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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

OR

For the transition period from              to             

Commission file number:  000-31409

MOTIVE, INC.

(Exact name of registrant as specified in its charter)

(512) 339-8335

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

(Title of class)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $172,429,508, based on the closing price as of June 30, 2004. Shares of Common Stock held by each executive officer, director, and stockholders known by the registrant to own more than 5% or more of the outstanding stock based on information known to us, have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 28, 2005 there were 26,028,532 outstanding shares of the common stock of Motive, Inc.

DOCUMENTS INCORPORATED BY REFERENCE

Part III—Portions of the registrant’s definitive Proxy Statement to be issued in conjunction with its 2005 Annual Meeting of Stockholders currently scheduled to be held on May 20, 2005 are incorporated by reference into Part III of this report. Except as expressly incorporated by reference, the registrant’s proxy statement shall not be deemed to be part of this report.

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MOTIVE, INC.

FORM 10-K

FOR FISCAL YEAR ENDED DECEMBER 31, 2004

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CAUTIONARY STATEMENT

The statements contained in this Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management. Words such as “we expect,” “anticipate,” “target,” “project,” “believe,” “goals,” “estimate,” “potential,” “predict,” “may,” “might,” “could,” “intend,” variations of these types of words and similar expressions are intended to identify these forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.

Among the important factors that could cause actual results to differ materially from those indicated by our forward-looking statements are those discussed below in “Management Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors that May Affect Future Results” and elsewhere in this report. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.

PART I

Market Overview

A large and increasing number of Internet users have high-speed connectivity, and many businesses are capitalizing on this fact by launching new, networked product and service offerings. While these offerings allow for increased revenue growth and the organizational speed and flexibility demanded by today’s competitive landscape, there are risks and difficulties associated with deploying them. Specifically, businesses must be able to both maintain the ongoing health of a networked service, and reliably change the service in response to market dynamics and user needs. To address these challenges, we believe that providers of networked product and service offerings are demanding a new generation of intelligent management software that uses various levels of automation to allow networked products and services to manage themselves, requiring manual intervention only when necessary. At its core, intelligent management software applies logic to networks and systems to remove manual constraints and high labor costs that keep businesses from reaping the full economic opportunity that networked services provide.

Company Overview

Motive, Inc. is a Delaware corporation formed in 1997. We are a leading supplier of management software for networked products and services. Our products build intelligent automation into networked products and services to expedite or eliminate various management tasks that both businesses and end-users must undertake in order to launch, maintain or update the products and services. Since our inception in 1997, more than one hundred businesses have used our software to design self-management into more than 200 different networked product and service offerings that they market and sell to their customers. Examples of these offerings include:

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Some of the key benefits that our customers derive from our built-in management approach include the ability to:

Motive Products and Services

Our products and services automate different types of management tasks required to maintain the ongoing health of a networked product or service and to reliably manage its change. They are either used internally by providers’ operations employees or by end-users of a networked service. These products fall into two categories – broadband related products and corporate enterprise related products. See “—Management’s Discussion and Analysis of Financial Condition and Results of Operation — Revenue” and Note 15 to the consolidated financial statements for financial information about these two product categories. The chart below summarizes some of the key features and benefits of our products:

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Customers

Our customer base is comprised of telecommunications providers, cable service providers, Internet service providers, hardware vendors, independent software vendors and corporate enterprises, across various industries. Our customers either deploy our software in their environment, or, to a lesser extent, use our hosting and operations infrastructure to deploy and support our software.

Licensing

We license our software to customers under non-exclusive license agreements on a fixed term or perpetual basis. In 2004, 79% of the licenses that we entered into were for a fixed term, as opposed to perpetual. The term of our licenses is typically three years. Our license agreements generally restrict the use of our software to a specific customer product or service as well as the usage of a particular Motive product or service. We believe that licensing our products in this manner allows our customers to license only the software they need and allows us the opportunity to expand our agreements and execute renewal agreements over time.

We experience seasonality in our revenue, with the fourth quarter of the year typically having the highest revenue for the year. We believe that this seasonality results primarily from customer budgeting cycles and our sales compensation model, and we expect this seasonality to continue.

Services

Our products are complemented by a set of professional and managed services that primarily assist our customers in rapidly deploying our solutions; optimizing business processes; and measuring the financial impact of our products.

Deployment Services.    Customers utilize our deployment services to install, configure and deploy Motive solutions on a global, regional and industry-specific level. Our proven methodology includes pre-project preparation, planning, requirements definition, installation and configuration, testing and transitioning into a production environment. Deployment services are typically provided on our customers’ premises and managed by two to four consultants who complete the entire process from initiation to full production often within three to four months. Larger implementations can take four to six months and may involve additional consultants.

Education Services.    Our education services are designed to enable customer independence in ongoing maintenance and administration of our solutions. Drawing on industry-standard instructional principles and real-

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world experience, our training organization delivers a comprehensive series of training programs spanning all aspects of our solutions. These programs can be delivered at the customer’s business, via the Internet or at our state-of-the-art training facilities in Austin, Texas.

Support Services.    Our support organization employs a set of highly skilled support engineers to help customers solve problems and answer questions on a 24x7 basis. Our goal is to ensure customer satisfaction each time we receive a call for support by providing ongoing communication regarding problem status though problem resolution and defining an escalation process when further management assistance is needed. Our support plans include both basic and premium options to meet the needs of our entire customer base – whether related to a small installation or a large-scale deployment.

Business Optimization Services.    Our business optimization services are designed to align our customers’ business processes with Motive solutions, dramatically improving the effectiveness of our products in an organization. Based on best practices gained through multiple deployments worldwide, business optimization services maximize a customer’s ability to achieve business goals, while lowering the overall cost of utilizing our technology. Specific services include usability testing of customer user interfaces, optimization of contact center processes, service data analytics, monitoring and measuring results, and internal marketing of our technology solutions.

Managed Services.    Our managed services offerings are an important part of our overall strategy to help ensure customers get maximum value from their Motive products. These services provide customers flexibility in deploying and running their Motive solutions by offering various levels of hosting, complete solution outsourcing or remote management of our solutions. Our state-of-the-art data center features dedicated staff and advanced technology infrastructure, high system availability, proactive monitoring and disaster recovery capabilities necessary to operate mission-critical services. Our managed services offerings allow our customers to realize the benefits of our solution with reduced project risk, complexity and time to market, while simultaneously achieving increased operational efficiency, service and maintenance levels. Our services also include a wide range of production support, including 24x7 technical assistance and problem resolution and customer-specific services, as well as availability, performance and transaction monitoring.

As of December 31, 2004, we had 121 employees in our services organizations. These employees are based primarily in Austin, Texas, but also reside in other locations throughout the United States, Europe and Asia.

Strategic Alliances

We form strategic alliances with leading hardware and software providers as well as with the systems integrators who deploy technology to enhance our solutions, accelerate the use our solutions in key markets, or increase the value our customers receive from our products.

In 2004, we established relationships with several companies, including Alcatel, BEA and Siebel Systems. A short summary of each of these relationships follows:

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Sales and Marketing

We employ skilled sales professionals and engineers to help customers understand the full value of our solutions. We use this team to sell products primarily through a direct sales model. We generate leads from a variety of sources, including marketing programs and inside sales activities. Initial sales activities typically include a demonstration of our product capabilities, a customer-specific technical and financial analysis and information regarding deployment capabilities.

We develop and execute a variety of marketing programs to build market awareness about us, our solutions and their value to potential customers. A broad mix of programs is used to accomplish these goals, including market research, product and strategy updates with industry analysts, business and trade press tours, direct mail and relationship marketing programs, Internet marketing, seminars, industry-specific trade shows, speaking engagements and co-operative marketing with customers and partners. Our marketing organization also produces materials in support of sales to prospective customers that include Internet web sites, programs and materials, brochures, data sheets, white papers, presentations, demonstrations and other marketing tools.

As of December 31, 2004, our sales and marketing organizations consisted of 82 employees located in a variety of locations in the United States, as well as Canada, the United Kingdom, Germany, Switzerland, France, Spain and Japan.

Research and Development

We invest in research and development through both internal development and technology acquisition. This development consists primarily of adding new competitive features to established products, as well as the creation of additional products. We leverage our strategic partner and customer relationships to identify and develop new innovative solutions.

As of December 31, 2004, we have received eight issued patents for our technology innovations over the course of many generations of product development, and we have an additional 15 patent applications currently being reviewed by the United States Patent and Trademark Office. As of December 31, 2004, we had 105 employees in our research and development organization.

Competition

The market for management automation is competitive, rapidly evolving and subject to frequent technological change. Our current and potential competitors in the market vary in size, in industries they serve, in the scope of the products and services that they offer or may offer in the future. Many of our current and potential competitors have greater financial, marketing and infrastructure resources than we have. As a result, they may be able to respond more quickly to changes in customer requirements. They may also be able to devote greater resources to sales and marketing and research and development than we can. Competition may also result in changes to pricing policies by us or our competitors, which could adversely affect our business, prospects, future quarterly and annual operating results and financial condition. We may not be able to compete successfully against current and future competitors.

Companies that offer competitive products, may develop competitive products or may adopt a similar business model to ours include the following:

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We believe the principal competitive factors in our industry are:

Intellectual Property and Other Proprietary Rights

Our success heavily depends on our proprietary technology. We rely on a combination of copyright, trade secret, trademark and patent laws, confidentiality procedures, contractual provisions and other similar measures to protect our proprietary information and intellectual property rights. As part of our confidentiality procedures, we enter into proprietary information and invention agreements with our employees and non-disclosure agreements with certain of our consultants, customers, prospective customers and service providers. We also enter into license agreements with respect to our technology, documentation and other proprietary information.

The unauthorized reproduction or other misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it. In addition, the steps we have taken to protect our proprietary rights and intellectual property may not be adequate to deter misappropriation. We may not be able to detect unauthorized use of our proprietary information or take appropriate steps to enforce our intellectual property rights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our software or technology that we consider proprietary and third parties may attempt to develop similar technology independently.

We currently hold a trademark registration in the United States for the Motive name, our logo and certain marks associated with our product suite. We also hold a trademark registration of, or have pending applications for the trademark registration of, the Motive name, our logo and for certain marks associated with our product suite in certain countries in North America, South America, Europe, Asia and Australia. In addition, as of December 31, 2004, we have eight patents issued and 15 pending patent applications for technology related to our product suite. Our patents have expiration dates ranging from 2018 to 2020. It is possible that our patents, copyrights or registered trademarks could be challenged and invalidated. In addition, existing patent, copyright and trademark laws afford only limited protections. Effective protection of intellectual property rights may be

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unavailable or limited in certain countries, because the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Monitoring unauthorized use of our patents and trademarks is difficult and expensive, particularly given the global nature and reach of the Internet. Furthermore, it is possible that our competitors will adopt product or service names similar to ours, impeding our ability to protect our intellectual property and possibly leading to customer confusion. Although we are not aware that our products, patents, trademarks, copyrights or other proprietary rights infringe the proprietary rights of third parties, any infringement claims, with or without merit, brought by such third parties could be time-consuming and expensive to defend.

Employees

As of December 31, 2004, we had 351 total employees. Our future success will depend on our continuing ability to attract, train and retain highly qualified technical, sales and managerial personnel. Our employees are not represented by a collective bargaining agreement and we have never experienced a strike or similar work stoppage. We consider our relations with our employees to be good.

Other Information

We are subject to the informational requirements of the Securities Exchange Act of 1934 (the Exchange Act). As a result, we file periodic reports, proxy statements, and other information with the Securities and Exchange Commission (the SEC). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street, NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy, and information statements and other information regarding issuers that file electronically. You can access financial and other information on the investor relations portion of our website at www.motive.com. We have made all reports and amendments to reports that we have filed with the SEC available on our website. The content on any website referred to in this report is not incorporated by reference into this report unless expressly noted otherwise.

Our principal administrative, sales and marketing and research and development facility is located in Austin, Texas and consists of approximately 117,300 square feet of office space under a lease that expires December 2012. We also maintain offices for sales and support personnel in Pleasanton, California; Denver, Colorado; Atlanta, Georgia; Boston, Massachusetts; Minneapolis, Minnesota; Toronto, Canada; Paris, France; Zurich, Switzerland; Munich, Germany; London, England; and Tokyo, Japan. We believe that our facilities are adequate for our current needs and that suitable additional or substitute space will be available as needed to accommodate foreseeable expansion of our operations.

From time to time, we may be involved in litigation relating to claims arising out of our ordinary course of business. United Parcel Service General Services Co. (“UPS”) has alleged that we have breached various provisions of a License Agreement for OEM Partners, dated as of May 23, 2000 (the “License Agreement”), pursuant to which we agreed to license and support software to be used by UPS, in exchange for the payment by UPS of license and maintenance fees. UPS is seeking a refund of fees totaling $5,181,670. The terms of the License Agreement call for binding arbitration to resolve any dispute between the parties. UPS has served us with a demand for arbitration, the arbitration process is in its discovery phase, and a date for the arbitration has been set for July of 2005. We believe that we have valid defenses to the claims of UPS and intend to defend the matter vigorously, although we cannot predict its final outcome.

No matters were submitted to a vote of our stockholders during the quarter ended December 31, 2004.

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PART II

Market of Common Stock

Our common stock has been listed on the NASDAQ National Market under the symbol “MOTV” since June 25, 2004. Before that date, there was no public market for shares of our common stock. The following table presents, for the periods indicated, the high and low sales prices per share of our common stock as reported on the NASDAQ National Market:

Holders of Record

As of February 28, there were approximately 392 holders of record (not including beneficial holders of stock held in street name) of the common stock.

Dividend Policy

We have never declared or paid any cash dividends on our capital stock since our inception, and do not intend to do so in the foreseeable future. We currently expect that we will retain any future earnings to fund the operation and expansion of our business. In addition, our line of credit with Silicon Valley Bank prohibits us from declaring or paying dividends without the bank’s consent.

Securities Authorized for Issuance Under Equity Compensation Plans

Information regarding the securities authorized for issuance under our equity compensation plans can be found under Item 12 of this report.

Sales of Unregistered Securities

During the fiscal year ended December 31, 2004, we issued and sold the following unregistered securities:

The sales of the above securities were considered to be exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions under compensatory benefit plans and contracts relating to compensation provided under Rule 701. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with a view to or for sale with any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in these transactions. All recipients had adequate access, through their relationship with us, to information about us.

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Use of Proceeds from Sales of Registered Securities

The Securities and Exchange Commission declared our registration statement effective on June 24, 2004, which we filed on Form S-1 (Registration No. 333-111030) under the Securities Act of 1933 in connection with the initial public offering of our common stock. The managing underwriters of the offering were J.P. Morgan Securities, Inc., acting as sole book-runner and co-lead manager, Thomas Weisel Partners LLC, acting as co-lead manager, and Friedman, Billings, Ramsey & Co., Inc., Needham & Company, Inc. and America’s Growth Capital, LLC, acting as co-managers.

On June 30, 2004, we completed our initial public offering in which we sold 5,000,000 shares of our common stock at $10 per share, for an aggregate public offering price of $50 million. We currently have approximately $25.3 million of the offering proceeds available for working capital and general corporate purposes. Since the date of our quarterly report on Form 10-Q for the quarter ended September 30, 2004, we applied approximately $100,000 of offering proceeds to cover additional offering related costs and expenses. In addition, in December 2004 we used approximately $6.0 million of the offering proceeds to repay in full outstanding term loans.

Issuer Purchases of Equity Securities

The following table provides information with respect to any purchase made by or on behalf of the Company or any “affiliated purchaser” of shares of the Company’s common stock during the quarter ended December 31, 2004:

ISSUER PURCHASES OF EQUITY SECURITIES

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The following table presents our selected consolidated financial data. The selected consolidated statement of operations data for the years ended December 31, 2002, 2003 and 2004 and the selected consolidated balance sheet data at December 31, 2003 and 2004, are derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for the years ended December 31, 2000 and 2001 and the selected consolidated balance sheet data at December 31, 2000, 2001 and 2002 are derived from audited consolidated financial statements, including the notes thereto, not included in this Annual Report on Form 10-K. The historical results are not necessarily indicative of results to be expected in any future period. You should read the data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this report. Additionally, the following discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. In some cases, forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” and similar expressions. In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors that May Affect Future Results”. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.

Overview

We are a leading supplier of management software for networked products and services. Our products build intelligent automation into networked products and services to expedite or eliminate various management tasks that both businesses and end-users must undertake in order to launch, maintain or update the products and services. Since our inception in 1997, more than one hundred businesses have used our software to design self-management into more than 200 different product and service offerings that they market and sell to their customers.

Our future success will depend on many factors, including but not limited to:

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In evaluating our financial condition and operating performance, our management team and our board of directors focus on a wide variety of information and performance metrics, including, among others, the following:

The principal operational challenge that we face is the fact that our quarterly revenue and results of operations are difficult to predict. Unlike more established software vendors, we have experienced, and expect to continue to experience, fluctuations in revenue and operating results from quarter to quarter. Weak capital spending and competitive pressures may challenge our future financial performance. Additionally, we typically derive a significant portion of our revenue each quarter from a number of license agreements closed in the last month of a quarter. If we fail to close certain agreements that are expected to be completed toward the end of a quarter, our quarterly results would suffer.

To address these challenges, we intend to continue to invest to enhance our current products and services and to develop new products and services. We also intend to increase our services, sales and development resources, and to invest in the expansion of our operations outside North America, which represented 37% of our revenue in 2004. We may seek to accomplish these expansions by acquiring businesses that possess products, technology, or operations that are complementary to ours.

Another operational challenge that we face is the fact that our operating expenses are, to a large extent, fixed in the short term. If our revenue falls below our expectation in a quarter and we are not able to greatly reduce our operating expenses in response, our operating results for that quarter could be adversely affected. To address this challenge, we attempt to closely monitor our cost structure and operating expense trends, as well as to closely monitor our sales pipeline and related sales activities.

In addition, our ability to compete effectively will depend on the timely introduction and success of future software products and releases and the ability of our products to interoperate and perform well with existing and future leading databases, applications, operating systems and other platforms. To address this challenge, we have made and will continue to make significant investments in research and development to keep pace with technological change in our industry.

On June 30, 2004, we completed our initial public offering in which we sold 5 million shares of our common stock at $10 per share, for an aggregate public offering price of $50.0 million. Our sale of shares of common stock resulted in aggregate net proceeds to us of approximately $43.8 million. See Note 2 to the accompanying consolidated financial statements for additional information.

We intend the following discussion of our financial condition and results of operations to provide information that will assist in understanding our financial statements, the changes in certain key items in those

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financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our financial statements.

Sources of Revenue

Through December 31, 2004, substantially all of our revenue was derived from licensing our product suite and providing related services. Customers pay us license fees for the right to use our products for a fixed-term or a perpetual basis. For the years ended December 31, 2003 and 2004, 78% and 79%, respectively, of the license agreements we entered into were fixed-term and 22% and 21%, respectively, were perpetual. The term of our licenses is typically three years. We price our license fees based on an expected volume of usage during the license term.

Our licensing arrangements may also include the provision of certain services. Services revenue is comprised of revenue from professional services, such as consulting services, maintenance and support services and hosting and managed services. Consulting services include a range of services such as installation, implementation and non-complex interface development for the customer’s specific applications. Maintenance and support services represent technical support of our software products and include the right to unspecified product upgrades on an if-and-when available basis. Hosting and managed services involve remote management of our solutions.

We experience seasonality in our revenue, with the fourth quarter of the year typically having the highest revenue for the year. We believe that this seasonality results primarily from customer budgeting cycles and our sales compensation model. We expect that this seasonality will continue.

In January 2003, we acquired BroadJump, a provider of solutions for broadband companies, to solidify our position as a leader in management software. As a result, we assumed liabilities related to existing software arrangements with a fair value of approximately $40.1 million. The fair value of these assumed liabilities, which was recorded as deferred revenue, relates to the remaining contractual obligations under the BroadJump software arrangements and is being recognized ratably as services revenue acquired in business combination over the remaining life of the individual software arrangements. This revenue will continue to decline on a quarterly basis through 2006 when the remaining individual contractual obligations under the BroadJump software arrangements expire. The following table summarizes how this revenue will be recognized in each calendar quarter of 2005 and 2006 (in millions):

Excluding services revenue acquired in business combination, license fees revenue in recent years has typically represented 63% to 77% of total revenue and services revenue has typically represented 23% to 37% of total revenue.

Recent Acquisitions

In January 2003, we acquired BroadJump in exchange for 9,557,977 shares of our capital stock. We accounted for the BroadJump acquisition using the purchase method of accounting and BroadJump has been included in our results of operations from the date of acquisition. We recorded approximately $73.6 million in goodwill and intangibles in connection with the acquisition.

Peregrine Systems

We entered into a software license arrangement with Peregrine Systems in April 2000, as amended in October 2000, pursuant to which we granted to Peregrine the right to sublicense and distribute certain of our

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software in exchange for minimum license fees of $30 million. In March 2002, we amended the agreement to allow Peregrine to satisfy its payment obligations to us with either cash or Peregrine common stock.

We did not recognize revenue from the Peregrine license arrangement in 2000, as no amounts were due during that year. In 2001, we recognized license revenue of $10.5 million based upon nonrefundable fixed minimum license fees due during the 2001 calendar year. As of December 31, 2001 we had an accounts receivable balance of $6.0 million which was considered collectible based on Peregrine’s past payment history and general creditworthiness.

Pursuant to the amended license arrangement, we received 1,000,000 shares of unregistered Peregrine common stock in the first quarter of 2002. Upon receipt of the shares, we recorded a short-term investment in marketable equity securities of $9.5 million. The fair value of the shares received was determined based on the then-current trading price of the stock. Additionally, in the first quarter of 2002 we credited accounts receivable for $6.0 million and license fees revenue for $3.5 million. We recorded revenue at the time the shares were received because such amount was nonrefundable and we had performed all of our obligations under the amended agreement.

The trading price of Peregrine stock fell from $9.52 on March 31, 2002 to $0.30 on June 30, 2002. Due to the decline in market value of the Peregrine stock, in the second quarter of 2002 we deemed the Peregrine shares to be other than temporarily impaired and recorded an impairment charge of $9.5 million pursuant to Staff Accounting Bulletin (“SAB”) Topic 5M. In August 2002, we received $1.6 million in cash from CIBC pursuant to the termination and settlement of an agreement in connection with our attempted sale of a portion of the Peregrine shares. We recorded the receipt of such cash as a recovery of impairment on investment during the quarter ended September 30, 2002.

Peregrine filed for bankruptcy in September 2002. Peregrine’s plan of reorganization provided for satisfaction of Peregrine’s obligations by payments to us of cash totaling $9.0 million, and Peregrine’s return to us of 416,667 shares of our common stock that had been previously issued by us to Peregrine for a cash purchase price of $11.0 million. The cash payments totaling $9.0 million are comprised of a $4.0 million payment that was paid in August 2003 and four annual payments of $1.25 million to be made over the following four years. We recognize other income from this arrangement when cash or shares are actually received. During 2003, we recognized approximately $6.1 million in other income from this arrangement, based upon our receipt of $4.0 million in cash and the return of 416,667 shares of our common stock. The 416,667 shares of common stock were recorded at $5.00 per share or approximately $2.1 million, which was the then current fair value of our common stock as determined by our board of directors. During 2004, we received $1.25 million in cash pursuant to this arrangement, which has been recorded as other income.

Critical Accounting Policies

Revenue Recognition

We recognize revenue in accordance with the American Institute of Certified Public Accountants’ (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. In addition, we apply the provisions of the Emerging Issues Task Force (“EITF”) Issue No. 00-3, Application of AICPA SOP 97-2 to Arrangements that Include the Right to Use Software Stored on Another Entity’s Hardware, to our managed services software transactions.

License fees revenue is comprised of fees for term and perpetual licenses of our software. To date, we have not entered into an arrangement solely for the license of products and, therefore, we have not demonstrated vendor specific objective evidence (“VSOE”) of fair value for the license element. We recognize revenue for the fees associated with both perpetual and term licenses using the residual method in accordance with SOP 98-9 regardless of any separate prices stated within the contract for each element. Under the residual method, the

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arrangement fee is first allocated to the undelivered elements based upon their VSOE of fair value; the remaining arrangement fee, including any discount, is allocated to the delivered element. Therefore, if and when we offer discounts on professional services or other elements, those discounts are applied to the license portion of the arrangement. License fees revenue is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no unfulfilled obligations remain, the fee is fixed or determinable and collectibility is probable.

If the fee for the license has any payment terms that are in excess of our normal payment terms, the fee is considered to not be fixed or determinable. In this scenario, the amount of revenue recognized is limited to the amount currently due from the customer. In such arrangements, license fees are recognized as license fees revenue as the related amounts become due. Because each such arrangement is individually negotiated, the payment schedule and resulting revenue recognition associated with each arrangement can vary.

If an arrangement includes a right of acceptance or a right to cancel, revenue is recognized when acceptance is received or the right to cancel has expired.

License fees revenue from arrangements with resellers involving nonrefundable fixed minimum license fees are recognized when payment becomes due from the reseller and delivery of the product has occurred, assuming no significant vendor obligations remain. Royalties related to such reseller arrangements in excess of the fixed minimum amounts are recognized as revenue when such amounts are reported to us.

Services revenue is comprised of revenue from professional services, such as consulting services, maintenance and support, and hosting and managed software services. Generally, we have determined that the service elements of our software arrangements are not essential to the functionality of the software. We have also determined that our professional services (1) are available from other vendors, (2) do not involve a significant degree of risk or unique acceptance criteria, and (3) qualify for separate accounting as we have sufficient experience in providing such services.

VSOE of fair value of services in multiple element arrangements is based upon rates for consulting and training services and annual subscription fees for pre-packaged technical support services which we have charged in stand-alone contracts for services. For both perpetual and term licensing arrangements, in accordance with paragraph 57 of SOP 97-2, VSOE of fair value for maintenance is determined by reference to the price the customer has paid or will be required to pay when maintenance is sold separately. VSOE of fair value for maintenance contracts is based upon our pricing practice that maintenance renewal rates are based upon a percentage of the quoted license fees in the related contract.

Consulting and training services are recognized as services revenue as the related consulting or training services are performed and payments become due. Maintenance revenue is deferred and recognized on a straight-line basis as services revenue over the life of the related agreement, which is typically one year. Hosting and managed software services revenue is deferred and recognized on a straight-line basis as services revenue over the life of the related agreement, which typically ranges from one month to one year.

In January 2003, we assumed liabilities related to existing software arrangements with a fair value of approximately $40.1 million as a result of the BroadJump acquisition. The fair value of these assumed liabilities, which was recorded as deferred revenue, relates to the remaining contractual obligations under the BroadJump software arrangements and is being recognized ratably as services revenue acquired in business combination over the remaining life of each software arrangement. This revenue will continue to decline on a quarterly basis through 2006 when the remaining individual contractual obligations under the BroadJump software arrangements expire.

Accounts receivable include amounts due from customers for which revenue has been recognized. Deferred revenue includes amounts received from customers for which revenue has not been recognized.

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Allowance for Doubtful Accounts

We continuously assess the collectibility of outstanding customer invoices and in doing so, we maintain an allowance for estimated losses resulting from the non-collection of customer receivables. In estimating this allowance, we consider factors such as: historical collection experience; a customer’s current credit worthiness; customer concentration; age of the receivable balance, both individually and in the aggregate; and general economic conditions that may affect a customer’s ability to pay. Actual customer collections could differ from our estimates and accordingly could exceed our related loss allowance.

Goodwill and Other Intangible Assets

In January 2003, we acquired BroadJump and recorded certain intangibles, including acquired technology, customer contractual relationships, order backlog and non-competition agreements. Amounts allocated to acquired technology, customer contractual relationships and order backlog are being amortized over the respective assets’ estimated useful lives of four to five years using a method of amortization that reflects the pattern in which their economic benefits are consumed based upon estimated contributions to discounted cash flows during the applicable period. Amounts allocated to non-compete agreements are being amortized over their estimated useful lives of three years using the straight line method. We periodically review the estimated useful lives and fair value of our identifiable intangible assets, taking into consideration any events or circumstances which might result in a diminished fair value or revised useful life.

We assess whether goodwill and indefinite-lived intangibles are impaired on an annual basis. Upon determining the existence of goodwill and/or indefinite-lived intangibles impairment, we measure that impairment based on the amount by which the book value of goodwill and/or indefinite-lived intangibles exceeds its fair value. The implied fair value of goodwill is determined by deducting the fair value of a reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if that reporting unit had just been acquired and the purchase price were being initially allocated. Additional impairment assessments may be performed on an interim basis if we encounter events or changes in circumstances that would indicate that, more likely than not, the book value of goodwill and/or indefinite-lived intangibles has been impaired.

Stock-Based Compensation

We account for our employee stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees. We make disclosures regarding employee stock-based compensation using the fair value method in accordance with SFAS No. 123, Accounting for Stock Based Compensation. We have calculated the fair value of options granted and have determined the pro forma impact on net income (loss). We use an accelerated method of amortization for both book and pro forma stock based compensation. We account for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18, Accounting for Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.

Results of Operations

In view of our limited operating history and changes in the general economic climate, we believe that period-to-period comparisons of revenue and operating results are not necessarily meaningful and should not be relied upon as indications of future performance. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies in new and rapidly evolving markets. Additionally, despite our revenue growth during prior periods, we do not believe that historical growth rates are necessarily sustainable or indicative of future growth.

The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted

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accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions are reviewed periodically, and actual results may differ from these estimates under different assumptions or conditions.

The following table sets forth, for the periods indicated, our consolidated statements of operations as a percentage of total revenue.

Comparison of the Fiscal Years Ended December 31, 2002, 2003 and 2004

Revenue

Total revenue increased by $34.2 million from $58.1 million in 2002 to $92.3 million in 2003 and by $5.7 million in 2004 to $98.0 million. The increase in 2003 was due to $24.9 million of services revenue acquired as a result of the BroadJump acquisition and an increase of $11.0 million of other services revenue, partially offset by

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a $1.7 million decrease in license fees revenue. The increase in 2004 was due to an increase of $13.2 million in license fees revenue and $9.0 million of other services revenue, partially offset by a $16.5 million decrease in services revenue acquired as a result of the BroadJump acquisition. The services revenue acquired as a result of the BroadJump acquisition will decline on a quarterly basis through 2006 when the remaining individual contractual obligations under the BroadJump software arrangements expire (see “—Overview—Sources of Revenue”).

Revenue from North America increased by $28.2 million from $46.4 million in 2002 to $74.6 million in 2003 and decreased by $12.7 million in 2004 to $61.9 million. Revenue from Europe and Asia Pacific increased by $6.1 million from $11.6 million in 2002 to $17.7 million in 2003 and by $17.9 million in 2004 to $35.6 million. Revenue from outside North America represented 20%, 19% and 37% of our total revenue for 2002, 2003 and 2004, respectively. The increase in revenue from outside North America is consistent with our focus on further expanding our European and Asia Pacific operations. However, as a result of the application of our revenue recognition policies, the amount of revenue attributable to any customer, and thus the amount of revenue attributable to any specific geographic area, can vary significantly within any period. For more information about our international revenue and expansion plans, please see “—Quantitative and Qualitative Disclosures About Market Risk.” Although U.S. generally accepted accounting principles require us to report our revenue in terms of revenue from customers in the United States and revenue from customers outside the United States and we have done so elsewhere in this report (see “— Quantitative and Qualitative Disclosures About Market Risk”), we believe that it is more meaningful to view our business in terms of revenue from customers in North America and revenue from customers outside of North America.

Our revenue recognition policy requires that we only recognize revenue when persuasive evidence of an agreement exists, delivery of the product has occurred, no unfulfilled vendor obligations remain, the fee is fixed or determinable and collectibility is probable. If the fee for a license has payment terms that exceed our normal payment terms, the fee is not considered to be fixed or determinable and we only recognize license revenue when amounts actually become due. Therefore, the revenue contribution by a customer in any given period is dictated by the payment terms associated with such customer’s agreement. As a result, the revenue—both in absolute dollars and as a percentage of total revenue —attributable to any particular customer in any given period can vary significantly. Hewlett-Packard constituted 19%, 2% and 3% of our revenue in 2002, 2003 and 2004, respectively, and Mercury Interactive constituted 0%, 11% and 3% of our revenue in 2002, 2003 and 2004, respectively. No individual customer constituted 10% or more of total revenue in 2004.

We market one set of products to broadband service providers, and a separate set of products to corporate enterprises. The products that we market to corporate enterprises are Motive Remote Service Manager, Motive Desktop Manager, Motive Triage and Resolution, and Motive Profile. We sell our Motive Remote Service Manager and Motive Desktop Manager products primarily to technology hardware vendors, software vendors, and IT departments of corporations. This group of customers comprised the majority of our annual revenue contributed by corporate enterprises through 2004. In 2004 we began marketing Motive Triage and Resolution and Motive Profile, which are focused on configuration management for software applications. We are marketing these products primarily to software vendors and application development groups within other corporations. Revenue from Motive Triage and Resolution and Motive Profile comprised a negligible amount of our 2004 total revenue.

In 2002, 2003 and 2004, broadband service providers comprised 32%, 64% and 78%, respectively, and corporate enterprises comprised 68%, 36% and 22%, respectively, of our of our total revenue (excluding revenue acquired in business combination). The decrease in revenue from corporate enterprises is primarily due to a decline in sales of our Remote Service Manager and Desktop Manager products, and we expect this trend to continue. However, we expect this decline will be partially offset by revenue from our new configuration application management products in 2005.

License Fees. Revenue from license fees decreased by approximately $1.7 million from $44.7 million in 2002 to $43.0 million in 2003, and increased by $13.2 million in 2004 to $56.2 million. License fees revenue

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represented 77%, 47% and 57% of our total revenue for 2002, 2003 and 2004, respectively. License fees declined as a percentage of total revenue in 2003 primarily because of the significant increase in services revenue as a result of the BroadJump acquisition.

The decrease in license fees from 2002 to 2003 was due to an $8.0 million decrease in license fees revenue from existing customers from $23.3 million to $15.3 million, partially offset by a $6.3 million increase in license fees revenue from new license customers from $21.4 million to $27.7 million. Approximately $6.0 million of the decrease in license fees revenue from existing customers in 2003 was attributable to the reduction in revenue recognized from a license agreement previously entered into with Hewlett-Packard due to the fact that the payment terms under that license agreement provided for substantial payments in 2002 and relatively minor payments in 2003. Under our revenue recognition policy described above for payment terms that exceed our normal payment terms, license revenue attributable to this agreement was recognized when amounts actually became due. License fees revenue from new license customers was primarily generated from increased acceptance of our products, as evidenced by the 19 new customers that executed license agreements during 2003. Approximately $9.9 million of license fees revenue from new license customers in 2003 was attributable to international sales.

The increase in license fees from 2003 to 2004 was due to a $20.4 million increase in license fees revenue from existing customers from $15.3 million to $35.7 million, partially offset by a $7.2 million decrease in license fees revenue from new license customers from $27.7 million to $20.5 million. The increase in license fees revenue from existing customers was primarily due to revenue recognized on contracts entered into in previous periods based on their negotiated payment terms and the application of our revenue recognition policy, new product sales into existing customers and renewals of existing term contracts. In accordance with our revenue recognition policy described above, the decrease in license fees revenue from new customers was primarily attributable to the fact that Mercury, a new customer in 2003, contributed 11% of our 2003 total revenue, whereas no new customer contributed a significant portion of our 2004 total revenue.

Services.    Our revenue from services increased by $35.9 million from $13.4 million in 2002 to $49.3 million in 2003 and decreased by $7.5 million in 2004 to $41.8 million. Services revenue represented 23%, 53% and 43% of our total revenue in 2002, 2003 and 2004, respectively.

Approximately $24.9 million of the increase in services revenue in 2003 was due to services revenue from contracts acquired in the BroadJump acquisition. The remainder of the increase was due to an increase of approximately $4.5 million in consulting and training services, approximately $3.7 million due to growth in the number and size of maintenance contracts, and approximately $2.8 million due to revenue from our hosting and managed service business which was introduced during 2003.

The reasons for the decrease in services revenue in 2004 are as follows: a decrease of approximately $16.5 million was due to expected declining services revenue from contracts acquired in the BroadJump acquisition and a decrease of approximately $1.5 million in hosting revenue. These decreases were partially offset by an $8.1 million increase in consulting and training services revenue and a $2.4 million increase in maintenance revenue.

Service revenue acquired in business combinations was 27% and 9% of our total revenue for the years ended December 31, 2003 and 2004, respectively. This revenue will decline on a quarterly basis through 2006 when the remaining individual contractual obligations under the BroadJump software arrangements expire (see “—Overview—Sources of Revenue”).

Cost of Revenue

Cost of License Fees Revenue.    Cost of license fees revenue includes third-party software royalties, product packaging, documentation production and shipping costs related to software used by our customers. Cost of

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license fees revenue increased by $0.8 million from $1.2 million in 2002 to $2.0 million in 2003 and decreased by $1.3 million in 2004 to $0.7 million, representing 3%, 5% and 1% of license fees revenue for 2002, 2003 and 2004, respectively. Cost of license fees revenue was higher in 2003 than in 2002 and 2004 primarily due to nonrecurring royalties paid in 2003 for our right to integrate and distribute certain third-party software to several of our customers. We have expensed all costs as they have been incurred in the research and development of our software products and, as a result, cost of license fees revenue includes no amortization of capitalized software development costs.

Amortization of Acquired Technology.    As a result of our January 2003 purchase of BroadJump, we acquired certain intangible technology assets having an estimated fair value of $9.4 million and an estimated useful life of five years. Amortization of these intangible assets in the amount of $448,000 and $916,000 are recorded as a cost of revenue in 2003 and 2004, respectively. These amounts represented less than 1% of revenue in 2003 and 2004. The increase in amortization of acquired technology is due to the acquired technology being amortized over its estimated useful life using a method of amortization that reflects the pattern in which its economic benefits are consumed based upon estimated contributions to discounted cash flows during that period.

Cost of Services Revenue.    Cost of services revenue includes salaries and related expenses for our customer support, consulting, training and hosting and managed services organizations, third-party contractor expenses and an allocation of our facilities, communications and depreciation expenses. For the years ended December 31, 2003 and 2004, cost of services revenue also includes the costs incurred in connection with servicing the remaining contractual obligations under the acquired BroadJump software arrangements. Costs associated with these remaining obligations decreased by $7.5 million from $14.1 million in 2003 to $6.6 million in 2004.

Excluding the costs incurred in connection with servicing the BroadJump software arrangements, total cost of services revenue increased by $4.4 million from $12.3 million in 2002 to $16.7 million in 2003 and by $5.2 million in 2004 to $21.9 million. Expansion of our professional services organization to support the increase in our services revenue and the addition of the BroadJump hosting and managed services organization contributed $3.7 million to the increase in 2003 as did $700,000 in increased third-party consulting costs. The increase in services costs in absolute dollars in 2004 was due to an increase of approximately $2.7 million in salary costs, $1.3 million in third-party consulting costs, and $1.2 million in travel related costs.

Total cost of services revenue represented 91%, 62% and 68% of total services revenue in 2002, 2003 and 2004, respectively. Excluding the costs and revenue associated with the acquired BroadJump software arrangements, cost of services revenue represented 68% and 65% of total services revenue in 2003 and 2004, respectively.

Operating Expenses

Sales and Marketing. Sales and marketing expenses consist of salaries and related costs of our sales and marketing organizations, sales commissions, travel and entertainment expenses, costs of our marketing programs, including public relations, and collateral materials, and rent and facilities costs associated with our regional sales offices. Sales and marketing expenses increased by $6.9 million from $26.1 million in 2002 to $33.0 million in 2003 and by $0.3 million in 2004 to $33.3 million, representing 45%, 36% and 34% of total revenue for 2002, 2003 and 2004, respectively. The increase in absolute dollars in 2003 was due to a $3.5 million increase in sales commissions and incentives due to the growth in revenue, a $1.8 million increase in salary costs, a $1.1 million increase in travel related costs, and to a lesser extent by an increase of approximately $300,000 in third-party consulting and $200,000 in marketing program expenses during the year ended December 31, 2003. The increase in absolute dollars in 2004 was due to a $1.7 million increase in salary costs and a $300,000 increase in travel related costs. These increases were partially offset by a decrease of $1.3 million in sales commissions and incentives due to a change in our sales incentive plan structure, and a decrease of $400,000 in third-party consulting costs.

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Research and Development.    Research and development expenses consist of employee salaries, benefits, consulting costs and the cost of software development tools and expenses associated with the development of new products, enhancements of existing products and quality assurance activities. Research and development expenses increased by $5.7 million from $11.2 million in 2002 to $16.9 million in 2003 and by $1.3 million in 2004 to $18.2 million, representing 19%, 18% and 19% of total revenue for 2002, 2003 and 2004, respectively. The increase in absolute dollars in 2003 was primarily due to a $4.2 million increase in salary related costs, a $1.1 million increase in third-party consulting costs and a $400,000 increase in travel related costs. The increase in absolute dollars in 2004 was due to a $900,000 increase in third-party consulting and a $400,000 increase in salary related costs.

General and Administrative.    General and administrative expenses consist of salaries and related costs of our administrative, finance, business operations and information technology personnel as well as legal and accounting services and costs associated with our recruiting programs. General and administrative expenses increased by $1.7 million from $6.3 million in 2002 to $8.0 million in 2003 and by $0.7 million in 2004 to $8.7 million, representing 11%, 9% and 9% of total revenue in each of the respective periods. The increase in absolute dollars in 2003 was due to a $2.2 million increase in salary costs and a $100,000 increase in travel related costs. These increases were partially offset by a $400,000 decrease in legal and professional costs as well as a $200,000 decrease in bad debt expense. The increase in absolute dollars in 2004 was primarily due to a $600,000 increase in legal and professional costs, a $200,000 increase in recruiting fees related to an outside director search and a $100,000 increase in costs related to our investor relations programs. These increases were partially offset by a $200,000 decrease in salary costs resulting from a reduction in personnel in the general and administrative organization.

Amortization of Intangibles.    In January 2003, we recorded $13.0 million of definite-lived intangibles in connection with the BroadJump acquisition, which resulted in amortization expense of $2.4 million and $3.2 million for 2003 and 2004, respectively, representing 3% of our total revenue for each of the respective periods. These intangibles are being amortized over their estimated useful lives of four to five years through 2008 using a method of amortization that reflects the pattern in which their economic benefits are consumed based upon estimated contributions to discounted cash flows during the applicable period.

Amortization of Deferred Stock Compensation.    We recorded deferred stock compensation in connection with stock options granted to employees and consultants. These amounts represent the difference between the exercise price of certain stock option grants and the deemed fair value of our common stock at the time of such grants. We are amortizing these amounts over the vesting periods of the applicable options using an accelerated method, resulting in amortization expense of $2.1 million in 2002, $1.2 million in 2003 and $2.3 million in 2004. The increase in amortization in 2004 was related to the grant of in-the-money options in the fourth quarter of 2003 and first quarter of 2004, which are being amortized over the vesting periods of the applicable options.

Business Restructuring Charge.    During the first quarter of 2003, we initiated a restructuring program as a result of our integration of BroadJump. We incurred a non-recurring charge of approximately $1.4 million related to severance and other employee termination benefits related to a reduction in workforce of approximately 25 employees in January 2003 as well as costs associated with the closing of duplicative facilities and the elimination of other overlapping efforts. As of December 31, 2003, all termination benefits related to the restructuring had been paid.

Interest Income (Expense), Net

Interest income (expense), net decreased from $(1.2) million in 2002 to $(1.9) million in 2003 and by $0.4 million to $(2.3) million in 2004. The decrease in interest income (expense), net from 2002 to 2003 was due to the increased interest expense incurred on the outstanding subordinated debt, as it was outstanding for a full year in 2003 compared to only one calendar quarter in 2002. The decrease in interest income (expense), net from 2003 to 2004 was primarily due to the $1.5 million write-off of the remaining debt discount on our subordinated debt, which was repaid in full in June 2004.

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Other Income (Expense), Net

In connection with Peregrine’s plan of reorganization in the third quarter of 2003, we recognized approximately $6.1 million in other income based upon our receipt of $4.0 million in cash and the return of 416,667 shares of our common stock. The 416,667 shares of common stock were recorded at $5.00 per share or approximately $2.1 million, which was the then current fair value of our common stock as determined by our board of directors. In the third quarter of 2004, we recognized $1.25 million in cash received as other income related to this agreement.

Loss on Investment

In connection with a software license arrangement between us and Peregrine Systems, we received 1,000,000 shares of unregistered Peregrine common stock in the first quarter of 2002 in satisfaction of certain accounts receivable. Upon receipt of the shares, they were classified as a short-term investment in marketable equity securities. The trading price of Peregrine stock fell from $9.52 on March 31, 2002 to $0.30 on June 30, 2002. Due to the decline in value of the Peregrine stock, in the second quarter of 2002 we deemed the Peregrine shares to be other than temporarily impaired and recorded an impairment charge of $9.5 million. In August 2002, we received $1.6 million in cash from CIBC pursuant to the termination and settlement of an agreement in connection with the attempted sale of a portion of the Peregrine shares. We recorded the receipt of such cash as a recovery of impairment on investment.

Provision for Income Taxes

We have incurred operating losses for all fiscal years from inception through December 31, 2003 and only had a small amount of income in 2004, and therefore have not recorded a material provision for income taxes. Our provision for income taxes consists primarily of foreign income tax withholdings related to international sales. We have recorded a valuation allowance for the full amount of our net deferred tax assets, which include net operating loss, research and development, and foreign tax credit carryforwards, because of the uncertainty regarding their realization. Our accounting for deferred taxes under SFAS No. 109, “Accounting for Income Taxes,” involves the evaluation of a number of factors concerning the realizability of our deferred tax assets. In concluding that a full valuation allowance was required, management primarily considered such factors as our history of operating losses and expected future losses and the nature of our deferred tax assets.

As of December 31, 2004, we had net operating loss, research and development, and foreign tax credit carryforwards of approximately $102 million, $4 million, and $2.8 million respectively. The net operating loss and research and development credit carryforwards will expire at various dates, beginning in 2012, if not utilized. The foreign tax credit carryforward will expire at various dates, beginning 2001, if not utilized. Under the provisions of the Internal Revenue Code, certain substantial changes in our ownership may limit the amount of net operating loss and tax credit carryforwards that could be utilized annually in the future to offset taxable income.

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Quarterly Results of Operations

The following tables set forth our consolidated statement of operations data for the eight quarters ended December 31, 2004, as well as these data expressed as a percentage of our total revenue represented by each item. This information has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this prospectus and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below and present fairly the results of such periods when read in conjunction with the audited consolidated financial statements and notes thereto.