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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 0-17920

MetaSolv, Inc.

(Exact name of registrant as specified in its charter)

5560 Tennyson Parkway

Plano, Texas 75024

(Address of principal executive offices)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No ¨

Indicate by check mark whether Registrant is an accelerated filer (as defined in Rule 126-2 of the Act).

Yes þ No ¨

As of March 31, 2003, there were 37,940,698 shares of the registrant’s common stock outstanding.

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METASOLV, INC.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

METASOLV, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

ASSETS

See accompanying notes to condensed consolidated financial statements.

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METASOLV, INC.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

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METASOLV, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

See accompanying notes to condensed consolidated financial statements.

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METASOLV, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1) Basis of Presentation

These unaudited condensed consolidated financial statements reflect all adjustments (consisting only of those of a normal recurring nature), which are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2002, contained in the Company’s Annual Report to Stockholders and Form 10-K filed with the Securities and Exchange Commission. Operating results for the three months ended March 31, 2003, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2003.

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” establishes requirements for reporting and display of comprehensive income and its components. The Company reports comprehensive income in its consolidated statement of stockholders’ equity. Comprehensive income represents changes in stockholders’ equity from non-owner sources. For the three months ended March 31, 2003 and 2002, net of taxes, unrealized gains on available-for-sale securities and cumulative foreign currency translation adjustments were the only items of other comprehensive income for the Company. The unrealized losses on available-for-sale securities for the three months ended March 31, 2003 and 2002 were $6,000 and $86,000, respectively. The foreign currency translation adjustments for the three months ended March 31, 2003 and 2002 were a loss of $57,000 and a gain of $2,000, respectively. Total comprehensive loss for the three months ended March 31, 2003 and 2002 was $9,915,000 and $9,103,000, respectively.

The Company recognizes compensation cost associated with stock-based awards under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The difference between the quoted market price as of the date of the grant and the contract purchase price of shares is charged to operations over the vesting period. No compensation cost has been recognized for fixed stock options with exercise prices equal to the market price of the stock on the dates of grant and shares acquired by employees under the Company’s Stock Purchase Plan. Pro forma net income and earnings per share disclosures as if the Company recorded compensation expense based on the fair value for stock-based awards have been presented in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, and are as follows for the three months ended March 31, 2003 and 2002 (in thousands, except per share amounts):

2) Revenue Recognition

The Company recognizes revenue using the “residual method” when there is vendor-specific objective evidence of the fair values of all undelivered elements in a multiple-element arrangement that is not accounted for using long-term contract accounting. Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the

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undelivered elements, as indicated by vendor-specific objective evidence, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2, and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements.

3) Earnings Per Share

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

Securities that were not included in the computation of diluted earnings per share because their effect was antidilutive consist of options to purchase 11,261,799 shares of common stock in the first quarter of 2003 and 8,536,910 shares of common stock in the first quarter of 2002.

4) Acquisition

In February 2003, the Company acquired London-based Orchestream Holdings plc, a recognized leader in Internet Protocol (IP) service activation software solutions for wire line and mobile carriers. The Orchestream acquisition added a robust IP service activation product to the Company’s portfolio and technology partnerships in Europe. The Company paid £0.06 per common share of Orchestream common stock valuing the transaction at approximately £7.9 million ($13.0 million). This acquisition became effective in February 2003 and, as of March 31, 2003, the Company had acquired 92% of Orchestream common stock. Effective April 25, 2003, the Company completed the acquisition of the remaining shares and Orchestream became a wholly owned subsidiary.

The Company accounted for the acquisition using the purchase method of accounting, as required by Statements of Financial Accounting Standards No.141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets.” The results of Orchestream have been included with those of the Company effective February 1, 2003.

The purchase price was allocated to tangible assets and liabilities based on their respective estimated fair values as of the closing date of the transaction. The excess of the purchase price over the fair value of the net tangible assets acquired was allocated to identifiable intangible assets, including customer arrangements, contract rights, the core technology related to the products, and in-process research and development costs, partially offset by minority interests with the remainder being allocated to goodwill which will not be deductible for tax purposes. In addition, deferred taxes have been recognized for the difference between the book and tax basis of certain intangible assets.

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

The $1.6 million allocated to in-process research and development was charged to expense upon closing in February 2003. Under SFAS 142, goodwill recorded as a result of the acquisition will not be amortized. The developed technology will be amortized over its useful life of three years; the customer relationships will be amortized over their useful life of five years; and the contract rights will be amortized over one year.

The following summary, which was prepared on a pro forma basis, reflects the results of operations for three-month periods ended March 31, 2003 and 2002, as if the acquisition had occurred at the beginning of the respective periods. The table includes the impact of certain adjustments, including intangible asset amortization, but does not include a charge for in-process research and development (in thousands except for share data).

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

The Company accounted for the acquisition using the purchase method of accounting, as required by Statements of Financial Accounting Standards No.141, “Business Combinations,” and No. 142 “Goodwill and Other Intangible Assets.”

The total purchase price was allocated to tangible assets and liabilities based on their respective estimated fair values as of the closing date of the transaction. The tangible assets were inventoried and evaluated by an independent third party, and did not differ materially from the net book value in the historical financial statements of Nortel Networks. The excess of the purchase price over the fair value of the net tangible assets acquired was allocated to identifiable intangible assets, including customer arrangements, the core technology related to the products, and in-process research and development

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costs, with the remainder being allocated to goodwill which will be deductible for tax purposes over the next fifteen years. In addition, deferred taxes were recognized for the difference between the book and tax basis of certain intangible assets.

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

The $4.1 million allocated to in-process research and development costs was charged to expense upon closing on February 1, 2002. Under FAS 142, goodwill recorded as a result of the acquisition will not be amortized. The developed technology will be amortized over its useful life of two years and the customer contracts will be amortized over their useful life of three years.

The following summary, which was prepared on a pro forma basis for 2002, reflects the results of operations for three-months ended March 31, 2002, as if the acquisition had occurred at the beginning of the period. The table includes the impact of certain adjustments, including the adjustment of interest income, intangible asset amortization, and the Company’s income tax benefit, but does not include a charge for in-process research and development (in thousands except for share data).

5) Segment Information

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

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6) Restructuring and Other Costs

In 2002, the Company recorded pre-tax restructuring charges of $12.1 million. These charges consisted of $5.0 million for a reduction in force of approximately 190 positions, $5.8 million for lease commitments on office space that has been vacated, and approximately $2.3 million of related asset write-downs, partially offset by $1.0 million non recurring adjustments to accrued royalties.

During the quarter ended March 31, 2003, the Company recorded a pre-tax restructuring charge of $1.3 million. This charge was for a reduction in force of 55 positions. This restructuring program was implemented to align costs with expected market conditions. The expenditures related to restructuring are expected to be completed by June 30, 2003. The following table summarizes the status of the restructuring actions (in thousands).

During the quarter ended March 31, 2002, the Company recorded a pre-tax restructuring charge of $2.8 million. This charge consisted of $1.4 million for a reduction in force of approximately 100 positions, and approximately $1.4 million for write-down of assets and closing of remote offices. This restructuring program was implemented to align costs with expected market conditions. The staff reduction expenditures were completed by September 30, 2002.

7) Goodwill and Other Intangible Assets

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

The market capitalization of the Company has been at a level well below its book value for an extended period. This prolonged decline in the market capitalization indicated that the capitalization of goodwill as a result of the acquisition of Orchestream Holdings plc was not warranted. Accordingly, the Company recorded a charge of $2.2 million to eliminate the goodwill.

The changes in the carrying value of goodwill during the three months ended March 31, 2003, are as follows:

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The following is a summary of intangible assets at March 31, 2003 and December 31, 2002 (in thousands):

Amortization expense related to intangible assets was approximately $1,613,000 and $2,271,000 for the three months ended March 31, 2003 and 2002, respectively. Amortization expense related to intangible assets subject to amortization at March 31, 2003, will be as follows for the next five years (in thousands):

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Overview

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

The communications provider industry continued to experience significant financial weakness during the quarter ended March 31, 2003, reducing the number of sales opportunities to many of our customers and prospective customers. The adverse effects of weak markets on our business are moderated to some extent by our regional diversification, by the wide spectrum of communication service providers that buy our products, and by our expanded product portfolio, but our financial results remain largely influenced by decreased overall capital spending by communications providers.

CRITICAL ACCOUNTING POLICIES

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

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

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

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

Service revenues consist principally of software implementations, upgrades and configurations, and customer training, as well as software maintenance agreements that include both customer support and the right to product updates. We use our own employees and subcontract with system integrator partners to provide consulting services to our customers. The

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majority of our services are priced on an hourly basis. We also offer fixed-price consulting packages, primarily for repeatable solutions.

Since we implement some of our services on a fixed fee basis, if we incur more costs than we expect in implementations, our profitability will suffer. Our process for tracking progress to completion on such arrangements is through individual detailed project plans and regular review of labor hours incurred compared to estimated hours to complete the project. When estimates of costs to complete the project indicate that a loss will be incurred, these losses are recognized immediately.

Any estimation process, including that which is used in preparing contract accounting models, involves inherent risk. To the extent that our estimates of revenues and expenses on these contracts change periodically in the normal course of business, due to the modifications of our contractual arrangements or changes in cost, such changes would be reflected in the results of operations as a change in accounting estimates in the period the revisions are determined.

We normally ship our software and perform services shortly after we receive orders. As a result, our quarterly financial results are largely dependent on orders received during that period.

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

We assess the realizability of our deferred tax assets by projecting whether it is more likely than not that some portion or all of the deferred tax assets will not be realized in the foreseeable future. Accordingly, we carry a valuation allowance against our deferred tax assets, which are related primarily to temporary differences between financial and income tax reporting based on enacted tax laws and rates, tax credit carryforwards and net operating loss carryforwards. We evaluate a variety of factors in determining the amount of the deferred income tax assets to be recognized pursuant to SFAS No 109, “Accounting for Income Taxes,” including our earnings history, the number of years our operating loss and tax credits can be carried forward, the existence of taxable temporary differences, near-term earnings expectation, and the highly competitive nature of the telecommunications industry and its potential impact on our business.

We evaluate our long-lived assets, including acquired intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of any assets to be held and used is measured by a comparison of the carrying amount of any asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

PRO FORMA FINANCIAL RESULTS

We report quarterly unaudited financial statements prepared in accordance with Generally Accepted Accounting Principles. We also report pro forma financial information in earnings releases and investor conference calls. This pro forma financial information excludes certain non-cash and special charges, consisting primarily of the impairment of goodwill, amortization of intangible assets, and restructuring costs. In accordance with applicable regulations, when we disclose pro forma financial information, such disclosure is accompanied by (i) a comparable financial measure calculated and presented in accordance with Generally Accepted Accounting Principles and (ii) a reconciliation of the differences between the pro forma financial information and the comparable financial measure calculated and presented in accordance with Generally Accepted Accounting Principles. We believe the disclosure of the pro forma financial information helps investors evaluate the results of our ongoing operations. However, we urge investors to carefully review the Generally Accepted Accounting Principles financial information that accompanies the pro forma financial information and that is included as part of our quarterly reports on Form 10-Q and our annual reports on Form 10-K.

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ACQUISITIONS

Orchestream. In February 2003, we acquired London-based Orchestream Holdings plc, a recognized leader in IP service activation software solutions for wire line and mobile carriers. The Orchestream acquisition added a robust IP service activation product to our portfolio and technology partnerships in Europe. We paid £0.06 per common share of Orchestream common stock valuing the transaction at approximately £7.9 million ($13.0 million). This acquisition became effective in February 2003 and as of March 31, 2003, we had acquired 92% of Orchestream common stock. Effective April 25, 2003, MetaSolv completed the acquisition of the remaining shares and Orchestream became a wholly owned subsidiary. Our financial results include revenues and costs of the acquired business effective February 2003.

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

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Results of Operations

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

Revenues

Total revenues decreased 3% to $21.1 million in the first quarter of 2003, from $21.9 million in the first quarter of 2002. The decrease in revenue between these periods resulted from lower services revenue, partially offset by higher license sales.

License Fees. License fee revenues in the first quarter of 2003 increased 8% to $7.6 million, from $7.0 million in the first quarter of 2002. The increase in license revenue resulted primarily from the inclusion of sales of Orchestream products.

Services. Revenues from services decreased 9% to $13.5 million in the first quarter of 2003 from $14.8 million in the first quarter of 2002, primarily due to lower demand for implementation and related technical services.

Technical consulting and education service revenues decreased 21% to $4.1 million in the first quarter of 2003, from $5.2 million in the first quarter of 2002. The decrease in consulting and education revenues resulted from fewer services engagements.

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Post-contract customer support, or maintenance revenues, decreased 2% to $9.5 million in the first quarter of 2003, from $9.7 million in the first quarter of 2002. The decrease in maintenance revenue was primarily due to a decrease in customers due to their financial deterioration, partially offset by maintenance revenue from our recently acquired products.

Concentration of Revenues. As of March 31, 2003, our active customer list included more than 170 communications service providers worldwide, including approximately 40% of the world’s largest providers. During the first quarter of 2003, our top ten customers represented 54% of our total revenue with the top two customers accounting for 21% and 10% of revenue, respectively. In any given quarter, we generally derive a significant portion of our revenue from a small number of relatively large sales. A significant decrease in the sale of products and services to any customer from whom we received more than 10% of our total revenue during a recent quarter is likely to have a material adverse affect on our results of operations and financial condition. Additionally, our inability to consummate one or more substantial sales in any future period could seriously harm our operating results for that period.

International Revenues. During the first quarter of 2003 we recognized $11.0 million in revenues from sources outside the United States compared to $5.8 million in the first quarter of 2002, representing 52% and 27% of revenue in each period, respectively. The growth in international revenues was primarily due to our successes at European communications providers, accelerated by our product acquisitions.

Cost of Revenues

License Costs. License costs consist primarily of royalties for third party software that is embedded in our products. License costs were $0.5 million in the first quarter of 2003, and $0.2 million in the first quarter of 2002, representing 7% and 2% of license revenue in each period, respectively. The increase in license costs in the first quarter of 2003, in absolute dollars and as a percentage of revenue, is primarily due to proportionately higher sales of royalty-bearing products.

We plan to continue the use of third party software where it provides an advantage for our customers. While this plan lowers our overall product development cost, it may increase our cost of license revenue, both in absolute terms and as a percentage of revenues.

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

Service costs were $8.3 million in the first quarter of 2003, up from $7.1 million in the first quarter of 2002, representing 61% and 48% of service revenues in each period, respectively. The increase in service costs in 2003 resulted primarily from additional customer support for our newly acquired products and customers. The increase in service costs as a percentage of service revenues was primarily due to a higher level of software engineering effort for specific customers. We record engineering effort that is specific to a customer contract as a cost of revenue, whereas engineering effort towards general product releases is normally recorded as development expense. We expect this higher level of customer-specific engineering support to continue in future periods as we work to adapt our software to provide customers with competitive advantages in their unique operating environments.

Amortization of Intangible Assets. The value assigned to intangible assets, primarily technology rights, is amortized over the estimated useful life of the assets using the greater of straight-line or the ratio that current gross revenues related to those assets bears to the total current and anticipated future gross revenues related to those assets. The estimated useful life of these assets range from one to five years.

In the first quarter of 2003, cost of revenues included $1.6 million in amortization of intangible assets acquired from Nortel Networks and Orchestream. This compares to $2.3 million in the first quarter of 2002. The decrease in amortization expense in the first quarter of 2003 versus first quarter 2002 was primarily due to elimination of intangibles from a previous acquisition partially offset by the addition of technology rights and contracts from the Orchestream acquisition in February 2003.

Operating Expenses

Research and Development Expenses. Research and development expenses consist primarily of costs related to our staff of software developers, contracted development costs and the associated infrastructure costs required to support

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product development. Research and development expenses during the first quarter or 2003 decreased 19% to $7.8 million from $9.7 million in the first quarter of 2002, representing 37% and 44% of total revenues in each period, respectively. The decrease in research and development expense, in dollars and as a percentage of revenue was primarily due to lower contracted labor expense and redirecting engineering resources to specific customer support.

During the first quarter of 2003, our research and development investments were focused on new products and enhancements to address next-generation communications networks, including wireless mobility technologies, internet protocol (IP) services management and customer defined product enhancements.

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

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

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries, commissions, travel, trade shows and other related expenses required to sell our software. In the first quarter of 2003, sales and marketing expenses decreased 14% to $6.1 million from $7.1 million in the first quarter of 2002, representing 29% and 33% of revenue in each period, respectively. The decrease in expenses from first quarter 2002 to first quarter 2003 was primarily due to 23% lower staffing levels and a 27% reduction in commission expense.

General and Administrative Expenses. General and administrative expenses consist of costs for finance and accounting, legal, human resources, information systems, facilities, bad debt expense, and corporate management not directly allocated to other departments. General and administrative expenses in the first quarter of 2003 were $4.5 million, compared to $3.8 million in the first quarter of 2002, representing 21% and 17% of revenues in each period, respectively. The increase in general and administrative expenses was primarily due to expenses associated with our newly acquired Orchestream operations.

Restructuring and Other Costs. We recorded a restructuring charge of $1.3 million in the first quarter of 2003 for costs associated with the elimination of 55 staff positions. We expect these actions to yield approximately $5 million of annual cost savings and to be completed by the end of 2003. We have completed these staff reductions and the severance payments will be completed by September 30, 2003. We expect these actions to yield approximately $5 million of annual cost savings.

In the first quarter of 2002, we recorded a restructuring charge of $2.8 million, consisting of $1.4 million for severance costs related to a reduction in force of approximately 100 people and $1.4 million for write-down of assets and closing of remote offices. These actions were expected to yield approximately $10 million in annual cost savings.

In-Process Research and Development. In connection with our acquisition of Orchestream, we recorded a charge of $1.6 million in the first quarter of 2003 for acquired in-process research and development (IPR&D). These in-process projects consisted primarily of upgrades to existing products. The value of the IPR&D was calculated using a discounted cash flow analysis of the anticipated income stream of the related product sales. The projected net cash flows were computed using discount rates from 27% to 30% for the various IPR&D projects. These projects are expected to be completed by year-end 2003.

In connection with the February 2002 acquisition of certain OSS assets from Nortel Networks, we recorded a pre-tax charge of $4.1 million for acquired in-process research and development during the first quarter of 2002. At the date of the acquisition, the IPR&D projects had not yet reached technological feasibility and had no alternative future uses. The projects generally included enhancements and upgrades to existing technology, enhanced communication among systems, introduction of new functionality and the development of new technology primarily for integration purposes. The value of the IPR&D was calculated using a discounted cash flow analysis of the anticipated income stream of the related product sales. The projected net cash flows were computed using discount rates from 25% to 32% for the various IPR&D projects. These projects were essentially completed by year-end 2002.

Goodwill Impairment. The Company is required to assess the value of goodwill under the provisions of Statement of Financial Accounting Standards No. 142. The Company is one reporting unit, as defined by the standard. As outlined in

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the authoritative literature, the assessment of whether goodwill has been impaired is based on the Company’s estimate of the fair value of the reporting unit using a model that considers both a discounted future cash flow analysis and market capitalization data.

The market capitalization of the Company has been at a level well below its book value for an extended period. This prolonged decline in the market capitalization indicated that the capitalization of goodwill as a result of the acquisition of Orchestream Holdings plc was not warranted. Accordingly, the Company recorded a charge of $2.2 million to eliminate the goodwill.

Interest and Other Income, Net

In the first quarter of 2003, interest and other income, net, primarily consisting of interest income and interest expense, was $0.3 million, compared to $0.5 million in the first quarter of 2002. The decrease in interest and other income was primarily due to the decline in cash and marketable securities balances upon which we receive interest income and lower interest rates earned on invested balances.

Income Tax Benefit

We recorded an income tax benefit of $2.5 million in the first quarter of 2003 and $5.6 million in the first quarter of 2002. As a percentage of the loss before taxes, our income tax benefit was 20% in the first quarter 2003 compared to 38% in the first quarter of 2002. The difference between our effective income tax benefit and the statutory rate is due to the write-off of goodwill and IPR&D and amortization of intangible assets, all of which are not deductible for tax purposes, and adjustments for the realizability of tax benefits related to Orchestream losses.

Under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“FAS 109”), deferred tax assets and liabilities are determined based on the difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. FAS 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the available evidence, which includes our recent operating performance and projections for the future near- term performance, we have maintained a valuation allowance of approximately $14.5 million against our net deferred tax assets. We intend to evaluate the realizability of the deferred tax assets on a quarterly basis. Any future changes will be reflected as a component of income tax expense.

Minority Interest

As of March 31, 2003, we had acquired 92% of the outstanding common stock of Orchestream Holdings plc. Accordingly, 8% of Orchestream’s net loss during the quarter ended March 31, 2003, is attributable to non-MetaSolv shareholders and we recorded a non-cash after-tax minority interest adjustment. Effective April 25, 2003, MetaSolv completed the acquisition of the remaining shares and Orchestream became a wholly owned subsidiary.

Liquidity and Capital Resources

At March 31, 2003, our primary sources of liquidity were cash and cash equivalents, restricted cash, and marketable securities, totaling $58.2 million and representing 44% of total assets. We invest our cash in excess of current operating requirements in short and intermediate term investment grade securities that are available for sale as needed to finance our future growth. Total cash and marketable securities decreased $12.6 million during the first quarter of 2003, from a balance of $70.8 million at the end of 2002. This decrease was primarily attributable to our net loss ($5.9 million, net of non cash items such as goodwill impairment, depreciation, and amortization), the February 2003 acquisition of Orchestream ($3.1 million, net of $10.0 million cash acquired), restructuring payments ($1.9 million), payments for sales, property and franchise taxes ($1.3 million), and payments on previous acquisition-related liabilities ($1.0 million).

Cash used in operating activities during the first quarter of 2003 was $10.3 million, comprised of our $9.9 million net loss adjusted for non-cash items such as goodwill impairment, amortization of intangibles, tax benefits, in-process research and development write-offs, and changes in non-cash working capital.

Net cash generated by investing activities was $11.0 million in the first quarter of 2003, comprised primarily of a reduction in restricted cash ($12.0 million), net proceeds of sales and purchases of marketable securities ($2.0 million), partially offset by net expenditures for the acquisition of Orchestream ($3.1 million, net of $10.0 million cash acquired).

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We have no unusual capital commitments at March 31, 2003, and our principal commitments consist of obligations under operating leases.

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

Certain Factors That May Affect Future Results

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

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

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

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

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

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

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

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

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

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

The communications industry and in particular our customers have experienced significant consolidation. In the future, there may be fewer potential customers requiring operations support systems and related services, increasing the level of competition in the industry. In addition, larger, consolidated communications companies have strengthened their purchasing power, which could create pressure on the prices we charge and the margins we realize. These companies are also striving to streamline their operations by combining different communications systems and the related operations support systems into one system, reducing the number of vendors needed. Although we have sought to address this situation by continuing to market our products and services to new customers and by working with existing customers to

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provide products and services that they need to remain competitive, we cannot be certain that we will not lose additional customers as a result of industry consolidation.

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

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

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

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

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

A significant portion of revenue each quarter is derived from a relatively small number of large sales. As consolidation in the telecommunications industry continues, our reliance on a limited number of customers for a significant portion of our revenue may increase. The amount of revenue we derive from a specific customer is likely to vary from period to period, and a major customer in one period may not produce significant additional revenue in a subsequent period. During the year 2002, our top ten customers accounted for 42% of our total revenue, compared to 36% during the year 2001. One customer accounted for 15% of total revenue in 2002 and no other customer was more than 5% of total revenue in 2002. In first quarter of 2003 we had two customers, who individually accounted for 10% or more of our revenues. To the extent that any major customer terminates its relationship with us, our revenue could be adversely affected. While we believe that the loss of any single customer would not seriously harm our overall business or financial condition, our inability to consummate one or more substantial sales in any future period could seriously harm our operating results for that period.

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

Competition in the communications products market is intense. Although we compete against other companies selling communications software and services, the in-house development efforts of our customers may also result in our making

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fewer sales. We expect competition to persist in the future. We cannot be certain that we can compete successfully with existing or new competitors, and increased competition could result in price reductions, reduced gross margins and loss of market share.

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

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

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

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

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

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

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

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

In addition to time and materials contracts, we have periodically entered into fixed-price contracts for software implementation, and service level contracts requiring performance at agreed service levels. We may do so in the future. These fixed-price contracts involve risks because they require us to absorb possible cost overruns. Service level contracts involve risks because a failure to meet the required service levels may incur compensatory or liquidated damages. Our failure to accurately estimate the resources required for a project or our failure to complete our contractual obligations in a manner consistent with the project plan or service level requirements would likely cause us to have lower margins or to suffer a loss on such a project or contract, which would negatively impact our operating results. Also, in some instances our sales and support contracts may require us to provide software functionality that we have procured from third party vendors. The cost of this third party functionality may impact our margins, and we could fail to accurately anticipate or manage these costs. On occasion we have been asked or required to commit unanticipated additional resources or funds to complete projects or fulfill sales and support contracts. Our acquisitions of certain OSS assets from Nortel Networks in February 2002 and Orchestream Holdings plc in February 2003, and associated customer obligations, may intensify these risks.

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

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

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

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

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

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

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

We have entered into relationships with third party systems integrators and hardware platform and software applications developers. We rely on these third parties to assist our customers and to lend expertise in large scale, multi-

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system implementation and integration projects, including overall program management and development of custom interfaces for our products. Should these third parties go out of business or choose not to provide these services, we may be forced to develop those capabilities internally, incurring significant expense and adversely affecting our operating margins. In addition, we have derived and anticipate that we will continue to derive a significant portion of our revenues from customers that have established relationships with our marketing and platform alliances. We could lose sales opportunities if we fail to work effectively with these parties or fail to grow our base of marketing and platform alliances.

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

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

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

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

OUR INTERNATIONAL OPERATIONS MAY BE DIFFICULT AND COSTLY.

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

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

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

We have acquired other businesses and may make additional acquisitions, or engage in joint business ventures in the future that may be difficult to integrate, disrupt our business, dilute stockholder value, complicate our management tasks and affect our operating results. In February 2002 we completed the acquisition of certain OSS assets from Nortel Networks that added service activation and other products to our product portfolio, and in February 2003 we completed the acquisition of Orchestream Holdings plc, a manufacturer of IP network management software located in the United Kingdom. Acquisitions and investments in businesses involve significant risks, and our failure to successfully manage acquisitions or joint business ventures could seriously harm our business. Our past acquisitions and potential future acquisitions or joint business ventures create numerous risks and uncertainties including:

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

THE VALUE OF OUR ASSETS MAY BECOME IMPAIRED.

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

During the first quarter of 2003, we recorded impairment charges of $2.2 million for goodwill.

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

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

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

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

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

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

Our success depends in part on our proprietary software technology. We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect our technology. We cannot guarantee that the steps we have taken to assess and protect our proprietary rights will be adequate to deter misappropriation of our intellectual property, and we may not be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. If third parties infringe or misappropriate our copyrights, trademarks, trade secrets or other proprietary information, our business could be seriously harmed. In addition, although we believe that our proprietary rights do not infringe on the intellectual property rights of others, other parties may assert infringement claims against us or claim that we have violated their intellectual property rights. These risks may be increased by the addition of intellectual property assets through business or product acquisitions. Claims against us, either successful or unsuccessful, could result in significant legal and other costs and may be a distraction to management. We currently focus on intellectual property protection within the United States. Protection of intellectual property outside of the United States will sometimes require additional filings with local patent, trademark, or copyright offices, as well as the implementation of contractual or license terms different from those used in the United States. Protection of intellectual property in many foreign countries is weaker and less reliable than in the United States. As our business expands into foreign countries, costs and risks associated with protecting our intellectual property abroad will increase. We also may choose to forgo the costs and related benefits of certain intellectual property benefits in some of these jurisdictions.

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

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

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

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

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