact on Tangram’s business, operating results and financial condition.  As a result of the risk factors set forth below and elsewhere in this Form 10-Q, and the risks discussed in Tangram’s other Securities and Exchange Commission filings including our Annual Report on Form 10-K for our fiscal year ended December 31, 2002, actual results could differ materially from those projected in any forward-looking statements.  Moreover, the risks and uncertainties described below are not the only ones facing us.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.  If any of the following risks actually occur, our business could be materially harmed.  In that event, the trading price of our common stock could decline.

          If the market for ITAM software does not continue to develop as we anticipate, the demand for our products might be adversely affected.

          As their needs have become more complex, many companies have been addressing their ITAM needs for systems and applications internally and only recently have become aware of the benefits of third-party software products such as ours.  Our future financial performance will depend in large part on the continued growth in the number of businesses adopting third-party ITAM software products and their deployment of these products on an enterprise-wide basis.

          Recent unfavorable economic conditions and reductions in IT spending could limit our ability to grow our business.  Our business and operating results are subject to the effects of changes in general economic conditions.

          The significant downturn in the U.S. and worldwide economies during the past 18 months has negatively affected our revenues and operations.  As companies experience economic downturns, they often delay or cease spending on capital assets and IT infrastructure (including software and related services).  We expect this economic downturn to continue, but are uncertain as to its future severity and duration.  In the future, fears of global recession, war and additional acts of terrorism may continue to impact global economies negatively.  We believe that these conditions, as well as the decline in worldwide economic conditions, have led our current and potential customers to reduce their IT spending.  If these conditions worsen,

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demand for our products and services may be further reduced as a result of continued decreased spending on IT products such as ours.

          Control by Safeguard Scientifics, Inc.

          Safeguard Scientifics, Inc. (“Safeguard”) beneficially owns approximately 56% of our outstanding common stock and 3,000 shares of our Series F Convertible Preferred Stock.  The 3,000 shares of Series F Convertible Preferred Stock are convertible at any time at the option of the holder into 1,500,000 shares of common stock, subject to anti-dilution adjustments. Safeguard is entitled to one vote for each share of common stock into which the Series F Convertible Preferred Stock may be converted and may vote on all matters submitted to a vote of the holders of common stock.  Therefore, Safeguard controls approximately 58% of the Company’s outstanding voting shares.

          As a result, Safeguard has the ability to control the election of Tangram’s board of directors and the outcome of all other matters submitted to our shareholders.  In addition, Safeguard’s influence may either deter any acquisition of Tangram or our ability to acquire another entity, and its significant ownership position reduces the public float for our common stock.  Consequently, this influence and significant ownership could adversely affect the market price and liquidity of our common stock.

          We face strong competitors that have greater market share than we do and pre-existing relationships with our potential customers, and if we are unable to compete effectively, we might not be able to achieve sufficient market penetration to achieve or sustain profitability.

          The market for our products is intensely competitive and diverse, and the technologies for our products can change rapidly.  New products are introduced frequently and existing products are continually enhanced.  Historically, we have encountered competition from a number of sources, including system management and infrastructure management companies.  Vendors of system management software and infrastructure management offerings continue to enhance their products to include functionality that was provided by asset tracking and low-end discovery tool software.  Even though the asset tracking functionality provided as standard features of asset management and infrastructure management software is more limited than that of our Asset Insight products, there can be no assurance that a significant number of potential customers would not elect to accept such functionality in lieu of purchasing additional software.  While we believe we maintain a strong competitive advantage in functionality and features, this emergence of asset management software and infrastructure management offerings is having the effect of extending our sales cycle, as well as creating pressure on us to reduce prices for our Asset Insight product line.

          Competitors vary in size and in the scope and breadth of software and services offered.  There are many vendors in the infrastructure management market, which includes asset tracking and asset management.  This has created confusion and overlap among vendors, such as Peregrine, Altiris, MRO/MainControl, Computer Associates, and Tally.  Additionally, systems management suites provide auto-discovery features that overlap with our offerings.  These vendors include Microsoft’s SMS, Hewlett-Packard’s OpenView, and Computer Associates’ Unicenter.  In the mid-sized asset tracking market, Asset Insight express competes with low-end discovery tools, such as AssetMetrix, Blue Ocean’s TrackIT, Centennial Discovery, and Eracent’s EnterpriseAM.  We also face competition from numerous start-up and other entrepreneurial companies offering products that compete with the functionality offered by one or more of our asset management products and the internal information technology departments of those companies with asset management needs.

          If we cannot compete effectively in our markets by offering products that are comparable in functionality, ease of use, and price to those of our competitors, our revenues will decrease, and our operating results will be adversely affected.  Many of our current and potential competitors have substantially greater financial, technical, marketing, and other resources than we have.  As a result, they may be able to devote greater resources than we can to the development, promotion, and sale of their products and may be able to respond more quickly to new or emerging technologies and changes in customer needs.

          Additional competition from new entrepreneurial companies or established companies entering our markets could have an adverse effect on our business, revenues, and operating results.  In addition, alliances among companies that are not currently direct competitors could create new competitors with substantial market presence.  Because few barriers to entry exist in the software industry, we anticipate additional competition from new and established companies, as well as business alliances.  We expect that the software industry will continue to consolidate.  In particular, we expect that large software companies will continue to acquire or establish alliances with our smaller competitors, thereby increasing the resources available to these competitors.  These new competitors or alliances could rapidly gain significant market share at our expense.

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          The market addressed by our ITAM product suite is in turmoil, and a significant new competitor may emerge.

          Our Asset Insight and Enterprise Insight products are targeted at the ITAM market.  In the past, Peregrine Systems, Inc. had the biggest single share of this market; Peregrine recently filed for bankruptcy protection.  As a result of Peregrine’s bankruptcy, some prospective Asset Insight and Enterprise Insight customers have questioned the validity of the ITAM market, and some have adopted a “wait and see” position towards purchasing products in this market.  The ultimate disposition of Peregrine’s IT asset-related business may have a detrimental effect on our ability to market our Asset Insight and Enterprise Insight products.  If Peregrine successfully emerges from bankruptcy with streamlined operations and without the burden of its pre-bankruptcy liabilities, we may be competing against a stronger competitor.  Additionally, during the bankruptcy process, Peregrine may auction off its IT asset-related business, and the buyer could become a significant competitor to us in this market.  This new competitor may have previously been a competitor of ours, or it may be a new entrant in our competitive landscape.  There is considerable uncertainty about the future of Peregrine’s IT asset-related business, and the prospects for the IT asset management market and our ability to market and sell Asset Insight and Enterprise Insight may be affected by the outcome of Peregrine’s bankruptcy proceedings.  If the ITAM market or Peregrine’s bankruptcy has an adverse effect on our sales, there could be an adverse impact on our business and results of operations.

          If we do not respond adequately to our industry’s evolving technology standards, or do not continually develop products that meet the complex and evolving needs of our customers, sales of our products may decrease.

          As a result of rapid technological change in our industry, our competitive position in existing markets, or in markets we may enter in the future, can be eroded rapidly by product advances and technological changes.  As the market evolves and competitive pressures increase, we believe that we will need to further expand our product offerings and further improve the integration between our asset tracking and asset repository solutions.  We may be unable to improve the performance and features of our products as necessary to respond to these developments.  In addition, the lifecycles of our products are difficult to estimate.  Our growth and future financial performance depend in part on our ability to improve existing products and develop and introduce new products that keep pace with technological advances, meet changing customer needs, and respond to competitive products.  Our product development efforts will continue to require substantial investments.  In addition, competitive or technological developments may require us to make substantial, unanticipated investments in new products and technologies, and we may not have sufficient resources to make these investments.

          If we are unable to expand our business internationally, our business, revenues, and operating results could be harmed.

          In order to grow our business, increase our revenues, and improve our operating results, we believe we must continue to expand internationally.  We have expanded our European and Pacific Rim sales initiatives by establishing agreements with nine distributors that are marketing our Asset Insight and Enterprise Insight solutions in the United Kingdom, Germany, Ireland, Scandinavia, Switzerland, Italy, Portugal, the Benelux countries, Spain, Australia, New Zealand, Hong Kong, and Singapore.  We carefully select distributors that share our customer-centric philosophy and are committed to selling Tangram’s solutions as their exclusive ITAM offerings.  If we expend substantial resources while pursuing an international strategy and we are not successful, our revenues will fall short of our expectations, and our operating results will suffer.  International expansion will require significant management attention and financial resources, and we may not be successful in expanding our international operations.  Additionally, we have limited experience in developing local language versions of our products or in marketing our products to international customers.  We may not be able to successfully translate, market, sell, and deliver our products internationally.

          If we cannot attract and retain qualified sales and marketing personnel, software developers, and customer service personnel, we will not be able to sell and support our products.

          Competition for qualified employees has been intense, particularly in the technology industry, and we have in the past experienced difficulty recruiting qualified employees.  If we are not successful in attracting and retaining qualified sales and marketing personnel, software developers, and customer service personnel, our revenue growth rates could decrease, or our revenues could decline, and our operating results could be materially harmed.  Our products and services require a sophisticated selling effort targeted at several key people within a prospective customer’s organization.  This process requires the efforts of experienced sales personnel, as well as specialized consulting professionals.  In addition, the complexity of our products, and issues associated with installing and maintaining them, require highly-trained customer service and support personnel.  We intend to hire these personnel in the future and train them in the use of our products.  We believe our success will depend in large part on our ability to attract and retain these key employees.

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          Product development delays could harm our competitive position and reduce our revenues.

          If we experience significant product development delays, our position in the market would be harmed and our revenues could be substantially reduced, which would adversely affect our operating results.  We have experienced product development delays in the past and may experience delays in the future.  Delays may occur for many reasons, including an inability to hire a sufficient number of developers, discovery of software bugs and errors, or a failure of our current or future products to conform to industry requirements.

          If our existing customers do not purchase additional licenses or renew post-contract customer support services, our sources of revenue might be limited to new customers and our ability to grow our business might be impaired.

          Historically, we have derived, and expect to continue to derive, a significant portion of our total revenue from existing customers who purchase additional products and renew post-contract customer support services (“PCS”).  New licenses and products to existing customers represented 38% of our revenue in 2001 and 72% of our revenue in  2002.  If our customers do not purchase additional products or renew PCS, our ability to increase or maintain revenue levels could be limited.  A number of our current customers initially license a limited number of our products for use in a division of their enterprises.  We actively market to these customers to have them license additional products from us and increase their use of our products on an enterprise-wide basis.  Our customers may not license additional products and may not expand their use of our products throughout their enterprises.  In addition, as we deploy new versions of our products or introduce new products, our current customers may not require or desire the functionality of our new products and may not ultimately license these products.

          We also depend on our installed customer base for future revenue from PCS renewal fees.  The terms of our standard license arrangements provide for a one-time license fee and the purchase of one year of PCS.  PCS is renewable annually at the option of our customers and there are no minimum payment obligations or obligations to license additional software.  PCS renewals have accounted for a significant portion of our revenue; however, there can be no assurance that we will be able to sustain current renewal rates in the future.  Substantial cancellations of PCS agreements, or a failure of a substantial number of customers to renew these contracts, would reduce our revenues and harm our operating results.

          We have a history of losses and negative cash flow from operations and cannot assure that we will be profitable in the future on an operating basis or otherwise.

          We have incurred substantial losses in recent years, and predicting our future operating results is difficult.  If we continue to incur losses and consume cash, if our revenues decline, or if our expenses increase without commensurate increases in revenues, our operating results will suffer and the price of our common stock may fall.  Although operating activities may provide cash in certain periods, we anticipate that our operating and investing activities may use additional cash.  Consequently, operations may require us to obtain additional equity or debt financing.  However, we have no present understanding, commitment, or agreement with respect to any such transaction.  Accordingly, there can be no assurance that we will have access to adequate debt or equity financing or that, if available, it will be under terms and conditions satisfactory to us or which may not be dilutive.

          Our future operating expenses and capital expenditures will increase, which may harm our operating results.

          We will continue to incur significant operating expenses and capital expenditures as we seek to:

          If these expenditures do not lead to improved results, we may not earn profits.

          Our revenues vary significantly from quarter to quarter for numerous reasons beyond our control.  Quarter to quarter variations could result in a substantial decrease in our stock price if our revenues or operating results are less than the expectations of our investors.

          Our revenues or operating results in a given quarter could be substantially less than anticipated by our investors, which could result in a substantial decline in our stock price.  In addition, quarter to quarter variations could create uncertainty about

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the direction or progress of our business, which could also result in a decline in the price of our common stock.  Our revenues and operating results will vary from quarter to quarter for many reasons, many of which are beyond our control, including:

          As a result, our quarterly revenues and operating results are not predictable with any significant degree of accuracy.

          Our quarterly revenue and revenue growth are increasingly dependent on a small number of large license transactions.

          Our revenues in a given quarter could be adversely affected if we are unable to complete one or more large license agreements, if the completion of a large license agreement is delayed, or if the contract terms were to prevent us from recognizing revenue during that quarter.

          Historically, we have been dependent on closing large Asset Insight product sales in a given quarter.  We expect our reliance on these large transactions to continue for the foreseeable future.  If we are unable to complete a large license transaction by the end of a particular quarter, our revenues and operating results could be materially below the expectations of our investors, and our stock price could fall.  In particular, our dependence on a few relatively large license transactions could have a material adverse effect on our quarterly revenues or revenue growth rates as prospects may reduce their capital investments in technology in response to slowing economic growth, budget constraints, or other factors.

          In addition, when negotiating large software licenses, many customers postpone their negotiations until quarter-end in an effort to improve their ability to obtain more favorable pricing terms.  As a result, we recognize a substantial portion of our revenues in the last month or weeks of a quarter, and license revenues in a given quarter depend substantially on orders booked during the last month or weeks of a quarter.

          Our revenue growth may be affected if our partners are unsuccessful in selling our products or if we are unsuccessful in adding new partners.

          Many of our transactions are sourced, developed, and closed through our strategic and distribution partners, including resellers and system integrators.  If the number or size of these partner-influenced transactions were to decrease for any reason, our revenue growth and operating results could be materially and adversely affected.  If our sales through these indirect channels, or to new distributors, resellers, or strategic partners, were to decrease in a given quarter, our total revenues and operating results could be harmed.  Historically, sales through indirect channels, including distributors, third-party resellers, and system integrators, represent a significant percentage of our total sales.  If sales through these channels were to decrease, we could experience a shortfall in our revenues.  We have less ability to manage sales through indirect channels, relative to direct sales, and less visibility into our channel partners’ success in selling our products.  As a result, we could experience unforeseen variability in our revenues and operating results for a number of reasons, including the following:

          Many of our channel partners experienced internal management and financial performance problems that impacted their ability to resell our product.  In response, we have shifted from an exclusively indirect sales channel to a predominantly direct sales organization.

          Our ability to sell our products into new markets and to increase our penetration into existing markets will be impaired if we fail to expand our distribution channels and sales force.  Our products and services require a sophisticated selling effort targeted at several key people within a prospective customer’s organization.  This process requires the efforts of experienced sales personnel, as well as specialized consulting professionals.  In addition, the complexity of our products, and issues

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associated with installing and maintaining them, require highly-trained customer service and support personnel.  We are in the process of transitioning and expanding our direct sales force to complement our marketing arrangements with our channel partners and distributors.  Our direct sales force has limited experience selling and delivering our phased asset management solutions.  If we are unable to successfully train our direct sales force or hire these personnel in the future and train them in the use of our products, our business, operating results, and financial conditions could be harmed.

          A key part of our solution will be the delivery of expert asset management services.  If we are unable to meet customers’ service requests with internal resources (due to limited capacity or business expertise), we will partner with our resellers and other third-party service providers for additional support.  There can be no assurance that we will be able to effectively implement this new sales focus on providing consulting services.  Our failure to implement solutions that address customers’ requirements and provide timely and cost-effective customer support and service could have a material adverse effect on our business, operating results, and financial condition.

          We may be unable to expand our business and increase our revenues if we are unable to expand our distribution channels.

          If we are unable to expand our distribution channels effectively, our business, revenues, and operating results could be harmed.  In particular, we will need to expand our direct sales force and establish relationships with additional system integrators, resellers and other third-party channel partners who market and sell our products.  If we cannot establish these relationships, or if our channel partners are unable to market our products effectively or provide cost-effective customer support and service, our business, revenues, and operating results could be harmed.  Even where we are successful in establishing a new third-party relationship, our agreement with the third-party may not be exclusive.  As a result, our partners may carry competing product lines.

          Seasonal trends in sales of our software products may result in periodic reductions in our revenues and impairment of our operating results.

          Seasonality in our business could result in our revenues in a given period being inconsistent.  Seasonality could also result in quarter to quarter decreases in our revenues.  In either of these events, seasonality could have an adverse impact on our results of operations.  Historically, our revenues and operating results in our third and fourth quarters have tended to benefit, relative to our first and second quarters, from purchase decisions made by the large concentration of our customers with calendar year-end budgeting requirements.  Our first and second quarters tend to produce the lowest revenues.  Notwithstanding these seasonal factors, other factors, including those identified in this section, could still result in reduced revenues or operating results in our third and fourth quarters.  Historical patterns may change over time.  As our international operations expand, we may experience variability in demand associated with seasonal buying patterns in these foreign markets different from those in the United States.

          Our quarterly revenues and revenue growth rates could be affected by the new products that we announce or that our competitors announce.

          Announcements of new products or releases by us or our competitors could cause customers to delay purchases pending the introduction of the new product or release.  In addition, announcements by us or our competitors concerning pricing policies could have an adverse effect on our revenues in a given quarter.

          Our products and service offerings have different margins, and changes in our revenue mix could have an adverse effect on our operating results.

          Changes in our revenue mix could adversely affect our operating results because some products and service offerings provide higher margins than others.  For example, margins on software licenses tend to be higher than margins on maintenance and services.  Additionally, we have utilized both inside and outside professional services consultants trained in the deployment of Asset Insight to deliver our implementation services.  The outside consultants who are subcontractors generally cost significantly more than the consultants employed directly by us.  Our gross profit can fluctuate based upon the mix of use of consultants who are subcontractors versus consultants employed directly by us.

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          The long sales cycle for our products may cause substantial fluctuations in our revenues and operating results.

          Delays in customer orders could result in our revenues being substantially below the expectations of our investors.  The sales cycle for our products typically takes six to nine months to complete, and we may experience delays that further extend this period.  The length of the sales cycle may vary depending on factors over which we have little or no control, such as the size of the transaction, the internal activities of potential customers, and the level of competition that we encounter in selling the products.  Our customers’ planning and purchasing decisions involve a significant commitment of resources and a lengthy evaluation and product qualification process.  As a result, we may incur substantial sales and marketing expenses during a particular period in an effort to obtain orders.  If we are unsuccessful in generating offsetting revenues during that period, our revenues and earnings could be substantially reduced, or we could experience a large loss.  During the sales cycle, we typically provide a significant level of education to prospective customers regarding the use and benefits of our products.  Any delay in the sales cycle of a large license or a number of smaller licenses could have an adverse effect on our operating results and financial condition.

          Conducting business internationally poses risks that could affect our financial results.

          Even if we are successful in expanding our operations internationally, conducting business outside North America poses many risks that could adversely affect our operating results.  In particular, we may experience gains and losses resulting from fluctuations in currency exchange rates, for which hedging activities may not adequately protect us.  To date, the majority of our international revenue has been denominated in United States currency; therefore, we have not experienced any significant currency fluctuations.  During the period ended March 31, 2003, approximately 0.4% of the U.S. dollar value of our invoices were denominated in currencies other than the United States dollar.  For the year ended December 31, 2002, approximately 1.9% of the U.S. dollar value of our invoices were denominated in currencies other than the United States dollar.  Accordingly, we have minimal exposure to adverse movements in foreign currency exchange rates.  However, future exchange rate risks can have an adverse effect on our ability to sell our products in foreign markets.  Since we sell our products in U.S. dollars, our sales could be adversely affected by declines in foreign currencies relative to the dollar, thereby making our products more expensive in local currencies.  If we are to sell our products in local currencies, we could be competitively unable to change our prices to reflect exchange rate changes.  Additional risks we face in conducting business internationally include longer payment cycles, difficulties in staffing and managing international operations, problems in collecting accounts receivable, and the adverse effects of tariffs, duties, price controls, or other restrictions that impair trade.

          Our future revenues and operating results may be adversely affected if the software application market continues to evolve toward a subscription-based model, which may prove less profitable for us.

          We expect our revenue growth rates and operating results to be adversely affected as customers move to a subscription-based application service provider model.  Historically, we have sold our asset management solutions on a perpetual license basis in exchange for an up-front license fee.  Businesses are increasingly attempting to reduce their up-front capital expenditures by purchasing software applications under a hosted subscription service model.  Under the hosted model, the customer subscribes to use an application from the software provider.  The application is generally hosted on a server managed by the software provider or a third-party hosting service.  Under the subscription revenue model, revenue is recognized ratably over the term of a subscription.  As a result, our rate of revenue growth under a subscription model will be less than under a license model.  In addition, the price of our services will be fixed at the time of entering into the subscription agreement.  If we are unable to adequately predict the costs associated with maintaining and servicing a customer’s subscription, then the periodic expenses associated with a subscription may exceed the revenues we recognize for the subscription in the same period, which would adversely affect our operating results.

          If the asset management market evolves toward a subscription-based model and if an increasing number of our future customers demand a subscription-based solution, or if we are not successful in implementing a subscription-based revenue model, or if market analysts or investors do not believe that the model is attractive relative to our traditional license model, our business could be impaired, and our stock price could decline.

          Errors or other software bugs in our products could result in significant expenditures to correct the errors or bugs, potentially resulting in our inability to deliver product, and could result in product liability claims.

          Software products as complex as those we offer may contain errors that may be detected at any point in a product’s lifecycle.  While we continually test our products for errors and work with customers through our customer support services to identify and correct bugs, errors in our products may be found in the future even after our products have been commercially

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introduced.  Testing for errors is complicated in part because it is difficult to simulate the complex, distributed computing environments in which our customers use our products, as well as because of the increased functionality of our product offerings.  We have experienced errors in the past that resulted in delays in product shipment and increased costs.  There can be no assurance that, despite our testing, errors will not be found.  If we were required to expend significant amounts to correct software bugs or errors, our revenues could be harmed as a result of an inability to deliver the product, and our operating results could be impaired as we incur additional costs without offsetting revenues.  Such errors may result in loss of, or delay in, market acceptance and sales, diversion of development resources, injury to our reputation, or increased service and warranty costs, any of which could have a material adverse effect on our business, results of operations, and financial condition.

          If we were held liable for damages incurred as a result of our products, our operating results could be significantly impaired.  Our license agreements with our customers typically contain provisions designed to limit exposure to potential product liability claims.  These limitations, however, may not be effective under the laws of some jurisdictions.  Although we have not experienced any product liability losses to date, the sale and support of our products entails the risks of these claims.

          We may experience integration or other problems with future acquisitions, which could have an adverse effect on our business or results of operations.  New acquisitions could dilute the interests of existing shareholders, and the announcement of new acquisitions could result in a decline in the price of our common stock.

          As part of our business strategy, we may find it desirable in the future to make acquisitions of, or significant investments in, businesses that offer complementary products, services and technologies.  We may also make acquisitions of, or investments in, businesses that we believe could expand our distribution channels.  If we identify an appropriate acquisition candidate, we may not be able to negotiate the terms of the acquisition successfully or finance the acquisition.  If we consummate one or more significant acquisitions in which the consideration consists of stock or other securities, shareholder ownership percentages in Tangram could be significantly diluted.  In addition, we may be required to write off or amortize significant amounts of goodwill and other intangible assets in connection with future acquisitions, which could materially impair our operating results and financial condition.  Any future acquisition or substantial investment would present numerous risks.  The following are examples of these risks:

          Our business could be harmed if we lose the services of one or more members of our senior management team.

          The loss of the services of one or more of our executive officers or key employees, or the decision of one or more of these individuals to join a competitor, could adversely affect our business and harm our operating results and financial condition.  Our success depends to a significant extent on the continued service of our senior management and other key sales, consulting, technical, and marketing personnel.

          We could be competitively disadvantaged if we are unable to protect our intellectual property.

          If we fail to adequately protect our proprietary rights, competitors could offer similar products relying on technologies we developed, potentially harming our competitive position and decreasing our revenues.  We attempt to protect our intellectual property rights by limiting access to the distribution of our software, documentation, and other proprietary information and by relying on a combination of copyright, trademark, and trade secret laws.  In addition, we enter into confidentiality agreements with our employees and certain customers, vendors, and strategic partners.

          Despite precautions that we take, it may be possible for unauthorized third parties to copy aspects of our current or future products or to obtain and use information that we regard as proprietary.  Policing unauthorized use of software is difficult, and some foreign laws do not protect proprietary rights to the same extent as United States laws.  Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others, any of which could adversely affect our revenues and operating results.

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          If we become involved in an intellectual property dispute, we may incur significant expenses or may be required to cease selling our products, which would substantially impair our revenues and operating results.

          In recent years, there has been significant litigation in the United States involving intellectual property rights, including rights of companies in the software industry.  Intellectual property claims against us, and any resulting lawsuit, may result in our incurring significant expenses and could subject us to significant liability for damages and invalidate what we currently believe are our proprietary rights.  These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and could divert management’s time and attention.  Any potential intellectual property litigation against us could also force us to do one or more of the following:

          If we are subject to a successful claim of infringement and we fail to develop non-infringing technology or license the infringed technology on acceptable terms and on a timely basis, our revenues could decline or our expenses could increase.

          We may in the future initiate claims or litigation against third parties for infringement of our proprietary rights or to determine the scope and validity of our proprietary rights or the proprietary rights of competitors.  These claims could also result in significant expense and the diversion of technical and management personnel’s attention.

          Our stock price has been and is likely to continue to be highly volatile, which may make our common stock difficult to resell at attractive times and prices.

          The trading price of our common stock has been and is likely to remain highly volatile.  Our stock price could be subject to wide fluctuations in response to a variety of factors, including the following:

          In addition, the markets for securities of technology and software companies have experienced extreme price and volume volatility and a significant cumulative decline in recent months.  This volatility has affected many companies irrespective of, or disproportionately to, the operating performance of these companies.  These industry factors can materially and adversely affect the market price of our common stock, regardless of our actual operating performance.

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          We risk liability from potential product liability claims that our insurance may not cover, which could materially adversely affect our business, financial condition, and results of operations.

          In testing, manufacturing, and marketing our products, we risk liability from the failure of the products to perform as we expect.  Although we currently have product liability insurance and seek to obtain indemnification from licensees of the products, obtaining additional insurance or indemnification may be inadequate, unobtainable, or prohibitively expensive.  We must renew our policies each year.  We may not be able to renew our current policies or obtain additional insurance in the future on acceptable terms or at all.  Our inability to obtain sufficient insurance coverage on reasonable terms, or otherwise protect ourselves against potential product liability claims in excess of our insurance, could materially adversely affect our business, financial condition, and results of operations. 

          Future changes in accounting standards, particularly changes affecting revenue recognition, could cause unexpected revenue fluctuations.

          Future changes in accounting standards, particularly those affecting revenue recognition, could require us to change our accounting policies.  These changes could cause deferment of revenue recognized in current periods to subsequent periods or accelerate recognition of deferred revenue to current periods, each of which could cause shortfalls in meeting investors’ expectations.  Any of these shortfalls could cause a decline in our stock price.

          Certain provisions of Pennsylvania law and our articles of incorporation and bylaws could have the effect of making it more difficult for a third-party to acquire, or of discouraging a third-party from attempting to acquire, control of us.

          We are a Pennsylvania corporation.  Certain provisions of Pennsylvania law and our articles of incorporation and bylaws could have the effect of making it more difficult for a third-party to acquire, or of discouraging a third-party from attempting to acquire, control of us.  While these provisions may provide us with flexibility in managing our business, they could discourage or make a merger, tender offer, or proxy contest more difficult, even though certain shareholders may wish to participate in the transaction.  These provisions could also potentially adversely affect the market price of the common stock. These provisions include:

          We are exposed to market risk from changes in interest rates.  Such changes in interest rates impact interest cost on our interest rate-sensitive liabilities.  Interest rate-sensitive liabilities are assumed to be those for which the stated interest rate is not contractually fixed for the next 12-month period.  Thus, liabilities that have a market-based index, such as the prime rate, are rate sensitive.  As of May 9, 2003, the only interest rate-sensitive liabilities are the Revolving Note, the Safeguard Demand Note, and the TBBH Demand Note.  Assuming a hypothetical, immediate 100 basis point increase in the interest rate, our interest expense over the following 12-month period would be increased by approximately $23,000.  The hypothetical model prepared by us assumes that the balance of interest rate-sensitive liabilities fluctuates based on our anticipated borrowing levels over the next 12-month period.  Thus, this model represents a static analysis, which cannot adequately portray how we would respond to significant changes in market conditions.  Furthermore, the analysis does not necessarily reflect our expectations regarding the movement of interest rates in the near term, including the likelihood of an immediate 100 basis point change in the interest rates nor the actual effect on interest cost if such a rate change were to occur.  We have not historically used financial instruments to hedge interest rate exposure, do not use financial instruments for trading purposes, and are not a party to any leveraged derivatives.

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Foreign Currency Risk

          Our business is principally transacted in United States currency.  The majority of international revenue has been denominated in United States currency; therefore, we have not experienced any significant currency fluctuations.  During the period ended March 31, 2003, approximately 0.4% of the U.S. dollar value of our invoices were denominated in currencies other than the United States dollar.  Accordingly, we have minimal exposure to adverse movements in foreign currency exchange rates.  This exposure is primarily related to local currency denominated revenue and operating expenses in the United Kingdom.  We will continue to assess our need to hedge currency exposures on an ongoing basis and if we are successful in growing our international revenues.  However, as of March 31, 2003, we had no hedging contracts outstanding.

          Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.  Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports.  It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

          We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis, improve our controls and procedures over time, and correct any deficiencies that we may discover in the future.  Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business.  While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to modify our disclosure controls and procedures.

          In addition, we reviewed our internal controls and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation.

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PART II - OTHER INFORMATION

          On February 14, 2003, the registrant filed with the Commission a Current Report on Form 8-K, dated February 13, 2003, to report that the registrant had modified the terms of its $3 million unsecured revolving line of credit with Safeguard Scientifics, Inc. and its $1.2 million unsecured non-interest bearing Promissory Note to TBBH Investments Europe AG (“TBBH”) (the successor in interest to Axial Technology Holding AG).

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SIGNATURES

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

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CERTIFICATION

I, Norman L. Phelps, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Tangram Enterprise Solutions, Inc.;

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

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

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

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

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CERTIFICATION

I, John N. Nelli, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Tangram Enterprise Solutions, Inc.;

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

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

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

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

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