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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q/A

(Amendment No. 1)



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2003



| ̈ | 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 000-23783



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MICROMUSE INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|DELAWARE                                                       |  | 94-3288385                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



139 TOWNSEND STREET

SAN FRANCISCO, CALIFORNIA 94107

(415) 538-9090

(Address, including ZIP code, and telephone number)



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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 ̈No  x



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



78,270,124 shares of Common Stock, $0.01 par value, were outstanding as of May 3, 2004.



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##### Table of Contents

MICROMUSE INC.



TABLE OF CONTENTS



|                               |  |                                                                                                             |  |     
|------------------------------ |  | ----------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                             |  | Page
|                               | 
|Explanatory Note               |  | 3                                                                                                          
|                               | 
|PART I - Financial Information |  |                                                                                                            
|                               |  |                                                                                                            
|Item 1.                        |  | Condensed Consolidated Financial Statements (Unaudited):                                                    |  |     
|                               |  |                                                                                                            
|                               |  | Condensed Consolidated Balance Sheets as of June 30, 2003, as restated and September 30, 2002, as restated  |  | 4   
|                               |  |                                                                                                            
|                               |  | Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2003 and 2002* |  | 5   
|                               |  |                                                                                                            
|                               |  | Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2003 and 2002*           |  | 6   
|                               |  |                                                                                                            
|                               |  | Notes to Condensed Consolidated Financial Statements                                                        |  | 7   
|                               |  |                                                                                                            
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                       |  | 22  
|                               |  |                                                                                                            
|Item 4.                        |  | Controls and Procedures                                                                                     |  | 35  
|                               |  |                                                                                                            
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                                            |  | 36  
|                               | 
|Signatures                     |  | 37                                                                                                         
|                               | 
|Certifications                 |  |                                                                                                            

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|* | The Condensed Consolidated Statements of Operations for the three and nine month periods ended June 30, 2003 and 2002 and the Condensed Consolidated Statements of Cash Flows for the
nine month periods ended June 30, 2003 and 2002 have been restated as described in Note 2 of Notes to Condensed Consolidated Financial Statements.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



2



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##### Table of Contents

MICROMUSE INC.



Explanatory Note



This Amendment No. 1 on Form 10-Q/A for Micromuse Inc.
(the Company) for the quarter ended June 30, 2003 is being filed to amend and restate the items described below contained in the Companys Quarterly Report on Form 10-Q for such period originally filed with the Securities and
Exchange Commission on August 13, 2003.



This Amendment No. 1
amends Part I, Item 1, Financial Statements, Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations, and Item 4 Controls and Procedures, for the following purposes:



| |  | To restate the Companys Unaudited Condensed Consolidated Financial Statements as of June 30, 2003 and September 30, 2002 for the Balance Sheets, for the three and nine month
periods ended June 30, 2003 and 2002 for the Statements of Operations, for the nine month periods ended June 30, 2003 and 2002 for the Statements of Cash Flows, and the related Notes to Condensed Consolidated Financial Statements, as more fully
described in Note 2 to the Condensed Consolidated Financial Statements;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | To amend Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations, to take into account the effects of the restatement; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | To amend Item 4 to reflect the matters discussed above.
| | - | -------------------------------------------------------



Pursuant to SEC Rule 12b-15, this Form 10-Q/A sets forth the complete text of each item of Form 10-Q listed above as amended, omits items of the original
Form 10-Q filed on August 13, 2003, that have not been amended, and includes as Exhibits 31 and 32 new certifications by the Chief Executive Officer and Chief Financial Officer.



In order to preserve the nature and character of the disclosures set forth in such items as originally filed, this Amendment
No. 1 does not reflect events occurring after the filing of the original Quarterly Report on Form 10-Q on August 13, 2003, or modify or update the disclosures presented in the original Quarterly Report on Form 10-Q, except to reflect the revisions
as described above.



3



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##### Table of Contents

Item 1. Condensed Consolidated Financial Statements (Unaudited)



MICROMUSE INC.



CONDENSED
CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)



|                                                                                                                                                        |  |               |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                        |  | June 30,2003  |         |   | September 30,2002 |  
|                                                                                                                                                        |  | (As Restated) |         |   | (As Restated)     |  
|ASSETS                                                                                                                                                  |  |               |         |   |                   |   |         |  
|Current assets:                                                                                                                                         |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                               |  | $             | 88,971  |   |                   | $ | 117,218 |  
|Short-term investments                                                                                                                                  |  |               | 45,957  |   |                   |   | 42,126  |  
|Billed receivables, net                                                                                                                                 |  |               | 6,807   |   |                   |   | 17,916  |  
|Prepaid expenses and other current assets                                                                                                               |  |               | 6,675   |   |                   |   | 5,925   |  
|                                                                                                                                                        |  |               |         |   |                   |   |         |  
|Total current assets                                                                                                                                    |  |               | 148,410 |   |                   |   | 183,185 |  
|Property and equipment, net                                                                                                                             |  |               | 6,081   |   |                   |   | 9,544   |  
|Long-term investments                                                                                                                                   |  |               | 77,344  |   |                   |   | 28,293  |  
|Goodwill, net                                                                                                                                           |  |               | 32,055  |   |                   |   | 30,036  |  
|Other intangible assets, net                                                                                                                            |  |               | 7,895   |   |                   |   | 10,579  |  
|                                                                                                                                                        |  |               |         |   |                   |   |         |  
|                                                                                                                                                        |  | $             | 271,785 |   |                   | $ | 261,637 |  
|                                                                                                                                                        |  |               |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                    |  |               |         |   |                   |   |         |  
|Current liabilities:                                                                                                                                    |  |               |         |   |                   |   |         |  
|Accounts payable                                                                                                                                        |  | $             | 4,538   |   |                   | $ | 2,374   |  
|Accrued expenses                                                                                                                                        |  |               | 20,702  |   |                   |   | 23,830  |  
|Income taxes payable                                                                                                                                    |  |               | 6,171   |   |                   |   | 6,652   |  
|Deferred revenue                                                                                                                                        |  |               | 45,805  |   |                   |   | 36,156  |  
|                                                                                                                                                        |  |               |         |   |                   |   |         |  
|Total current liabilities                                                                                                                               |  |               | 77,216  |   |                   |   | 69,012  |  
|                                                                                                                                                        |  |              
|Stockholders equity:                                                                                                                                   |  |               |         |   |                   |   |         |  
|Preferred stock; $0.01 par value; 5,000 shares authorized no shares issued and outstanding                                                              |  |               |        |   |                   |   |        |  
|Common stock; $0.01 par value; 200,000 shares authorized; 77,174 and 75,194 shares outstanding as of June 30, 2003 and September 30, 2002,
respectively |  |               | 772     |   |                   |   | 752     |  
|Additional paid-in capital                                                                                                                              |  |               | 205,046 |   |                   |   | 196,849 |  
|Treasury stock                                                                                                                                          |  |               | (2,657  | ) |                   |   | (2,657  | )
|Accumulated other comprehensive loss                                                                                                                    |  |               | (1,152  | ) |                   |   | (580    | )
|Accumulated deficit                                                                                                                                     |  |               | (7,440  | ) |                   |   | (1,739  | )
|                                                                                                                                                        |  |               |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                              |  |               | 194,569 |   |                   |   | 192,625 |  
|                                                                                                                                                        |  |               |         |   |                   |   |         |  
|                                                                                                                                                        |  | $             | 271,785 |   |                   | $ | 261,637 |  
|                                                                                                                                                        |  |               |         |   |                   |   |         |  



See accompanying
notes to the condensed consolidated financial statements



4



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##### Table of Contents

MICROMUSE INC.



CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                     |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|---------------------------------------------------- |  | --------------------------- | ------ | - | -------------------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | ------- | -
|                                                     |  | Three months ended June 30, |        |   | Nine months ended June 30, |  
|                                                     |  | 2003                        |        |   | 2002                       |   |        | 2003          |  |   | 2002          |  
|                                                     |  | (As Restated)               |        |   | (As Restated)              |   |        | (As Restated) |  |   | (As Restated) |  
|Revenues:                                            |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|License                                              |  | $                           | 18,233 |   |                            | $ | 20,120 |               |  | $ | 50,390        |   |  | $ | 68,073  |  
|Maintenance and services                             |  |                             | 14,692 |   |                            |   | 14,923 |               |  |   | 42,054        |   |  |   | 46,179  |  
|                                                     |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|Total revenues                                       |  |                             | 32,925 |   |                            |   | 35,043 |               |  |   | 92,444        |   |  |   | 114,252 |  
|                                                     |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|Cost of revenues:                                    |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|License                                              |  |                             | 1,251  |   |                            |   | 1,624  |               |  |   | 3,335         |   |  |   | 4,819   |  
|Maintenance and services                             |  |                             | 2,593  |   |                            |   | 3,095  |               |  |   | 8,115         |   |  |   | 11,594  |  
|Amortization of developed technology                 |  |                             | 1,053  |   |                            |   | 790    |               |  |   | 3,089         |   |  |   | 2,370   |  
|                                                     |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|Total cost of revenues                               |  |                             | 4,897  |   |                            |   | 5,509  |               |  |   | 14,539        |   |  |   | 18,783  |  
|                                                     |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|Gross profit                                         |  |                             | 28,028 |   |                            |   | 29,534 |               |  |   | 77,905        |   |  |   | 95,469  |  
|                                                     |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|Operating expenses:                                  |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|Sales and marketing                                  |  |                             | 14,436 |   |                            |   | 19,781 |               |  |   | 45,833        |   |  |   | 57,010  |  
|Research and development                             |  |                             | 7,417  |   |                            |   | 7,595  |               |  |   | 21,726        |   |  |   | 23,293  |  
|General and administrative                           |  |                             | 3,947  |   |                            |   | 4,140  |               |  |   | 12,623        |   |  |   | 13,459  |  
|Amortization of goodwill and other intangible assets |  |                             | 194    |   |                            |   | 1,977  |               |  |   | 1,115         |   |  |   | 5,931   |  
|Restructuring costs                                  |  |                             | 1,655  |   |                            |   |       |               |  |   | 4,795         |   |  |   |        |  
|                                                     |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|Total operating expenses                             |  |                             | 27,649 |   |                            |   | 33,493 |               |  |   | 86,092        |   |  |   | 99,693  |  
|                                                     |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|Income (loss) from operations                        |  |                             | 379    |   |                            |   | (3,959 | )             |  |   | (8,187        | ) |  |   | (4,224  | )
|Interest and other income, net                       |  |                             | 693    |   |                            |   | 1,071  |               |  |   | 3,378         |   |  |   | 3,706   |  
|                                                     |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|Income (loss) before income tax provision (benefit)  |  |                             | 1,072  |   |                            |   | (2,888 | )             |  |   | (4,809        | ) |  |   | (518    | )
|Income tax provision (benefit)                       |  |                             | (144   | ) |                            |   | (1,216 | )             |  |   | 899           |   |  |   | 20      |  
|                                                     |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|Net income (loss)                                    |  | $                           | 1,216  |   |                            | $ | (1,672 | )             |  | $ | (5,708        | ) |  | $ | (538    | )
|                                                     |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|Per share data:                                      |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|Basic net income (loss)                              |  | $                           | 0.02   |   |                            | $ | (0.02  | )             |  | $ | (0.07         | ) |  | $ | (0.01   | )
|Diluted net income (loss)                            |  | $                           | 0.02   |   |                            | $ | (0.02  | )             |  | $ | (0.07         | ) |  | $ | (0.01   | )
|Weighted average shares used in computing:           |  |                             |        |   |                            |   |        |               |  |   |               |   |  |   |         |  
|Basic net income (loss) per share                    |  |                             | 76,635 |   |                            |   | 74,711 |               |  |   | 76,577        |   |  |   | 74,390  |  
|Diluted net income (loss) per share                  |  |                             | 80,087 |   |                            |   | 74,711 |               |  |   | 76,577        |   |  |   | 74,390  |  



See accompanying
notes to the condensed consolidated financial statements



5



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##### Table of Contents

MICROMUSE INC.



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                |  |                            |          |   |               |   |         |  
|------------------------------------------------------------------------------- |  | -------------------------- | -------- | - | ------------- | - | ------- | -
|                                                                                |  | Nine months ended June 30, |         
|                                                                                |  | 2003                       |          |   | 2002          |  
|                                                                                |  | (As Restated)              |          |   | (As Restated) |  
|Cash flows from operating activities:                                           |  |                            |          |   |               |   |         |  
|Net loss                                                                        |  | $                          | (5,708   | ) |               | $ | (538    | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                            |          |   |               |   |         |  
|Depreciation and amortization                                                   |  |                            | 9,178    |   |               |   | 15,029  |  
|Purchased in process research & development                                     |  |                            | 142      |   |               |   |        |  
|Non-cash compensation expense related to restructuring                          |  |                            | 54       |   |               |   |        |  
|Non-cash expense related to issuance of warrant                                 |  |                            |         |   |               |   | 170     |  
|Tax benefit related to exercise of stock options                                |  |                            | 427      |   |               |   | 56      |  
|Changes in operating assets and liabilities net of acquired amounts:            |  |                            |          |   |               |   |         |  
|Billed receivables, net                                                         |  |                            | 11,088   |   |               |   | 8,449   |  
|Prepaid expenses and other current assets                                       |  |                            | (736     | ) |               |   | 3,925   |  
|Accounts payable                                                                |  |                            | 1,803    |   |               |   | (4,421  | )
|Accrued expenses                                                                |  |                            | (3,714   | ) |               |   | (10,195 | )
|Income taxes payable                                                            |  |                            | (479     | ) |               |   | (11     | )
|Deferred revenue                                                                |  |                            | 9,470    |   |               |   | 4,461   |  
|                                                                                |  |                            |          |   |               |   |         |  
|Net cash provided by operating activities                                       |  |                            | 21,525   |   |               |   | 16,925  |  
|                                                                                |  |                            |          |   |               |   |         |  
|Cash flows from investing activities:                                           |  |                            |          |   |               |   |         |  
|Capital expenditures                                                            |  |                            | (836     | ) |               |   | (2,368  | )
|Purchases of investments                                                        |  |                            | (130,252 | ) |               |   | (50,722 | )
|Proceeds from sales of investments                                              |  |                            | 77,370   |   |               |   | 4,038   |  
|Acquisition of net assets, net of cash acquired                                 |  |                            | (1,538   | ) |               |   |        |  
|Repayment of long term debt assumed upon acquisition                            |  |                            | (855     | ) |               |   |        |  
|                                                                                |  |                            |          |   |               |   |         |  
|Net cash used in investing activities                                           |  |                            | (56,111  | ) |               |   | (49,052 | )
|                                                                                |  |                            |          |   |               |   |         |  
|Cash flows from financing activities:                                           |  |                            |          |   |               |   |         |  
|Proceed from issuance of common stock                                           |  |                            | 7,719    |   |               |   | 4,888   |  
|                                                                                |  |                            |          |   |               |   |         |  
|Net cash provided by financing activities                                       |  |                            | 7,719    |   |               |   | 4,888   |  
|                                                                                |  |                            |          |   |               |   |         |  
|Effects of exchange rate changes on cash and cash equivalents                   |  |                            | (1,380   | ) |               |   | (350    | )
|                                                                                |  |                            |          |   |               |   |         |  
|Net decrease in cash and cash equivalents                                       |  |                            | (28,247  | ) |               |   | (27,589 | )
|Cash and cash equivalents at beginning of period                                |  |                            | 117,218  |   |               |   | 138,261 |  
|                                                                                |  |                            |          |   |               |   |         |  
|Cash and cash equivalents at end of period                                      |  | $                          | 88,971   |   |               | $ | 110,672 |  
|                                                                                |  |                            |          |   |               |   |         |  



See accompanying
notes to the condensed consolidated financial statements



6



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##### Table of Contents

MICROMUSE INC.



NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS



Note 1. Basis of Presentation



The condensed consolidated financial statements are the unaudited
historical financial statements of Micromuse Inc. and subsidiaries (the Company) and reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of
interim period results. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys fiscal year 2003 Form 10-K as filed with the
Securities and Exchange Commission on May 17, 2004. The September 30, 2002, condensed consolidated balance sheet included herein was derived from restated audited financial statements, but does not include all disclosures, including notes, required
by generally accepted accounting principles.



The results of operations for the
current interim period are not necessarily indicative of results to be expected for the entire current year or other future interim periods.



Reclassifications



Certain reclassifications, none of which affected net income, have been made to prior amounts to conform to the current year presentation.



Use of Estimates



The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from these estimates.



On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allocation of technical services department costs among expense categories, provision for doubtful accounts and sales
returns, fair value of investments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, restructuring costs, and contingencies and litigation, among others. We base our
estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results could differ significantly from the estimates made by management with respect to these items and other items that require managements estimates.



The costs of our technical services department are allocated between cost of revenue, sales
and marketing expenses, and research and development expenses based upon an estimate of the time spent by the technical services employees in various departments and the areas benefited by that time. Total costs of the technical services
department were $5.7 million and $17.4 million for the quarter and the nine month period ended June 30, 2003, respectively, and $6.9 million and $21.4 million for the quarter and the nine month period ended June 30, 2002, respectively. The
allocation rates applied to these department costs were 22% to cost of revenue, 73% to sales and marketing, and 5% to research and development in the quarter ended June 30, 2003; 22% to cost of revenue, 73% to sales and marketing, and 5% to research
and development in the nine month period ended June 30, 2003; 17% to cost of revenue, 80% to sales and marketing, and 3% to research and development in the quarter ended June 30, 2002; and 16% to cost of revenue, 75% to sales and marketing, and 9%
to research and development in the nine month period ended June 30, 2002. The allocation estimate is subject to change and, if changed, will impact the allocation of expenses in the statement of operations but will not impact net income or loss.



Cash Equivalents



The Company considers all highly liquid instruments with an original maturity of three
months or less to be cash equivalents.



Earnings Per Share



Basic per share amounts are calculated using the weighted-average number of common shares
outstanding during the period. Diluted per share amounts are calculated using the weighted-average number of common shares outstanding during the period and, when dilutive, the weighted-average number of potential common shares from the exercise of
outstanding options and warrants to purchase common stock using the treasury stock method. Excluded from the computation of diluted loss per share for the quarter ended June 30, 2002, and the nine months ended June 30, 2003 and 2002, were options to
acquire 12.6 million, 12.4 million, and 12.6 million shares of common stock, respectively, and a warrant to acquire 54,321 shares of common stock at $5.42 per share because their effect would be anti-dilutive. Excluded from the computation of
diluted earnings per share for the quarter ended June 30, 2003 were options to acquire 3.7 million shares of common stock because of the application of the treasury stock method to calculate fully diluted shares outstanding. A reconciliation of the
numerators and denominators used in the basic and diluted net income (loss) per share amounts follows (in thousands):



|                                                                                        |  |                             |        |               |                            |        |               |  |   |               |   |  |   |        |  
|--------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ------------- | -------------------------- | ------ | ------------- |  | - | ------------- | - |  | - | ------ | -
|                                                                                        |  | Three months ended June 30, |        |               | Nine months ended June 30, |       
|                                                                                        |  | 2003                        |        | 2002          |                            |        | 2003          |  |   | 2002          |  
|                                                                                        |  | (As Restated)               |        | (As Restated) |                            |        | (As Restated) |  |   | (As Restated) |  
|Numerator for basic and diluted net income (loss)                                       |  | $                           | 1,216  |               | $                          | (1,672 | )             |  | $ | (5,708        | ) |  | $ | (538   | )
|                                                                                        |  |                             |        |               |                            |        |               |  |   |               |   |  |   |        |  
|Denominator for basic net income (loss) per share  weighted-average shares outstanding |  |                             | 76,635 |               |                            | 74,711 |               |  |   | 76,577        |   |  |   | 74,390 |  
|Dilutive effect of:                                                                     |  |                             |        |               |                            |        |               |  |   |               |   |  |   |        |  
|Common stock options                                                                    |  |                             | 3,398  |               |                            |       |               |  |   |              |   |  |   |       |  
|Warrants                                                                                |  |                             | 54     |               |                            |       |               |  |   |              |   |  |   |       |  
|                                                                                        |  |                             |        |               |                            |        |               |  |   |               |   |  |   |        |  
|Denominator for diluted net income (loss) per share                                     |  |                             | 80,087 |               |                            | 74,711 |               |  |   | 76,577        |   |  |   | 74,390 |  
|                                                                                        |  |                             |        |               |                            |        |               |  |   |               |   |  |   |        |  



7



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##### Table of Contents

Concentration of Revenues



One third-party distributor customer accounted for approximately 19% and 29% of revenues for the quarter and nine months ended June 30,
2003, respectively, and 16% for the nine months ended June 30, 2002. Another third party distributor customer accounted for 13% of revenue for the quarter ended June 30, 2002. One end-user customer accounted for 13% of revenues for the nine months
ended June 30, 2003. No one end-user customer accounted for greater than 10% of revenues for the quarters ended June 30, 2003 and 2002 and the nine months ended June 30, 2002.



Billed Receivables



Billed receivables include an allowance for doubtful accounts of $2.5 million and $3.8 million as of June 30, 2003 and September 30, 2002, respectively.



Accumulated Other Comprehensive Loss



The only component of accumulated other comprehensive loss is net foreign currency
translation adjustments. Other comprehensive income, net of tax, for the quarters ended June 30, 2003 and 2002, was $0.1 million and $0.6 million, respectively. Other comprehensive loss, net of tax, for the nine months ended June 30, 2003 and 2002,
was $0.6 million and $0.3 million, respectively.



Stock-Based
Compensation



At June 30, 2003, the Company had two stock-based employee
compensation plans, which are described more fully in the notes included in the Form 10-K as filed with the Securities Exchange Commission on May 17, 2004. The Company accounts for those plans under the recognition and measurement principles of APB
Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123,Accounting
for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, to stock-based employee compensation.



|                                                                         |  |                             |        |   |                            |   |         |               |  |   |               |   |  |   |         |  
|------------------------------------------------------------------------ |  | --------------------------- | ------ | - | -------------------------- | - | ------- | ------------- |  | - | ------------- | - |  | - | ------- | -
|                                                                         |  | Three months ended June 30, |        |   | Nine months ended June 30, |  
|                                                                         |  | 2003                        |        |   | 2002                       |   |         | 2003          |  |   | 2002          |  
|                                                                         |  | (As Restated)               |        |   | (As Restated)              |   |         | (As Restated) |  |   | (As Restated) |  
|Net income (loss), as reported                                           |  | $                           | 1,216  |   |                            | $ | (1,672  | )             |  | $ | (5,708        | ) |  | $ | (538    | )
|Add: stock based compensation expense, included in net income (loss)     |  |                             |       |   |                            |   |        |               |  |   | 54            |   |  |   |        |  
|Less: stock based compensation determined under SFAS No. 123, net of tax |  |                             | (7,371 | ) |                            |   | (11,625 | )             |  |   | (25,483       | ) |  |   | (36,322 | )
|                                                                         |  |                             |        |   |                            |   |         |               |  |   |               |   |  |   |         |  
|Net loss, pro-forma                                                      |  | $                           | (6,155 | ) |                            | $ | (13,297 | )             |  | $ | (31,137       | ) |  | $ | (36,860 | )
|                                                                         |  |                             |        |   |                            |   |         |               |  |   |               |   |  |   |         |  
|Net income (loss) per share:                                             |  |                             |        |   |                            |   |         |               |  |   |               |   |  |   |         |  
|Basic  as reported                                                      |  | $                           | 0.02   |   |                            | $ | (0.02   | )             |  | $ | (0.07         | ) |  | $ | (0.01   | )
|Basic  pro-forma                                                        |  | $                           | (0.08  | ) |                            | $ | (0.18   | )             |  | $ | (0.41         | ) |  | $ | (0.50   | )
|Diluted  as reported                                                    |  | $                           | 0.02   |   |                            | $ | (0.02   | )             |  | $ | (0.07         | ) |  | $ | (0.01   | )
|Diluted  pro-forma                                                      |  | $                           | (0.08  | ) |                            | $ | (0.18   | )             |  | $ | (0.41         | ) |  | $ | (0.50   | )



8



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##### Table of Contents

Geographic and Segment Information



The Companys chief operating decision-maker is considered to be the Companys Chief Executive Officer (CEO). The CEO
reviews financial information presented on a consolidated basis accompanied by certain geographic information for purposes of making operating decisions and assessing financial performance. Therefore, the Company operates as a single operating
segment: service and business assurance software.



The Company markets its
products primarily from the United States. International sales are primarily to customers in the United Kingdom and continental Europe. Information regarding regional revenues, which are based on the location of the end-user, and operations in
different geographic regions is as follows (in thousands):



|                    |  |                             |        |                            |   |               |  |               |        |  |   |        
|------------------- |  | --------------------------- | ------ | -------------------------- | - | ------------- |  | ------------- | ------ |  | - | -------
|                    |  | Three months ended June 30, |        | Nine months ended June 30,
|                    |  | 2003                        |        | 2002                       |   | 2003          |  | 2002         
|                    |  | (As Restated)               |        | (As Restated)              |   | (As Restated) |  | (As Restated)
|Revenues:           |  |                             |        |                            |   |               |  |               |        |  |   |        
|United States       |  | $                           | 19,301 |                            | $ | 17,482        |  | $             | 60,185 |  | $ | 58,987 
|United Kingdom      |  |                             | 2,892  |                            |   | 2,578         |  |               | 7,964  |  |   | 11,206 
|Other International |  |                             | 10,732 |                            |   | 14,983        |  |               | 24,295 |  |   | 44,059 
|                    |  |                             |        |                            |   |               |  |               |        |  |   |        
|Total               |  | $                           | 32,925 |                            | $ | 35,043        |  | $             | 92,444 |  | $ | 114,252
|                    |  |                             |        |                            |   |               |  |               |        |  |   |        



|                     |  |               |        |                   |   |       
|-------------------- |  | ------------- | ------ | ----------------- | - | ------
|                     |  | June 30,2003  |        | September 30,2002
|                     |  | (As Restated) |        | (As Restated)    
|Long - lived assets: |  |               |        |                   |   |       
|United States        |  | $             | 28,260 |                   | $ | 30,760
|International        |  |               | 17,771 |                   |   | 19,399
|                     |  |               |        |                   |   |       
|Total                |  | $             | 46,031 |                   | $ | 50,159
|                     |  |               |        |                   |   |       



Goodwill and Other Intangibles



In July 2001, the FASB issued SFAS No. 142,Goodwill and Other Intangible
Assets. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Goodwill will be
tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. Upon adoption of SFAS No. 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 ceased, and
intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under SFAS No. 141,Business Combinations, will be reclassified to goodwill. The Company adopted SFAS No. 142 on October 1, 2002. Upon adoption,
approximately $30.0 million of goodwill was no longer amortized but is tested annually for impairment. During the quarter ended March 31, 2003, the Company completed the transitional goodwill impairment test which indicated that goodwill was not
impaired as of the adoption date. The Company has chosen the September quarter as the date of the annual impairment test.



9



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##### Table of Contents

The following table sets forth the carrying amount of goodwill as of June 30, 2003, and September 30, 2002. Goodwill also
includes amounts originally allocated to assembled workforce (in thousands):



|         |  |                                       |        |                         |   |         |                    |  |   |       
|-------- |  | ------------------------------------- | ------ | ----------------------- | - | ------- | ------------------ |  | - | ------
|         |  | As of June 30, 2003, as restated     
|         |  | GrossCarryingAmount                   |        | AccumulatedAmortization |   |         | Net CarryingAmount
|Goodwill |  | $                                     | 49,971 |                         | $ | (17,916 | )                  |  | $ | 32,055
|         |  |                                       |        |                         |   |         |                    |  |   |       
|         | 
|         |  | As of September 30, 2002, as restated
|         |  | GrossCarryingAmount                   |        | AccumulatedAmortization |   |         | Net CarryingAmount
|Goodwill |  | $                                     | 47,952 |                         | $ | (17,916 | )                  |  | $ | 30,036
|         |  |                                       |        |                         |   |         |                    |  |   |       



The following tables set forth the
carrying amount of other intangibles assets that will continue to be amortized (in thousands):



|                                             |  |                                       |        |                         |   |         |                    |  |   |       
|-------------------------------------------- |  | ------------------------------------- | ------ | ----------------------- | - | ------- | ------------------ |  | - | ------
|                                             |  | As of June 30, 2003, as restated     
|                                             |  | GrossCarryingAmount                   |        | AccumulatedAmortization |   |         | Net CarryingAmount
|Developed technology                         |  | $                                     | 18,090 |                         | $ | (10,540 | )                  |  | $ | 7,550 
|Customer contracts                           |  |                                       | 1,126  |                         |   | (1,126  | )                  |  |   |      
|Trademarks                                   |  |                                       | 807    |                         |   | (462    | )                  |  |   | 345   
|Other intangible assets                      |  |                                       | 809    |                         |   | (809    | )                  |  |   |      
|                                             |  |                                       |        |                         |   |         |                    |  |   |       
|Intangibles related to business acquisitions |  | $                                     | 20,832 |                         | $ | (12,937 | )                  |  | $ | 7,895 
|                                             |  |                                       |        |                         |   |         |                    |  |   |       
|                                             | 
|                                             |  | As of September 30, 2002, as restated
|                                             |  | GrossCarryingAmount                   |        | AccumulatedAmortization |   |         | Net CarryingAmount
|Developed technology                         |  | $                                     | 16,795 |                         | $ | (7,287  | )                  |  | $ | 9,508 
|Customer contracts                           |  |                                       | 900    |                         |   | (300    | )                  |  |   | 600   
|Trademarks                                   |  |                                       | 807    |                         |   | (336    | )                  |  |   | 471   
|Other intangible assets                      |  |                                       | 617    |                         |   | (617    | )                  |  |   |      
|                                             |  |                                       |        |                         |   |         |                    |  |   |       
|Intangibles related to business acquisitions |  | $                                     | 19,119 |                         | $ | (8,540  | )                  |  | $ | 10,579
|                                             |  |                                       |        |                         |   |         |                    |  |   |       



The total amortization expense related
to goodwill and other intangible assets is set forth in the table below (in thousands):



|                        |  |                                        |       |                                       |   |       |  |      |       |  |   |      
|----------------------- |  | -------------------------------------- | ----- | ------------------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                        |  | Three months endedJune 30, as restated |       | Nine months endedJune 30, as restated
|                        |  | 2003                                   |       | 2002                                  |   | 2003  |  | 2002
|Goodwill                |  | $                                      |      |                                       | $ | 1,818 |  | $    |      |  | $ | 5,454
|Developed technology    |  |                                        | 1,053 |                                       |   | 790   |  |      | 3,089 |  |   | 2,370
|Customer contracts      |  |                                        | 82    |                                       |   |      |  |      | 776   |  |   |     
|Trademarks              |  |                                        | 42    |                                       |   | 42    |  |      | 126   |  |   | 126  
|Other intangible assets |  |                                        | 70    |                                       |   | 117   |  |      | 213   |  |   | 351  
|                        |  |                                        |       |                                       |   |       |  |      |       |  |   |      
|Total amortization      |  | $                                      | 1,247 |                                       | $ | 2,767 |  | $    | 4,204 |  | $ | 8,301
|                        |  |                                        |       |                                       |   |       |  |      |       |  |   |      



The amortization of developed
technology is recorded as a cost of revenue line item with the remaining amortization being reflected as an operating expense.



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##### Table of Contents

The total expected future amortization related to other intangible assets is set forth in the table below (in thousands):



|      |  |                     |      
|----- |  | ------------------- | -----
|Year  |  | FutureAmortizations
|2003  |  | $                   | 1,168
|2004  |  |                     | 4,550
|2005  |  |                     | 2,177
|      |  |                     |      
|Total |  | $                   | 7,895
|      |  |                     |      



Summarized below are the effects on
net income (loss) and net income (loss) per share data, if the Company had followed the provisions of SFAS No. 142 for all periods presented (in thousands, except per share amounts):



|                                                                                                   |  |                             |        |               |                            |        |               |  |   |               |   |  |   |        |  
|-------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ------------- | -------------------------- | ------ | ------------- |  | - | ------------- | - |  | - | ------ | -
|                                                                                                   |  | Three months ended June 30, |        |               | Nine months ended June 30, |       
|                                                                                                   |  | 2003                        |        | 2002          |                            |        | 2003          |  |   | 2002          |  
|                                                                                                   |  | (As Restated)               |        | (As Restated) |                            |        | (As Restated) |  |   | (As Restated) |  
|Net income (loss)  as reported                                                                    |  | $                           | 1,216  |               | $                          | (1,672 | )             |  | $ | (5,708        | ) |  | $ | (538   | )
|Adjustments:                                                                                       |  |                             |        |               |                            |        |               |  |   |               |   |  |   |        |  
|Amortization of goodwill                                                                           |  |                             |       |               |                            | 1,717  |               |  |   |              |   |  |   | 5,151  |  
|Amortization of assembled workforce                                                                |  |                             |       |               |                            | 101    |               |  |   |              |   |  |   | 303    |  
|                                                                                                   |  |                             |        |               |                            |        |               |  |   |               |   |  |   |        |  
|Net adjustments                                                                                    |  |                             |       |               |                            | 1,818  |               |  |   |              |   |  |   | 5,454  |  
|                                                                                                   |  |                             |        |               |                            |        |               |  |   |               |   |  |   |        |  
|Net income (loss)  as adjusted for SFAS No. 142                                                   |  | $                           | 1,216  |               | $                          | 146    |               |  | $ | (5,708        | ) |  | $ | 4,916  |  
|                                                                                                   |  |                             |        |               |                            |        |               |  |   |               |   |  |   |        |  
|Basic and diluted net income (loss) per common share  as reported                                 |  | $                           | 0.02   |               | $                          | (0.02  | )             |  | $ | (0.07         | ) |  | $ | (0.01  | )
|Basic net income (loss) per common share  as adjusted for SFAS No. 142                            |  | $                           | 0.02   |               | $                          | 0.00   |               |  | $ | (0.07         | ) |  | $ | 0.07   |  
|Diluted net income (loss) per common share  as adjusted for SFAS No. 142                          |  | $                           | 0.02   |               | $                          | 0.00   |               |  | $ | (0.07         | ) |  | $ | 0.06   |  
|Weighted average common shares outstanding used in calculating net income (loss) per common share: |  |                             |        |               |                            |        |               |  |   |               |   |  |   |        |  
|Basic                                                                                              |  |                             | 76,635 |               |                            | 74,711 |               |  |   | 76,577        |   |  |   | 74,390 |  
|Diluted                                                                                            |  |                             | 80,087 |               |                            | 76,116 |               |  |   | 76,577        |   |  |   | 77,498 |  



Recent Accounting
Pronouncements



The Company adopted SFAS No. 143, Accounting for Asset
Retirement Obligations in fiscal 2003, which addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated retirement costs. SFAS No. 143 requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The obligation is recorded as a liability and the associated cost is capitalized as part of the
related long-lived asset and then depreciated over its remaining useful life. Changes in the liability resulting from the passage of time are recognized as operating expense. The adoption of SFAS No. 143 did not have a material effect on the
Companys financial position, results of operations or cash flows. The pro forma effects of the application of SFAS No. 143 as if the Statement had been adopted on January 1, 2001 are not material and, therefore, have not been presented.



In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which was effective for fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes certain provisions of Accounting Principles Board (APB) Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. Although SFAS No. 144 supersedes SFAS No. 121 and the provisions of APB No. 30 regarding the accounting and reporting of the disposal of a segment of a business, it retains many of the fundamental provisions
of SFAS No. 121 and the requirements in APB No. 30 to report separately discontinued operations. SFAS No. 144 also extends the reporting of discontinued operations to a component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. The Company adopted SFAS No. 144 on October 1, 2002, and the adoption did not have a material effect on its consolidated financial position, results of operations, or cash flows.



In November 2001, the Emerging Issues Task Force (EITF) reached consensus on
EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendors Products. EITF No. 01-9 addresses the accounting for consideration given by a vendor to a customer and is a codification of EITF
No. 00-14, Accounting for Certain Sales Incentives, EITF No. 00-22, Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentives Offers and Offers for Free Products or Services to be Delivered in the
Future, and EITF No. 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendors Products. The Company adopted EITF No. 01-9 in the quarter ended March 31, 2002 and it did not have an effect on
the Companys financial position and results of operations.



In July 2002,
the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses financial accounting and reporting costs associated with exit or disposal activities. SFAS No. 146 is effective for exit
or disposal activities that are initiated after December 31, 2002. The effect of adopting SFAS No. 146 is that it may affect the timing of recognizing any future restructuring costs as well as amounts recognized. As of June 30, 2003, the Company did
not have any exit or disposal activities as defined under SFAS No. 146 that were initiated after the effective date.



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##### Table of Contents

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued
after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. We typically warrant our products to be free from defects in media and to
substantially conform to material specifications for a period of 90 days. We also indemnify our customers from third party claims of intellectual property infringement relating to our products. Historically, costs related to these guarantees have
not been significant, and we are unable to estimate the potential impact of these guarantees on our future results of operations.



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities(FIN No. 46). A variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support
its activities. FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entitys activities or is entitled to receive a majority of
the entitys residual returns or both. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Disclosure requirements apply to any financial statements issued after January 31, 2003. The adoption of FIN No. 46 did not have an effect on the Companys consolidated financial position,
results of operations, or cash flows.



In August 2003, the EITF reached a
consensus on EITF Issue No. 03-5, Applicability of AICPA Statement of Position 97-2, Software Revenue Recognition, to Non-Software Deliverables in an Arrangement Containing More than Incidental Software. EITF Issue No. 03-5 affirms that SOP
97-2 applies to non-software deliverables such as hardware in an arrangement if the software is essential to the functionality of the non-software deliverables. The Company has adopted and does not expect the adoption of EITF No. 03-5 to have a
material impact on its consolidated financial position, results of operations, or cash flows.



Note 2. Restatement of Financial Statements



The Company has restated its consolidated financial statements for the fiscal years ended September 30, 2001 and 2002 and for the quarters ended December 31, 2000 through June 30, 2003. Accordingly, the financial statements for those
periods described above that have been included in the Companys previous filings in 2003 or earlier with the Securities and Exchange Commission or included in previous announcements in 2003 or earlier should not be relied upon.



The Companys Form 10-K for the fiscal year ended September 30, 2003, filed with the SEC
on May 17, 2004, contains restated information for all of the above periods to which the restatement applies and other information relating to the restatement, in the Form 10-K Item 6 Selected Financial Data, Item 7
Managements Discussion and Analysis of Financial Condition and Results of Operations  Restatement of Financial Statements, Notes 2 and 11 of the Notes to Consolidated Financial Statements included in Item 8, and Item 9A,
Controls and Procedures.



In September 2003, the Audit Committee of
our Board of Directors, with assistance from independent legal counsel and subsequently, independent forensic accountants, undertook an internal investigation regarding questions raised internally, primarily concerning the accounting for accrued
expenses, expense recognition and certain journal entries. The Audit Committee initially determined on December 28, 2003, that it was likely the Company would have to restate its financial statements for the periods described above based upon the
status of the investigation at that date. On December 29, 2003, the Company informed Nasdaq and the SEC that the Company would not timely file its Form 10-K for fiscal year 2003. On December 30, 2003, we filed a Notification of Late Filing on Form
12b-25 with the SEC disclosing that the Form 10-K would be delayed pending completion of that internal investigation and issued a press release stating the same. The Companys December 30, 2003 press release also announced that the Company
expected that this inquiry would lead to a restatement of historical financial statements including adjustments to previously filed and published financial results, resulting in a positive impact to earnings in certain periods and a negative impact
in others. Also on December 30, 2003, Lloyd Carney and Michael Luetkemeyer hosted a conference call to inform the public of the accounting inquiry and explain the delay in filing the Companys Form 10-K. The Company furnished a copy of the
transcript of that call as an exhibit to a Form 8-K filed on December 31, 2003.



On January 29, 2004, the Audit Committee met with its independent legal counsel at which time the investigations findings and conclusions were presented. The Audit Committee approved those findings and conclusions that certain
accruals for certain expenses were overstated in certain periods, and understated in other periods and that adjustments were required in certain other areas. The Audit Committee has discussed with the Companys independent accountants, KPMG
LLP, the Committees findings and conclusions and the adjustments described below.



The Company has adopted and implemented a number of remedial measures that were recommended or identified in the course of the investigation. These measures are summarized in Part I, Item 4, Controls and Procedures.



The net effect of all of the restatement adjustments for the three months and nine months
ended June 30, 2003 and June 30, 2002 is to increase the Companys net income by $787 thousand for the three months ended June 30, 2003, increase the net loss by $693 thousand for the three months ended June 30, 2002, decrease the net loss by
$197 thousand for the nine months ended June 30, 2003 and increase the net loss by $594 thousand for the nine months ended June 30, 2002. The Companys consolidated statements of cash flows have been restated to reflect the reclassification of
changes in assets and liabilities during the periods discussed above. The Companys Form 10-K for the fiscal year ended September 30, 2003, describes the net effect of other adjustments made pursuant to the restatement.



12



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##### Table of Contents

Restated consolidated financial statements reflect the following adjustments during the three months and nine months
ended June 30, 2003 and 2002. These adjustments should be read in conjunction with the information contained the Companys Form 10-K for the fiscal year ended September 30, 2003.



Note that numbers in parentheses represent an increase in expense and/or a decrease in income. Numbers with no parentheses represent a
decrease in expense and/or an increase in income.



Effects on
Net Income  Increase (Decrease)

Effects on Net Loss  (Increase) Decrease

(in thousands)



|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|------------------------------------------------------------- |  | --------------------------- | ----- | - | -------------------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | ------ | -
|                                                              |  | Three Months Ended June 30, |       |   | Nine Months Ended June 30, |  
|                                                              |  | 2003                        |       |   | 2002                       |   |        | 2003          |  |   | 2002          |  
|                                                              |  | (as restated)               |       |   | (as restated)              |   |        | (as restated) |  |   | (as restated) |  
|Net adjustments to:                                           |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Revenues                                                      |  | $                           | (85   | ) |                            | $ | 9      |               |  | $ | 302           |   |  | $ | 133    |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Expenses:                                                     |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Cost of revenue:                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Allocation adjustment                                         |  |                             | 463   |   |                            |   | 991    |               |  |   | 1,270         |   |  |   | 3,176  |  
|Accrued expense adjustments                                   |  |                             | 329   |   |                            |   | (18    | )             |  |   | 978           |   |  |   | (357   | )
|Receivable and reserve adjustments                            |  |                             |      |   |                            |   |       |               |  |   |              |   |  |   | (626   | )
|Reclassification                                              |  |                             | 64    |   |                            |   |       |               |  |   | 128           |   |  |   |       |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Subtotal                                                      |  |                             | 856   |   |                            |   | 973    |               |  |   | 2,376         |   |  |   | 2,193  |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Sales and marketing:                                          |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Allocation adjustment                                         |  |                             | (537  | ) |                            |   | (1,519 | )             |  |   | (1,860        | ) |  |   | (3,654 | )
|Accrued expense adjustments                                   |  |                             | 666   |   |                            |   | (399   | )             |  |   | (488          | ) |  |   | 684    |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Subtotal                                                      |  |                             | 129   |   |                            |   | (1,918 | )             |  |   | (2,348        | ) |  |   | (2,970 | )
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Research and development:                                     |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Allocation adjustment                                         |  |                             | 74    |   |                            |   | 528    |               |  |   | 590           |   |  |   | 478    |  
|Accrued expense adjustments                                   |  |                             | 126   |   |                            |   | 140    |               |  |   | 24            |   |  |   | 122    |  
|Reclassification                                              |  |                             | (64   | ) |                            |   |       |               |  |   | (128          | ) |  |   |       |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Subtotal                                                      |  |                             | 136   |   |                            |   | 668    |               |  |   | 486           |   |  |   | 600    |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|General and administrative:                                   |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Accrued expense adjustments                                   |  |                             | 25    |   |                            |   | (29    | )             |  |   | (625          | ) |  |   | (158   | )
|Deferred rent                                                 |  |                             | 31    |   |                            |   | (18    | )             |  |   | 92            |   |  |   | (248   | )
|Receivable and reserve adjustments                            |  |                             |      |   |                            |   |       |               |  |   |              |   |  |   | 506    |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Subtotal                                                      |  |                             | 56    |   |                            |   | (47    | )             |  |   | (533          | ) |  |   | 100    |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Restructuring costs:                                          |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Accrued expense adjustments                                   |  |                             | 31    |   |                            |   |       |               |  |   | 220           |   |  |   |       |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Subtotal                                                      |  |                             | 31    |   |                            |   |       |               |  |   | 220           |   |  |   |       |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Total Expenses                                                |  |                             | 1,208 |   |                            |   | (324   | )             |  |   | 201           |   |  |   | (77    | )
|                                                              |  |                             |       |  
|Interest and other income, net                                |  |                             | (330  | ) |                            |   | (381   | )             |  |   | (288          | ) |  |   | (659   | )
|Provision for income taxes                                    |  |                             | (6    | ) |                            |   | 3      |               |  |   | (18           | ) |  |   | 9      |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Total effect on net income/loss                               |  | $                           | 787   |   |                            | $ | (693   | )             |  | $ | 197           |   |  | $ | (594   | )
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Basic earnings (loss) per share impact of total adjustments   |  | $                           | 0.01  |   |                            | $ | (0.01  | )             |  | $ | 0.00          |   |  | $ | (0.01  | )
|Diluted earnings (loss) per share impact of total adjustments |  | $                           | 0.01  |   |                            | $ | (0.01  | )             |  | $ | 0.00          |   |  | $ | (0.01  | )



13



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Revenues



The Company identified certain revenue related adjustments for which the amount of the net revenue and the timing of the revenue recorded originally required adjustment.
These adjustments caused the pre-tax income to decrease by $85 thousand in the quarter ended June 30, 2003, the pre-tax loss to decrease by $9 thousand in the quarter ended June 30, 2002, the pre-tax loss to decrease by $302 thousand in the nine
months ended June 30, 2003, and the pre-tax loss to decrease by $133 thousand in the nine months ended June 30, 2002.



Expenses



Total expense adjustments increased the pre-tax income by $1.2 million in the quarter ended June 30, 2003, increased the pre-tax loss by $324 thousand in the quarter ended June 30, 2002, decreased the pre-tax loss by
$201 thousand in the nine months ended June 30, 2003, and increased the pre-tax loss by $77 thousand in the nine months ended June 30, 2002.



The Company allocates costs incurred by the Technical Services Department between Cost of Revenues, Sales and Marketing, and Research and Development. A review of these
allocation rates led to certain adjustments in these rates to more accurately reflect the time spent by certain employees in various departments. These adjustments had no effect on net income or loss for the periods presented. See Note 1 Use
of Estimates for additional discussion on these allocations.



The
allowance for doubtful accounts was adjusted to reflect a change to correct the original accounting for a transaction with a customer that announced bankruptcy.



In addition to the allocation rate and allowance impacts to expenses noted above, the quarters ended June 30, 2003 and 2002 and the nine months ended June 30, 2003 and
2002 were impacted by adjustments in accrued expenses. The Company identified several accrued expense items for which it concluded that the amount of the liability, the timing of the liability recognition, or the timing of the release of the
liability could not be substantiated or was in error and should be adjusted.



Further, the Company identified that it had not been accounting for its lease expense on a straight-line basis in accordance with SFAS No. 13, Accounting for Leases. As a result, the Company adjusted its lease expense and the related
deferred lease liability.



In addition, a reclassification was made in fiscal
year 2003 between cost of revenue and research and development to correctly classify certain earnout payments related to the Lumos acquisition. This reclassification had no impact on net income or loss.



Interest and Other Income



The Company identified certain cumulative translation adjustment accounts that required
adjustment to properly reflect foreign subsidiary account balances and appropriate foreign currency translation rates used. In addition to these adjustments, which resulted in a reclassification between accumulated comprehensive income and
accumulated deficit, certain other adjustments caused the pre-tax income to decrease by $330 thousand in the quarter ended June 30, 2003, the pre-tax loss to increase by $381 thousand in the quarter ended June 30, 2002, the pre-tax loss to increase
by $288 thousand in the nine months ended June 30, 2003, and the pre-tax loss to increase by $659 thousand in the nine months ended June 30, 2002.



Provision for Income Taxes



The above adjustments resulted in changes to the Companys provision for income taxes. The tax effect of each individual adjustment depends on the period and the
taxing jurisdiction in which the adjustment occurred, as well as the Companys preexisting tax position and the effect of any other adjustments. The combined effect of the above adjustments resulted in a decrease to the net income of $6
thousand in the quarter ended June 30, 2003, a decrease to the net loss of $3 thousand in the quarter ended June 30, 2002, an increase to the net loss of $18 thousand in the nine months ended June 30, 2003, and a decrease to the net loss of $9
thousand in the nine months ended June 30, 2002.



As a result of the foregoing
factors, the Companys unaudited condensed consolidated financial statements for the three and nine month periods ended June 30, 2003 and 2002 have been restated from amounts previously reported. The accompanying condensed consolidated
financial data set forth below presents the Companys condensed consolidated statements of operations for the three and nine month periods ended June 30, 2003 and 2002 and condensed consolidated balance sheet as of June 30, 2003 and September
30, 2002 on a comparative basis showing the amounts as originally reported and as restated.



14



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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                     |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|---------------------------------------------------- |  | -------------------------------- | ------ | - | -------------------------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | ------ | -
|                                                     |  | Three months ended June 30, 2003 |        |   | Three months ended June 30, 2002 |  
|                                                     |  | (As Reported)                    |        |   | (As Restated)                    |   |        | (As Reported) |  |   | (As Restated) |  
|Revenues:                                            |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|License                                              |  | $                                | 18,443 |   |                                  | $ | 18,233 |               |  | $ | 20,077        |   |  | $ | 20,120 |  
|Maintenance and services                             |  |                                  | 14,567 |   |                                  |   | 14,692 |               |  |   | 14,957        |   |  |   | 14,923 |  
|                                                     |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|Total revenues                                       |  |                                  | 33,010 |   |                                  |   | 32,925 |               |  |   | 35,034        |   |  |   | 35,043 |  
|                                                     |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|Cost of revenues:                                    |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|License                                              |  |                                  | 1,476  |   |                                  |   | 1,251  |               |  |   | 1,568         |   |  |   | 1,624  |  
|Maintenance and services                             |  |                                  | 3,160  |   |                                  |   | 2,593  |               |  |   | 4,124         |   |  |   | 3,095  |  
|Amortization of developed technology                 |  |                                  | 1,117  |   |                                  |   | 1,053  |               |  |   | 790           |   |  |   | 790    |  
|                                                     |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|Total cost of revenues                               |  |                                  | 5,753  |   |                                  |   | 4,897  |               |  |   | 6,482         |   |  |   | 5,509  |  
|                                                     |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|Gross profit                                         |  |                                  | 27,257 |   |                                  |   | 28,028 |               |  |   | 28,552        |   |  |   | 29,534 |  
|                                                     |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|Operating expenses:                                  |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|Sales and marketing                                  |  |                                  | 14,565 |   |                                  |   | 14,436 |               |  |   | 17,863        |   |  |   | 19,781 |  
|Research and development                             |  |                                  | 7,553  |   |                                  |   | 7,417  |               |  |   | 8,263         |   |  |   | 7,595  |  
|General and administrative                           |  |                                  | 4,003  |   |                                  |   | 3,947  |               |  |   | 4,093         |   |  |   | 4,140  |  
|Amortization of goodwill and other intangible assets |  |                                  | 194    |   |                                  |   | 194    |               |  |   | 1,977         |   |  |   | 1,977  |  
|Restructuring costs                                  |  |                                  | 1,686  |   |                                  |   | 1,655  |               |  |   |              |   |  |   |       |  
|                                                     |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|Total operating expenses                             |  |                                  | 28,001 |   |                                  |   | 27,649 |               |  |   | 32,196        |   |  |   | 33,493 |  
|                                                     |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|Income (loss) from operations                        |  |                                  | (744   | ) |                                  |   | 379    |               |  |   | (3,644        | ) |  |   | (3,959 | )
|Interest and other income, net                       |  |                                  | 1,023  |   |                                  |   | 693    |               |  |   | 1,452         |   |  |   | 1,071  |  
|                                                     |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|Income (loss) before income tax benefit              |  |                                  | 279    |   |                                  |   | 1,072  |               |  |   | (2,192        | ) |  |   | (2,888 | )
|Income tax benefit                                   |  |                                  | (150   | ) |                                  |   | (144   | )             |  |   | (1,213        | ) |  |   | (1,216 | )
|                                                     |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|Net income (loss)                                    |  | $                                | 429    |   |                                  | $ | 1,216  |               |  | $ | (979          | ) |  | $ | (1,672 | )
|                                                     |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|Per share data:                                      |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|Basic net income (loss)                              |  | $                                | 0.01   |   |                                  | $ | 0.02   |               |  | $ | (0.01         | ) |  | $ | (0.02  | )
|Diluted net income (loss)                            |  | $                                | 0.01   |   |                                  | $ | 0.02   |               |  | $ | (0.01         | ) |  | $ | (0.02  | )
|Weighted average shares used in computing:           |  |                                  |        |   |                                  |   |        |               |  |   |               |   |  |   |        |  
|Basic net income (loss) per share                    |  |                                  | 76,635 |   |                                  |   | 76,635 |               |  |   | 74,711        |   |  |   | 74,711 |  
|Diluted net income (loss) per share                  |  |                                  | 80,087 |   |                                  |   | 80,087 |               |  |   | 74,711        |   |  |   | 74,711 |  



15



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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                     |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | ------- | -
|                                                     |  | Nine months ended June 30, 2003 |        |   | Nine months ended June 30, 2002 |  
|                                                     |  | (As Reported)                   |        |   | (As Restated)                   |   |        | (As Reported) |  |   | (As Restated) |  
|Revenues:                                            |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|License                                              |  | $                               | 50,464 |   |                                 | $ | 50,390 |               |  | $ | 67,932        |   |  | $ | 68,073  |  
|Maintenance and services                             |  |                                 | 41,678 |   |                                 |   | 42,054 |               |  |   | 46,187        |   |  |   | 46,179  |  
|                                                     |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|Total revenues                                       |  |                                 | 92,142 |   |                                 |   | 92,444 |               |  |   | 114,119       |   |  |   | 114,252 |  
|                                                     |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|Cost of revenues:                                    |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|License                                              |  |                                 | 4,300  |   |                                 |   | 3,335  |               |  |   | 4,669         |   |  |   | 4,819   |  
|Maintenance and services                             |  |                                 | 9,398  |   |                                 |   | 8,115  |               |  |   | 13,937        |   |  |   | 11,594  |  
|Amortization of developed technology                 |  |                                 | 3,217  |   |                                 |   | 3,089  |               |  |   | 2,370         |   |  |   | 2,370   |  
|                                                     |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|Total cost of revenues                               |  |                                 | 16,915 |   |                                 |   | 14,539 |               |  |   | 20,976        |   |  |   | 18,783  |  
|                                                     |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|Gross profit                                         |  |                                 | 75,227 |   |                                 |   | 77,905 |               |  |   | 93,143        |   |  |   | 95,469  |  
|                                                     |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|Operating expenses:                                  |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|Sales and marketing                                  |  |                                 | 43,485 |   |                                 |   | 45,833 |               |  |   | 54,040        |   |  |   | 57,010  |  
|Research and development                             |  |                                 | 22,212 |   |                                 |   | 21,726 |               |  |   | 23,893        |   |  |   | 23,293  |  
|General and administrative                           |  |                                 | 12,090 |   |                                 |   | 12,623 |               |  |   | 13,559        |   |  |   | 13,459  |  
|Amortization of goodwill and other intangible assets |  |                                 | 1,115  |   |                                 |   | 1,115  |               |  |   | 5,931         |   |  |   | 5,931   |  
|Restructuring costs                                  |  |                                 | 5,015  |   |                                 |   | 4,795  |               |  |   |              |   |  |   |        |  
|                                                     |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|Total operating expenses                             |  |                                 | 83,917 |   |                                 |   | 86,092 |               |  |   | 97,423        |   |  |   | 99,693  |  
|                                                     |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|Loss from operations                                 |  |                                 | (8,690 | ) |                                 |   | (8,187 | )             |  |   | (4,280        | ) |  |   | (4,224  | )
|Interest and other income, net                       |  |                                 | 3,666  |   |                                 |   | 3,378  |               |  |   | 4,365         |   |  |   | 3,706   |  
|                                                     |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|Income (loss) before income tax provision            |  |                                 | (5,024 | ) |                                 |   | (4,809 | )             |  |   | 85            |   |  |   | (518    | )
|Income tax provision                                 |  |                                 | 881    |   |                                 |   | 899    |               |  |   | 29            |   |  |   | 20      |  
|                                                     |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|Net income (loss)                                    |  | $                               | (5,905 | ) |                                 | $ | (5,708 | )             |  | $ | 56            |   |  | $ | (538    | )
|                                                     |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|Per share data:                                      |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|Basic net income (loss)                              |  | $                               | (0.08  | ) |                                 | $ | (0.07  | )             |  | $ | 0.00          |   |  | $ | (0.01   | )
|Diluted net income (loss)                            |  | $                               | (0.08  | ) |                                 | $ | (0.07  | )             |  | $ | 0.00          |   |  | $ | (0.01   | )
|Weighted average shares used in computing:           |  |                                 |        |   |                                 |   |        |               |  |   |               |   |  |   |         |  
|Basic net income (loss) per share                    |  |                                 | 76,577 |   |                                 |   | 76,577 |               |  |   | 74,390        |   |  |   | 74,390  |  
|Diluted net income (loss) per share                  |  |                                 | 76,577 |   |                                 |   | 76,577 |               |  |   | 77,498        |   |  |   | 74,390  |  





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##### Table of Contents

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)



|                                                                                                        |  |                     |         |   |               |   |         |  
|------------------------------------------------------------------------------------------------------- |  | ------------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                        |  | As of June 30, 2003 |        
|                                                                                                        |  | (As Reported)       |         |   | (As Restated) |  
|ASSETS                                                                                                  |  |                     |         |   |               |   |         |  
|Current assets:                                                                                         |  |                     |         |   |               |   |         |  
|Cash and cash equivalents                                                                               |  | $                   | 88,971  |   |               | $ | 88,971  |  
|Short-term investments                                                                                  |  |                     | 45,957  |   |               |   | 45,957  |  
|Billed receivables, net( 1 )                                                                            |  |                     | 7,255   |   |               |   | 6,807   |  
|Prepaid expenses and other current assets( 2 )                                                          |  |                     | 5,632   |   |               |   | 6,675   |  
|                                                                                                        |  |                     |         |   |               |   |         |  
|Total current assets                                                                                    |  |                     | 147,815 |   |               |   | 148,410 |  
|Property and equipment, net( 3 )                                                                        |  |                     | 6,240   |   |               |   | 6,081   |  
|Long-term investments                                                                                   |  |                     | 77,344  |   |               |   | 77,344  |  
|Goodwill, net( 4 )                                                                                      |  |                     | 31,343  |   |               |   | 32,055  |  
|Other intangible assets, net( 4 )                                                                       |  |                     | 7,853   |   |               |   | 7,895   |  
|                                                                                                        |  |                     |         |   |               |   |         |  
|                                                                                                        |  | $                   | 270,595 |   |               | $ | 271,785 |  
|                                                                                                        |  |                     |         |   |               |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                    |  |                     |         |   |               |   |         |  
|Current liabilities:                                                                                    |  |                     |         |   |               |   |         |  
|Accounts payable                                                                                        |  | $                   | 4,538   |   |               | $ | 4,538   |  
|Accrued expenses( 5 )                                                                                   |  |                     | 21,990  |   |               |   | 20,702  |  
|Income taxes payable                                                                                    |  |                     | 6,171   |   |               |   | 6,171   |  
|Deferred revenue( 6 )                                                                                   |  |                     | 46,350  |   |               |   | 45,805  |  
|                                                                                                        |  |                     |         |   |               |   |         |  
|Total current liabilities                                                                               |  |                     | 79,049  |   |               |   | 77,216  |  
|                                                                                                        |  |                    
|Stockholders equity:                                                                                   |  |                     |         |   |               |   |         |  
|Preferred stock; $0.01 par value; 5,000 shares authorized no shares issued and outstanding              |  |                     |        |   |               |   |        |  
|Common stock; $0.01 par value; 200,000 shares authorized; 77,174 shares outstanding as of June 30, 2003 |  |                     | 772     |   |               |   | 772     |  
|Additional paid-in capital( 7 )                                                                         |  |                     | 204,228 |   |               |   | 205,046 |  
|Treasury stock                                                                                          |  |                     | (2,657  | ) |               |   | (2,657  | )
|Accumulated other comprehensive loss( 8 )                                                               |  |                     | (2,876  | ) |               |   | (1,152  | )
|Accumulated deficit( 9 )                                                                                |  |                     | (7,921  | ) |               |   | (7,440  | )
|                                                                                                        |  |                     |         |   |               |   |         |  
|Total stockholders equity                                                                              |  |                     | 191,546 |   |               |   | 194,569 |  
|                                                                                                        |  |                     |         |   |               |   |         |  
|                                                                                                        |  | $                   | 270,595 |   |               | $ | 271,785 |  
|                                                                                                        |  |                     |         |   |               |   |         |  

---

|(1) | Billed receivables, net was adjusted to reflect certain of the revenue and allowance adjustments.
|--- | -------------------------------------------------------------------------------------------------

|(2) | Prepaid expenses and other current assets was adjusted as a result of certain of the accrued expense and revenue adjustments.
|--- | -----------------------------------------------------------------------------------------------------------------------------

|(3) | Property and equipment, net was adjusted to reflect certain accrued expense adjustments.
|--- | ----------------------------------------------------------------------------------------

|(4) | Goodwill and intangible assets, net was adjusted as a result of certain foreign currency adjustments.
|--- | -----------------------------------------------------------------------------------------------------

|(5) | Accrued expenses was adjusted as a result of certain accrued expense adjustments.
|--- | ---------------------------------------------------------------------------------

|(6) | Deferred revenue was adjusted as a result of certain of the revenue adjustments.
|--- | --------------------------------------------------------------------------------

|(7) | Additional paid-in capital was adjusted as a result of certain accrued expense and provision for income tax adjustments.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(8) | Accumulated other comprehensive loss was adjusted as a result of certain foreign currency adjustments.
|--- | ------------------------------------------------------------------------------------------------------

|(9) | Refer to the above table which details the effects of the restatement on net income/loss.
|--- | -----------------------------------------------------------------------------------------



17



---

##### Table of Contents

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)



|                                                                                                             |  |                          |         |   |               |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ------- | - | ------------- | - | ------- | -
|                                                                                                             |  | As of September 30, 2002 |        
|                                                                                                             |  | (As Reported)            |         |   | (As Restated) |  
|ASSETS                                                                                                       |  |                          |         |   |               |   |         |  
|Current assets:                                                                                              |  |                          |         |   |               |   |         |  
|Cash and cash equivalents                                                                                    |  | $                        | 117,218 |   |               | $ | 117,218 |  
|Short-term investments                                                                                       |  |                          | 42,126  |   |               |   | 42,126  |  
|Billed receivables, net( 1 )                                                                                 |  |                          | 18,386  |   |               |   | 17,916  |  
|Prepaid expenses and other current assets( 2 )                                                               |  |                          | 5,760   |   |               |   | 5,925   |  
|                                                                                                             |  |                          |         |   |               |   |         |  
|Total current assets                                                                                         |  |                          | 183,490 |   |               |   | 183,185 |  
|Property and equipment, net( 3 )                                                                             |  |                          | 9,534   |   |               |   | 9,544   |  
|Long-term investments                                                                                        |  |                          | 28,293  |   |               |   | 28,293  |  
|Goodwill, net( 4 )                                                                                           |  |                          | 30,087  |   |               |   | 30,036  |  
|Other intangible assets, net                                                                                 |  |                          | 10,579  |   |               |   | 10,579  |  
|                                                                                                             |  |                          |         |   |               |   |         |  
|                                                                                                             |  | $                        | 261,983 |   |               | $ | 261,637 |  
|                                                                                                             |  |                          |         |   |               |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                         |  |                          |         |   |               |   |         |  
|Current liabilities:                                                                                         |  |                          |         |   |               |   |         |  
|Accounts payable                                                                                             |  | $                        | 2,374   |   |               | $ | 2,374   |  
|Accrued expenses( 5 )                                                                                        |  |                          | 25,205  |   |               |   | 23,830  |  
|Income taxes payable                                                                                         |  |                          | 6,652   |   |               |   | 6,652   |  
|Deferred revenue( 6 )                                                                                        |  |                          | 36,524  |   |               |   | 36,156  |  
|                                                                                                             |  |                          |         |   |               |   |         |  
|Total current liabilities                                                                                    |  |                          | 70,755  |   |               |   | 69,012  |  
|                                                                                                             |  |                         
|Stockholders equity:                                                                                        |  |                          |         |   |               |   |         |  
|Preferred stock; $0.01 par value; 5,000 shares authorized no shares issued and outstanding                   |  |                          |        |   |               |   |        |  
|Common stock; $0.01 par value; 200,000 shares authorized; 75,194 shares outstanding as of September 30, 2002 |  |                          | 752     |   |               |   | 752     |  
|Additional paid-in capital( 7 )                                                                              |  |                          | 196,048 |   |               |   | 196,849 |  
|Treasury stock                                                                                               |  |                          | (2,657  | ) |               |   | (2,657  | )
|Accumulated other comprehensive loss( 8 )                                                                    |  |                          | (899    | ) |               |   | (580    | )
|Accumulated deficit( 9 )                                                                                     |  |                          | (2,016  | ) |               |   | (1,739  | )
|                                                                                                             |  |                          |         |   |               |   |         |  
|Total stockholders equity                                                                                   |  |                          | 191,228 |   |               |   | 192,625 |  
|                                                                                                             |  |                          |         |   |               |   |         |  
|                                                                                                             |  | $                        | 261,983 |   |               | $ | 261,637 |  
|                                                                                                             |  |                          |         |   |               |   |         |  

---

|(1) | Billed receivables, net was adjusted to reflect certain of the revenue and allowance adjustments.
|--- | -------------------------------------------------------------------------------------------------

|(2) | Prepaid expenses and other current assets was adjusted as a result of certain of the accrued expense and revenue adjustments.
|--- | -----------------------------------------------------------------------------------------------------------------------------

|(3) | Property and equipment, net was adjusted to reflect certain accrued expense adjustments.
|--- | ----------------------------------------------------------------------------------------

|(4) | Goodwill, net was adjusted as a result of certain foreign currency adjustments.
|--- | -------------------------------------------------------------------------------

|(5) | Accrued expenses was adjusted as a result of certain accrued expense adjustments.
|--- | ---------------------------------------------------------------------------------

|(6) | Deferred revenue was adjusted as a result of certain of the revenue adjustments.
|--- | --------------------------------------------------------------------------------

|(7) | Additional paid-in capital was adjusted as a result of certain accrued expense and provision for income tax adjustments.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(8) | Accumulated other comprehensive loss was adjusted as a result of certain foreign currency adjustments.
|--- | ------------------------------------------------------------------------------------------------------

|(9) | Refer to the above table which details the effects of the restatement on net income/loss.
|--- | -----------------------------------------------------------------------------------------



18



---

##### Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                         |  |                                 |         |   |                                 |   |          |               |  |   |               |   |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------- | - | -------- | ------------- |  | - | ------------- | - |  | - | ------- | -
|                                                                                         |  | Nine months ended June 30, 2003 |         |   | Nine months ended June 30, 2002 |  
|                                                                                         |  | (As Reported)                   |         |   | (As Restated)                   |   |          | (As Reported) |  |   | (As Restated) |  
|Cash flows from operating activities:                                                    |  |                                 |         |   |                                 |   |          |               |  |   |               |   |  |   |         |  
|Net income (loss)                                                                        |  | $                               | (5,905  | ) |                                 | $ | (5,708   | )             |  | $ | 56            |   |  | $ | (538    | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                 |         |   |                                 |   |          |               |  |   |               |   |  |   |         |  
|Depreciation and amortization                                                            |  |                                 | 9,330   |   |                                 |   | 9,178    |               |  |   | 15,089        |   |  |   | 15,029  |  
|Purchased in process research & development                                              |  |                                 | 142     |   |                                 |   | 142      |               |  |   |              |   |  |   |        |  
|Non-cash compensation expense related to restructuring                                   |  |                                 | 54      |   |                                 |   | 54       |               |  |   |              |   |  |   |        |  
|Non-cash expense related to issuance of warrant                                          |  |                                 |        |   |                                 |   |         |               |  |   | 170           |   |  |   | 170     |  
|Tax benefit related to exercise of stock options                                         |  |                                 | 427     |   |                                 |   | 427      |               |  |   | 56            |   |  |   | 56      |  
|Changes in operating assets and liabilities net of acquired amounts:                     |  |                                 |         |   |                                 |   |          |               |  |   |               |   |  |   |         |  
|Billed receivables, net                                                                  |  |                                 | 11,465  |   |                                 |   | 11,088   |               |  |   | 8,207         |   |  |   | 8,449   |  
|Prepaid expenses and other current assets                                                |  |                                 | 335     |   |                                 |   | (736     | )             |  |   | 5,550         |   |  |   | 3,925   |  
|Accounts payable                                                                         |  |                                 | 2,075   |   |                                 |   | 1,803    |               |  |   | (4,430        | ) |  |   | (4,421  | )
|Accrued expenses                                                                         |  |                                 | (3,883  | ) |                                 |   | (3,714   | )             |  |   | (11,628       | ) |  |   | (10,195 | )
|Income taxes payable                                                                     |  |                                 | (493    | ) |                                 |   | (479     | )             |  |   | (13           | ) |  |   | (11     | )
|Deferred revenue                                                                         |  |                                 | 8,867   |   |                                 |   | 9,470    |               |  |   | 4,226         |   |  |   | 4,461   |  
|                                                                                         |  |                                 |         |   |                                 |   |          |               |  |   |               |   |  |   |         |  
|Net cash provided by operating activities                                                |  |                                 | 22,414  |   |                                 |   | 21,525   |               |  |   | 17,283        |   |  |   | 16,925  |  
|                                                                                         |  |                                 |         |   |                                 |   |          |               |  |   |               |   |  |   |         |  
|Cash flows from investing activities:                                                    |  |                                 |         |   |                                 |   |          |               |  |   |               |   |  |   |         |  
|Capital expenditures                                                                     |  |                                 | (1,004  | ) |                                 |   | (836     | )             |  |   | (2,450        | ) |  |   | (2,368  | )
|Purchases of investments                                                                 |  |                                 | (52,880 | ) |                                 |   | (130,252 | )             |  |   | (46,685       | ) |  |   | (50,722 | )
|Proceeds from sales of investments                                                       |  |                                 |        |   |                                 |   | 77,370   |               |  |   |              |   |  |   | 4,038   |  
|Acquisition of net assets, net of cash acquired                                          |  |                                 | (2,597  | ) |                                 |   | (1,538   | )             |  |   |              |   |  |   |        |  
|Repayment of long term debt assumed upon acquisition                                     |  |                                 |        |   |                                 |   | (855     | )             |  |   |              |   |  |   |        |  
|                                                                                         |  |                                 |         |   |                                 |   |          |               |  |   |               |   |  |   |         |  
|Net cash used in investing activities                                                    |  |                                 | (56,481 | ) |                                 |   | (56,111  | )             |  |   | (49,135       | ) |  |   | (49,052 | )
|                                                                                         |  |                                 |         |   |                                 |   |          |               |  |   |               |   |  |   |         |  
|Cash flows from financing activities:                                                    |  |                                 |         |   |                                 |   |          |               |  |   |               |   |  |   |         |  
|Proceed from issuance of common stock                                                    |  |                                 | 7,719   |   |                                 |   | 7,719    |               |  |   | 4,888         |   |  |   | 4,888   |  
|                                                                                         |  |                                 |         |   |                                 |   |          |               |  |   |               |   |  |   |         |  
|Net cash provided by financing activities                                                |  |                                 | 7,719   |   |                                 |   | 7,719    |               |  |   | 4,888         |   |  |   | 4,888   |  
|                                                                                         |  |                                 |         |   |                                 |   |          |               |  |   |               |   |  |   |         |  
|Effects of exchange rate changes on cash and cash equivalents                            |  |                                 | (1,899  | ) |                                 |   | (1,380   | )             |  |   | (945          | ) |  |   | (350    | )
|                                                                                         |  |                                 |         |   |                                 |   |          |               |  |   |               |   |  |   |         |  
|Net decrease in cash and cash equivalents                                                |  |                                 | (28,247 | ) |                                 |   | (28,247  | )             |  |   | (27,909       | ) |  |   | (27,589 | )
|Cash and cash equivalents at beginning of period                                         |  |                                 | 117,218 |   |                                 |   | 117,218  |               |  |   | 138,581       |   |  |   | 138,261 |  
|                                                                                         |  |                                 |         |   |                                 |   |          |               |  |   |               |   |  |   |         |  
|Cash and cash equivalents at end of period                                               |  | $                               | 88,971  |   |                                 | $ | 88,971   |               |  | $ | 110,672       |   |  | $ | 110,672 |  
|                                                                                         |  |                                 |         |   |                                 |   |          |               |  |   |               |   |  |   |         |  



19



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##### Table of Contents

Note 3. Acquisitions



On December 19, 2002, the Company acquired all of the outstanding common stock of Lumos Technologies Inc. (Lumos), a privately-held developer of sophisticated
technology for managing Layer 1 networks. By integrating their capabilities with existing Netcool applications, the Company will be able to deliver comprehensive Layer 1 network visibility, event correlation, and problem resolution to current and
future users of the Netcool suite. Under the terms of the acquisition agreement, the Company will pay up to $2.7 million in cash and has assumed $0.9 million in outstanding debt. Approximately $1.0 million of the cash purchase price was paid at
closing, with a further $0.7 million paid as of June 30, 2003 in connection with certain earnouts in relation to revenue, development and employee retention goals. The earnout primarily increases the amount allocated to goodwill, except for earnout
amounts related to employee retention goals which are expensed. The debt assumed of $0.9 million was repaid shortly after acquisition. The transaction was accounted for under the purchase method of accounting with Lumos results of operations
included from the acquisition date.



A summary of the allocation of the initial
purchase price plus the earnouts as of June 30, 2003 is as follows (in millions):



|                                    |  |   |      |  
|----------------------------------- |  | - | ---- | -
|Total tangible liabilities, net     |  | $ | (1.3 | )
|Intangible assets:                  |  |   |      |  
|In process research and development |  |   | 0.1  |  
|Developed technology                |  |   | 1.2  |  
|Customer contracts                  |  |   | 0.2  |  
|Goodwill                            |  |   | 1.3  |  
|Other                               |  |   | 0.2  |  
|                                    |  |   |      |  
|Total intangible assets             |  |   | 3.0  |  
|                                    |  |   |      |  
|Total                               |  | $ | 1.7  |  
|                                    |  |   |      |  



At the time of the acquisition, the
estimated aggregate fair value of Lumos research and development efforts that had not reached technological feasibility as of the acquisition date and had no alternative future uses was estimated by the Companys management to be $0.1
million, and was expensed at the acquisition date. Goodwill, which represents the excess of the purchase price over the fair value of identifiable tangible and intangible assets acquired less liabilities assumed, will be tested annually for
impairment or whenever events or circumstances occur indicating the goodwill might be impaired. Identifiable intangible assets will be amortized on a straight line basis over a period ranging from six months to two years.



The following summary, unaudited and prepared on a pro forma basis, combines the
Companys consolidated results of operations with Lumos results of operations, as if the combination had occurred at the beginning of the periods presented. The table includes the impact of certain adjustments including the elimination of
the charge for acquired in process research and development, and the additional amortization relating to intangible assets acquired (in thousands, except per share amounts):



|                                      |  |                             |        |               |                            |        |               |  |   |               |   |  |   |         |  
|------------------------------------- |  | --------------------------- | ------ | ------------- | -------------------------- | ------ | ------------- |  | - | ------------- | - |  | - | ------- | -
|                                      |  | Three months ended June 30, |        |               | Nine months ended June 30, |       
|                                      |  | 2003                        |        | 2002          |                            |        | 2003          |  |   | 2002          |  
|                                      |  | (As Restated)               |        | (As Restated) |                            |        | (As Restated) |  |   | (As Restated) |  
|Revenues                              |  | $                           | 32,925 |               | $                          | 36,317 |               |  | $ | 93,296        |   |  | $ | 118,581 |  
|Net income (loss)                     |  | $                           | 1,513  |               | $                          | (1,862 | )             |  | $ | (5,886        | ) |  | $ | (1,479  | )
|Net income (loss) per share:          |  |                             |        |               |                            |        |               |  |   |               |   |  |   |         |  
|Basic                                 |  | $                           | 0.02   |               | $                          | (0.02  | )             |  | $ | (0.08         | ) |  | $ | (0.02   | )
|Diluted                               |  | $                           | 0.02   |               | $                          | (0.02  | )             |  | $ | (0.08         | ) |  | $ | (0.02   | )
|Shares used in per share computation: |  |                             |        |               |                            |        |               |  |   |               |   |  |   |         |  
|Basic                                 |  |                             | 76,635 |               |                            | 74,711 |               |  |   | 76,577        |   |  |   | 74,390  |  
|Diluted                               |  |                             | 80,087 |               |                            | 74,711 |               |  |   | 76,577        |   |  |   | 74,390  |  



20



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##### Table of Contents

Note 4. Restructuring Costs



As a result of the Companys change in strategy and its desire to improve its cost structure and profitability, the Company announced
and implemented two separate restructuring plans, which were accounted for under EITF No. 94-3 Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a
Restructuring). The Company does not have any exit or disposal activities as defined under SFAS No. 146 that were initiated after the effective date of SFAS No. 146.



The fiscal 2002 restructuring plan, which was announced during the quarter ended September 30, 2002, resulted in a decrease of the
Companys workforce by 85 employees and the elimination of excess facilities. In connection with implementation of the restructuring plan, the Company incurred restructuring charges of $4.4 million in the quarter ended September 30, 2002. In
the quarter ended June 30, 2003, as a result of a potential tenant terminating negotiations, an additional restructuring charge of $1.7 million was incurred on property leases relating to the fiscal 2002 restructuring plan. The Company determined
that it would not be able to sub-lease some of the excess facilities that it had expected to sub-lease when calculating the original restructuring charge.



The fiscal 2003 restructuring plan, which was announced during the quarter ended December 31, 2002, resulted in a decrease of the Companys workforce by 117
employees and total restructuring charges of $3.1 million, relating to severance and employment related charges.



Severance and employment-related charges consist primarily of severance, health benefits, other termination costs and legal expenses as a result of the termination of
employees. Severance and employment related charges could be higher than the Company has estimated should there be additional arbitration and legal proceedings. The total severance accrual balance of $1.0 million as of June 30, 2003 is expected to
be paid by September 30, 2004.



Facility costs primarily represent closure and
downsizing costs related to offices in Europe and North America that were vacated as part of the fiscal 2002 restructuring program. Closure and downsizing costs include payments required under lease contracts, after the properties were abandoned,
less any applicable estimated sublease income during the period after abandonment. To determine the lease loss portion of the closure and downsizing costs, certain estimates were made related to the (1) time period over which the relevant building
would remain vacant, (2) sublease terms, and (3) sublease rates, including common area charges. The lease loss accrual is an estimate and will be adjusted in the future upon triggering events (such as changes in estimates of time to sublease and
actual sublease rates). As of June 30, 2003, the remaining $1.9 million accrual of lease termination costs, net of estimated sublease income, is expected to be paid on various dates through December 2005.



The following table sets forth the restructuring activity for the nine months ended June 30,
2003 (in thousands):



|                                                     |  |                                |       |   |                               |   |        |               |  |   |        |   |  |   |        |  
|---------------------------------------------------- |  | ------------------------------ | ----- | - | ----------------------------- | - | ------ | ------------- |  | - | ------ | - |  | - | ------ | -
|                                                     |  | Fiscal 2002 Restructuring Plan |       |   | Fiscal 2003Restructuring Plan |   |        |               | 
|                                                     |  | (As Restated)                  |       |   | (As Restated)                 |   |        | (As Restated) | 
|                                                     |  | Facility                       |       |   | Severance                     |   |        | Severance     |  |   | Total  |  
|Accrual balance at September 30, 2002                |  | $                              | 971   |   |                               | $ | 1,636  |               |  |   |       |   |  | $ | 2,607  |  
|Restructuring charges                                |  |                                | 1,655 |   |                               |   |       |               |  | $ | 3,140  |   |  |   | 4,795  |  
|Cash paid during the nine months ended June 30, 2003 |  |                                | (713  | ) |                               |   | (1,037 | )             |  |   | (2,740 | ) |  |   | (4,490 | )
|                                                     |  |                                |       |   |                               |   |        |               |  |   |        |   |  |   |        |  
|Accrual balance at June 30, 2003                     |  | $                              | 1,913 |   |                               | $ | 599    |               |  | $ | 400    |   |  | $ | 2,912  |  
|                                                     |  |                                |       |   |                               |   |        |               |  |   |        |   |  |   |        |  



21



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



The following information should be read in conjunction with the condensed consolidated historical financial information and the notes thereto included in Item 1 of this
Quarterly Report on Form 10-Q/A and Managements Discussion and Analysis of Financial Condition and Results of Operations and other relevant information contained in our fiscal year 2003 Form 10-K as filed with the Securities and Exchange
Commission on May 17, 2004.



The statements contained in this Form 10-Q/A that
are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, beliefs, hopes, intentions or strategies regarding the future. All
forward-looking statements in this Form 10-Q/A are based upon information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from our current
expectations. Factors that could cause or contribute to such differences include, but are not limited to: variation in demand for our software products and services; the level and timing of sales; the extent of product and price competition;
introductions or enhancements of products or delays in introductions or enhancements of products; hiring and retention of personnel; changes in the mix of products and services sold; general domestic and international economic and political
conditions; and other factors and risks discussed in Risk Factors below and elsewhere in this Quarterly Report, and other Micromuse filings with the Securities and Exchange Commission.



Restatement of Financial Statements



The Company has restated its consolidated financial statements for the fiscal years ended
September 30, 2001 and 2002 and for the quarters ended December 31, 2000 through June 30, 2003. All applicable financial information contained in this Form 10-Q/A gives effect to these restatements. Accordingly, the financial statements for those
fiscal periods described above that have been included in the Companys previous filings in 2003 or earlier with the Securities and Exchange Commission or included in previous announcements in 2003 or earlier should not be relied upon.



In September 2003, the Audit Committee of our Board of Directors, with
assistance from independent legal counsel and subsequently, independent forensic accountants, undertook an internal investigation regarding questions raised internally, primarily concerning the accounting for accrued expenses, expense recognition
and certain journal entries. The Audit Committee initially determined on December 28, 2003, that it was likely the Company would have to restate its financial statements for the periods described above based upon the status of the investigation at
that date. On December 29, 2003, the Company informed Nasdaq and the SEC that the Company would not timely file its Form 10-K for fiscal year 2003. On December 30, 2003, we filed a Notification of Late Filing on Form 12b-25 with the SEC disclosing
that the Form 10-K would be delayed pending completion of that internal investigation and issued a press release stating the same. The Companys December 30, 2003 press release also announced that the Company expected that this inquiry would
lead to a restatement of historical financial statements including adjustments to previously filed and published financial results, resulting in a positive impact to earnings in certain periods and a negative impact in others. Also on December 30,
2003, Lloyd Carney and Michael Luetkemeyer hosted a conference call to inform the public of the accounting inquiry and explain the delay in filing the Companys Form 10-K. The Company furnished a copy of the transcript of that call as an
exhibit to a Form 8-K filed on December 31, 2003.



On January 29, 2004, the
Audit Committee met with its independent legal counsel at which time the investigations findings and conclusions were presented. The Audit Committee approved those findings and conclusions that certain accruals for certain expenses were
overstated in certain periods and understated in other periods and that adjustments were required in certain other areas more fully described below. The Audit Committee has discussed with the Companys independent accountants, KPMG LLP, the
Committees findings and conclusions and the adjustments described below.



The Company has adopted and implemented a number of remedial measures that were recommended or identified in the course of the investigation. These measures are summarized in Part I, Item 4, Controls and Procedures.



The net effect of all of the restatement adjustments for the three months and nine months
ending June 30, 2003 and June 30, 2002 is to increase the Companys net income by $787 thousand for the three months ended June 30, 2003, increase the net loss by $693 thousand for the three months ended June 30, 2002, decrease the net loss by
$197 thousand for the nine months ended June 30, 2003 and increase the net loss by $594 thousand for the nine months ended June 30, 2002. The Companys consolidated statements of cash flows have been restated to reflect the reclassification of
changes in assets and liabilities during the period discussed above. The Companys Form 10-K for the fiscal year ended September 30, 2003, filed with the SEC on May 17, 2004, describes the net effect of other adjustments made pursuant to the
restatement.



22



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##### Table of Contents

Restated consolidated financial statements reflect the following adjustments during the three months and nine months
ended June 30, 2003 and 2002:



Note that numbers in parentheses represent an
increase in expense and/or a decrease in income. Numbers with no parentheses around them represent a decrease in expense and/or an increase in income.



Effects on Net Income  Increase (Decrease)

Effects on Net Loss  (Increase) Decrease

(in thousands)



|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|------------------------------------------------------------- |  | --------------------------- | ----- | - | -------------------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | ------ | -
|                                                              |  | Three Months Ended June 30, |       |   | Nine Months Ended June 30, |  
|                                                              |  | 2003                        |       |   | 2002                       |   |        | 2003          |  |   | 2002          |  
|                                                              |  | (as restated)               |       |   | (as restated)              |   |        | (as restated) |  |   | (as restated) |  
|Net adjustments to:                                           |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Revenues                                                      |  | $                           | (85   | ) |                            | $ | 9      |               |  | $ | 302           |   |  | $ | 133    |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Expenses:                                                     |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Cost of revenue:                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Allocation adjustment                                         |  |                             | 463   |   |                            |   | 991    |               |  |   | 1,270         |   |  |   | 3,176  |  
|Accrued expense adjustments                                   |  |                             | 329   |   |                            |   | (18    | )             |  |   | 978           |   |  |   | (357   | )
|Receivable and reserve adjustments                            |  |                             |      |   |                            |   |       |               |  |   |              |   |  |   | (626   | )
|Reclassification                                              |  |                             | 64    |   |                            |   |       |               |  |   | 128           |   |  |   |       |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Subtotal                                                      |  |                             | 856   |   |                            |   | 973    |               |  |   | 2,376         |   |  |   | 2,193  |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Sales and marketing:                                          |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Allocation adjustment                                         |  |                             | (537  | ) |                            |   | (1,519 | )             |  |   | (1,860        | ) |  |   | (3,654 | )
|Accrued expense adjustments                                   |  |                             | 666   |   |                            |   | (399   | )             |  |   | (488          | ) |  |   | 684    |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Subtotal                                                      |  |                             | 129   |   |                            |   | (1,918 | )             |  |   | (2,348        | ) |  |   | (2,970 | )
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Research and development::                                    |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Allocation adjustment                                         |  |                             | 74    |   |                            |   | 528    |               |  |   | 590           |   |  |   | 478    |  
|Accrued expense adjustments                                   |  |                             | 126   |   |                            |   | 140    |               |  |   | 24            |   |  |   | 122    |  
|Reclassification                                              |  |                             | (64   | ) |                            |   |       |               |  |   | (128          | ) |  |   |       |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Subtotal                                                      |  |                             | 136   |   |                            |   | 668    |               |  |   | 486           |   |  |   | 600    |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|General and administrative:                                   |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Accrued expense adjustments                                   |  |                             | 25    |   |                            |   | (29    | )             |  |   | (625          | ) |  |   | (158   | )
|Deferred rent                                                 |  |                             | 31    |   |                            |   | (18    | )             |  |   | 92            |   |  |   | (248   | )
|Receivable and reserve adjustments                            |  |                             |      |   |                            |   |       |               |  |   |              |   |  |   | 506    |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Subtotal                                                      |  |                             | 56    |   |                            |   | (47    | )             |  |   | (533          | ) |  |   | 100    |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Restructuring costs:                                          |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Accrued expense adjustments                                   |  |                             | 31    |   |                            |   |       |               |  |   | 220           |   |  |   |       |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Subtotal                                                      |  |                             | 31    |   |                            |   |       |               |  |   | 220           |   |  |   |       |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Total Expenses                                                |  |                             | 1,208 |   |                            |   | (324   | )             |  |   | 201           |   |  |   | (77    | )
|                                                              |  |                             |       |  
|Interest and other income, net                                |  |                             | (330  | ) |                            |   | (381   | )             |  |   | (288          | ) |  |   | (659   | )
|Provision for income taxes                                    |  |                             | (6    | ) |                            |   | 3      |               |  |   | (18           | ) |  |   | 9      |  
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Total effect on net income/loss                               |  | $                           | 787   |   |                            | $ | (693   | )             |  | $ | 197           |   |  | $ | (594   | )
|                                                              |  |                             |       |   |                            |   |        |               |  |   |               |   |  |   |        |  
|Basic earnings (loss) per share impact of total adjustments   |  | $                           | 0.01  |   |                            | $ | (0.01  | )             |  | $ | 0.00          |   |  | $ | (0.01  | )
|Diluted earnings (loss) per share impact of total adjustments |  | $                           | 0.01  |   |                            | $ | (0.01  | )             |  | $ | 0.00          |   |  | $ | (0.01  | )



23



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Revenues



The Company identified certain revenue related adjustments for which the amount of the net revenue and the timing of the revenue recorded originally needed to be
adjusted. These adjustments caused the pre-tax income to decrease by $85 thousand in the quarter ended June 30, 2003, the pre-tax loss to decrease by $9 thousand in the quarter ended June 30, 2002, the pre-tax loss to decrease by $302 thousand in
the nine months ended June 30, 2003, and the pre-tax loss to decrease by $133 thousand in the nine months ended June 30, 2002.



Expenses



Total expense adjustments increased the pre-tax income by $1.2 million in the quarter ended June 30, 2003, increased the pre-tax loss by $324 thousand in the quarter ended June 30, 2002, decreased the pre-tax loss by
$201 thousand in the nine months ended June 30, 2003, and increased the pre-tax loss by $77 thousand in the nine months ended June 30, 2002.



The Company allocates costs incurred by the Technical Services Department between Cost of Revenues, Sales and Marketing, and Research and Development. A review of these
allocation rates as part of the restatement process led to certain adjustments in these rates to more accurately reflect the time spent by certain employees in various departments. These adjustments had no effect on net income or loss for the
periods presented. See Item 1, Note 1 Use of Estimates in the accompanying Condensed Consolidated Financial Statements for additional discussion on these allocations.



The allowance for doubtful accounts was adjusted to reflect a change to correct the original accounting for a transaction with a customer
that announced bankruptcy.



In addition to the allocation rate and allowance
impacts to expenses noted above, the quarters ended June 30, 2003 and 2002 and the nine months ended June 30, 2003 and 2002 were impacted by adjustments in accrued expenses. The Company identified several accrued expense items for which it concluded
that the amount of the liability, the timing of the liability recognition, or the timing of the release of the liability could not be substantiated or was in error and should be adjusted.



Further, the Company identified that it had not been accounting for its lease expense on a straight-line basis in accordance with SFAS No.
13, Accounting for Leases. As a result of this restatement process, the Company adjusted its lease expense and the related deferred lease liability.



In addition, a reclassification was made in fiscal year 2003 between cost of revenue and research and development to correctly classify certain earnout payments related
to the Lumos acquisition. This reclassification had no impact on net income or loss.



Interest and Other Income



The Company identified certain
cumulative translation adjustment accounts that needed to be adjusted to properly reflect foreign subsidiary account balances and appropriate foreign currency translation rates used. In addition to these adjustments, which resulted in a
reclassification between accumulated comprehensive income and accumulated deficit, certain other adjustments caused the pre-tax income to decrease by $330 thousand in the quarter ended June 30, 2003, the pre-tax loss to increase by $381 thousand in
the quarter ended June 30, 2002, the pre-tax loss to increase by $288 thousand in the nine months ended June 30, 2003, and the pre-tax loss to increase by $659 thousand in the nine months ended June 30, 2002.



Provision for Income Taxes



The above adjustments resulted in changes to the Companys provision for income taxes.
The effect of each individual adjustment depends on the period and the taxing jurisdiction in which the adjustment occurred, as well as the Companys preexisting tax position and the effect of any other adjustments. The combined effect of the
above adjustments resulted in a decrease to the net income of $6 thousand in the quarter ended June 30, 2003, a decrease to the net loss of $3 thousand in the quarter ended June 30, 2002, an increase to the net loss of $18 thousand in the nine
months ended June 30, 2003, and an decrease to the net loss of $9 thousand in the nine months ended June 30, 2002.



Overview



Micromuse Inc. develops, markets and supports a family of scalable, highly configurable, rapidly deployable software solutions that enable fault management and service assurance  the effective monitoring and
management of multiple elements underlying an Information Technology infrastructure, including network devices, computing systems and applications, and the mapping of these elements to the business services they impact. The Company was founded in
1989 and subsequently developed our Netcool/OMNIbus software, which we began shipping in January 1995. All of our revenues continue to be derived from licenses for our Netcool family of products and related maintenance, training and consulting
services. We currently expect that Netcool-related revenues will continue to account for all or substantially all of our revenues for the foreseeable future. As a result, our future operating results are dependent upon continued market acceptance of
our Netcool products and enhancements thereto.



Critical Accounting
Policies and Estimates



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



We believe the following are the critical accounting policies
and estimates that are used in the preparation of our consolidated financial statements:



Revenue Recognition. Our revenues are derived from license revenues for our Netcool family of products, as well as associated maintenance, consulting and training services revenues. We recognize revenue in
accordance with Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), as amended by SOP 98-9, and recognize revenue using the residual method. Under the residual method, revenue is recognized when vendor specific objective
evidence of fair value exists for all of the undelivered elements in the arrangement (i.e., maintenance and professional services), but does not exist for one or more of the delivered elements in the arrangement (i.e., the software product). We
allocate revenue to each undelivered element based on its respective fair value, with the fair value determined by the price charged when that element is sold separately. We determine the fair value of the maintenance portion of the arrangement
based on the renewal price charged to the customer when maintenance is sold separately or the option price for annual maintenance renewals included in the underlying customer contracts. The fair value of the



24



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professional services portion of the arrangement is based on the hourly rates that we charge for these services when sold
independently from a software license. If evidence of fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue from the arrangement is deferred and recognized ratably over the period that
these elements are delivered.



For all of our software arrangements, we defer
revenue for the fair value of the undelivered elements and recognize revenue for the delivered elements when the basic criteria of SOP 97-2 have been met - (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the
vendors fee is fixed or determinable and (4) collectibility is probable. We evaluate each as follows:



| |  | Persuasive evidence of an arrangement exists: For license arrangements with end-users, an arrangement is evidenced by a written contract, which is signed by both the customer and
the Company, or a purchase order from those customers who have previously negotiated a standard license arrangement with us. Sales to our resellers are evidenced by a master agreement governing the relationship together with a purchase order on a
transaction-by-transaction basis. For certain of our OEM arrangements, an arrangement is evidenced on receipt of a delivery notification to the end user. Further, in the case of arrangements with resellers and OEMs, evidence of sell-through to an
end user is required as additional evidence that the arrangement exists. Evidence of sell-through usually comes in the form of a purchase order or contract identifying the end user and sell-through shipping reports, identifying the ship
to location.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Delivery has occurred: Delivery to both our direct customers and our resellers and OEMs is considered to have occurred when media containing the licensed programs is provided to a
common carrier or, in the case of electronic delivery, the customer is given access to the fully functional licensed programs.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Fixed or determinable fee: The Company considers the fee to be fixed or determinable if the fee is not subject to refund or adjustment. If the arrangement fee is not fixed or
determinable, the Company recognizes the revenue as amounts become due and payable.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Collection is probable: The Company conducts a credit review for all significant transactions at the time of the arrangement to determine the creditworthiness of the customer.
Collection is deemed probable if the Company expects that the customer will be able to pay amounts under the arrangement as payments become due. If the Company determines that collection is not probable, the Company defers the revenue and recognizes
the revenue upon cash collection.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Maintenance revenues from
ongoing customer support and product upgrades are deferred and recognized ratably over the term of the maintenance agreement, typically 12 months. Payments for maintenance fees (on initial order or on renewal) are generally made in advance and are
nonrefundable. Revenues for professional services are recognized as the services are performed. Professional services generally are not essential to the functionality of the software. Our software products are fully functional upon delivery and do
not require any significant modification or alteration.



Deferred revenue
includes revenue not yet recognized as a result of deferred maintenance, professional services not yet rendered and license revenue deferred until all the requirements of SOP 97-2 are met.



Allowance for Doubtful Accounts. We regularly review the adequacy of our allowance for
doubtful accounts after considering the size of the accounts receivable aging, the age of each invoice, each customers expected ability to pay and our collection history with each customer. We review any invoice greater than 30 days past due
to determine if a specific allowance is appropriate based on its risk category. In addition, we maintain a general reserve for all invoices by applying a percentage to each 30-day age category. In determining these percentages, we analyze our
historical collection experience by region and current economic trends. If the historical data we use to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional
provisions for doubtful accounts may be needed and the future results of operations could be materially affected. However, historically the reserve has proven to be adequate.



Circumstances that have caused revisions to the allowance calculation have been primarily due to the contraction of the overall economy.
Deterioration in the economy could result in more customers being placed in the specific reserve category, thereby increasing our reserve estimate and negatively impacting operating results.



Allocations of technical services department costs. The costs of our technical
services department are allocated between cost of revenue, sales and marketing expenses, and research and development expenses based upon an estimate of the time spent by the technical services employees in various departments and the areas
benefited by that time. Total costs of the technical services department were $5.7 million and $17.4 million for the quarter and the nine month period ended June 30, 2003, respectively, and $6.9 million and $21.4 million for the quarter and the
nine month period ended June 30, 2002, respectively. The allocation rates applied to these department costs were 22% to cost of revenue, 73% to sales and marketing, and 5% to research and development in the quarter ended June 30, 2003; 22% to cost
of revenue, 73% to sales and marketing, and 5% to research and development in the nine month period ended June 30, 2003; 17% to cost of revenue, 80% to sales and marketing, and 3% to research and development in the quarter ended June 30, 2002; and
16% to cost of revenue, 75% to sales and marketing, and 9% to research and development in the nine month period ended June 30, 2002. The allocation estimate is subject to change and, if changed, will impact the allocation of expenses in the
statement of operations but will not impact net income or loss.



Impairment
Assessments. We review the carrying amount of goodwill for impairment on an annual basis in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. In addition we perform an
impairment assessment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value of goodwill and other intangible assets may not be recoverable. Significant changes in circumstances can be
both internal to our strategic and financial direction, as well as changes to the competitive and economic landscape. Changes in circumstances that are considered important for asset impairment include, but are not limited to, a decrease in our
market capitalization, contraction of the telecommunications industry, reduction or elimination of geographic economic growth, reductions in our forecasted growth and significant changes to operating costs.



As part of our impairment assessment, we examine economic conditions, products, customer base
and geography. Based on these criteria, we determine which products we will continue to support and sell and, thereby, determine which assets will continue to have future strategic value and benefit. If indicators suggest the carrying value of our
long-lived assets may not be recoverable we then estimate the fair value of these long-lived assets based on the sum of the expected discounted future cash flows expected to result from the use of the assets and their eventual disposition under the
requirements of SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets.



Allowance for Returns. For customers having a right of return, the Company estimates future returns based on historical experience and other assumptions, to determine if an allowance is appropriate. To date,
the Company has experienced an immaterial level of returns, and as a result, the Companys allowance for returns has been insignificant. If historical data used to calculate the allowance for returns does not reflect actual future returns,
additional provisions for returns may be needed and future results of operations could be materially affected. However, historically the reserve has proven to be adequate.



Restructuring-related Assessments. Our critical accounting policy and judgment as it relates to restructuring-related assessments in
accordance with Emerging Issues Task Force (EITF) No. 94-3 Liability Recognition for Certain Employee Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring) and SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activitiesincludes our estimate of the loss related to facility costs and severance-related costs. To determine the facility costs, which is the loss after our cost recovery efforts from subleasing a building,
certain estimates were made related to the (1) time period over which the relevant building would remain vacant, (2) sublease terms, and (3) sublease rates, including common area charges. This lease loss is an estimate and will be adjusted in the
future upon triggering events (such as changes in estimates of time to sublease and actual sublease rates). In the quarter ended September 30, 2002, the fiscal 2002 restructuring plan resulted in the elimination of excess facilities. In the quarter
ended June 30, 2003, as a result of a potential tenant terminating negotiations with us, an additional restructuring charge of $1.7 million was incurred on property leases relating to the fiscal 2002 restructuring plan. The fiscal 2003 restructuring
plan, which was announced during the quarter ended December 31, 2002, resulted in a decrease of the Companys workforce by 117 employees and total restructuring charges of $3.1 million, relating to severance and employment related charges.



To determine the severance and employment-related charges, we have made
certain estimates as they relate to severance benefits including the remaining time employees will be retained, the estimated severance period, health benefits and other termination costs as well as the estimated legal costs. Severance and
employment-related charges for the fiscal 2003 restructuring plan could be higher than we have estimated should there be additional arbitration and legal proceedings.



25



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Legal contingencies. The Company is subject to various claims and legal actions arising in the ordinary course of
business. We have accrued for estimated losses in the accompanying consolidated financial statements for those matters where we believe that the likelihood that a loss has occurred is probable and the amount of loss is reasonably estimable. Although
we currently believe that we have adequately accrued for estimable and probable losses regarding the outcome of outstanding legal proceedings, claims and litigation involving us and that such outcome will not have a material adverse effect on our
business, results of operations or financial condition, litigation is inherently uncertain, and there can be no assurance that existing or future litigation will not have a material adverse effect on our business, results of operations or financial
condition or that the current amount of accrued losses is sufficient for any actual losses that may be incurred.



Accrued Commission Policy. The Company accounts for commission accruals and related expenses to reflect a liability in the period the obligation arose for the
actual amounts to be paid, with the related expense being recorded in the period in which the related revenue was recognized. The Company calculates the total commission liability for all valid purchase orders or approved written contracts received
in the period and adjusts the accrued liability for purchase orders or approved written contracts not recognized as revenue in the period because they did not meet one or more of the revenue recognition requirements of SOP 97-2.



Non-GAAP Financial Results



We prepare and release quarterly unaudited financial statements prepared in accordance with
generally accepted accounting principles (GAAP). We also disclose and discuss certain non-GAAP financial information in the related earnings release and investor conference call. This non-GAAP financial information excludes certain
non-cash and special charges, consisting primarily of the amortization and impairment of goodwill and other intangible assets, in process research and development, restructuring costs, executive recruiting costs, and the related income tax effects.
However, we urge investors to carefully review the GAAP financial information included as part of our Quarterly Reports on Form 10-Q, our Annual Reports on Form 10-K, and our quarterly earnings releases.



Results of Operations



The following table sets forth certain items in our consolidated statement of operations as
a percentage of total revenues, except as indicated:



|                                                     |  |                             |    |  |                            |    |  |               |    |  |               |   
|---------------------------------------------------- |  | --------------------------- | -- |  | -------------------------- | -- |  | ------------- | -- |  | ------------- | --
|                                                     |  | Three months ended June 30, |    |  | Nine months ended June 30, |   
|                                                     |  | 2003                        |    |  | 2002                       |    |  | 2003          |    |  | 2002          |   
|                                                     |  | (As Restated)               |    |  | (As Restated)              |    |  | (As Restated) |    |  | (As Restated) |   
|As a Percentage of Total Revenues:                   |  |                             |    |  |                            |    |  |               |    |  |               |   
|Revenues:                                            |  |                             |    |  |                            |    |  |               |    |  |               |   
|License                                              |  | 55.4                        | %  |  | 57.4                       | %  |  | 54.5          | %  |  | 59.6          | % 
|Maintenance and services                             |  | 44.6                        | %  |  | 42.6                       | %  |  | 45.5          | %  |  | 40.4          | % 
|                                                     |  |                             |    |  |                            |    |  |               |    |  |               |   
|Total revenues                                       |  | 100.0                       | %  |  | 100.0                      | %  |  | 100.0         | %  |  | 100.0         | % 
|                                                     |  |                             |    |  |                            |    |  |               |    |  |               |   
|Cost of revenues:                                    |  |                             |    |  |                            |    |  |               |    |  |               |   
|License                                              |  | 3.8                         | %  |  | 4.6                        | %  |  | 3.6           | %  |  | 4.2           | % 
|Maintenance and services                             |  | 7.9                         | %  |  | 8.8                        | %  |  | 8.8           | %  |  | 10.1          | % 
|Amortization of developed technology                 |  | 3.2                         | %  |  | 2.3                        | %  |  | 3.3           | %  |  | 2.1           | % 
|                                                     |  |                             |    |  |                            |    |  |               |    |  |               |   
|Total cost of revenues                               |  | 14.9                        | %  |  | 15.7                       | %  |  | 15.7          | %  |  | 16.4          | % 
|                                                     |  |                             |    |  |                            |    |  |               |    |  |               |   
|Gross profit                                         |  | 85.1                        | %  |  | 84.3                       | %  |  | 84.3          | %  |  | 83.6          | % 
|                                                     |  |                             |    |  |                            |    |  |               |    |  |               |   
|Operating expenses:                                  |  |                             |    |  |                            |    |  |               |    |  |               |   
|Sales and marketing                                  |  | 43.8                        | %  |  | 56.5                       | %  |  | 49.6          | %  |  | 49.9          | % 
|Research and development                             |  | 22.5                        | %  |  | 21.7                       | %  |  | 23.5          | %  |  | 20.4          | % 
|General and administrative                           |  | 12.0                        | %  |  | 11.8                       | %  |  | 13.7          | %  |  | 11.8          | % 
|Amortization of goodwill and other intangible assets |  | 0.6                         | %  |  | 5.6                        | %  |  | 1.2           | %  |  | 5.2           | % 
|Restructuring costs                                  |  | 5.0                         | %  |  | 0.0                        | %  |  | 5.2           | %  |  | 0.0           | % 
|                                                     |  |                             |    |  |                            |    |  |               |    |  |               |   
|Total operating expenses                             |  | 83.9                        | %  |  | 95.6                       | %  |  | 93.2          | %  |  | 87.3          | % 
|                                                     |  |                             |    |  |                            |    |  |               |    |  |               |   
|Income (loss) from operations                        |  | 1.2                         | %  |  | (11.3                      | )% |  | (8.9          | )% |  | (3.7          | )%
|Interest and other income, net                       |  | 2.1                         | %  |  | 3.1                        | %  |  | 3.7           | %  |  | 3.2           | % 
|                                                     |  |                             |    |  |                            |    |  |               |    |  |               |   
|Income (loss) before income tax provision (benefit)  |  | 3.3                         | %  |  | (8.2                       | )% |  | (5.2          | )% |  | (0.5          | )%
|Income tax provision (benefit)                       |  | (0.4                        | )% |  | 3.4                        | %  |  | 1.0           | %  |  | 0.0           | % 
|                                                     |  |                             |    |  |                            |    |  |               |    |  |               |   
|Net income (loss)                                    |  | 3.7                         | %  |  | (4.8                       | )% |  | (6.2          | )% |  | (0.5          | )%
|                                                     |  |                             |    |  |                            |    |  |               |    |  |               |   
|As a Percentage of Related Revenues:                 |  |                             |    |  |                            |    |  |               |    |  |               |   
|Cost of license revenues                             |  | 6.9                         | %  |  | 8.1                        | %  |  | 6.6           | %  |  | 7.1           | % 
|Cost of maintenance and services revenues            |  | 17.6                        | %  |  | 20.7                       | %  |  | 19.3          | %  |  | 25.1          | % 



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Revenues.



Revenues decreased to $32.9 million and $92.4 million in the quarter and nine months ended June 30, 2003, from $35.0 million and $114.3 million in the comparable
periods of the prior year. License revenues decreased to $18.2 million and $50.4 million in the quarter and nine months ended June 30, 2003, from $20.1 million and $68.1 million in the comparable periods of the prior year. The decline in license
revenues was primarily due to the economic slowdown that limited the overall capital spending of our existing and potential customers, especially in the telecommunications market. Maintenance and services revenues decreased to $14.7 million and
$42.1 million in the quarter and nine months ended June 30, 2003, from $14.9 million and $46.2 million in the comparable periods of the prior year. The decrease in maintenance and services revenues was a result of the related decrease in license
revenue and lower overall services revenue. Services revenue declined $0.2 million and $2.7 million in the quarter and nine months ended June 30, 2003, respectively, in comparison to the same periods in the prior year. License revenues as a
percentage of total revenues was 55.4% and 54.5% in the quarter and nine months ended June 30, 2003, as compared to 57.4% and 59.6% in the comparable periods of the prior year.



One third-party distributor customer accounted for approximately 19% and 29% of revenues for the quarter and nine months ended June 30,
2003, and 16% for the nine months ended June 30, 2002. Another third party distributor customer accounted for 13% of revenue for the quarter ended June 30, 2002. One end-user customer accounted for 13% of revenues for the nine months ended June 30,
2003. No one end-user customer accounted for greater than 10% of revenues for the quarters ended June 30, 2003 and 2002 and the nine months ended June 30, 2002.



Cost of Revenues



The cost of license revenues consists primarily of technology license fees paid to third-party software vendors and production costs. Cost of license revenues as a percentage of license revenues decreased to 6.9% and
6.6% in the quarter and nine months ended June 30, 2003, as compared to 8.1% and 7.1% in the comparable periods of the prior year. The decrease was mainly due to a change in the mix of license revenue in the current quarter and nine months ended
June 30, 2003. The cost of maintenance and services revenues consists primarily of personnel-related costs incurred in providing maintenance, consulting and training to customers. Cost of maintenance and services revenues as a percentage of
maintenance and services revenues decreased to 17.6% and 19.3% in the quarter and nine months ended June 30, 2003, from 20.7% and 25.1% in the comparable periods of the prior year. This improvement was principally due to a proportionally greater
percentage of higher-margin maintenance revenues over services revenue in addition to economies of scale, and a decrease in headcount, facilities, and travel costs related to the Companys previously announced restructuring.



Cost of the amortization of developed technology relates to the amortization of developed
technology acquired in the acquisitions of CAN, NetOps Corporation, RiverSoft plc and Lumos Technologies Inc. The increase in the quarter and nine months ended June 30, 2003 as compared to the same periods of the prior year is due to the acquisition
of RiverSoft plc in the quarter ended September 30, 2002 and Lumos technologies in the quarter ended December 31, 2002.



Sales and Marketing Expenses



Sales and marketing expenses decreased to $14.4 million and $45.8 million in the quarter and nine months ended June 30, 2003, from $19.8 million and $57.0 million in the
comparable periods of the prior year. This decrease was primarily due to a decrease in sales commission as a result of the related decrease in revenue and a decrease in personnel related costs as a result of lower headcount and travel expenditures
related to the above mentioned restructuring. Sales and marketing expenses as a percentage of total revenues decreased to 43.8% from 56.5% in the quarter ended June 30, 2003 and 2002, respectively, and decreased to 49.6% from 49.9% in the nine
months ended June 30, 2003 and 2002, respectively.



Research and Development
Expenses



Research and development expenses decreased to $7.4 million and
$21.7 million in the quarter and nine months ended June 30, 2003, from $7.6 million and $23.3 million in the comparable periods of the prior year. The decrease was primarily due to the decrease in personnel related costs as a result of reductions in
headcount related to the above mentioned restructuring. Research and development costs as a percentage of total revenues increased to 22.5% from 21.7% in the quarter ended June 30, 2003 and 2002, respectively, and increased to 23.5% from 20.4% in
the nine months ended June 30, 2003 and 2002, respectively.



General and
Administrative Expenses



General and administrative expenses
decreased to $3.9 million and $12.6 million in the quarter and nine months ended June 30, 2003, from $4.1 million and $13.5 million in the comparable periods of the prior year. The decrease in general and administrative expenses in the quarter ended
June 30, 2003 as compared to the comparable period of the prior year was primarily due to a decrease in headcount and travel related expenditures related to the above mentioned restructuring. The decrease in general and administrative expenses in
the nine months ended June 30, 2003 as compared to the comparable period of the prior year was also due to the decrease in headcount, in addition to a decrease in the bad debt expense of $0.6 million which was offset by an increase in professional
legal fees of $0.7 million. General and administrative expenses as a percentage of revenues increased to 12.0% and 13.7% in the quarter and nine months ended June 30, 2003, from 11.8% and 11.8% in the comparable periods of the prior year.



Amortization of Goodwill and Other Intangible Assets



Amortization of goodwill and other intangible assets decreased to $194
thousand and $1.1 million in the quarter and nine months ended June 30, 2003, from $2.0 million and $5.9 million in the comparable periods of the prior year. The charges reflect the amortization of the goodwill and other intangible assets over
estimated useful lives of three to five years. The decrease was mainly due to the adoption of SFAS No. 142, which changed the accounting for goodwill from an amortization method to an impairment-only approach. If the Company had followed the
provisions of SFAS No. 142 in the prior year, the expense would have decreased by $1.8 million and $5.5 million for the quarter and nine months ended June 30, 2002, respectively.



Restructuring Costs



During the quarter and nine months ended June 30, 2003, we incurred $1.7 million and $4.8 million, respectively, in restructuring costs. (See Restructuring-related
Assessment under Critical Accounting Policies and also Note 3 of Notes to Condensed Consolidated Financial Statements.)



Interest and Other Income, Net



Interest and other income decreased to $0.7 million and $3.4 million in the quarter and nine months ended June 30, 2003, respectively, from $1.1 million and $3.7 million
in the nine months ended June 30, 2002, respectively. This net decrease was primarily due to the decline in interest rates over the past year.



Provision for (benefit from) Income Taxes



Income taxes showed a benefit of $0.1 million and a charge of $0.9 million in the quarter and nine months ended June 30, 2003, as compared to a benefit of $1.2 million
and a charge of $20 thousand in the comparable periods of the prior year. The change for the nine months ended June 30, 2003 compared to 2002 was mainly due to an increase in taxable income in certain countries and the change for the quarter ended
June 30, 2003 compared to 2002 was mainly due to a decline in projected taxes in fiscal year 2003 from fiscal year 2002.



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Liquidity and Capital Resources



As of June 30, 2003, we had $89.0 million in cash and cash equivalents and $123.3 million in marketable securities, as compared to $117.2
million in cash and cash equivalents and $70.4 million in marketable securities as of September 30, 2002. The net decrease in cash and cash equivalents in the nine months ended June 30, 2003, was due primarily to net loss adjusted for non-cash
expenses, the decrease in accrued expenses, capital expenditures, the acquisition of Lumos Technologies Inc., and the purchases of investments. These outflows of cash and cash equivalents were partially offset by inflows of cash and cash equivalents
related to the decrease in billed receivables, the increase in accounts payable, the increase in deferred revenue, proceeds from sales of investments and proceeds from the issuance of common stock.



As of June 30, 2003, the Companys principal commitments consisted of obligations under
operating leases.



We believe that our current cash balances and the cash flows
generated by operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next 12 months. Thereafter, if cash generated from operations is insufficient to satisfy our liquidity requirements,
we may seek to sell additional equity or convertible debt securities or obtain credit facilities. The decision to sell additional equity or debt securities could be made at any time and would likely result in additional dilution to our stockholders.
A portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we evaluate potential acquisitions of
such businesses, products or technologies.



RISK FACTORS



The following factors, in addition to the other information contained in
this report, should be considered carefully in evaluating the Company and our prospects. This report (including without limitation the following Risk Factors) contains forward-looking statements (within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934) regarding the Company and our business, financial condition, results of operations and prospects. Words such as expects, anticipates, intends,
plans, believes, seeks, estimates and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking
statements in this report. Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, possible changes in legislation and other statements regarding matters that are not historical are
forward-looking statements.



Although forward-looking statements in this report
reflect the good faith judgment of our management, such statements can only be based on facts and factors we currently know about. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and
outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, but are not limited to, those discussed below and
in Managements Discussion and Analysis of Financial Condition and Results of Operations as well as those discussed elsewhere in this report. Readers are urged not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of the report.



The risk factors set forth below should be read in conjunction with all relevant information
contained in the Companys Form 10-K for the fiscal year ended September 30, 2003, and Forms 10-Q for the quarters ended December 31, 2003, and March 31, 2004, filed with the SEC on May 17, 2004. Except to the extent financial information set
forth in this Form 10-Q/A has been adjusted to reflect the restatement of financial statements described elsewhere in this report, this Form 10-Q/A does not reflect events occurring after the filing of the original Form 10-Q filed on August 13,
2003. Accordingly, the risk factors set forth below speak as of the original August 13, 2003, filing date and have not been updated for subsequent events.



Our operating results may vary as a result of the current economic slowdown.



We face uncertainty in the degree to which the current economic slowdown will negatively affect growth and capital spending by our existing
and potential customers. We continue to experience instances of customers delaying or deferring licenses of our software and maintenance agreement, and longer lead times needed to close our customer sales. In addition, recent political turmoil in
many parts of the world, including terrorist and military actions, may continue to put pressure on global economic conditions. If the economic conditions in the United States and globally do not improve, or if we experience a worsening in the global
economic slowdown, we may continue to experience material adverse impacts on our business, operating results, and financial condition. We may not be able to accurately anticipate the magnitude of these impacts on future quarterly and annual results.



Our operating results may vary from quarter to quarter, causing our stock
price to fluctuate.



Our operating results have in the past, and will
continue to be, subject to quarterly and annual fluctuations. Our quarterly revenues and operating results in geographic segments that we track fluctuate and are difficult to predict. It is possible that in some quarter or quarters our operating
results will be below the expectations of public market analysts or investors. In such event, or in the event adverse conditions prevail, or are perceived to prevail, with respect to our business or financial markets generally, the market price of
our common stock may decline significantly.



We realize a significant portion
of our license revenues in the last month of a quarter, frequently in the last weeks or even days of a quarter. As a result, license revenues in any quarter are difficult to forecast because it is substantially dependent on orders booked and shipped
in that quarter. Moreover, our sales cycle, from initial evaluation to delivery of software, varies substantially from customer to customer. Further, we base our expense levels in part on forecasts of future orders and sales, which are extremely
difficult to predict. A substantial portion of our operating expenses is related to personnel, facilities, and sales and marketing programs. The level of spending for such expenses cannot be adjusted quickly and is, therefore, relatively fixed in
the short term. Accordingly, our operating results will be harmed if revenues fall below our expectations in a particular quarter. In addition, the number and timing of large individual sales has been difficult for us to predict, and large
individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or deferral of one or more significant sales in a quarter could harm our operating results.



Because of these fluctuations we believe that quarter-to-quarter comparisons of our operating
results are not necessarily meaningful or indicative of our future performance. A number of other factors are likely to cause these variations, including:



| | changes in the demand for our software products and services and the level of product and price competition that we encounter;
|- | ------------------------------------------------------------------------------------------------------------------------------



| | the timing of new hires and our ability to attract, retain and motivate qualified personnel, including changes in our sales incentives;
|- | ---------------------------------------------------------------------------------------------------------------------------------------



| | the mix of products and services sold, including the mix of sales to new and existing customers and through third-party distributors and our direct sales force;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | changes in the mix of, and lack of demand from, distribution channels through which our products are sold;
|- | ----------------------------------------------------------------------------------------------------------



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| | the length of our sales cycles and the success of our new customer generation activities;
|- | -----------------------------------------------------------------------------------------



| | spending patterns and budgetary resources of our customers on network management software solutions;
|- | ----------------------------------------------------------------------------------------------------



| | product life-cycles and the timing of introductions or enhancements of products, or delays in the introductions or enhancements of our products and those of our competitors;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | market acceptance of new products;
|- | ----------------------------------



| | changes in the renewal rate of maintenance agreements;
|- | ------------------------------------------------------



| | fluctuations in our gross margins;
|- | ----------------------------------



| | our ability to achieve targeted cost reductions;
|- | ------------------------------------------------



| | actual events, circumstances, outcomes and amounts differing from judgments, assumptions and estimates used in determining the value of certain assets, liabilities and other items
reflected in our financial statements;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | expansion of international operations, including gains and losses on the conversion to United States dollars of accounts receivable and accounts payable arising from international
operations and the mix of international and domestic revenue;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | the extent of market consolidation; and
|- | ---------------------------------------



| | software defects and other product quality problems.
|- | ----------------------------------------------------



Therefore, operating results for a particular future period are difficult to predict and prior results are not necessarily indicative of results to be expected in future
periods. Any of the foregoing factors, or others discussed elsewhere herein, could have a material adverse effect on our business, operating results, financial condition and stock price.



Failure to manage our business may adversely affect our operations.



Over the past few years, we have added customers, personnel and expanded the scope and geographic area of our operations that has placed and
will continue to place a significant strain upon our management and our operating and financial systems and resources. However, we have reduced our headcount from 660 employees on September 30, 2002 to 538 employees on June 30, 2003, mainly as a
result of planned reductions and attrition. Given the uncertainties discussed in this Risk Factors section, together with factors that might affect our ability to quickly expand or contract our work force around the world, it is difficult to predict
future requirements for the number and type of employees in the fields and geographies in which we operate. Failure to align employee skills and populations with revenue and market requirements would have a material adverse impact on our business
and its operating results.



Our restructuring of operations may not achieve
the results we intend and may harm our business.



In the quarters ended
September 30, 2002 and December 31, 2002, we initiated plans to streamline operations and reduce expenses, which included cuts in discretionary spending, reductions in capital expenditures, reductions in the work force and consolidation of certain
office locations, as well as other steps to reduce expenses. The implementation of our restructuring plans has placed, and may continue to place, a significant strain on our managerial, operational, financial, employee and other resources.
Additionally, the restructurings may negatively affect our employee turnover as well as recruiting and retention of important employees. It is possible that these reductions could impair our marketing, sales and customer support efforts or alter our
product development plans. If we experience difficulties in carrying out the restructuring plans, our expenses could increase more quickly than we expect. If we find that our planned restructurings do not achieve our objectives, it may be necessary
to implement further reduction of our expenses, to perform additional reductions in our headcount, or to undertake additional restructurings of our business.



We may fail to support our operations.



To succeed in the implementation of our business strategy, we must execute our sales strategy and further develop products and expand service capabilities, while managing
future operations by implementing effective planning and operating processes. If we fail to manage effectively, our business could suffer. To manage, we must:



| | successfully manage the business with fewer employees due to the restructuring plans;
|- | -------------------------------------------------------------------------------------



| | continue to implement and improve our operational, financial and management information systems;
|- | ------------------------------------------------------------------------------------------------



| | hire, train and retain qualified personnel, especially if the business climate improves;
|- | ----------------------------------------------------------------------------------------



| | continue to expand and upgrade core technologies;
|- | -------------------------------------------------



| | effectively manage multiple relationships with various OEMs, resellers and system integrators; and
|- | ---------------------------------------------------------------------------------------------------



| | successfully integrate the businesses of our acquired companies.
|- | ----------------------------------------------------------------



We need to continue to expand our distribution channels and retain our existing third-party distributors.



We need to continue to develop relationships with leading network equipment and
telecommunications providers and to expand our third-party channels of distribution through OEMs, resellers and systems integrators. We currently invest significant resources to develop these relationships and channels of distribution, which could
reduce our ability to generate profits. Third-party distributors accounted for approximately 51%, 49% and 41% of our total revenues in the nine months ended June 30, 2003, fiscal 2002 and fiscal 2001, respectively. Our business will be harmed if we
are not able to retain and attract additional distributors that market our products effectively. Further, many of our agreements with third-party distributors are nonexclusive, and many of the companies with which we have agreements also have
similar agreements with our competitors or potential competitors. Our third-party distributors have significantly greater sales and marketing resources than we do, and their sales and marketing efforts may conflict with our direct sales efforts. In
addition, although sales through third-party distributors result in reduced sales and marketing expense with respect to such sales, we sell our products to third-party distributors at reduced prices, resulting in lower gross margins on such
third-party



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sales. We believe that our success in penetrating markets for our fault and service level management applications depends
substantially on our ability to maintain our current distribution relationships, in particular, those with Cisco Systems, IBM, Ericsson, Accenture, Cap Gemini Ernst & Young and others. Our business will be harmed if network equipment and
telecommunications providers and distributors discontinue their relationships with us, compete directly with us or form additional competing arrangements with our competitors.



We are dependent on the market for software designed for use with advanced communications services, and the size of this market is
unproven.



The market for our products is in an early stage of development
or is developed but not highly penetrated. Although the rapid expansion and increasing complexity of computer networks in recent years and the resulting emergence of service level agreements has increased, the demand for fault and service level
management software products, and the awareness of and the need for such products is a recent development. Therefore, it is difficult to assess the size of this market, the appropriate features and prices for products to address this market, the
optimal distribution strategy and the competitive environment that will develop.



We are substantially dependent upon telecommunications carriers and other service providers continuing to purchase our products.



Telecommunications carriers, including Internet service providers, that deliver advanced communications services to their customers accounted for approximately 58%, 77%
and 82% of our total revenues in the nine months ended June 30, 2003, fiscal 2002 and fiscal 2001, respectively. In addition, these providers are an important focus of our sales strategy. If these customers cease to deploy advanced communications
services for any reason, the market for our products will be harmed. Also, delays in the introduction of advanced services or the failure of such services to gain widespread market acceptance or the decision of telecommunications carriers and other
service providers not to use our products in the deployment of these services would harm our business.



Consolidations in, or a continued slowdown in, the telecommunications industry could harm our business.



We have derived a substantial amount of our revenues from sales of products and related services to the telecommunications industry. The telecommunications industry has
experienced significant growth and consolidation in the past few years, although, over recent years, trends indicate that capital spending by this industry has decreased and may continue to decrease in the future as a result of a general decline in
economic growth in local and international markets. Our business is highly dependent on the telecommunications industry and on continued capital spending by our customers in that industry. In the event of further significant slowdown in capital
spending of the telecommunications industry, our business would be adversely affected. Furthermore, as a result of industry consolidation, there may be fewer potential customers requiring our software in the future. Larger, consolidated
telecommunications companies may also use their purchasing power to create pressure on the prices and the margins we could realize. We cannot be certain that consolidations in, or a slowdown in the growth of, the telecommunication industry will not
harm our business.



Our business depends on the continued growth in use and
improvement of the Internet.



A significant portion of our revenues comes
from telecommunications carriers, Internet service providers and other customers that rely upon or are driven by the Internet. As a result, our future results of operations substantially depend on the continued acceptance and use of the Internet as
a medium for commerce and communication. Our business could be harmed if this growth does not continue or if the rate of technological innovation, deployment or use of the Internet slows or declines. Recent data and reports indicate that both the
growth of significant portions of the Internet and technological innovations have slowed. If these trends continue, they will likely have an adverse impact on our business.



Furthermore, the growth and development of the market for Internet-based services may prompt the introduction of new laws and regulations.
Laws, which impose additional burdens on those companies that conduct business online, could decrease the expansion of the use of the Internet. A decline in the growth of the Internet could decrease demand for our products and services and increase
our cost of doing business, or otherwise harm our business, which could result in a material adverse effect on the market price of our common stock.



We face intense competition, including from larger competitors with greater resources than our own, which could result in our losing market share or experiencing a
decline in gross margins.



We face intense competition in our markets. As
we enter new markets, we encounter additional, market-specific competitors. In addition, because the software market has relatively low barriers to entry, we are aware of new and potential entrants in portions of our market space. Increased
competition is likely to result in price reductions and may result in reduced gross margins and loss of market share.



Further, many of our competitors have longer operating histories and have significantly greater financial, technical, sales, marketing and other resources, as well as
greater name recognition and a larger customer base, than we do. As a result, they may be able to devote greater resources to the development, promotion, sale and support of their products or to respond more quickly to new or emerging technologies
and changes in customer requirements than we can. Existing competitors could also increase their market share by bundling products having functionality offered by our products with their current applications. Moreover, our current and potential
competitors may increase their share of the fault and service level management market by strategic alliances and/or the acquisition of competing companies. In addition, network operating system vendors could introduce new or upgrade and extend
existing operating systems or environments that include functionality offered by our products, which could render our products obsolete and unmarketable.



Our current and prospective competitors offer a variety of solutions to address the fault and service level and enterprise network management markets and generally fall
within the following five categories:



| | customers internal design and development organizations that produce service level management and network management applications for their particular needs, in some cases
using multiple instances of products from hardware and software vendors such as Compaq and Hewlett-Packard;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | vendors of network and systems management frameworks including Computer Associates International, Inc.;
|- | -------------------------------------------------------------------------------------------------------



| | vendors of network and systems management applications including Hewlett-Packard Company and BMC Software, Inc;
|- | ---------------------------------------------------------------------------------------------------------------



| | providers of specific market applications; and
|- | ----------------------------------------------



| | systems integrators serving the telecommunications industry which primarily provide programming services to develop customer specific applications including Team Telecom
International Ltd. and Agilent Technologies, Inc.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Many of our
existing and potential customers and distributors continuously evaluate whether to design and develop their own network operations support and management applications or purchase them from outside vendors. Sometimes these customers internally design
and develop their own software solutions for their particular needs and therefore may be reluctant to purchase products offered by independent vendors such as ours.



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As a result, we must continuously educate existing and prospective customers as to the advantages of our products versus
internally developed network operations support and management applications.



If we ship products that contain defects, the market acceptance of our products and our reputation will be harmed, and our customers could seek to recover their damages from us.



Complex software products frequently contain errors or defects, especially when first introduced or when new versions or enhancements are
released. Because of defects, we could continue to experience delays in or failure of market acceptance of products, or damage to our reputation or relationships with our customers. Any defects and errors in new versions or enhancements of our
products after commencement of commercial shipments would harm our business.



In addition, because our products are used to monitor and address network problems and avoid failures of the network to support critical business functions, any design defects, software errors, misuse of our products, incorrect data from
network elements or other potential problems within or out of our control that may arise from the use of our products could result in financial or other damages to our customers. Our customers could seek to have us pay for these losses. Although we
maintain product liability insurance, it may not be adequate. Further, although our license agreements with our customers typically contain provisions designed to limit our exposure to potential claims as well as any liabilities arising from such
claims, such provisions may not effectively protect us against such claims and the liability and costs associated therewith.



The sales cycle for our software products is long, and the delay or failure to complete one or more large license transactions in a quarter could cause our operating
results to fall below our expectations.



The sales cycle is highly
customer specific and can vary from a few weeks to many months. The software requirements of customers is highly dependent on many factors, including but not limited to their projections of business growth, capital budgets and anticipated cost
savings from implementation of our software. Our delay or failure to complete one or more large license transactions in a quarter could harm our operating results. Our software is generally used for division-wide or enterprise-wide,
business-critical purposes and involves significant capital commitments by customers. Potential customers generally commit significant resources to an evaluation of available enterprise software and require us to expend substantial time, effort and
money educating them about the value of our solutions. Licensing of our software products often requires an extensive sales effort throughout a customers organization because decisions to license such software generally involve the evaluation
of the software by a significant number of customer personnel in various functional and geographic areas, each often having specific and conflicting requirements. A variety of factors, including actions by competitors and other factors over which we
have little or no control, may cause potential customers to favor a particular supplier or to delay or forego a purchase.



We depend on our key personnel, and the loss of any of our key personnel could harm our business.



Our success is substantially dependent upon a limited number of key management, sales, product development, technical services and customer
support personnel. The loss of the services of one or more of such key employees could harm our business. We do not generally have employment contracts with key personnel. In addition, we are dependent upon our continuing ability to attract, train
and retain additional highly qualified management, sales, product development, technical services and customer support personnel. We have at times experienced and continue to experience difficulty in recruiting qualified personnel. Also, the
volatility or lack of positive performance in our stock price may also adversely affect our ability to attract and retain key employees, who often expect to realize value from stock options. Because we face intense competition in our recruiting
activities, we may be unable to attract and/or retain qualified personnel.



On
December 13, 2002, we announced that Gregory Q. Brown resigned as Chairman and Chief Executive Officer of the Company. On July 29, 2003, the Company announced that Lloyd A. Carney was appointed Chairman of the Board of Directors and Chief Executive
Officer of the Company. Coincident with this announcement, it was announced that David Schwab, an independent member of the Board of Directors since prior to the Companys Initial Public Offering, would function as the lead independent director
on the Board of Directors, and Michael Luetkemeyer will continue as the Companys Senior Vice President and Chief Financial Officer. Our success depends upon the performance of our executive officers and other key employees and the ability of
our management team to work together effectively. There can be no assurance that the management team will be able to work together effectively, and the effective execution of our business strategy will depend in large part on how well key management
and other personnel perform in their positions and are integrated within our company.



We have acquired other businesses and we may make additional acquisitions in the future, which will complicate our management tasks and could result in substantial expenditures.



We have acquired other businesses and we may make additional acquisitions in the future,
which will complicate our management tasks and could result in substantial expenditures. In August 2002, we completed the acquisition of RiverSoft plc, a developer of flexible object modeling and root-cause analysis software. In December 2002, we
completed the acquisition of Lumos Technologies Inc., a developer of sophisticated technology for managing Layer 1 networks. Because of these acquisitions, we are integrating distinct products, customers and corporate cultures into our own. These
past and potential future acquisitions create numerous risks for us, including:



| | failure to successfully assimilate acquired operations and products;
|- | --------------------------------------------------------------------



| | diversion of our managements attention from other matters;
|- | -----------------------------------------------------------



| | loss of key employees of acquired companies;
|- | --------------------------------------------



| | substantial transaction costs;
|- | ------------------------------



| | substantial liabilities or exposures in the acquired entity that were not known or accurately evaluated or forecast by us; and
|- | ------------------------------------------------------------------------------------------------------------------------------



| | substantial additional costs charged to operations as a result of the failure to consummate a potential acquisition.
|- | --------------------------------------------------------------------------------------------------------------------



Further, some of the products we acquire would require significant additional development
before they can be marketed and may not generate revenue at levels we anticipate. Moreover, our future acquisitions, if any, may result in issuances of our equity securities which dilute our stockholders, the incurrence of debt, large one-time
write-offs and creation of goodwill or other intangible assets that could result in amortization and impairment expense. It is possible that our efforts to consummate or integrate acquisitions will not be successful, which would harm our business.



We have relied and expect to continue to rely on a limited number of
products for a significant portion of our revenues.



All of our revenues
have been derived from licenses for our Netcool family of products and related maintenance, training and consulting services. We currently expect that Netcool/OMNIbus-related revenues will continue to account for a substantial percentage of our
revenues beyond fiscal 2002 and for the foreseeable future thereafter. Although we have Netcool/Impact, Netcool/Precision, Netcool/Visionary and other products, our future operating results, particularly in the near term, are significantly dependent
upon the continued market acceptance and continuing improvements of Netcool/OMNIbus. Our business will be harmed if Netcool/OMNIbus



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does not continue to achieve market acceptance or if we fail to develop and market improvements to Netcool/OMNIbus or new
or enhanced products. The life cycles of Netcool/OMNIbus and other Netcool applications are difficult to estimate due in large part to the recent emergence of many of our markets, the effect of future product enhancements and competition. A decline
in the demand for Netcool/OMNIbus as a result of competition, technological change or other factors would harm our business.



We have relied and expect to continue to rely on a limited number of customers for a significant portion of our revenues.



We derive a significant portion of our revenues in any particular period from a limited
number of customers. See Concentration of Revenues in Notes to Condensed Consolidated Financial Statements. We expect to derive a significant portion of our revenues from a limited number of customers in the future. If a significant
customer, or group of customers, cancels or delays orders for our products, or does not continue to purchase our products at or above historical levels, our business will be harmed. For example, pre-existing customers may be part of, or become part
of, large organizations that standardize using a competitive product. The terms of our agreements with our customers typically contain a one-time license fee and a prepayment of one year of maintenance fees. The maintenance agreement is renewable
annually at the option of the customer and there are no minimum payment obligations or obligations to license additional software. Therefore, we generally do not have long-term customer contracts upon which we can rely for future revenues.



Our business is subject to risks from global operations and we are exposed
to fluctuations in currency exchange rates.



We license our products in
foreign countries. In addition, we maintain a significant portion of our operations, including the bulk of our software development operations, in the United Kingdom. Fluctuations in the value of these currencies relative to the United States dollar
have adversely impacted our results in the past and may do so in the future. See Geographic and Segment Information in Notes to Condensed Consolidated Financial Statements for information concerning revenues outside the United States. We
expect that international license, maintenance and consulting revenues will continue to account for a significant portion of our total revenues in the future. We pay the expenses of our international operations in local currencies and do not
currently engage in hedging transactions with respect to such obligations.



Our
international operations and revenues involve a number of other inherent risks, including:



| | longer receivables collection periods and greater difficulty in accounts receivable collection;
|- | -----------------------------------------------------------------------------------------------



| | difficulty in staffing and generally higher costs associated with managing foreign operations;
|- | ----------------------------------------------------------------------------------------------



| | an even lengthier sales cycle than with domestic customers;
|- | -----------------------------------------------------------



| | the impact of possible recessionary environments in economies outside the United States;
|- | ----------------------------------------------------------------------------------------



| | sales in Europe and certain other parts of the world generally are adversely affected in the quarter ending September 30, as many customers reduce their business activities during
the summer months. If our international sales become a greater component of total revenue, these seasonal factors may have a more pronounced effect on our operating results;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | changes in regulatory requirements, including a slowdown in the rate of privatization of telecommunications service providers, reduced protection for intellectual property rights in
some countries and tariffs and other trade barriers;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | changes in or failure to be aware of or to account for payroll, stock option, employee stock purchase and business related taxation;
|- | ------------------------------------------------------------------------------------------------------------------------------------



| | political, economic or terrorism induced instability;
|- | -----------------------------------------------------



| | lack of acceptance of non-localized products;
|- | ---------------------------------------------



| | legal and cultural differences in the conduct of business; and
|- | --------------------------------------------------------------



| | immigration regulations that limit our ability to deploy our employees.
|- | -----------------------------------------------------------------------



We intend to enter into additional international markets and to continue to expand our operations outside of the United States. Such expansion will require significant
management attention and expenditure of significant financial resources and could adversely affect our ability to generate profits. If we are unable to establish additional foreign operations in a timely manner, our growth in international sales
will be limited, and our business could be harmed.



Rapid technological
change, including evolving industry standards and regulations and new product introductions by our competitors, could render our products obsolete.



Rapid technological change, including evolving industry standards and regulations and new product introductions by our competitors, could render our products obsolete. As
a result, the life cycles of our products are difficult to estimate and we must constantly develop, market and sell new and enhanced products. If we fail to do so, our business will be harmed. For example, the widespread adoption of new architecture
standards for managing telecommunications networks would force us to adapt our products to such standard, which we may be unable to do on a timely basis or at all. In addition, to the extent that any product upgrade or enhancement requires extensive
installation and configuration, current customers may postpone or forgo the purchase of new versions of our products. Further, the introduction or announcement of new product offerings by us or one or more of our competitors may cause our customers
to defer licensing of our existing products.



Our products operate on
third-party software platforms, and we could lose market share if our products do not operate on the hardware and software operating platforms employed by our customers.



Our products are designed to operate on a variety of hardware and software platforms employed by our customers in their networks. We must
continually modify and enhance our products to keep pace with changes in hardware and software platforms and database technology. As a result, uncertainties related to the timing and nature of new product announcements, introductions or
modifications by systems vendors, particularly Sun Microsystems, Inc., International Business Machines Corporation, Hewlett-Packard Company, and Cisco Systems, Inc. and by vendors of relational database software, particularly Oracle Corporation and
Sybase, Inc., could harm our business.



Our efforts to protect our
intellectual property may not be adequate, or a third-party could claim that we are infringing its proprietary rights.



We cannot guarantee that the steps we have taken to protect our proprietary rights will be adequate to deter misappropriation of our intellectual property. In addition,
we may not be able to detect unauthorized use of our intellectual property and take appropriate steps to enforce our rights. If third parties infringe or misappropriate our



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trade secrets, copyrights, patents, trademarks or other proprietary information or intellectual property, our business
could be harmed. In addition, protection of intellectual property in many foreign countries is weaker and less reliable than in the United States, so as our international operations expand, the risk that we will fail to adequately protect our
intellectual property increases.



Further, while we believe that our products
and trademarks do not infringe upon the proprietary rights of third parties, other parties may assert that our products infringe, or may infringe, their proprietary rights or we have not fulfilled the terms of agreements with them. On December 9,
2002, Aprisma Management Technologies, Inc. filed a complaint against Micromuse in the U.S. District Court for the District of New Hampshire. See Part II, Item 1, Legal Proceedings, for additional information relating to this matter.



The Aprisma matter is in a preliminary stage and we cannot predict its outcome with
certainty. Management believes that the Company has strong defenses to Aprismas claims including non-infringement of the patents by Micromuses products and invalidity of Aprismas patents. However, management is aware that the
litigation process is inherently uncertain on any individual claims. Additionally, patent litigation can become complex and extend for a protracted time, which may increase the cost of such litigation. Protracted litigation may also divert the
efforts and attention of some of our key management and technical personnel. Should the outcome of this litigation be adverse to us, we may be required to pay monetary damages to Aprisma, and we could be enjoined from selling any of our products
found to infringe Aprismas patents without a license from Aprisma, which may not be available on acceptable terms or at all. If we are required to pay significant monetary damages, are enjoined from selling any of our products or are required
to make substantial royalty payments, our business would be harmed.



We rely
on software that we have licensed from third-party developers to perform key functions in our products.



We rely on software 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 or it could be made available to us only on commercially unreasonable terms. Although we believe that alternative software is available from other third-party suppliers or internal developments, the loss of or inability to maintain any of
these software 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 stock price is volatile, exposing us to possible risks of costly and time-consuming securities class action litigation.



The market price of our common stock has been and is likely to continue
to be highly volatile. The market price may vary in response to many factors, some of which are outside our control, including:



| | actual or anticipated fluctuations in our operating results;
|- | ------------------------------------------------------------



| | announcements of technological innovations, new products or new contracts by us or our competitors;
|- | ---------------------------------------------------------------------------------------------------



| | developments with respect to intellectual property rights;
|- | ----------------------------------------------------------



| | adoption of new accounting standards affecting the software industry; and
|- | -------------------------------------------------------------------------



| | general market conditions and other factors.
|- | --------------------------------------------



In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market price for the common
stock of technology companies. These types of broad market fluctuations may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a companys securities, securities class
action litigation has often been initiated against such company. Such litigation could result in substantial costs and a diversion of our managements attention and resources that could harm our business.



Our goodwill and other intangible assets may become impaired.



Due to rapidly changing market conditions, our goodwill and other intangible assets may
become impaired such that their carrying amounts may not be recoverable, and we may be required to record an impairment charge impacting our financial position. As of June 30, 2003, we had approximately $40.0 million of goodwill and other intangible
assets, which relate to the acquisitions of CAN, NetOps, RiverSoft and Lumos. We regularly perform reviews to determine if the carrying value of assets is impaired. As part of our impairment assessment, we examine economic conditions, products,
customer base and geography. Based on these criteria, we determine which products we will continue to support and sell and, thereby, determine which assets will continue to have future strategic value and benefit. No such impairment has been
indicated to date. Asset impairment charges of this nature could be large and could have a material adverse effect on our financial condition and reported results of operations. In the quarter ended March 31, 2003, the Company performed its
transitional goodwill impairment test required under SFAS No. 142 and concluded that no goodwill was impaired.



Future sales of our common stock may affect the market price of our common stock.



As of June 30, 2003, we had approximately 77.2 million shares of common stock outstanding, excluding approximately 9.0 million shares subject to options outstanding as of
such date under our stock option plans that are exercisable at prices ranging from approximately $0.58 to $106.22 per share. We cannot predict the effect, if any, that future sales of common stock or the availability of shares of common stock for
future sale, will have on the market price of common stock prevailing from time to time. Sales of substantial amounts of common stock (including shares issued upon the exercise of stock options), or the perception such sales could occur, may
materially and adversely affect prevailing market prices for common stock. In addition, tax charges resulting from the exercise of stock options could adversely affect the reported results of operations.



We have various mechanisms in place to discourage takeover attempts.



Certain provisions of our certificate of incorporation and bylaws and certain provisions of
Delaware law could delay or make difficult a change in control of Micromuse that a stockholder may consider favorable. The provisions include:



| | blank check preferred stock that could be used by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; and
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | a classified board of directors with staggered, two-year, terms, which may lengthen the time required to gain control of the board of directors
|- | -----------------------------------------------------------------------------------------------------------------------------------------------



In addition, Section 203 of the General Corporation Law of the State of Delaware, which is
applicable to us, and our stock incentive plans, may discourage, delay or prevent a change of control of Micromuse.



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Changes in effective tax rates could affect our results.



Our future effective tax rates could be adversely affected by earnings being lower than
anticipated in countries where we have lower statutory rates, changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or interpretations thereof.



Our business is especially subject to the risks of earthquakes, floods and other natural catastrophic events, and to interruption by
man-made problems such as computer viruses or terrorism.



Our corporate
headquarters are located in San Francisco, a region known for seismic activity. A significant natural disaster, such as an earthquake or a flood, could have a material adverse impact on our business, operating results and financial condition. In
addition, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. Any such event could have a material adverse effect on our business, operating results and financial
condition. In addition, the effects of war or acts of terrorism could have a material adverse effect on our business, operating results and financial condition. The terrorist attacks in New York and Washington, D.C. on September 11, 2001 disrupted
commerce throughout the world and intensified the uncertainty of the U.S. and other economies. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause
further disruptions to these economies and create further uncertainties. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders, or the manufacture or shipment of our products, our business,
operating results and financial condition could be materially and adversely affected.



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Item 4. Controls and Procedures



Based on their
evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q/A, and subject to and except for the discussion below and elsewhere in this Form 10-Q/A concerning the restatement of our financial statements, our Companys
Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act), are effective to
ensure that information required to be disclosed by our Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange
Commissions rules and forms. In connection with the evaluation described above, we identified no change in our internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2003, and that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.



We have described the restatement of our financial statements contained in this Form 10-Q/A in Part I, Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations 
Restatement of Financial Statements, and in Note 2 of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1. Remedial measures relating to our accounting controls and procedures that were recommended or
identified in the course of the restatement process are summarized below.



In
connection with its audit for the years ended September 30, 2001 through 2003, KPMG LLP issued a letter May 10, 2004 to the Audit Committee of our Board of Directors that identified three material weaknesses in our internal controls over financial
reporting. The identified weaknesses were deficiencies in internal controls related to the recording of accrued liabilities, deficiencies in internal controls related to the documentation of support for journal entries and ineffective review of
financial information, although the letter noted that the Company regularly conducted thorough and timely review and analysis of revenue arrangements. We believe all of these have been addressed or are being addressed in the measures summarized
below.



In connection with the evaluation described above and in connection
with the restatement of our financial statements as described under the Restatement of Financial Statements in Part I, Item 2, the Company has adopted and implemented numerous measures in connection with its ongoing process improvement, compliance
and governance activities, some of which have been enhanced further or implemented in connection with the restatement process. Included among these changes are the following:



| | The Company implemented a Code of Business Conduct that includes a section entitled Financial Code of Ethics for Employees with Financial Reporting Obligations. This
section contains specific ethical and related standards applicable to those with responsibilities for financial reporting and disclosure to investors and is applicable to our Chief Executive Officer, Chief Financial Officer, and other members of our
finance team.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | We have recruited personnel in our finance department with expertise in financial controls and reporting, including hiring a Vice President of Global Finance and Corporate
Controller and an Americas Controller. We have also approved the staffing of an internal audit function.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | We have re-emphasized to finance employees their responsibility for appropriate journal entries that are properly documented, in particular relating to non-system generated journal
entries.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | We have revised procedures to enhance documentation procedures and to improve the segregation of duties in connection with account reconciliations, manual journal entries, and the
preparation and review of documentation to support quarterly reported financial statements.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Regional controllers are expected to review and sign off on the reconciliation of all accrual accounts balances quarterly.
|- | --------------------------------------------------------------------------------------------------------------------------



| | We have implemented an enhanced quarterly closing process including a formal closing meeting each quarter chaired by the Chief Financial Officer and including other appropriate
finance staff.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | We have identified the following additional enhancements that we intend to implement during the remainder of fiscal 2004: annual technical training for finance employees, improved
systems processes intended to reduce manual journal entries, and implementation of a global purchase order system.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Item 6. Exhibits and Reports on Form 8-K:



(a)
Exhibits



|               |  |                                                                                                                                                                                                                               
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                   
|3.1            |  | Restated Certificate of Incorporation of the Registrant (incorporated by reference from exhibit 3.1 in our Form 10-K filed with the SEC on December 21, 2001).                                                                
|               | 
|3.2            |  | Amended and Restated Bylaws of the Registrant (incorporated by reference from exhibit 3.2 in our amended registration statement on Form S-1, No. 333-58975, as filed with the SEC on July 13,
1998).                          
|               | 
|10.2           |  | 1997 Stock Option/Stock Issuance Plan, as amended and restated through June 30, 1999, and forms of agreements thereunder (incorporated by reference from exhibit 10.2 in our Form 10-Q filed
with the SEC on August 13, 2004).
|               | 
|31             |  | Separate Certifications of the Chief Executive Officer and Chief Financial Officer of Registrant required by SEC Rule 13a-14(a) (pursuant to Section 302 of the Sarbanes-Oxley Act of
2002).                                  
|               | 
|32             |  | Combined Certification of the Chief Executive Officer and the Chief Financial Officer of Registrant required by SEC Rule 13a-14(b) (pursuant to Section 906 of the Sarbanes-Oxley Act of
2002).                               





(b) Reports on Form 8-K



A current report on Form 8-K was filed with the Securities and Exchange Commission by Micromuse Inc. on April 23, 2003, to report the results of operations and financial condition for its fiscal quarter ended March
31, 2003.



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SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 17, 2004.



MICROMUSE INC.(Registrant)By:

/S/ LLOYD A. CARNEYLloyd A. CarneyChairman and Chief Executive Officer(Duly Authorized Officer)By:

/S/ MICHAEL L. LUETKEMEYERMichael L. LuetkemeyerSenior Vice President and Chief Financial Officer(Principal Financial Officer)




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