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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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



For the fiscal year ended December 31, 2002



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



For the transition period from
                         to



Commission File Number 0-17920



METASOLV, INC.

(Exact name of registrant as specified in its charter)



|Delaware                 |  | 75-2912166                          
|------------------------ |  | ------------------------------------
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)



5560
Tennyson Parkway

Plano, Texas 75024

(Address of principal executive offices)



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



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



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





|Title of each class                                                                         |  | Name of each exchange on which registered
|------------------------------------------------------------------------------------------- |  | -----------------------------------------
|Common Stock, Par Value $.005                                                               |  | The Nasdaq Stock Market                  
|Rights to Purchase Series A Junior Participating Preferred Stock, Par Value $0.01 per
share |  | The Nasdaq Stock Market                  



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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.    x Yes ̈No



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



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



The aggregate market value of the voting stock held by
non-affiliates of the Registrant, as of June 30, 2002, was approximately $150,400,000, based upon the last reported sales price on such date.



On February 28, 2003, there were 37,939,738 shares of the Registrants common stock outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Registrants Proxy Statement for the
Annual Meeting of Stockholders scheduled to be held May 20, 2003, are incorporated by reference into Part III of this report. The Proxy Statement is expected to be filed with the Commission not later than April 30, 2003.



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MetaSolv,
Inc.



2002 FORM 10-K



TABLE OF CONTENTS



|Item     |  | Description                                                                           |  | Page
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|        
|PART I  
|        
|1        |  | Business                                                                              |  | 1   
|        
|2        |  | Properties                                                                            |  | 23  
|        
|3        |  | Legal Proceedings                                                                     |  | 23  
|        
|4        |  | Submission of Matters to a Vote of Security Holders                                   |  | 24  
|        
|PART II 
|        
|5        |  | Market for the Registrants Common Equity and Related Stockholder Matters             |  | 25  
|        
|6        |  | Selected Financial Data                                                               |  | 26  
|        
|7        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 27  
|        
|7a       |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 39  
|        
|8        |  | Financial Statements and Supplementary Data                                           |  | 41  
|        
|9        |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 64  
|        
|PART III
|        
|10       |  | Directors and Executive Officers of the Registrant                                    |  | 65  
|        
|11       |  | Executive Compensation                                                                |  | 65  
|        
|12       |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 65  
|        
|13       |  | Certain Relationships and Related Transactions                                        |  | 65  
|        
|14       |  | Controls and Procedures                                                               |  | 67  
|        
|PART IV 
|        
|15       |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 67  





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PART I



This report includes certain statements that
are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statement in this report that is not a statement of historical fact may be deemed to be a forward-looking statement. We often
use these types of statements when discussing our plans and strategies, our anticipation of revenues from designated markets, the development of our businesses, the markets for our products and services, our anticipated capital expenditures,
operations, support systems, changes in regulatory requirements and other statements regarding matters that are not historical facts. Words such as expect, anticipate, intend, plan,
believe, seek, estimate, and other similar expressions are intended to identify such forward-looking statements. Although we believe that that these forward looking statements reasonably reflect our plans,
intentions, and expectations, we can give no assurance that we will achieve these plans, intentions, or expectations. Certain important factors that could cause actual results to differ materially from the forward-looking statements we make in this
report include, without limitation, the following:



| |  |  | Our quarterly operating results are difficult to predict and can vary significantly;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | We could be materially harmed if we fail to anticipate and react to rapid changes in the communications market;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | We could be materially harmed if consolidation in the communications industry reduces customer demand for the products and services we provide;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We could be materially harmed if our customers are unable to obtain financing to continue their operations or for continued expansion of their businesses;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We could be materially harmed due to government regulatory changes in the telecommunications market;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Expected increased competition could result in price reductions, reduced gross margins, and loss of market share; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Other factors identified in our Securities and Exchange Commission filings, including, but not limited to those discussed elsewhere in this report under the heading
Factors That May Affect Future Results located at the end of Item 1, Business, of this report.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Many of these risks and uncertainties are beyond our control, and in many cases we cannot predict the risks and uncertainties that could
cause our actual results to differ materially from those indicated by the forward-looking statements. All forward looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary
statements and risk factors contained throughout this report. In light of these risks, uncertainties, and assumptions, the forward-looking events we discuss in this report might not occur.



Our forward-looking statements speak only as of the date made, and other than as required by law, we
undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.



ITEM 1.    BUSINESS



General



We are a leading
global provider of operational support system (OSS) software solutions that help communications providers and businesses manage their next-generation communication networks and services. Our products integrate and automate key communications
management processes, and enable communications providers to simplify the costly and complex process of delivering value-added communications services over new packet-based technologies, as well as traditional circuit-switched networks.



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Communications
service providers using our software are able to efficiently enter, manage, and fulfill orders for service from their customers, collect data for billing purposes and ensure that appropriate Service Level Agreements (SLAs) are enforced. These
communications service providers offer a full array of communications services, including local and long-distance voice services, high-speed data services and Internet (IP) services, often as a bundled offering. We derive substantially all of our
revenue from the combination of the sale of software licenses, related professional services, maintenance, and support of our packaged software to these communications service providers. Operators today strive to introduce and deliver services
quickly, offer differentiated services, leverage their network investments and continually reduce operational costs of delivering communications services. We are focused on creating open and flexible software to help communications service providers
meet these challenges and manage the complexity associated with todays communications environment. Increasing global demand for faster, cheaper communications services to homes and businesses have created additional complexities in service
management. This demand for faster, cheaper services is driven primarily by the unprecedented growth in the Internet as a communications medium, and by the integration of wireless and internet protocol communications technologies into mainstream
communication services for both enterprise and individual end-users. Our software is designed to automate and simplify the fulfillment of all types of communication services for use by a variety of communications providers across diverse,
interconnected networks.



Worldwide deregulation,
privatization, and advances in technology have necessitated extensive coordination in the service management process  both coordination between communications service providers whose networks must interconnect in order to establish service to
the customer, and between different communications technologies that must work together to carry the communications service. Traditional software systems were not designed to manage the still evolving complexities of a variety of communications
services delivered over a diverse network spanning multiple communications service providers. Consequently, our customers need innovative, flexible software systems to efficiently handle rapidly changing market and technology demands. We have become
a leading provider of service management software by continually enhancing our product to manage the complexities of providing multiple communications services over a diverse, interconnected network. Our customers worldwide represent all facets of
both the traditional (wire line and voice) and the next-generation (mobile, broad-band and internet protocol-based) telecommunications industry.



In February 2002, we acquired certain OSS assets from Nortel Networks. With this acquisition, we extended our product portfolio with a
leading carrier-class (highly scalable and reliable) service activation product, and several point solutions that allow communications service providers to efficiently manage and deliver differentiated services for Internet Protocol (IP), data, and
wireless communications. As a result of this acquisition, we now offer a comprehensive suite of OSS solutions available for wireless, IP, data, and traditional networks and services. The acquisition also strengthens the worldwide scope of our
product sales and services through an established presence in Europe.



In December 2002, we announced an offer to acquire all of the outstanding shares of Orchestream Holdings plc, a UK headquartered company whose core product is Service Activator, an IP service activation tool.
Orchestream also has a service assurance product, Resolve, which performs network performance and reporting primarily for ATM and frame relay-based networks. With this acquisition, we gain an integrated IP Virtual Private Network activation tool
that has been sold to numerous customers  both wire line and mobile. This acquisition not only supports our strategic thrust of both Mobile and IP, but also strengthens our global nature through the addition of an engineering presence and a
headquarters facility in Europe. The accounts of Orchestream have been consolidated with those of MetaSolv effective February 1, 2003.



MetaSolv, Inc. is the holding company of MetaSolv Software, Inc. Our principal executive offices are located at 5560 Tennyson Parkway,
Plano, Texas 75024, and our telephone number is (972) 403-8300. Our web site is www.metasolv.com. Copies of our periodic and current reports as filed with the Securities and Exchange Commission from time to time are available on our website
(free of charge) as soon as reasonably practical after such reports are filed with the Securities and Exchange Commission. The information on our web site is not incorporated by reference into this Form 10-K.



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Our Products



The MetaSolv product portfolio consists of
a set of products that address key operational challenges in the areas of Network Resource Management, Subscriber and Service Provisioning, Network Data Collection and Service Quality management. In particular our product portfolio consists of the
following branded products:



| |  |  | MetaSolv Solution
| | - |  | -----------------



| |  |  | MetaSolv ASAP
| | - |  | -------------



| |  |  | MetaSolv Objectel
| | - |  | -----------------



| |  |  | MetaSolv Order Management System (OMS)
| | - |  | --------------------------------------



| |  |  | MetaSolv Policy Services
| | - |  | ------------------------



| |  |  | MetaSolv Service Analytics
| | - |  | --------------------------



| |  |  | Network Mediation
| | - |  | -----------------



| |  |  | Orchestream Service Activator (acquired in February 2003)
| | - |  | ---------------------------------------------------------



| |  |  | Orchestream Resolve (acquired in February 2003)
| | - |  | -----------------------------------------------



Our products are marketed and sold either individually or in combination with one another, depending upon each customers
requirements. All of these products support a variety of telecommunications services in a multi-hardware vendor network, in the Mobile and IP data market segments. Further details on our portfolio are as follows:



TheMetaSolv Solutionis built upon a flexible,
scalable, and integrated software architecture. We support any service on any technology with predefined ordering and provisioning capabilities. These technologies include optical, Virtual Private Networks (VPN), Digital Subscriber Line (DSL), IP,
Ethernet, and others. The MetaSolv Solution provides the tools needed to enable and support future growth and changes in the communications market. Major subsystems of the MetaSolv Solution include:



| |  |  | Work Management:    Tracks all the tasks in the service provisioning process, enabling work to flow electronically across an organization
and providing visibility to the customers business processes and resource utilization. Work Management includes the capability to design customized fulfillment plans, which organize and manage the flow of tasks, both electronic and manual,
according to specific business processes. In addition, through the Field Operations Portal, the workflow management functionality allows the customer to access critical service delivery information from the MetaSolv Solution through any
web-enabled device in the field.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data Management:    Provides the basis for the common data repository that enables our customers to manage information.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Network and Service Planning:    Applies geospatial information to key business and network planning functions, including strategic market
demand forecasting, network planning and design, service fulfillment, and executive decision support. This subsystem helps correlate the service providers actual and planned networks and market demand. During 2002 we made the decision to cease
providing enhancements to this product.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Order Management:    Provides functions that manage customers and prospects, capture customer requests, and manage simple and complex
processes to achieve end-to-end delivery of requested services. This end-to-end service delivery process often involves more than one type of request both within the service providers internal organization and with other external service
providers.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Network Inventory and Design:    Gives the carrier or enterprise the ability to provision large or small networks and the flexibility to
manage traditional as well as new technologies. This subsystem brings the physical, virtual, electrical, and logical dimensions of a network into a single view supported by inventory management and network system design modules.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Service Provisioning:    Enables the translation of customer requests and requirements into specific service designs that will deliver a
broad spectrum of services from traditional voice and data to broadband technologies such as Frame Relay and ATM (asynchronous transfer mode), as well as SONET (synchronous optical network), xDSL, DWDM (dense wavelength division multiplexing),
wireless, and IP technologies.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Trouble Management:    Enables a quick response when problems arise by accessing information about customers, equipment, and service
locations. Trouble Management information is fully integrated with the network and service inventory, providing complete network information for faster problem resolution.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Customer Care:    Integrates order management, service fulfillment, and customer care to provide a complete customer care solution for the
communications industry. A comprehensive profile provides access to current and historical aspects of the customer account information, including order status, services, and trouble.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The MetaSolv Solution can manage each service using all of the
different technologies through one integrated system. We offer Technology Modules to help adapt our system to new technologies. Our customers and system integration partners can develop and implement these modules more quickly than
traditional software upgrades.



We also offer a
library of Application Programming Interfaces(APIs), enabling interfaces with third party systems electronically to automate order processing, fault recovery, testing, service activation, convergent billing, and credit processing.



MetaSolv ASAPis a service activation
solution that enables service providers to instantly activate customer-requested services across multiple domains. This product is a customizable activation platform that works with all major hardware vendors and activates services to any type of
network or technology, including wireless and IP. It provides a toolkit for our own services organization and other third parties to add to and modify the product.



MetaSolv Objectelis an inventory management solution that provides a centralized system for network
engineering and management of network inventory. MetaSolv Objectel enables the tracking of physical network objects including equipment, facilities, and logical network objects. MetaSolv Objectel allows providers to determine service inventory
levels, ensure rapid service delivery, and manage network capacity. MetaSolv Objectel allows customers to model their inventory in a flexible manner to meet their operations needs.



MetaSolv Order Management System (OMS)is an order provisioning system that helps coordinate and
manages information moving to and from multiple internal business support systems and OSSs to complete service and network orders. MetaSolv OMS enables service providers to coordinate and manage internal information as well as order information
being exchanged between external service provider partners. Customers can use the system to develop their own provisioning order workflows to match their specific business needs.



MetaSolv Policy Services offers directory-based service management for next-generation service
delivery. MetaSolv Policy Services provides centralized management of users and subscribers and core IP services management capabilities including Domain Name Service (DNS), Dynamic Host Configuration Protocol (DHCP) and RADIUS (remote
authentication dial-in user service). MetaSolv Policy Services provides these fundamental IP services required by both mobile and fixed-line service providers.



MetaSolv Network Mediation provides a carrier-class mediation solution designed for multi-service, multi-vendor, IP, and 3G
wireless network environments. MetaSolv Network Mediation includes a network-facing ability to collect call data records and IP data records. By transforming raw network data into useful information representing a service-level view of customer
activity, service providers can price, bundle, and



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discount in a way that significantly differentiates their service offerings. MetaSolv Network Mediation works with various systems that
require this information including performance, billing, revenue assurance, rating, and service level management systems. This product allows customers to modify the system to meet their needs.



MetaSolv Service Analyticsprovides a service level
agreement contract management application that is designed for multi-service, multi-vendor network environments. MetaSolv Service Analytics is designed to manage the entire service contract management process through definition, negotiation,
assessment, analysis and reporting of customer compliance and business effectiveness. A service contract is a formal agreement between either a service provider and its customers, or a service provider and its suppliers, to define and manage service
expectations, clarify responsibilities and facilitate communication. Service contracts cover many aspects of the relationship and quality of service delivery, including service performance, service provisioning, customer-care, and billing. MetaSolv
Service Analytics collects the information from many sources and can provide customized reports for many uses.



Orchestream Service Activatorprovides a carrier-class service activation system for IP VPNs with differentiated classes of
service. This multi-vendor product discovers and interfaces with network elements from a variety of hardware vendors to properly configure these elements, and automates the real-time configuration of VPN-based services (e.g. multi protocol label
switching) enabling the operator to deliver these complex services quickly and accurately. In addition, the product has the ability to configure quality of service parameters such as marketing, queuing and congestion avoidance.



Orchestream Resolve is a carrier-class, scaleable
performance management system enabling operators to monitor and report performance across multi-vendor Asynchronous Transfer Mode (ATM) and Frame Relay networks. Orchestream Resolve allows the service provider to offer Service Level Agreements and
report against the compliance to these agreements enabling the operator to differentiate its ATM/Frame Relay service offerings. In addition, Orchestream Resolve allows the operator to deeply understand the capacity, performance and state of the
network for internal purposes and planning.



Technology



Our continuing development of the MetaSolv
product suite aims at incorporating a multi-tier architecture:



| |  |  | User Interface Tier:    Any type of user-interface client is possible, including both thin client types, such as browsers and
pagers, and rich client types, such as java applications. The user interface tier follows the Model-View-Controller (a software architecture design for segregating the user-interfaces and data, and controlling the interaction between the two)
architectural pattern and all user-interface clients access the same server-side business logic tier.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Application Server Tier:    The application server tier includes the business logic in components running (in most cases) on
J2EE-based application servers, a java platform designed for large scale computing. These business logic and database access objects enable us to build different graphical user interfaces with the same business logic code. In addition,
application-programming interfaces provide our customers and partners access to these components. Our interfaces make it possible to extend and integrate the MetaSolv Solution with existing customer, partner, and third party software applications.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data Tier:    The data tier provides the persistence layer that separates the business logic from the database technology. Oracle
is fully supported and is the recommended DBMS (database management system). Oracle database features are used, including delivering database solutions on any hardware platform supported by Oracle. For all graphics and graphic information systems
(GIS)-related data, different types of persistence techniques are utilized, such as raster and vector types of databases and files.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Network Interface Tier:    In many of the products there is also a layer of the product that interfaces with the network elements
directly for provisioning purposes, to collect data or offer services (such as DNS & DHCP) within the network.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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This
multi-tier technology design provides the following benefits to our customers:



| |  |  | Flexibility:Multiple graphical user interfaces enable our customers to select the presentation platform of their choice, to
manage the upgrade and internal distribution of the software, as well as allowing the flexible deployment of a product within the network from a geographic perspective.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Scalability:    The software is suitable for large and small networks while simultaneously maintaining high performance levels.
Customers can add multiple servers as needed to any level of the system, generally without service interruption.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data Integrity:    The data storage design preserves data integrity while ensuring fast, efficient transaction-oriented data
retrieval methods. As a demonstration of resilience, our data storage design has remained constant during the life and evolution of many components of our software. This stability provides reusability of the business functionality as new, updated
graphical user interfaces are developed.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Open Design:    Our open, fully documented application programming interfaces allow customers and alliance partners to integrate
our products with existing internal and external software systems. We are moving towards OSS through Java (OSS/J) compliance. The OSS/J API guidelines are publicly available and maintained and promoted by the telecom industry. These APIs enable
either tightly coupled interfaces (using Java) or loosely coupled interfaces (using XML) between our software modules and third party modules and applications.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Extensibility:Using our technology our products are able to support additional information, including attributes, classes,
class instances, interfaces, and operations. This extensibility enables customers to add new functionality to many of our products.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are active in various government and industry standards bodies, including the TeleManagement Forums e-Business Telecom Operations
Model (eTOM), Shared Information/Data (SID) model and OSS/J.



J2EE and Java are trademarks of Sun Microsystems, Inc.



Professional Services and Support



Comprehensive customer service and support and a high quality of service are key factors in our customers long-term satisfaction. We have developed a broad array of service offerings to assist our diverse customer base. We
focus on customer retention and our customers long-term satisfaction as key measures of the quality of these services.



PROFESSIONAL SERVICES



Our professional services organization delivers the expertise necessary to implement our software, educate
users on best practices for utilizing the software, assist with data migration, and provide maintenance and technical support after implementation. As of December 31, 2002, our professional services organization consisted of over 100 people
operating in the United States, Canada, Europe, Latin America and the Asia / Pacific region.



We work closely with systems integration (SI) partners who provide experience on large projects typically involving multiple systems, extensive program management, and the development of custom
interfaces. Together with our partners, we offer the following services:



IP/Next Generation Data Service Managementrepresents a set of offerings that meet service providers IP-based OSS requirements by providing pre-configured solutions designed to help service providers more
quickly deliver differentiated, reliable IP services. Offerings in this area include:



| |  |  | Service Provisioning with Quality of Service (QoS) capabilities for MPLS and IPSec VPNs.
| | - |  | ----------------------------------------------------------------------------------------



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| |  |  | Service Quality Management (SQM) in support of activation of IP/VPNs with QoS and Service Level Agreement (SLA) compliance.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Network Resource Management (NRM)Integrated order management, network inventory and service management, and service activation for ATM/FR/PL provisioning.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inventory and Service Provisioning for Optical, GiGe and VLAN networks.
| | - |  | -----------------------------------------------------------------------



| |  |  | Integrated inventory auto-discovery and reconciliation for Level 1 and Level 2 network data.
| | - |  | --------------------------------------------------------------------------------------------



Mobile Service Management represents a set of
solutions that offer wireless service providers the ability to differentiate themselves from their competition by giving them the ability to more quickly create and deliver profitable next-generation wireless services while maximizing the efficiency
of their networks. Offerings in this area include:



| |  |  | Service Provisioning with QoS capabilities for MPLS VPNs.
| | - |  | ---------------------------------------------------------



| |  |  | Service & Subscriber Provisioning and Activation for voice and data applications.
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Network Data Collection and Mediation for voice and data applications.
| | - |  | ----------------------------------------------------------------------



| |  |  | User / Subscriber Provisioning and Management with integrated authentication.
| | - |  | -----------------------------------------------------------------------------



| |  |  | SQM for WirelessEnterprise to Enterprise SLA and QoS management with the ability to configure QoS, collect data and report on SLAs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



Framework for Successis a set of tools and processes that enable a successful implementation of the MetaSolv Solution. These tools and processes incorporate industry
best practices and techniques that can be tailored to a customers unique requirements. By shortening a customers learning curve and streamlining the software implementation cycle, our Framework for Success implementation methodology
saves the customer both time and money.



QuickStartis a program designed to simplify and accelerate the implementation of the MetaSolv
Solution. This program consists of a database pre-loaded with information such as service fulfillment plans, equipment specifications and products, along with a defined training curriculum for the end user. As a result of this program, our solutions
can typically be implemented into a production environment in less than 90 days. Built from knowledge acquired in previous implementations, the QuickStart program makes maximum use of a customers resources and shortens service delivery
intervals.



Rapid Resultsis a workshop designed to improve the skills of the individuals on the customers implementation team and to
streamline the implementation of our software, primarily by improving business methods and processes. The workshop provides in-depth exposure to business process concepts and implementation methods that drive a rapid return on business results. Team
members learn how and where information is loaded in a MetaSolv software database, and they see demonstrations of best practices for setting up and maintaining the software.



Operational Assessments analyze the strengths and weaknesses of a customers existing business
processes. We study processes within a customers organization to compare internal practices to the current best practices of companies of comparable size, complexity and maturity. We cover areas such as application performance and tuning, data
integrity, and change management. Based upon our analysis of operational performance level, we recommend organizational improvements needed to increase the benefits received from the MetaSolv Solution.



EDUCATIONAL OFFERINGS



We provide a comprehensive series of
educational courses to our customers, partners, and employees to provide and enhance the knowledge and skills necessary to deploy, use and maintain our software solutions.



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These classes address the technical aspects of our products while providing real-world examples of customer best practices and operational
efficiencies. Classes include lectures, demonstrations, discussions and hands-on use of our software. Classes are held regularly at our training centers in our Plano, Texas headquarters. In addition, training sessions can be held in our Englewood,
Colorado, and McLean, Virginia, facilities, as well as at our customer sites. We also offer Train-the-Trainer programs to enable our customers to conduct their own internal end-user training.



MAINTENANCE AND
TECHNICAL SUPPORT



MetaSolv has designed and implemented a Global Customer Care program that offers several levels of support, enabling the customer to select the level that is best tailored to the needs and requirements of our customer.



Our Global Customer Care helps customers achieve success by
responding to the challenges that they face today and by taking advantage of opportunities to help them stay ahead of the competition in a dynamic marketplace. Global Customer Care is also involved in understanding customer needs and requirements.
Whether a company is implementing the software for the first time, testing new products, integrating its products with the MetaSolv product portfolio, or upgrading existing products, Global Customer Care supports customers and partners
application needs through all phases of implementation and day-to-day use.



Our Basic Service Offering is the foundation of our customer care program. Our basic maintenance and technical support services include Customer Care support, technical support, unlimited issue
submissions, Shared Account Management, Email, Web and phone access, FTP download, software releases for functionality purchased, enhancement requests, client specific reporting of open issues, two primary contacts available from 8:00 a.m. to 5:00
p.m. local time, support problem resolutions, software maintenance and scheduled software upgrades. We provide technical support for our products, utilizing the Internet, telephone, and electronic mail to respond to and resolve customers
technical problems. Our automated customer service system tracks each customers inquiry through to problem resolution.



Product upgrades are included in our maintenance agreements, allowing our customers to benefit from technological advances, stay current
with regulatory change, and achieve efficiencies from product enhancements. We also provide complete documentation with our software, including system administration guides, programming interface-integration guides, and extensive online help. We
furnish newsletters, technical product bulletins, Release Bulletins, Plans of Record and release, and Certification Schedules, as well as web resources such as problem-reports, access to product FAQs, information on the latest product releases,
documentation, technical bulletins, and the Customer Portal that contains information to aid in customer integration efforts and keep customers abreast of upcoming releases.



Global Customer Care, through its Customer Care Account Management model provides a shared Customer Care
Account Manager who is the customers advocate in tracking the customers needs and issues within Global Customer Care.



In addition to our Basic Service Offering, we offer these optional services:



| |  |  | Extended Service Offering: This option is designed for customers with larger, more complex business critical implementations. The Extended Service Offering builds on
the Basic Service Offering with all its inclusions, and provides additional enhanced services, including:
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Extended hours of coverage: 24 hours a day, seven days a week for Severity 1 emergency production issues.
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Additional Contacts: two additional customer contacts can log issues and ask questions, bringing the total number to two primary and two secondary contacts.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Premier Service Offering: This offering is designed for customers who need a dedicated technical resource. The Premium Service Offering builds on the Basic Service
Offering with all its inclusions, and provides a dedicated technical support analyst who:
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dedicates her/his time to understanding how the customer uses the software to support his/her business;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | Works all customer incidents through closure;
| | - |  | ---------------------------------------------



| |  |  | Provides customized status reports with scheduled status calls;
| | - |  | ---------------------------------------------------------------



| |  |  | Focuses on the customer to understand his/her business processes;
| | - |  | -----------------------------------------------------------------



| |  |  | Understands how the customer would use new product offerings/releases;
| | - |  | ----------------------------------------------------------------------



| |  |  | Attends the customers planning sessions for future releases, upgrades, etc.;
| | - |  | -----------------------------------------------------------------------------



| |  |  | Conducts proactive site visits as necessary; and
| | - |  | ------------------------------------------------



| |  |  | Accompanies consulting personnel to the customers site when necessary.
| | - |  | -----------------------------------------------------------------------



| |  |  | Custom Service Offering: This offering is a custom program adding the exact mix of premium supplementary services to create a support program that maps exactly to
each customers mission-critical support requirements.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The typical software maintenance agreement is on a 12-month renewable term.



Sales and Marketing



SALES



We market and sell our software through our worldwide sales force, which has direct representation in North America, South America, Europe, Middle East, Africa, and the Asia Pacific region. During
2002, we focused our sales efforts on established service providers and enterprises that manage, offer, or deliver communication services.



Our worldwide sales force is aligned by region, each focusing on a specific type of customer or prospect, whether it is a new account, a
growth account, or a strategic account. Due to the technological complexity of our market, our sales teams consist of an account executive that is responsible for the business aspect of the sale and a sales analyst who is responsible for the
technology aspect of the sale. Once a sale has been made, the ongoing account relationship is transitioned to our growth account team to ensure the attention and nurturing required to successfully serve the client. Our dedicated lead generation team
identifies qualified territory sales opportunities through telemarketing, campaign management, participation in trade shows, seminars and conferences, market research and our public relations programs. Once a qualified opportunity is identified, it
is assigned to the appropriate end-user sales team to initiate direct sales engagement. Upon gathering the prospects requirements, the sales team conducts multiple presentations and demonstrations to the potential customer. Customer visits to
our Executive Briefing Center located within our corporate headquarters are used to establish a strategic relationship with the prospect and our executive management, product managers, and software architects. Although we have dedicated teams in
each region, our sales efforts leverage local system integrator companies. We maintain strategic channel partnerships with Accenture, Cap Gemini Ernst & Young, Hewlett-Packard, and others.



Our average sales cycle ranges from four months to over a
year, from initial prospect contact to the execution of a license agreement. The majority of our selling activities are the result of sales participation in a customer-issued request for proposal and a lengthy bidding process.



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MARKETING



We continue to focus our marketing efforts on developing market strategies and product plans, creating awareness of our products and generating new sales opportunities. Our product management organization provides direction on target
markets and their business requirements. We base our product strategy on an analysis of market requirements, competitive offerings and projected return on investment. Our product enhancement plans are developed by our product management organization
in partnership with our customers, utilizing their communications experience with our market and competitive knowledge. Our customer user group maintains an active enhancement-ranking process, by which members continually establish priorities for
software improvements and evaluate the enhancements we deliver. In addition, our product managers are active in numerous technology and industry forums. Through these domestic and international forums, we participate in various projects that
demonstrate our capability to support world-class communications service fulfillment solutions.



We rely on several marketing communications activities and programs to create awareness of our products and to generate sales opportunities. Through our product marketing and marketing communications
functions, we manage and maintain our web site, publish product-related communications and educational white papers, and conduct seminars and user group conferences. We also have a public relations program and maintain relationships with recognized
industry analysts in an ongoing effort to create awareness of our products. We are an active sponsor of technology-related conferences and demonstrate our products at trade shows targeted at providers of communications services. We also focus on a
range of joint marketing strategies and programs with our partners to capitalize on their respective market relationships and resources.



Alliances and Partnerships



To ensure the availability of a comprehensive end-to-end solution and to optimize its effectiveness, we continue to develop our partner
programs and grow strategic relationships with systems integrators and complementary software application vendors.



Systems Integrators.    Our systems integration partners provide, jointly or separately, a range of
services to our customers. Among our partners are Accenture, BearingPoint, BusinessEdge Solutions, Cap Gemini Ernst & Young, DMR Consulting Group, Encore Software, Hewlett-Packard, Infosys, Tata Consulting Services, TierOne OSS and Wipro
Technologies. These partners assist in implementing our software at the customer location and often assist us in generating sales leads. Using our proven tools and processes, we have trained numerous consultants in these organizations in the
implementation and operation of our software.



Complementary Software Application Vendors.    During 2002 we expanded our program for joint marketing relationships with software vendors, offering products and services that are complementary to
the MetaSolv Solution. Throughout 2002 new partners were added to the program and other relationships were discontinued, as we continued our efforts to offer our customers software solutions with the efficiency and cost-effectiveness of commercial,
off-the-shelf interfaces. These software partners provide solutions for the operations support functions that our software does not address such as billing, fault management, network management and electronic exchange of information between service
providers. In addition, we have alliances with other application integration vendors that provide commercial interfaces between our software and other third party software systems. Some of our partners in these areas include CoManage, Harris
Corporation, Micromuse, Siebel Systems, Vitria Technology and WatchMark.



Segment Information and Foreign and Domestic Operations



The information set forth in Note 10 to the accompanying consolidated financial statements is incorporated herein by reference.



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Research and Development



Teams of development engineers, software
architects and product managers are responsible for our research and development efforts. We use a software development process that includes planning and documenting deliverables in advance, rigorously adhering to coding standards, and performing
significant performance and function tests. By involving all functional groups at various levels within our organization, this process provides a framework for turning concepts into products, which enables us to market these products cost
effectively. In addition, we have recruited and hired development engineers, architects and product managers with experience in order processing, management, and fulfillment solutions and other facets of software, along with senior managers
experienced in software used by communications service providers.



Our research and development expenditures totaled approximately $33.3 million for 2002, and $31.3 million for each of 2001and 2000.



Competition



Competition in our markets is intense and involves rapidly changing technologies and customer requirements, as well as evolving industry
standards and frequent product introductions. We believe several factors make us a strong competitor, including:



| |  |  | The breadth, depth and flexibility of our software;
| | - |  | ---------------------------------------------------



| |  |  | The diversity and skills of our employees worldwide;
| | - |  | ----------------------------------------------------



| |  |  | The quality and performance of our product;
| | - |  | -------------------------------------------



| |  |  | Our comprehensive, high-quality customer service;
| | - |  | -------------------------------------------------



| |  |  | Our proven ability to implement and integrate solutions;
| | - |  | --------------------------------------------------------



| |  |  | The overall value of our software; and
| | - |  | --------------------------------------



| |  |  | The references of our customers.
| | - |  | --------------------------------



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



Software Protection and Other Proprietary Rights



To establish and protect our intellectual property, we rely on a combination of patent, copyright, trade secret, and trademark laws, as
well as confidentiality procedures and contractual restrictions. Our trademarks include MetaSolv Software, the MetaSolv logo, MetaSolv Solution, MetaSolv QuickStart, MetaSolv Framework for Success, MetaSolv Field Operations Portal, MetaSolv Network
and Service Planning, and Rapid Results. In addition, MetaSolv®is a federally registered trademark of MetaSolv
Software, Inc. To maximize protection of our technology, we have set up a patent-protection program. We have filed for patent protection on certain aspects of our software, and we will continue to file patent applications to establish exclusive
rights to certain technology we have developed. While we rely on patent, copyright, trade secret and trademark laws to protect our intellectual property, we believe that the technical and creative skills of our employees, frequent product



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enhancements and improved product quality are greater factors in maintaining a technology leadership position. In addition to intellectual
property that we own, we also license certain intellectual property from third parties that is integrated with our software and used to perform key functions. There can be no assurance that in the future these third party licenses will continue to
be available to us on commercially reasonable terms or at all.



We generally enter into confidentiality and/or license agreements with our employees, partners, and customers, and generally control access to and distribution of our software, documentation and other proprietary information. We
license, rather than sell, our software and require our customers to enter into license agreements that restrict the use of our software.



We cannot guarantee that the steps we have taken to protect our proprietary rights will be adequate to deter misappropriation of our
intellectual property, and we may not be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. If third parties infringe on or misappropriate our copyrights, trademarks, trade secrets or other
proprietary information, our business could be seriously harmed. In addition, although we believe that our proprietary rights (including those we license from third parties) do not infringe on the intellectual property rights of others, other
parties may assert infringement claims against us or claim that we have violated their intellectual property rights. Claims against us, either successful or unsuccessful, could result in significant legal and other costs and may be a distraction to
management. While we have primarily focused on intellectual property protection within the United States, we have expanded that scope to selected international markets. Protection of intellectual property outside of the United States will sometimes
require additional filings with local patent, trademark, or copyright offices, as well as the implementation of contractual or license terms different from those used in the United States. Protection of intellectual property in many foreign
countries is weaker and less reliable than in the United States. As our business expands into foreign countries, costs and risks associated with protecting our intellectual property abroad will increase.



Executive Officers



Our executive officers and their ages as of December 31,
2002, are as follows:



|Name                  |  | Age |  | Position                                                                 
|--------------------- |  | --- |  | -------------------------------------------------------------------------
|                     
|James P. Janicki      |  | 47  |  | Chief Executive Officer                                                  
|                     
|T. Curtis Holmes, Jr. |  | 40  |  | President and Chief Operating Officer                                    
|                     
|Glenn A. Etherington  |  | 48  |  | Chief Financial Officer                                                  
|                     
|Jonathan K. Hustis    |  | 47  |  | Vice PresidentBusiness Services, General Counsel and Corporate Secretary
|                     
|Michael J. Cullen     |  | 43  |  | Executive Vice PresidentEngineering                                     
|                     
|Sam L. Kelley         |  | 43  |  | Executive Vice PresidentServices                                        
|                     
|Philip C. Thrasher    |  | 43  |  | Executive Vice PresidentAmericas Sales                                 



James
P. Janicki co-founded MetaSolv in July 1992 and since such time has served in various capacities. Mr. Janicki was appointed Chief Executive Officer in May 1999. He has served as a director since April 1994 and served as President from April 1994
to January 2001. From June 1982 to July 1992, Mr. Janicki was at Texas Instruments where he served in many capacities, including as manager of the Texas Instruments CASE consulting practice from July 1987 to August 1990 and as manager of the
Template software business from August 1990 until July 1992. Texas Instruments develops and manufactures semiconductors and other products in the electrical and electronics industry.



T. Curtis Holmes, Jr. has served as our President and Chief Operating Officer since January 2001 and
as a director since May 2001. From December 1996 to December 2000, Mr. Holmes served as Vice President and General Manager of the Intelligent Network Unit of Lucent Technologies, Inc., where his responsibilities



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included strategic planning, product marketing, product management, and development and deployment of enhanced services applications. From
July 1994 to December 1996, Mr. Holmes served as Applications Group Director for Operations Support Systems for Lucent Technologies/AT&T Network Systems.



Glenn A. Etherington has served as our Chief Financial Officer since May 1999. Mr. Etherington held various senior management
positions at Brite Voice Systems, a leading provider of enhanced communications products and interactive information systems, from August 1988 to May 1999. He was Chief Financial Officer from August 1988 to May 1999, Treasurer from August 1988 to
May 1993 and Secretary from May 1993 to May 1999.



Jonathan K. Hustis has served as our General Counsel and Corporate Secretary since April 1997. He was appointed our Vice PresidentBusiness Services in August 1998. Mr. Hustis was at Texas Instruments where he worked in
its Corporate Finance Group from November 1995 until April 1997 and as ManagerBusiness Services in its Information Technology Group (Advanced Information Management and Enterprise Solutions divisions) from September 1989 to November 1995.



Michael J. Cullen has served as our
Executive Vice PresidentEngineering since May 2001. From October 1997 to May 2001, Mr. Cullen served as Director of Engineering within the Intelligent Network Unit of Lucent Technologies, Inc., where his responsibilities included planning,
development and support of the provisioning and service creation product lines within the Intelligent Network Unit. From February 1991 to October 1997, Mr. Cullen served as technical manager within Lucent Technologies/AT&T Network Systems
Operations Support Systems.



Sam L. Kelley
has served as our Executive Vice PresidentServices since July 2001. From June 2000 to April 2001, Mr. Kelley was the Chief Operating Officer of Akili Systems Group, a developer of industry-based solutions for the telecommunications, utilities,
financial services and energy industries. Mr. Kelley was at IBM Global Services where he worked as Director, Managing PrincipalBusiness Innovation Services from January 2000 to June 2000 and as Director, Managing PrincipalIntegration
Services from January 1997 through December 1999. Mr. Kelley serves as a director of Geniant, Inc., a privately held professional services company.



Philip C. Thrasher has served as our Executive Vice President-Americas Sales since February 2002. From July 2000 to January
2002 Mr. Thrasher led the Sales and Professional Services team for Nortel Networks Service Commerce Group, assuming responsibility for Nortels entire Americas eBusiness sales portfolio in October 2000. From June 1998 to June 2000
Mr. Thrasher served as Senior Vice President of Telecom Solutions (the Americas) for Architel Systems Corporation. Prior to Architels merger with Accugraph Corporation in June 1998, Mr. Thrasher held a variety of senior executive positions
within Accugraph, his last position being Vice President and General Manager of Global Telecom Solutions.



Employees



We believe that our growth and success is attributable in large part to our employees and an experienced management team, many members of which have years of industry experience in building, implementing, marketing and
selling software applications critical to business operations. We maintain a strong corporate culture and reinforce it by providing our employees an extensive orientation program to learn our technology, the industry we serve, and our corporate
values. We intend to continue teaching and promoting our culture and believe such efforts provide us with a sustainable competitive advantage. We offer a work environment that enables employees to make meaningful contributions, as well as incentive
programs designed to motivate and reward our employees. None of our employees is represented by an organized labor union nor have we experienced any work stoppages.



As of December 31, 2002, we had 655 full-time employees of whom:



| |  |  | 171 were in professional services and customer support;
| | - |  | -------------------------------------------------------



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| |  |  | 112 were in sales and marketing;
| | - |  | --------------------------------



| |  |  | 296 were in research and development; and
| | - |  | -----------------------------------------



| |  |  | 76 were in finance, administration and operations.
| | - |  | --------------------------------------------------



Our February 2003 acquisition of Orchestream Holdings plc added 113 additional employees.



Factors That May Affect Future Results



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



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



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



| |  |  | The overall level of demand for communications services by consumers and businesses and its effect on demand for our products and services by our customers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our customers willingness to buy, rather than build, order processing, management and fulfillment software, network and service planning, activation, network
mediation, and service assurance software;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The timing of individual software orders, particularly those of our major customers involving large license fees that would materially affect our revenue in a given
quarter;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The introduction of new communications services and our ability to react quickly compared to our competitors;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to manage costs, including costs related to professional services and support services;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | The utilization rate of our professional services employees and the extent to which we use third party subcontractors to provide consulting services;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Costs related to possible acquisitions of other businesses;
| | - |  | -----------------------------------------------------------



| |  |  | Our ability to collect outstanding accounts receivable from very large product licenses;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | Innovation and introduction of new technologies, products and services in the communications and information technology industries;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Costs related to the expansion of our operations;
| | - |  | -------------------------------------------------



| |  |  | A requirement that we defer recognition of revenue for a significant period of time after entering into a contract due to undelivered products, extended payment
terms, or product acceptance; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in services and license revenue as a percentage of total revenue, as license revenue typically has a higher gross margin than services revenue.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



The communications industry and in particular our customers have experienced significant consolidation. In the future, there may be fewer
potential customers requiring operations support systems and related services, increasing the level of competition in the industry. In addition, larger, consolidated communications companies have strengthened their purchasing power, which could
create pressure on the prices we charge and the margins we realize. These companies are also striving to streamline their operations by combining different communications systems and the related operations support systems into one system, reducing
the number of vendors needed. Although we have sought to address this situation by continuing to market our products and services to new customers and by working with existing customers to provide products and services that they need to remain
competitive, we cannot be certain that we will not lose additional customers as a result of industry consolidation.



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



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



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



Many of our customers are small to medium sized competitive communications service providers with limited
operating histories. Many of these customers are not profitable and highly dependent on private sources of capital to fund their operations and many competitive communications service providers are currently unable to obtain sufficient funds to
continue expansion of their businesses. At the same time, many communications companies are encountering significant difficulties in achieving their business plans and financial projections. During 2002 several of our customers ceased their business
operations and a significant number of our customers initiated bankruptcy proceedings. It is possible that this downturn in the communications industry could continue for an indefinite period of time. The downturn in the communications industry and
the inability of many communications companies to raise capital have resulted in a decrease in the number of potential customers that are capable of purchasing our software, a delay by some of our existing customers in purchasing additional
products, decreases in our customers operating budgets relating to our software maintenance services, delays in payments by existing customers, or failure to pay for our products. If our customers are unable to obtain adequate financing, sales
of our software could suffer. If we fail to increase revenue related to our software, our operating results and financial condition would be adversely affected. In addition, adverse market conditions and limitations on the ability of our current
customers to obtain adequate financing could adversely affect our ability to collect outstanding accounts receivable resulting in increased bad debt losses and a decrease in our overall profitability. Decreases in our customers operating
budgets relating to software maintenance services could adversely affect our maintenance revenues and profitability. Any of our current customers who cease to be viable business operations would no longer be a source of maintenance revenue, or
revenue from sales of additional software or services products, and this could adversely affect our financial results.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



As a company focused on the development, sale and delivery of software products and related services, our personnel are our most valued assets. Our future success depends in large part on our ability to hire, train and



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retain software developers, systems architects, project managers, communications business process experts, systems analysts, trainers,
writers, consultants and sales and marketing professionals of various experience levels. Competition for skilled personnel is intense. Any inability to hire, train and retain a sufficient number of qualified employees could hinder the growth of our
business.



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



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



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



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



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



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



OUR INTERNATIONAL
OPERATIONS MAY BE DIFFICULT AND COSTLY.



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



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



| |  |  | Longer payment cycles;
| | - |  | ----------------------



| |  |  | Problems in collecting accounts receivable;
| | - |  | -------------------------------------------



| |  |  | The impact of recessions in economies outside the United States;
| | - |  | ----------------------------------------------------------------



| |  |  | Unexpected changes in regulatory requirements;
| | - |  | ----------------------------------------------



| |  |  | Variable and changing communications industry regulations;
| | - |  | ----------------------------------------------------------



| |  |  | Trade barriers and barriers to foreign investment, in some cases specifically applicable to the communications industry;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | Barriers to the repatriation of capital or profits;
| | - |  | ---------------------------------------------------



| |  |  | Political instability or changes in government policy;
| | - |  | ------------------------------------------------------



| |  |  | Restrictions on the import and export of certain technologies;
| | - |  | --------------------------------------------------------------



| |  |  | Lower protection for intellectual property rights;
| | - |  | --------------------------------------------------



| |  |  | Seasonal reductions in business activity during the summer months, particularly in Europe;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Potentially adverse tax consequences;
| | - |  | -------------------------------------



| |  |  | Increases in tariffs, duties, price controls or other restrictions on foreign currencies;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Requirements of a locally domiciled business entity;
| | - |  | ----------------------------------------------------



| |  |  | Regional variations in adoption and growth of new technologies served by our products; and
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Potential impact on the above factors of the failure, success, or variability between countries of acceptance of the Euro monetary unit, and other European Union
initiatives.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | Risk that the industry may develop in a different direction than anticipated and that the technologies we acquire will not prove to be those needed to be successful
in the industry;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Potential difficulties in completing in-process research and development projects;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Difficulty integrating new businesses and operations in an efficient and effective manner;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Risk that we have inaccurately evaluated or forecasted the benefits, opportunities, liabilities, or costs of the acquired businesses;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Risk of our customers or customers of the acquired businesses deferring purchase decisions as they evaluate the impact of the acquisition on our future product
strategy;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Risk that we may not properly determine or account for risks and benefits under acquired customer contracts;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | Potential loss of key employees of the acquired businesses;
| | - |  | -----------------------------------------------------------



| |  |  | Risk that we will be unable to integrate the products and corporate cultures of the acquired business;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Risk of diverting the attention of senior management from the operation of our business;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | Risk of entering new markets in which we have limited experience;
| | - |  | -----------------------------------------------------------------



| |  |  | Risk of increased costs related to expansion and compensation of indirect sales channels;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Risk of increased costs related to royalties for third party products that may be included with our own software products and services; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Future revenues and profits from acquisitions and investments may fail to achieve expectations.
| | - |  | -----------------------------------------------------------------------------------------------



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



THE VALUE
OF OUR ASSETS MAY BECOME IMPAIRED.



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



During 2002, we
recorded impairment charges of $28.7 million for goodwill and $7.2 million for intangible assets.



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



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



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



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



| |  |  | Delayed or lost revenues and market share due to adverse customer reaction;
| | - |  | ---------------------------------------------------------------------------



| |  |  | Loss of existing customers;
| | - |  | ---------------------------



| |  |  | Negative publicity regarding us and our products, which could adversely affect our ability to attract new customers;
| | - |  | --------------------------------------------------------------------------------------------------------------------



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| |  |  | Expenses associated with providing additional products and customer support, engineering and other resources to a customer at a reduced charge or at no charge;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Claims for substantial damages against us, regardless of our responsibility for any failure;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Increased insurance costs; and
| | - |  | ------------------------------



| |  |  | Diversion of development and management time and resources.
| | - |  | -----------------------------------------------------------



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



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



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



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



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



| |  |  | Revenue or results of operations in any quarter failing to meet the expectations, published or otherwise, of the investment community;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Announcements of technological innovations by us or our competitors;
| | - |  | --------------------------------------------------------------------



| |  |  | Acquisitions of new products or significant customers or other significant transactions by us or our competitors;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | Developments with respect to our patents, copyrights or other proprietary rights or those of our competitors;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Changes in recommendations or financial estimates by securities analysts;
| | - |  | -------------------------------------------------------------------------



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| |  |  | Rumors or dissemination of false and/or unofficial information;
| | - |  | ---------------------------------------------------------------



| |  |  | Changes in management;
| | - |  | ----------------------



| |  |  | Stock transactions by our management or businesses with whom we have a relationship;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Conditions and trends in the software and communications industries;
| | - |  | --------------------------------------------------------------------



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



| |  |  | General market conditions, including geopolitical events.
| | - |  | ---------------------------------------------------------



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



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



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



| |  |  | Authorize the issuance of blank check preferred stock;
| | - |  | --------------------------------------------------------



| |  |  | Provide for a classified board of directors with staggered, three-year terms;
| | - |  | -----------------------------------------------------------------------------



| |  |  | Prohibit cumulative voting in the election of directors;
| | - |  | --------------------------------------------------------



| |  |  | Prohibit our stockholders from acting by written consent without the approval of our board of directors;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Limit the persons who may call special meetings of stockholders; and
| | - |  | --------------------------------------------------------------------



| |  |  | Establish advance notice requirements for nominations for election to the board of directors or for proposing matters to be approved by stockholders at stockholder
meetings.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Delaware law may also
discourage, delay or prevent someone from acquiring or merging with us. In addition, purchase rights distributed under our stockholder rights plan will cause substantial dilution to any person or group attempting to acquire us without conditioning
the offer on our redemption of the rights. As a result, our stock price may decrease and you might not receive a change of control premium over the then-current market price of the common stock.



ITEM 2.    PROPERTIES



We lease two buildings in an office park in Plano, Texas, that total approximately 160,000 square feet, and we own an adjacent, undeveloped lot available for expansion. These buildings are used as our headquarters under a
lease that expires in 2010. In addition, we lease facilities and offices in Huntsville, Alabama; Englewood, Colorado; McLean, Virginia; Kanata, Canada; Toronto, Canada; Covent Garden and Reading, England; Rio de Janeiro and Sao Paulo, Brazil; Sophia
Antipolis, France; and Munich, Germany. As a result of our February 2003 acquisition of Orchestream Holdings plc we also now have leased facilities in Kensington Village, England; Allentown, Pennsylvania and New York, New York. Lease terms for all
our locations expire at various times through February 2010.



ITEM 3.    LEGAL PROCEEDINGS



On November 1, 2001, Bernstein Liebhard & Lifshitz, LLP announced that it had filed a class action suit in the United States District Court for the Southern District of New York against MetaSolv
Software, Inc., James P. Janicki, Glenn A. Etherington, Morgan Stanley Dean Witter, Inc., BancBoston Robertson Stephens, Inc., and



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Jeffries & Company, Inc. It alleged violations of Section 11 of the Securities Act of 1933 against all the defendants, violations of
Section 15 of the Securities Act of 1933 against James P. Janicki and Glenn A. Etherington, and violations of Section 12(a)(2) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder against Morgan Stanley Dean Witter, Inc., BancBoston Robertson Stephens, Inc., and Jeffries & Company, Inc. On April 19, 2002, the plaintiffs filed an amended complaint that added a claim against the Company under Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and a claim under Section 20(a) of the Securities Exchange Act of 1934 against James P. Janicki and Glenn A. Etherington. On October 9, 2002, the Court dismissed the claims
against James P. Janicki and Glenn A. Etherington from the case without prejudice based upon Stipulations of Dismissal filed by the plaintiffs and Messrs. Janicki and Etherington. On February 19, 2003, the Court dismissed the Section 10(b) claim
against the Company without prejudice and with leave to replead and dismissed all other remaining claims against the Company. Plaintiffs have indicated that they do not intend to replead the Section 10(b) claim against the Company and did not
replead the Section 10(b) claim by the deadline imposed by the Court. As a result, MetaSolv and its officers are no longer defendants in the above legal proceeding.



ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



No information is required in response to this Item, as no matter was submitted to a vote of our security holders during the fourth
quarter of the fiscal year covered by this report.



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PART II



|ITEM 5. |  | MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- |  | -------------------------------------------------------------------------



Our common stock is traded on The NASDAQ Stock Market (NASDAQ) under the symbol MSLV. Prices per share
reflected in the following table represent the range of high and low sales prices reported by The NASDAQ Stock Market for the quarters indicated.



|             |  | Fiscal 2002 |      | Fiscal 2001
|------------ |  | ----------- | ---- | -----------
|             |  | High        |      | Low        
|March 31     |  | $           | 8.68 |            
|June 30      |  |             | 7.55 |            
|September 30 |  |             | 4.35 |            
|December 31  |  |             | 2.40 |            



We have
not paid cash dividends on our common stock, and do not plan to pay cash dividends to our stockholders in the near future. We are not bound by any contractual terms that prohibit or restrict the payment of dividends; however, we presently intend to
retain our earnings to finance the future growth of the business.



As of February 28, 2003, we had approximately 8,250 beneficial stockholders, including approximately 122 stockholders of record. On February 28, 2003, the closing price of our common stock on NASDAQ was $1.30 per share.



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ITEM 6.    SELECTED FINANCIAL DATA



The following table contains certain selected financial data that should be read in conjunction with our consolidated financial statements and notes thereto and with Managements Discussion and
Analysis of Financial Condition and Results of Operations. The selected consolidated financial data for the years presented has been derived from our audited financial statements (in thousands, except per share data).



|                                           |  | Years Ended December 31, |        
|------------------------------------------ |  | ------------------------ | -------
|                                           |  | 2002                     |        
|Consolidated Statement of Operations Data: |  |                          |        
|Total revenues                             |  | $                        | 91,204 
|Gross profit                               |  |                          | 38,806 
|Operating expenses                         |  |                          | 121,324
|In process R&D write-off                   |  |                          | 4,060  
|Restructuring and other                    |  |                          | 12,126 
|Goodwill impairment                        |  |                          | 28,742 
|Income (loss) from operations              |  |                          | (82,518
|Net income (loss)                          |  |                          | (66,794
|Earnings (loss) per share of common stock: |  |                          |        
|Basic                                      |  | $                        | (1.77  
|Diluted                                    |  | $                        | (1.77  
|                                          
|Consolidated Balance Sheet Data:           |  |                          |        
|Cash and cash equivalents                  |  | $                        | 40,779 
|Working capital                            |  |                          | 65,923 
|Total assets                               |  |                          | 138,369
|Total current liabilities                  |  |                          | 39,348 
|Redeemable convertible preferred stock     |  |                          |       
|Total stockholders equity                 |  | $                        | 99,021 



|                                                 |  | Quarters Ended |        
|------------------------------------------------ |  | -------------- | -------
|                                                 |  | December 31    |        
|Unaudited Quarterly Consolidated Financial Data: |  |                |        
|2002:                                            |  |                |        
|Total revenues                                   |  | $              | 23,546 
|Gross profit                                     |  |                | 9,969  
|Operating expenses                               |  |                | 22,804 
|In process R&D write-off                         |  |                |       
|Restructuring and other                          |  |                | 6,144  
|Goodwill impairment                              |  |                |       
|Loss from operations                             |  |                | (12,835
|Net loss                                         |  | $              | (11,154
|Loss per share of common stock:                  |  |                |        
|Basic                                            |  | $              | (0.29  
|Diluted                                          |  | $              | (0.29  
|                                                
|2001:                                            |  |                |        
|Total revenues                                   |  | $              | 19,175 
|Gross profit                                     |  |                | 13,478 
|Operating expenses                               |  |                | 15,499 
|In process R&D write-off                         |  |                |       
|Restructuring and other                          |  |                |       
|Income (loss) from operations                    |  |                | (2,021 
|Net income (loss)                                |  | $              | (521   
|Earnings (loss) per share of common stock:       |  |                |        
|Basic                                            |  | $              | (.01   
|Diluted                                          |  | $              | (.01   



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|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



Overview



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



CRITICAL ACCOUNTING POLICIES



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



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



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



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



Service revenues consist principally of software
implementations, upgrades and configurations, and customer training, as well as software maintenance agreements that include both customer support and the right



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to product updates. We use our own employees and subcontract with system integrator partners to provide consulting services to our customers.
The majority of our services are priced on an hourly basis. We also offer fixed-price consulting packages, primarily for repeatable solutions.



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



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



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



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



We assess the realizability of our deferred tax
assets by projecting whether it is more likely than not that some portion or all of the deferred tax assets will not be realized in the foreseeable future. Accordingly, we carry a valuation allowance against our deferred tax assets, which are
related primarily to net deductible temporary difference, tax credit carryforwards and net operating loss carryforwards. We evaluate a variety of factors in determining the amount of the deferred income tax assets to be recognized pursuant to SFAS
No 109, Accounting for Income Taxes, including our earnings history, the number of years our operating loss and tax credits can be carried forward, the existence of taxable temporary differences, near-term earnings expectation, and the
highly competitive nature of the telecommunications industry and its potential impact on our business. As a result of these analyses, a $14.5 million valuation allowance was established during the year ended December 31, 2002.



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



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PRO FORMA FINANCIAL RESULTS



We report quarterly unaudited financial statements prepared in accordance with Generally Accepted Accounting Principles. We also report
pro forma financial information in earnings releases and investor conference calls. This pro forma financial information excludes certain non-cash and special charges, consisting primarily of the amortization and impairment of goodwill and other
intangible assets, and restructuring costs. We believe the disclosure of the pro forma financial information helps investors evaluate the results of our ongoing operations. However, we urge investors to carefully review the Generally Accepted
Accounting Principles financial information included as part of our quarterly reports on Form 10-Q and our annual reports on Form 10-K.



ACQUISITIONS



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



Lat45 Information Systems Inc.    In July 2001, we acquired all of the outstanding shares of capital stock of Montreal-based Lat45 Information Systems Inc., a developer of geospatial software for planning,
design and management of communications networks. Our acquisition of Lat45 Information Systems Inc. allowed us to use graphical geospatial (geographic) technology to expand a service providers capabilities in network planning and engineering
functions and extends the MetaSolv Solution functionality to include support for market demand forecasting, network planning and design, service fulfillment, and executive decision support. We offered this product under the brand, MetaSolv Network
and Service Planning, both as a separate product and integrated with the MetaSolv Solution. The aggregate
purchase price was approximately $9.0 million consisting of $6.2 million in cash and 366,666 exchangeable shares of MetaSolv Canada Holdings Inc., which were exchangeable for our shares on a one-to-one basis. In the third quarter of 2002, we
decided to cease providing enhancements to the MetaSolv Network and Service Planning product.



Orchestream.    In December 2002, we announced an offer to acquire all of the ordinary shares of London-based Orchestream Holdings plc, a recognized leader in IP service
activation software solutions for wire line and mobile carriers. The Orchestream acquisition adds a robust IP service activation product to our portfolio, and strong sales and technology partnerships in Europe. Under the terms of the offer, MetaSolv
will pay £0.06 pounds sterling per share, valuing Orchestream at approximately £7.9 million pounds, or $12.7 million U.S. dollars based on December 2002 exchange rates. This acquisition became effective in February 2003, and is not
included in our operating results for 2002.



Results of
Operations



The year 2002 was a difficult
time to sell software to the communications industry. Capital spending and the financial condition of many service providers remained depressed, and this is reflected in our financial results. As it became clear that our revenues would fall short of
our expectations, we implemented several initiatives during 2002 that we believe position us for long-term growth. These actions included:



| |  |  | Completion of the acquisition of OSS software assets from Nortel. This investment:
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Extended the breadth of our product offerings into service activation, billings mediation and other OSS applications, as well as adding robust and configurable
service ordering and provisioning management solutions to our product portfolio.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Provided us with an established international customer base, as well as sales and services operations in Europe. This was key to our achieving 38% of revenue from
outside the U.S. in 2002, up from 22% in 2001.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increased our penetration at large communications service providers, such that we now report approximately 40% of the worlds top 100 communications providers
as our customers,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expanded our sales to the rapidly growing wireless mobility segment, reaching 17% of our total revenue in 2002 and improving our long-term growth opportunities.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Closed facilities in Chicago, Montreal and Belgium, and consolidated facilities in Plano and Denver. We also eliminated approximately 190 staff positions during the
year. These actions reduced our ongoing cost structure by approximately $24 million, annually, and more closely matched our current expense levels with existing revenue opportunities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Initiated the acquisition of Orchestream, which will further strengthen our business in Europe and for IP activation worldwide.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



We believe our actions in 2002 provide a strong foundation for
future revenue growth and a return to profitability.



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



|                                                 |  | Year Ended December 31, |   
|------------------------------------------------ |  | ----------------------- | --
|                                                 |  | 2002                    |   
|Revenues:                                        |  |                         |   
|License                                          |  | 34                      | % 
|Service                                          |  | 66                      | % 
|                                                 |  |                         |   
|Total revenues                                   |  | 100                     | % 
|                                                
|Cost of revenues:                                |  |                         |   
|License                                          |  | 5                       | % 
|Amortization and impairment of intangible assets |  | 17                      | % 
|Service                                          |  | 35                      | % 
|                                                 |  |                         |   
|Total cost of revenues                           |  | 57                      | % 
|                                                 |  |                         |   
|                                                
|Gross profit                                     |  | 43                      | % 
|                                                
|Operating expenses:                              |  |                         |   
|Research and development                         |  | 36                      | % 
|Sales and marketing                              |  | 31                      | % 
|General and administrative                       |  | 16                      | % 
|Restructuring costs                              |  | 13                      | % 
|In-process research and development              |  | 4                       | % 
|                                                 |  |                         |   
|Total operating expenses                         |  | 133                     | % 
|                                                
|Income (loss) from operations                    |  | (90                     | %)
|Interest and other income, net                   |  | 2                       | % 
|Loss on investments                              |  |                        |   
|                                                 |  |                         |   
|                                                
|Income (loss) before taxes                       |  | (89                     | %)
|Income tax expense (benefit)                     |  | (15                     | %)
|                                                 |  |                         |   
|Net income (loss)                                |  | (73                     | %)



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2002 COMPARED TO 2001



Revenues



Total revenues decreased 25% to $91.2 million in the year
ended December 31, 2002, from $121.3 million in 2001. The decrease in revenue between these periods resulted from a decline in license sales, partially offset by increase in service revenue.



License fees.    License fee
revenues in 2002 declined 55% to $30.9 million, from $68.4 million in 2001. The decline in license revenue resulted primarily from fewer sales to new customers and fewer follow-on sales of capacity licenses and add-on functionality to existing
customers. Additionally, our average contract prices in 2002 have declined compared to prior years, due to smaller implementations, and competitive pricing pressures.



We believe the decline in license revenues results from the protracted downturn in the telecommunications
industry, and related decreases in capital expenditures by service providers. We expect these weak market conditions to continue in the near-term. However, we believe our extensive product portfolio positions us well to initiate deployments at new
customers and extend deployments at existing customers with new products and product capacity extensions, resulting in future license revenues.



Services.    Revenues from services increased 14% to $60.3 million in 2002 from $52.9 million in 2001,
primarily due to consulting and maintenance service revenues attributable to our recently acquired products.



Consulting and education service revenues increased 13% to $20.4 million in 2002, from $17.9 million in 2001. The increase in consulting
and education revenues resulted from fewer, but larger, services engagements. The larger project size reflects the scope of engagements primarily at larger customers, while the lower number of overall projects reflects fewer new customer
implementations. We are marketing longer services engagements to key customers to help them use our products most efficiently, and we expect these longer engagements to provide more stability in our consulting revenues.



Post-contract customer support, or maintenance revenues,
increased 14% to $40.0 million in 2002, from $34.9 million in 2001. The increase in maintenance revenue was primarily due to the inclusion of customer support for our newly acquired products, partially offset by a 23% decline in MetaSolv Solution
maintenance revenue compared to the year-ago period. The decline in same-product maintenance revenue resulted primarily from financial difficulties at some of our smaller customers. The newly acquired products represented approximately 32% of our
total maintenance revenue in the most recent fiscal year.



In 2002 we adopted a FASB staff position regarding the income statement classification of reimbursements received for out-of-pocket expenses incurred. For comparison purposes, service revenues and costs for 2001 and 2000
in this report have been restated to include our expenses that are reimbursed by our customers. Our reimbursable expenses during 2002, 2001 and 2000 increased services revenue and cost of revenue by $2.2 million, $2.4 million and $ 5.8 million,
respectively. There was no change in reported profits as a result of this change.



Concentration of Revenues.    As of December 31, 2002, our active customer list includes more than 170 communications service providers worldwide, including
approximately 40% of the worlds largest providers. During 2002, our top ten customers represented 42% of our total revenue with one customer accounting for 15% of revenue and no other single customer accounting for more than 5% of our revenue.
In any given year we generally derive a significant portion of our revenue from a small number of relatively large sales. A loss or significant decrease in the sale of products and services to any customer from whom we received more than 10% of our
total revenue during a recent year is likely to have a material adverse affect on our results of operations and financial condition. Additionally, our inability to consummate one or more substantial sales in any future period could seriously harm
our operating results for that period.



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International Revenues.    During 2002, we recognized $34.8 million in revenues from sources outside the United States compared to $26.9 million in 2001, representing 38% and 22% of revenue in each
period, respectively. The growth in international revenues during 2002 was due to our increased penetration into European and Asian markets, accelerated by our product acquisitions.



Cost of Revenues



License Costs.    License costs consist primarily of royalties for third party software that is embedded
in our products. License costs were $4.4 million in 2002 and $6.1 million in 2001, representing 14% and 9% of license revenue in each period, respectively. The decrease in license costs in 2002 in absolute dollars is primarily due to the elimination
of royalty expense for use of third party e-commerce software and to lower license revenue in 2002. The increase in license costs as a percent of license revenue in 2002 resulted from a single sale in the fourth quarter that included software from a
third party.



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



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



In 2002, cost of revenues included $8.6 million amortization
of intangible assets acquired from both Nortel Networks and Lat45 Information Systems Inc., and a $7.2 million charge for impairment of our intangible assets. This compares to a $1.4 million amortization of intangible assets in 2001. The increase in
amortization expense in 2002 was due to the purchase of developed OSS software technology rights and contracts from Nortel Networks in February of 2002.



In the third quarter of 2002, we performed an impairment test on our intangible assets and as a result reduced the value of these assets
and recorded a non-cash charge of $7.2 million. The revaluation of intangible assets consisted of a reduction in the value of technology rights acquired in each of the acquisitions.



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



Service costs were $32.1 million in 2002, up from $25.8
million in 2001, representing 53% and 49% of service revenues in each period, respectively. The increase in service costs in the most recent year resulted primarily from additional customer support for our newly acquired products and customers. The
increase in service costs as a percentage of service revenues was primarily due to a higher level of software engineering effort for specific customers. We record engineering effort that is specific to a customer contract as a cost of revenue,
whereas engineering effort towards general product releases is normally recorded as development expense. We expect this higher level of customer-specific engineering to continue in future periods as we work to adapt our software to provide customers
with competitive advantages in their unique operating environments.



Operating Expenses



Research and Development Expenses.    Research and development expenses consist primarily of costs related to our staff of software developers, contracted development costs and the associated
infrastructure costs required to support product development. During 2002, research and development expenses increased 6% to



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$33.3 million from $31.3 million in 2001, representing 36% and 26% of total revenues in each period, respectively. The year-to-year increase
in research and development expense was primarily due to increased personnel costs related to the February 2002 acquisition of new products, and was partially offset by lower contracted development expenses. Research and development expenses
increased as a percentage of revenues between these periods due to the increased personnel costs, coupled with the decline in revenues.



During 2002, our research and development investments were focused on new products and enhancements to address next-generation
communications networks, including wireless mobility technologies and user-group defined product enhancements. Specific enhancements include improved integration between our existing products and with major CRM, billing, and service assurance
systems, so that communications providers can more quickly realize business efficiencies using MetaSolv products. We are also developing products and enhancements to address the needs of our customers, including network inventory and billing
reconciliation, and extending functionality for IP and wireless management.



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



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



Sales and Marketing Expenses.    Sales and marketing expenses consist primarily of salaries, commissions, travel, trade shows and other related expenses required to sell our software.



In 2002, sales and marketing expenses increased 5% to $28.1
million from $26.8 million in 2001, representing 31% and 22% of revenue in each period, respectively. Major changes in sales and marketing expenses between these two periods include a 43% reduction in commission expense related to lower revenues,
partially offset by a 17% staff increase related to marketing and selling support for our new products and a strengthened sales force in Europe and South America.



We expect that our sales and marketing expenses will continue to increase, particularly due to the
integration of our sales and marketing teams with those from our recent acquisition, and as we increase our presence in Europe and Latin America.



General and Administrative Expenses.    General and administrative expenses consist of costs for
finance and accounting, legal, human resources, information systems, facilities, bad debt expense, and corporate management not directly allocated to other departments.



General and administrative expenses in 2002 decreased 27% to $15.0 million, compared to $20.7 million in
2001, representing 16% and 17% of revenues in each period, respectively. The decrease in general and administrative expenses was primarily due to a reduction in bad debt expense. Staffing in general and administrative functions remained relatively
unchanged between the periods.



Restructuring and other Costs.    Restructuring and other costs during 2002 totaled $12.1 million, comprised of approximately $5.0 related to a reduction in force of approximately 190
positions; $5.8 million for facilities consolidations and lease commitments for space being vacated; and $2.3 in asset write-offs and other restructuring expenses, partially offset by a $1.0 million nonrecurring adjustment to accrued royalties. The
remaining severance payments of $1.5 million will be paid out by year-end 2003, and the $5.8 million of lease payments will be paid out through year 2010.



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We expect
these restructuring actions to yield approximately $24 million in annual cost savings. We will continue to align costs with expectations for future revenues and market conditions, and may take future restructuring actions to better position our
company for profitable growth.



In 2001, we
recorded a pre-tax restructuring charge of $3.1 million that consisted of $2.0 million for a reduction in force of approximately 100 people, and approximately $1.1 million for lease commitments for certain field offices being closed and related
fixed asset write-downs. The restructuring was in response to lower software license bookings and the expectation of lower revenues in the second half of 2001.



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



Our financial results in 2001 included $2.9 million of IPR&D costs related to our Lat45 acquisition.



Goodwill Impairment.    We are required to periodically assess the value of goodwill under the
provisions of Statement of Financial Accounting Standards No. 142. We are one reporting unit, as defined by the Standard. As outlined in the authoritative literature, the assessment of whether goodwill has been impaired is based on the our estimate
of the fair value of the reporting unit using a model that considers both a discounted future cash flow analysis and market capitalization data.



During 2002, the market capitalization of our company fell to a level below its book value. The decline in the market capitalization
indicated that a potential impairment in the value of enterprise goodwill existed; therefore, management performed an interim valuation in July 2002. This valuation indicated that an impairment of goodwill existed and we recorded a charge of $28.7
million to eliminate the goodwill.



Interest and Other Income,
Net



In 2002, interest and other income,
net, primarily consisting of interest income and interest expense, was $1.7 million, compared to $5.4 million in the year-ago period. The decrease in interest and other income was primarily due to the decline in cash and marketable securities
balances upon which we receive interest income, and lower interest rates earned on invested balances.



Income Tax Expense (Benefit)



We recorded an income tax benefit of $14.0 million in 2002 and income tax expense of $2.2 million in 2001. As a percentage of the loss before taxes, our income tax benefit was 17% in 2002 compared to
income tax expense of 45.2% in 2001. The difference between our effective income tax benefit and the statutory rate in 2002 was due to state and local tax benefits, in-process research and development write-offs that were not deductible for tax
purposes, and the establishment of a valuation allowance against our deferred tax assets.



Under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109), deferred tax assets and liabilities are determined based on the difference between
financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. FAS 109 provides for the recognition of deferred tax assets if
realization



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of such assets is more likely than not. The write-down of the goodwill and revaluation of intangible assets generated an increase in deferred
tax benefits. Based upon the available evidence, which includes our recent operating performance and projections for the future near term performance, we have provided a valuation allowance of approximately $14.5 million against our net deferred tax
assets. We intend to evaluate the realizability of the deferred tax assets on a quarterly basis. Any future changes will be reflected as a component of income tax expense.



The difference between our effective income tax expense and the statutory federal rate in 2001 was due
principally to in-process research and development write-offs that were not deductible for tax purposes and state and local income taxes, offset by research and development tax credits.



2001 COMPARED TO 2000



Revenues



Total revenues in 2001 were $121.3 million, compared to $137.7 million in 2000, representing a 12% year over
year decrease. The decrease in revenues during 2001 was primarily related to fewer sales to new customers and, to a lesser extent, fewer follow-on sales to existing customers. We attributed the lower number of sales to overall lower capital spending
in the communications industry. The sales slowdown adversely affected our license and implementation consulting revenue in 2001, while the impact was partially offset by a 33% increase in maintenance revenues.



License fees.    License fee
revenues decreased 4% to $68.4 million in 2001 from $71.6 million in 2000. License revenue in the second half of 2001 was 60% below the first half, reflecting fewer sales to new customers, and also lower sales of modules and additional user seats to
existing customers, where business contraction and their staff reductions reduced their need for additional near-term capacity. Our product pricing remained relatively stable during 2001.



We contracted with 10 new license customers during 2001, compared to 52 in 2000, not including new customers
obtained through acquisition of the Lat45 Information Systems Inc. business in July 2001. The lower order activity in the latter part of the 2001, as well as the 4% decline in license revenue in 2001, was related to an overall slowdown in
communications infrastructure spending by our potential customers.



Services.    Revenues from services were $52.9 million in 2001 compared to $66.0 million in 2000, representing a 20% year over year decrease. The decline in service revenues from 2000 to 2001 was
due to a 55% decline in consulting and education services, partially offset by a 33% increase in maintenance revenue.



Consulting and education services revenue was $17.9 million in 2001 and $39.8 million in 2000. The decline in consulting and education
services revenue was largely due to fewer new customer implementations related to fewer new license product sales and, to a lesser extent, lower spending by our existing customers on upgrades, product integrations and training of their employees.
Our consulting revenue was also adversely affected by the increasing ability of alliance partners to provide consulting services directly to our customers, and license product enhancements and tools that shorten software implementation and upgrade
times for our customers.



Post-contract customer
support, or maintenance revenues, increased to $34.9 million in 2001 from $26.3 million in 2000, representing a year over year increase of 33%. The increase in maintenance revenue was due to a higher cumulative base of license products that we
supported. The number of customers from whom we recognized maintenance revenue declined 12% between the fourth quarter of 2001 and the fourth quarter of 2000, largely due to consolidation among some of our customers and financial failure of others.
The decline in the number of customers was most evident during the first half of 2001, and relatively stable during the second half of the year. The customer losses tended to be our smaller revenue accounts, while same-customer maintenance



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revenue from our remaining customers in 2001 increased over 2000, primarily due to their growth of operations and their follow-on purchases
of our products.



Concentration of
Revenues.    In 2001, our top ten customers represented 36% of our total revenue, with no one customer accounting for more than 6% of revenue.



International Revenues.    We recognized $26.9 million of revenue during
2001 from sources outside the United States, representing 22% of total revenue, up from 9% in 2000.



Cost of Revenues



License Costs.    License costs were $6.1 million in 2001 and $5.1 million in 2000, representing 9% and 7% of license revenue in each year, respectively. The increase in license costs, as a
percentage of license revenue, was primarily due to royalty expenses for use of third party e-commerce software that we embedded in some of our products. In July 2001 we replaced this royalty-based agreement with a one-time payment for a perpetual
license, thus reducing royalty expense as a percentage of license revenue.



Amortization and Impairment of Intangible Assets.    For the year ended December 31, 2001, cost of revenues included a $1.4 million charge for amortization of intangible
assets. This amortization consisted of $0.9 million of purchased technology rights and $0.5 million attributable to customer contracts purchased from Lat45 Information Systems Inc. The value assigned to intangible assets, primarily technology
rights, is amortized over the estimated useful life of the assets using the greater of straight-line or the ratio that current gross revenues related to those assets bears to the total current and anticipated future gross revenues related to those
assets. The estimated useful life of these assets ranged from nine months to thirty-six months.



Service Costs.    Service costs were $25.8 million in 2001 and $39.4 million in 2000, representing 49% and 60% of service revenues in each year, respectively. The decline in
service costs was primarily due to lower use of subcontracted consultants related to lower demand for consulting services, partially offset by increased costs for customer support. The decrease in service cost as a percentage of service revenues was
primarily due to the relatively higher proportion of higher-margin maintenance revenues, compared to consulting and training revenues.



Operating Expenses



Research and Development Expenses.    Product research and development expenses during 2001 and 2000 were both
$31.3 million, representing 26% and 23% of total revenues in each year, respectively. While our research and development investment in 2001 was equal to our investment in 2000, the investment in 2001 reflected an 18% increase in research and
development employees and a 52% decline in contracted development spending. During 2001, our research and development investments were focused on new products and enhancements to address next-generation communications networks, new features to
address the needs of multinational communications providers and user-group defined product enhancements.



Sales and Marketing Expenses.    Sales and marketing expenses were $26.8 million in 2001 and $24.5 million
in 2000, representing 22% and 18% of revenues in each year, respectively. Sales and marketing expenses increased each year primarily due to the expansion of our sales and marketing staff, increased commission expense, and increased travel costs,
coupled with higher expenses related to our expansion into Europe and Latin America. The increase in sales and marketing expenses as a percentage of revenues from 2000 to 2001 was due to the lower revenue in 2001.



General and Administrative
Expenses.    General and administrative expenses were $20.7 million in 2001 and $18.9 million in 2000, representing 17% and 14% of revenues in each year, respectively. The increase in general and administrative expenses
resulted primarily from a higher provision for doubtful accounts which



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increased to $8.6 million in 2001 from $6.8 million in 2000, and also due to staff increases in information systems and administrative
functions to support the increased scale of our operations.



Restructuring and other Costs.    In July 2001, we announced a corporate restructuring, and in the third quarter of 2001 we recorded a pre-tax restructuring charge of $3.1 million. This charge consisted of
$2.0 million for a reduction in force of approximately 100 people, and approximately $1.1 million for lease commitments for certain field offices being closed and related fixed asset write-downs. The restructuring was in response to lower software
license bookings and the expectation of lower revenues in the third and fourth quarters of 2001. We expected approximately $7.0 million of annualized savings from this restructuring program. At December 31, 2001, approximately $1.0 million was
included in accrued liabilities, related primarily to future minimum lease commitments, which expire in 2004.



In-Process Research and Development.    In connection with our acquisition of Lat45 Information Systems Inc.,
we recorded a pre-tax charge of $2.9 million for acquired in-process research and development (IPR&D) in the third quarter of 2001. At the date of this acquisition, the IPR&D projects had not yet reached technological feasibility and had no
alternative future uses. The projects generally included enhancements and upgrades to existing technology, enhanced communication among systems, introduction of new functionality and the development of new technology primarily for integration
purposes. The value of the IPR&D was calculated using a discounted cash flow analysis of the anticipated income stream of the related product sales. The projected net cash flows were computed using a discount rate of 35% for the IPR&D
project.



Loss on Investments



During the third quarter of 2001, we determined that the
decline in fair value of two equity investments below their carrying value was other than temporary. Accordingly, we recorded a pre-tax charge of $3.4 million to write down the value of investments, based on an independent appraisal.



Interest and Other Income, Net



Interest and other income (net), primarily consisting of
interest income and interest expense, was $5.4 million in 2001 and $7.7 million in 2000. The decrease in interest and other income from 2000 to 2001 was primarily due to lower interest rates earned on invested balances, partially offset by
higher cash and marketable security balances during 2001.



Income Tax Expense



Income tax expense was $2.2 million in 2001 and $10.0 million in 2000. As a percentage of income before taxes, income tax expense was 45.2% in 2001 and 38.4% in 2000. The increase in the effective tax rate during 2001 was due
principally to the in-process research and development write-off that is not deductible for tax purposes. Tax expense as a percentage of pre-tax income differs from the federal statutory rate primarily due to these nondeductible costs and state
taxes, partially offset by estimated tax credits in 2001.



Liquidity and Capital Resources



At December 31, 2002, our primary sources of liquidity were cash and cash equivalents, restricted cash and marketable securities, totaling $70.8 million and representing 51% of total assets. We invested our cash in excess of current
operating requirements in short and intermediate term investment grade securities that are available for sale as needed to finance our future growth. In December 2002 we deposited $12.7 million in escrow for the proposed acquisition of Orchestream
Holdings plc. This deposit was classified as restricted cash on the balance sheet at December 31, 2002. Total cash and marketable securities decreased $66.8 million during 2002, from a balance of $137.6 million at the end of 2001. This decrease was
primarily attributable to the February 2002 acquisition ($35.6 million), cash used in operations ($29.0 million), and capital expenditures ($3.4 million).



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Cash used in
operating activities during 2002 was $29.0 million, compared to $5.2 million generated from operations during 2001. The cash used in 2002 is primarily comprised of our $66.8 million net loss adjusted for the impairment of acquired goodwill and
intangible assets of $44.6 million, and other non-cash items, including an increase of $9.7 million in non-cash working capital and a $8.8 million increase in tax benefits which were partially offset by $5.8 million in depreciation and amortization
expense, and $4.1 million of purchased in-process research and development expense.



Net cash used in investing activities was $24.9 million in 2002, comprised of the net sale of $26.8 million in marketable securities, partially offset by $35.6 million in acquisition-related cash
outflows, $12.7 million restricted cash related to the February 2003 Orchestream acquisition, and $3.4 million in capital expenditures primarily for computing hardware and software and leasehold improvements for our new employees and offices. We
have no unusual capital commitments at December 31, 2002, and our principal commitments consist of obligations under operating leases. Net cash used for investing activities was $20.9 million in 2001, comprised of $8.0 million in purchases of
marketable securities, $6.8 million for the Lat45 Information Systems Inc. acquisition, and $6.1 million in capital expenditures for computing hardware and software, furniture, and leasehold improvements.



Net cash provided from financing activities during 2002
consisted of $1.3 million in proceeds from our employee stock option programs. Net cash provided from financing activities in 2001 was $2.6 million.



At December 31, 2002, we had outstanding contractual obligations for cumulative lease payments of approximately $26.2 million through
2010. We believe that our cash flows generated by operations, together with current cash and marketable securities balances, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next
twelve months. From time to time, we evaluate potential acquisitions and other strategic relationships with complementary businesses, products and technologies. Should cash balances be insufficient to complete an acquisition or otherwise meet our
business objectives, we may seek to sell additional equity or debt securities. The decision to sell additional equity or debt securities could be made at any time and could result in additional dilution to our stockholders.



New Accounting Standards



In July 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 141, Business Combinations,and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used and establishes new standards on the recognition of certain
identifiable intangible assets separate from goodwill for all business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead be
tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values. The Company adopted the provisions of
SFAS No. 141 effective July 1, 2001, and adopted SFAS No. 142 effective January 1, 2002.



Under SFAS No. 142, the Company is required to perform transitional impairment tests for its goodwill as of the date of adoption. Step one of the transitional goodwill impairment test, which compares
the fair values of our reporting units to their respective carrying values, was completed by June 30, 2002, and no impairment was indicated as of January 1, 2002. The Company is required to assess the value of goodwill under the provisions of
Statement of Financial Accounting Standards No. 142. The Company is one reporting unit, as defined by the standard. As outlined in the authoritative literature, the assessment of whether goodwill has been impaired is based on the Companys
estimate of the fair value of the reporting unit using a model which considers both a discounted future cash flow analysis and market capitalization data.



During 2002, the market capitalization of the Company fell to a level well below its book value. The decline in the market capitalization
indicated that a potential reduction in the value of goodwill existed; management



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performed an interim valuation as of July 31, 2002. This valuation indicated that an impairment of goodwill existed as of July 31, 2002.
Accordingly, the Company recorded a charge of $28.7 million to eliminate the goodwill.



In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes one accounting model to be used for long-lived assets to be
disposed of by sale and broadens the presentation requirements of discontinued operations to include more disposal transactions. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and the accounting and reporting provisions of Accounting Principles Board 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, relative to discontinued operations. SFAS No. 144 is effective for fiscal years beginning after December 31, 2001. The impact of its adoption did not have a material impact on the Companys
results of operations or financial position.



In
November 2001, the FASB issued a staff announcement regarding the income statement characterization of reimbursements received for out-of-pocket expenses incurred. This announcement indicated that the FASB believes that reimbursements
received for out-of-pocket expenses should be characterized as revenue in the income statement, where the service provider is the primary obligor with respect to purchasing goods and services from third parties, has supplier discretion and assumes
credit risk for the transaction. The announcement is effective for financial reporting periods beginning after December 15, 2001. Upon application of the statement, comparative financial statements for prior periods have been reclassified. In
January 2002, the Company adopted the FASB staff position regarding the income statement classification of reimbursements received for out-of-pocket expenses incurred. Service revenues related to this change were approximately $2,221,500
for the twelve months of 2002. Revenue for the twelve months ended December 31, 2001 and 2000 have been reclassified to present amounts previously shown net on a comparable basis by increasing service revenues and service cost of revenues by
approximately $2,428,000 and $5,797,000, respectively.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This pronouncement addresses the financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under SFAS No. 146,
liabilities for costs associated with an exit or disposal activity are to be recognized when the liability is incurred. Under EITF Issue No. 94-3, liabilities related to exit or disposal activities were recognized when an entity committed to an exit
plan. In addition, SFAS No. 146 establishes that the objective for the initial measurement of the liability is fair value. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002.



ITEM 7a.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Our exposure to market risks principally relates to changes in interest rates that may affect our fixed income investments. Our excess
cash is invested in debt securities issued by U.S. government agencies and corporate debt securities. We place our investments with high quality issuers and limit our credit exposure by restricting the amount of securities that may be placed with
any single issuer. Our general policy is to limit the risk of principal loss and assure the safety of invested funds by limiting market and credit risk. All highly liquid investments with original maturities of three months or less are considered to
be cash equivalents. At December 31, 2002, the weighted average pre-tax interest rate on the investment portfolio is approximately 1.7%. Market risk related to these investments can be estimated by measuring the impact of a near-term adverse
movement of 10% in short-term market interest rates. If these rates average 10% more in 2002 than in 2001, there would be no material adverse impact on our results of operations or financial position.



We do not hedge our foreign currency exposure, nor do we use
derivative financial instruments for speculative trading purposes. Market risk related to foreign currency exchange rates can be estimated by



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measuring the impact of a near-term adverse movement of 10% in foreign currency exchange rates against the U.S. dollar. If these rates
average 10% more in 2003 than in 2001, there would be no material adverse impact on our results of operations or financial position. During 2002, had these rates averaged 10% more than in 2001, there would have been no material impact on our results
of operations or financial position.



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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



|                                                                                                                              |  | Page
|----------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                             
|Independent Auditors Report                                                                                                  |  | 42  
|                                                                                                                             
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                                                  |  | 43  
|                                                                                                                             
|Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and
2000                                    |  | 44  
|                                                                                                                             
|Consolidated Statements of Stockholders Equity and Comprehensive Income for the
Years Ended December 31, 2002, 2001 and 2000 |  | 45  
|                                                                                                                             
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and
2000                                    |  | 46  
|                                                                                                                             
|Notes to Consolidated Financial Statements                                                                                    |  | 47  
|                                                                                                                             
|Supplemental Schedule:                                                                                                        |  |     
|                                                                                                                             
|Schedule II  Valuation and Qualifying Accounts                                                                               |  | 62  



|Note: |  | Schedules not listed above have been omitted because the information required to be set forth therein is not applicable.
|----- |  | ------------------------------------------------------------------------------------------------------------------------



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INDEPENDENT
AUDITORS REPORT



The
Board of Directors and Shareholders

MetaSolv, Inc.



We have audited the accompanying consolidated balance sheets of MetaSolv, Inc.
and subsidiaries as of December 31, 2002, and 2001, and the related consolidated statements of operations, stockholders equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2002. In
connection with our audits of the consolidated financial statements, we also have audited the related financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of MetaSolv, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.



As discussed in Note 1 to the consolidated financial statements, during 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) SFAS No. 141,
Business Combinations, and certain provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as required for goodwill and intangible assets resulting from business combinations consummated after June 30, 2001. In 2002, the
Company fully adopted the provisions of SFAS No. 142, as required for goodwill and intangible assets resulting from business combinations consummated before July 1, 2001.



KPMG LLP

Dallas,
Texas

February 12, 2003, except as to note 8, which is as of March 20, 2003



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METASOLV,
INC.



---



CONSOLIDATED BALANCE SHEETS

December 31, 2002 and 2001

(In thousands, except share and per share data)



|                                                                                                                                      |  | December 31, |        
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------
|                                                                                                                                      |  | 2002         |        
|Assets                                                                                                                                |  |              |        
|Current assets:                                                                                                                       |  |              |        
|Cash and cash equivalents                                                                                                             |  | $            | 28,113 
|Restricted cash                                                                                                                       |  |              | 12,666 
|Marketable securities                                                                                                                 |  |              | 30,001 
|Trade accounts receivable, less allowance for doubtful accounts of$3,825 in 2002 and
$3,171 in 2001                                   |  |              | 17,025 
|Unbilled receivables                                                                                                                  |  |              | 1,738  
|Prepaid expenses                                                                                                                      |  |              | 5,119  
|Deferred tax assets                                                                                                                   |  |              | 5,943  
|Other current assets                                                                                                                  |  |              | 4,666  
|                                                                                                                                      |  |              |        
|Total current assets                                                                                                                  |  |              | 105,271
|Property and equipment, net                                                                                                           |  |              | 16,185 
|Goodwill                                                                                                                              |  |              |       
|Intangible assets                                                                                                                     |  |              | 6,127  
|Deferred tax assets and other assets                                                                                                  |  |              | 10,786 
|                                                                                                                                      |  |              |        
|Total assets                                                                                                                          |  | $            | 138,369
|                                                                                                                                      |  |              |        
|                                                                                                                                     
|Liabilities and Stockholders
Equity                                                                                                  |  |              |        
|Current liabilities:                                                                                                                  |  |              |        
|Accounts payable                                                                                                                      |  | $            | 7,251  
|Accrued expenses                                                                                                                      |  |              | 22,780 
|Deferred revenue                                                                                                                      |  |              | 9,317  
|                                                                                                                                      |  |              |        
|Total current liabilities                                                                                                             |  |              | 39,348 
|Deferred income taxes                                                                                                                 |  |              |       
|                                                                                                                                     
|Stockholders equity:                                                                                                                 |  |              |        
|Preferred stock, $.01 par value, 10,000,000 shares authorized,no shares issued or
outstanding                                         |  |              |       
|Common stock, $.005 par value, 100,000,000 shares authorized,shares issued and
outstanding: 37,939,738 in 2002, and 37,422,649in 2001 |  |              | 190    
|Additional paid-in capital                                                                                                            |  |              | 144,388
|Deferred compensation                                                                                                                 |  |              | (66    
|Accumulated other comprehensive income                                                                                                |  |              | 38     
|Retained earnings (accumulated deficit)                                                                                               |  |              | (45,529
|                                                                                                                                      |  |              |        
|Total stockholders equity                                                                                                            |  |              | 99,021 
|                                                                                                                                      |  |              |        
|Total liabilities and stockholders equity                                                                                            |  | $            | 138,369
|                                                                                                                                      |  |              |        



See
accompanying notes to consolidated financial statements.



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METASOLV,
INC.



---



CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2002, 2001 and 2000

(In thousands, except
per share data)



|                                                 |  | Year Ended December 31,
|------------------------------------------------ |  | -----------------------
|                                                 |  | 2002                   
|Revenues:                                        |  |                        
|License                                          |  | $                      
|Service                                          |  |                        
|                                                 |  |                        
|Total revenues                                   |  |                        
|                                                
|Cost of revenues:                                |  |                        
|License                                          |  |                        
|Amortization and impairment of intangible assets |  |                        
|Service                                          |  |                        
|                                                 |  |                        
|Total cost of revenues                           |  |                        
|                                                 |  |                        
|Gross profit                                     |  |                        
|                                                
|Operating expenses:                              |  |                        
|Research and development                         |  |                        
|Sales and marketing                              |  |                        
|General and administrative                       |  |                        
|In process R&D write-off                         |  |                        
|Restructuring and other costs                    |  |                        
|Goodwill impairment                              |  |                        
|                                                 |  |                        
|Total operating expenses                         |  |                        
|                                                 |  |                        
|Income (loss) from operations                    |  |                        
|Interest and other income, net                   |  |                        
|Loss on investments                              |  |                        
|                                                 |  |                        
|Income (loss) before taxes                       |  |                        
|Income tax expense (benefit)                     |  |                        
|                                                 |  |                        
|Net income (loss)                                |  | $                      
|                                                 |  |                        
|Earnings (loss) per share of common stock:       |  |                        
|Basic                                            |  | $                      
|                                                 |  |                        
|Diluted                                          |  | $                      
|                                                 |  |                        



See
accompanying notes to consolidated financial statements.



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MetaSolv,
Inc.



CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME

Years Ended December 31, 2002, 2001 and 2000

(In thousands, except share amounts)



|                                                |  | Common stock |   |  | Treasury stock |     |   | Additional paid-in capital |          |   | Common stock subscription |   |        | Deferred compensation |  |   | Accumulated other comprehensive income |   |  | Retained Earnings |     |   | Total |  
|----------------------------------------------- |  | ------------ | - |  | -------------- | --- | - | -------------------------- | -------- | - | ------------------------- | - | ------ | --------------------- |  | - | -------------------------------------- | - |  | ----------------- | --- | - | ----- | -
|                                                |  | Shares       |   |  | Amount         |     |   | Shares                     |          |   | Amount                    |   |        |                       |  |   |                                        |  
|Balance, December 31, 1999                      |  | 34,504,334   |   |  | $              | 172 |   |                            | 24,000   |   |                           | $ | (14    | )                     |  | $ | 116,555                                |   |  | $                 | (47 | ) |       | $
|                                               
|Net income                                      |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   |                                       |   |  |                   |    |   |       |  
|Exercise of stock options                       |  | 1,212,662    |   |  |                | 7   |   |                            |         |   |                           |   |       |                       |  |   | 1,655                                  |   |  |                   |    |   |       |  
|Issuance of common stock for ESPP               |  | 213,349      |   |  |                | 1   |   |                            |         |   |                           |   |       |                       |  |   | 3,348                                  |   |  |                   |    |   |       |  
|Purchase of treasury stock                      |  |             |   |  |                |    |   |                            | 1,440    |   |                           |   | (1     | )                     |  |   |                                       |   |  |                   |    |   |       |  
|Reissuance of treasury stock                    |  |             |   |  |                |    |   |                            | (25,440  | ) |                           |   | 15     |                       |  |   | 374                                    |   |  |                   |    |   |       |  
|Tax benefit from disqualifying dispositions     |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   | 8,614                                  |   |  |                   |    |   |       |  
|Amortization of deferred compensation           |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   |                                       |   |  |                   |    |   |       |  
|Repayment of subscription note                  |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   |                                       |   |  |                   | 23  |   |       |  
|                                                |  |              |   |  |                |     |   |                            |          |   |                           |   |        |                       |  |   |                                        |   |  |                   |     |   |       |  
|Balance, December 31, 2000                      |  | 35,930,345   |   |  |                | 180 |   |                            |         |   |                           |   |       |                       |  | $ | 130,546                                |   |  | $                 | (24 | ) |       | $
|                                               
|Comprehensive income:                           |  |              |   |  |                |     |   |                            |          |   |                           |   |        |                       |  |   |                                        |   |  |                   |     |   |       |  
|Net income                                      |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   |                                       |   |  |                   |    |   |       |  
|Unrealized gain on marketable securities        |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   |                                       |   |  |                   |    |   |       |  
|Foreign currency translation                    |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   |                                       |   |  |                   |    |   |       |  
|                                                |  |              |   |  |                |     |   |                            |          |   |                           |   |        |                       |  |   |                                        |   |  |                   |     |   |       |  
|Total comprehensive income                      |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   |                                       |   |  |                   |    |   |       |  
|                                                |  |              |   |  |                |     |   |                            |          |   |                           |   |        |                       |  |   |                                        |   |  |                   |     |   |       |  
|Exercise of stock options                       |  | 971,626      |   |  |                | 4   |   |                            |         |   |                           |   |       |                       |  |   | 2,040                                  |   |  |                   |    |   |       |  
|Issuance of common stock for ESPP               |  | 313,101      |   |  |                | 2   |   |                            |         |   |                           |   |       |                       |  |   | 2,162                                  |   |  |                   |    |   |       |  
|Issuance of common stock for acquisition        |  | 366,666      |   |  |                | 2   |   |                            |         |   |                           |   |       |                       |  |   | 2,803                                  |   |  |                   |    |   |       |  
|Purchase of treasury stock                      |  |             |   |  |                |    |   |                            | 163,049  |   |                           |   | (1,602 | )                     |  |   |                                       |   |  |                   |    |   |       |  
|Reissuance of treasury stock                    |  |             |   |  |                |    |   |                            | (3,960   | ) |                           |   | 11     |                       |  |   |                                       |   |  |                   |    |   |       |  
|Cancellation of treasury stock                  |  | (159,089     | ) |  |                | (1  | ) |                            | (159,089 | ) |                           |   | 1,591  |                       |  |   | (1,590                                 | ) |  |                   |    |   |       |  
|Tax benefit from disqualifying dispositions     |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   | 3,559                                  |   |  |                   |    |   |       |  
|Stock compensation                              |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   | 254                                    |   |  |                   |    |   |       |  
|Amortization of deferred compensation           |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   |                                       |   |  |                   |    |   |       |  
|                                                |  |              |   |  |                |     |   |                            |          |   |                           |   |        |                       |  |   |                                        |   |  |                   |     |   |       |  
|Balance, December 31, 2001                      |  | 37,422,649   |   |  |                | 187 |   |                            |         |   |                           |   |       |                       |  |   | 139,774                                |   |  |                   | (24 | ) |       |  
|                                                |  |              |   |  |                |     |   |                            |          |   |                           |   |        |                       |  |   |                                        |   |  |                   |     |   |       |  
|Comprehensive income:                           |  |              |   |  |                |     |   |                            |          |   |                           |   |        |                       |  |   |                                        |   |  |                   |     |   |       |  
|Net loss                                        |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   |                                       |   |  |                   |    |   |       |  
|Unrealized gain (loss) on marketable securities |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   |                                       |   |  |                   |    |   |       |  
|Foreign currency translation                    |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   |                                       |   |  |                   |    |   |       |  
|                                                |  |              |   |  |                |     |   |                            |          |   |                           |   |        |                       |  |   |                                        |   |  |                   |     |   |       |  
|Total comprehensive income                      |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   |                                       |   |  |                   |    |   |       |  
|                                                |  |              |   |  |                |     |   |                            |          |   |                           |   |        |                       |  |   |                                        |   |  |                   |     |   |       |  
|Exercise of stock options                       |  | 148,820      |   |  |                | 1   |   |                            |         |   |                           |   |       |                       |  |   | 186                                    |   |  |                   |    |   |       |  
|Issuance of common stock for ESPP               |  | 372,749      |   |  |                | 2   |   |                            |         |   |                           |   |       |                       |  |   | 1,073                                  |   |  |                   |    |   |       |  
|Purchase of treasury stock                      |  |             |   |  |                |    |   |                            | (4,480   | ) |                           |   | (2     | )                     |  |   |                                       |   |  |                   |    |   |       |  
|Cancellation of treasury stock                  |  | (4,480       | ) |  |                |    |   |                            | 4,480    |   |                           |   | 2      |                       |  |   | (2                                     | ) |  |                   |    |   |       |  
|Repayment of subscription note                  |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   |                                       |   |  |                   | 24  |   |       |  
|Tax benefit from disqualifying dispositions     |  |             |   |  |                |    |   |                            |         |   |                           |   |        |                       |  |   | 3,357                                  |   |  |                   |    |   |       |  
|Amortization of deferred compensation           |  |             |   |  |                |    |   |                            |         |   |                           |   |       |                       |  |   |                                       |   |  |                   |    |   |       |  
|                                                |  |              |   |  |                |     |   |                            |          |   |                           |   |        |                       |  |   |                                        |   |  |                   |     |   |       |  
|Balance, December 31, 2002                      |  | 37,939,738   |   |  | $              | 190 |   |                            |         |   |                           | $ |       |                       |  | $ | 144,388                                |   |  | $                 |    |   |       | $
|                                                |  |              |   |  |                |     |   |                            |          |   |                           |   |        |                       |  |   |                                        |   |  |                   |     |   |       |  



See
accompanying notes to consolidated financial statements.





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##### Table of Contents



METASOLV,
INC



---



CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2002, 2001 and 2000

(In thousands)



|                                                                                         |  | 2002 |         |   | 2001 |   |         | 2000 | 
|---------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- | 
|Cash flows from operating activities:                                                    |  |      |         |   |      |   |         |      | 
|Net income (loss)                                                                        |  | $    | (66,794 | ) |      | $ | 2,717   |      | 
|Adjustments to reconcile net income (loss) to net cash provided by operating
activities: |  |      |         |   |      |   |         |      | 
|Goodwill impairment                                                                      |  |      | 28,742  |   |      |   |        |      | 
|Amortization and impairment of intangible assets                                         |  |      | 15,836  |   |      |   | 1,417   |      | 
|Depreciation and amortization                                                            |  |      | 5,756   |   |      |   | 4,045   |      | 
|Stock compensation                                                                       |  |      | 88      |   |      |   | 400     |      | 
|Loss on asset disposal                                                                   |  |      | 1,828   |   |      |   | 76      |      | 
|Deferred taxes                                                                           |  |      | (12,189 | ) |      |   | (2,423  | )    | 
|Tax benefit from disqualifying dispositions                                              |  |      | 3,357   |   |      |   | 3,559   |      | 
|Loss on investments                                                                      |  |      |        |   |      |   | 3,429   |      | 
|Purchased in-process research and development                                            |  |      | 4,060   |   |      |   | 2,940   |      | 
|Changes in operating assets and liabilities (net of effect of
acquisition):              |  |      |         |   |      |   |         |      | 
|Trade accounts receivable, net                                                           |  |      | (4,112  | ) |      |   | 11,125  |      | 
|Unbilled receivables                                                                     |  |      | (1,121  | ) |      |   | 893     |      | 
|Other assets                                                                             |  |      | (5,379  | ) |      |   | 3,009   |      | 
|Accounts payable and accrued expenses                                                    |  |      | 4,841   |   |      |   | (11,029 | )    | 
|Deferred revenue                                                                         |  |      | (3,891  | ) |      |   | (14,959 | )    | 
|                                                                                         |  |      |         |   |      |   |         |      | 
|Net cash provided by (used in) operating activities                                      |  |      | (28,978 | ) |      |   | 5,199   |      | 
|                                                                                         |  |      |         |   |      |   |         |      | 
|                                                                                        
|Cash flows from investing activities:                                                    |  |      |         |   |      |   |         |      | 
|Purchases of property and equipment                                                      |  |      | (3,422  | ) |      |   | (6,060  | )    | 
|Purchase of equity investments                                                           |  |      |        |   |      |   |        |      | 
|Purchase of marketable securities                                                        |  |      | (51,826 | ) |      |   | (87,198 | )    | 
|Proceeds from sale of marketable securities                                              |  |      | 78,638  |   |      |   | 79,245  |      | 
|Increase in restricted cash                                                              |  |      | (12,666 | ) |      |   |        |      | 
|Acquisition of Lat45 Information Systems Inc.                                            |  |      |        |   |      |   | (6,842  | )    | 
|Acquisition of Nortel Networks OSS Software Assets.                                     |  |      | (35,594 | ) |      |   |        |      | 
|                                                                                         |  |      |         |   |      |   |         |      | 
|Net cash used in investing activities                                                    |  |      | (24,870 | ) |      |   | (20,855 | )    | 
|                                                                                         |  |      |         |   |      |   |         |      | 
|                                                                                        
|Cash flows from financing activities:                                                    |  |      |         |   |      |   |         |      | 
|Proceeds from common stock transactions                                                  |  |      | 1,286   |   |      |   | 4,208   |      | 
|Purchase of treasury stock                                                               |  |      | (2      | ) |      |   | (1,602  | )    | 
|Reissuance of treasury stock                                                             |  |      |        |   |      |   | 11      |      | 
|                                                                                         |  |      |         |   |      |   |         |      | 
|Net cash provided by financing activities                                                |  |      | 1,284   |   |      |   | 2,617   |      | 
|                                                                                         |  |      |         |   |      |   |         |      | 
|                                                                                        
|Effect of exchange rate changes on cash                                                  |  |      | 19      |   |      |   | 2       |      | 
|                                                                                         |  |      |         |   |      |   |         |      | 
|                                                                                        
|Decrease in cash and cash equivalents                                                    |  |      | (52,545 | ) |      |   | (13,037 | )    | 
|Cash and cash equivalents, beginning of year                                             |  |      | 80,658  |   |      |   | 93,695  |      | 
|                                                                                         |  |      |         |   |      |   |         |      | 
|                                                                                        
|Cash and cash equivalents, end of year                                                   |  | $    | 28,113  |   |      | $ | 80,658  |      | 
|                                                                                         |  |      |         |   |      |   |         |      | 
|                                                                                        
|Supplemental disclosures of cash flow information Cash paid during the year for:        |  |      |         |   |      |   |         |      | 
|Interest                                                                                 |  | $    | 66      |   |      | $ | 71      |      | 
|                                                                                         |  |      |         |   |      |   |         |      | 
|Income taxes                                                                             |  | $    | 293     |   |      | $ | 2,253   |      | 
|                                                                                         |  |      |         |   |      |   |         |      | 
|                                                                                        
|Non-cash investing and financing activitiesIssuance of common stock for
acquisition     |  | $    |        |   |      | $ | 2,805   |      | 
|                                                                                         |  |      |         |   |      |   |         |      | 



See
accompanying notes to consolidated financial statements.





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##### Table of Contents



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2002, 2001 and 2000



1)    Organization and Summary of Significant
Accounting Policies



MetaSolv, Inc. (the
Company), a Delaware corporation headquartered in Plano, Texas, is a provider of software designed to automate the management of communications networks. Communications service providers using our software are able to efficiently enter,
manage and fulfill orders for service from their customers. These communications service providers offer a full array of communications services including local and long distance telephone services, high-speed data services and Internet services,
often as a bundled offering. The Company derives substantially all of its revenue from the sale of licenses, related professional services, maintenance and support of packaged software products to communications service providers.



a)  Principles of Consolidation



The consolidated financial statements
include the financial statements of MetaSolv, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.



b)  Revenue Recognition



The Companys software products are licensed to customers through a direct sales force and indirect
sales channels. The Companys software licensing arrangements typically include multiple elements, such as software products, post-contract customer support, consulting, and training. The Company uses the residual method of revenue recognition
for these arrangements. Under the residual method, the aggregate arrangement fee is allocated to each of the undelivered elements in an amount equal to its fair value, with the residual of the arrangement fee allocated to the delivered elements.
Fair values are based upon vendor specific objective evidence. Fees allocated to each software element of the arrangement are recognized as revenue when the following criteria have been met: (a) a written contract for the license of software has
been executed, (b) the product has been delivered to the customer, (c) the license fee is fixed or determinable, and (d) collectibility of the resulting receivable is deemed probable. If evidence of fair value of the undelivered elements of the
arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist, or until all elements of the arrangement are delivered. Fees allocated to post-contract customer support are recognized
as revenue ratably over the support period. Fees allocated to other services are recognized as revenue as the service is performed.



The Company is frequently engaged to provide consulting and implementation services in connection with the licensing of its software. In
situations where such services include significant modification or customization of the software or are otherwise essential to the functionality of the software, revenues relating to the software license and services are aggregated and the combined
revenues are recognized using the percentage-of-completion method. Revenue earned using the percentage-of-completion method is based on managements estimate of progress towards completion. Changes to estimates of progress towards completion,
if any, are accounted for as a change in estimate in the period of the change. Of total deferred revenues, $580,000 and $151,000 as of December 31, 2002 and 2001, respectively, represented billings in excess of costs and related profits on certain
contracts accounted for under the percentage-of-completion method. Unbilled receivables as of December 31, 2002, included $825,000 of costs and related profits in excess of billings on contracts accounted for under the percentage-of-completion
method.



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



c)  Cash and Cash Equivalents



Cash equivalents consist of investments in an
interest-bearing money market account and commercial paper with maturities of three months or less. For purposes of the statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less at
the date of purchase to be cash equivalents.



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2002, 2001 and 2000





d)  Marketable Securities and Equity Investments



Marketable securities at December 31, 2002 consisted of $13,000,000 of commercial paper with remaining contractual maturities of 120 days or less, debt securities issued by U.S. government agencies of
$10,000,000 with remaining contractual maturities of 24 months or less and $7,000,000 of corporate and municipal bonds. Marketable securities are classified as available-for-sale and recorded at fair value. Unrealized gains were $17,000 and $123,000
at December 31, 2002 and 2001, respectively.



The
Company uses the cost method to account for its investments in equity securities. A decline in the market value of any investment deemed to be other than temporary is charged to earnings. During 2001, the Company recorded an impairment charge of
$3,429,000 for other than temporary declines in the value of its investments.



e)  Property and Equipment



Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of
the assets or, for leasehold improvements, the term of the lease, if shorter. The estimated useful lives are as follows:



|                       |  | Years
|---------------------- |  | -----
|Furniture and fixtures |  | 7    
|Computer equipment     |  | 3    
|Leasehold improvements |  | 3-11 
|Other equipment        |  | 3-7  



f)  Fair Value of Financial Instruments



The carrying values of cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short maturities.



g)  Research and Development Costs



Research and development costs incurred
prior to the establishment of technological feasibility of the product are expensed as incurred. After technological feasibility is established, any additional software development costs are capitalized. The Company believes its process for
developing software is essentially completed concurrently with the establishment of technological feasibility and, accordingly, no software development costs have been capitalized to date.



In connection with the 2001 acquisition of Lat45 Information Systems Inc., the Company recorded a charge of
$2,940,000 for acquired in-process research and development. At the date of the acquisition, the in-process research and development projects had not yet reached technological feasibility and had no alternative future uses. The projects generally
included enhancements and upgrades to existing technology, enhanced communication among systems, introduction of new functionality and the development of new technology primarily for integration purposes. The value of the in-process research and
development was calculated using a discounted cash flow analysis of the anticipated income stream of the related product sales. The projected net cash flows were computed using a discount rate of 35% for the in-process research and development
projects.



In connection with the February 2002
acquisition of certain operational support system assets from Nortel Networks, the Company recorded a charge of $4,060,000 for acquired in-process research and development. At



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2002, 2001 and 2000



the date of the acquisition, the in-process research and development projects had not yet reached technological feasibility and had no
alternative future uses. The projects generally included enhancements and upgrades to existing technology, enhanced communication among systems, introduction of new functionality and the development of new technology primarily for integration
purposes. The value of the in-process research and development was calculated using a discounted cash flow analysis of the anticipated income stream of the related product sales. The projected net cash flows were computed using discount rates from
25% to 35% for the various in-process research and development projects. These projects were essentially completed by year-end 2002.



h)  Accounting for Impairment of Long-Lived Assets



The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the assets. If such assets are
considered to be impaired, the impairments to be recognized are measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of their carrying amount or
fair value less cost to sell.



i)  Income Taxes



Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the amounts of existing assets and
liabilities recorded for financial reporting purposes and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is reflected in income tax expense in the period that includes the enactment date.



j)  Use of Estimates



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



k)  Accounting for Stock Options



The Company applies APB Opinion No. 25 in accounting for stock options granted to employees and non-employee
directors under its stock option plans. As such, compensation expense is recorded only if the fair value of the underlying stock exceeded its exercise price on the date of grant. The Company recorded deferred compensation of $150,000 in 2001 as a
result of granting stock options with exercise prices below the estimated fair value per share of the Companys common stock at the date of grant. Deferred compensation has been recorded as a component of stockholders equity and is being
amortized as a charge to operations over the vesting period of the applicable options. Amortization of deferred compensation was $88,000, $296,000, and $256,000 in 2002, 2001, and 2000, respectively.



Had the Company determined compensation cost based on the fair
value at the grant date for its stock options and activity under the Employee Stock Purchase Plan under SFAS No. 123, Accounting for Stock Based



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2002, 2001 and 2000



Compensation, the Companys net income (loss) would have been changed to the pro forma amounts indicated below (in thousands, except per
share data):



|                                                                                                                                                                                                       |  | Year ended December 31, |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | -------
|                                                                                                                                                                                                       |  | 2002                    |        
|Net income (loss):                                                                                                                                                                                     |  |                         |        
|As reported                                                                                                                                                                                            |  | $                       | (66,794
|Plus: Stock-based employee compensation cost, net of relatedtax effects, included in
the determination of net income as reported                                                                       |  |                         | 53     
|Less: Stock-based employee compensation cost, net of relatedtax effects that would
have been included in the determination of net income if the fair value based method had been applied to all awards |  |                         | (8,439 
|                                                                                                                                                                                                       |  |                         |        
|Pro forma                                                                                                                                                                                              |  | $                       | (75,180
|                                                                                                                                                                                                      
|Earnings (loss) per share of common stock:                                                                                                                                                             |  |                         |        
|Basic:                                                                                                                                                                                                 |  |                         |        
|As reported                                                                                                                                                                                            |  | $                       | (1.77  
|Pro forma                                                                                                                                                                                              |  | $                       | (2.00  
|Diluted:                                                                                                                                                                                               |  |                         |        
|As reported                                                                                                                                                                                            |  | $                       | (1.77  
|Pro forma                                                                                                                                                                                              |  | $                       | (2.00  



Pro
forma net income (loss) reflects only stock options granted after December 31, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma amounts presented above because
compensation cost is reflected over the options vesting periods of five years and compensation expense pertaining to stock options granted in prior periods is not considered.



l)  Comprehensive Income



The Company reports comprehensive income in its consolidated
statement of stockholders equity. Comprehensive income represents changes in stockholders equity from non-owner sources. For the three years ended December 31, 2002, net of taxes, unrealized gains on available-for-sale securities and
cumulative foreign currency translation adjustments were the only items of other comprehensive income for the Company. The cumulative unrealized gains on available-for-sale securities as of December 31, 2002 were $17,000. The cumulative foreign
currency translation adjustments as of December 31, 2002 was $21,000.



m)  Foreign Currency Translations



For all significant non-U.S. operations, the functional currency is the local currency. Assets and liabilities of those operations are translated into U.S. dollars using year-end exchange rates; income
and expenses are translated using the average exchange rates for the reporting period. Translation adjustments are deferred in accumulated other comprehensive income, a separate component of stockholders equity.



n)  Earnings Per Share of Common Stock



Basic earnings per share are computed
by dividing income or loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the incremental increase in common shares outstanding assuming the
exercise of all stock options and conversion of all preferred stock that would have had a dilutive effect on earnings per share.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2002, 2001 and 2000





o)  Reclassifications



Certain reclassifications have been made to the 2001 and 2000 consolidated financial statements to conform to the 2002 presentation.



p)  Recently Adopted Accounting Standards



In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations,and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used and establishes new standards on the recognition of certain identifiable intangible assets separate from goodwill
for all business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead be tested for impairment at least annually. SFAS No. 142 also
requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values. The Company adopted the provisions of SFAS No. 141 effective July 1, 2001, and adopted SFAS No.
142 effective January 1, 2002.



Under SFAS No.
142, the Company is required to perform transitional impairment tests for its goodwill as of the date of adoption. Step one of the transitional goodwill impairment test, which compares the fair values of our reporting units to their respective
carrying values, was completed by June 30, 2002, and no impairment was indicated as of January 1, 2002. The Company is required to periodically assess the value of goodwill under the provisions of Statement of Financial Accounting Standards No. 142.
The Company is one reporting unit, as defined by the standard. As outlined in the authoritative literature, the assessment of whether e goodwill has been impaired is based on the Companys estimate of the fair value of the reporting unit using
a model, which considers both a discounted future cash flow analysis and market capitalization data.



During 2002, the market capitalization of the Company fell to a level well below its book value. The decline in the market capitalization
indicated that a potential impairment in the value of goodwill existed; therefore, management performed an interim valuation as of July 31, 2002. This valuation indicated that an impairment of goodwill existed as of July 31, 2002. Accordingly, the
Company recorded a charge of $28.7 million to eliminate the goodwill.



In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes one accounting model to be used for long-lived assets to be disposed of by sale
and broadens the presentation requirements of discontinued operations to include more disposal transactions. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
and the accounting and reporting provisions of Accounting Principles Board 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, relative to discontinued operations. SFAS No. 144 is effective for fiscal years beginning after December 31, 2001. The impact of its adoption did not have a material impact on the Companys results of
operations or financial position.



In November
2001, the FASB issued a staff announcement regarding the income statement characterization of reimbursements received for out-of-pocket expenses incurred. This announcement indicated that the FASB believes that reimbursements received
for out-of-pocket expenses should be characterized as revenue in the income statement, where the service provider is the primary obligor with respect to purchasing goods and services from third parties, has supplier discretion and assumes credit
risk for the transaction. The announcement is effective for financial reporting periods beginning after December 15, 2001. Upon application of the statement,



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2002, 2001 and 2000



comparative financial statements for prior periods have been reclassified. In January 2002, the Company adopted the FASB staff position
regarding the income statement classification of reimbursements received for out-of-pocket expenses incurred. Service revenues related to this change were approximately $2,221,500 for the twelve months of 2002. Revenue for the twelve
months ended December 31, 2001 and 2000 have been reclassified to present amounts previously shown net on a comparable basis by increasing service revenues and service cost of revenues by approximately $2,428,000 and $5,797,000, respectively.



In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. This pronouncement addresses the financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under SFAS No. 146, liabilities for costs associated with an exit or disposal
activity are to be recognized when the liability is incurred. Under EITF Issue No. 94-3, liabilities related to exit or disposal activities were recognized when an entity committed to an exit plan. In addition, SFAS No. 146 establishes that the
objective for the initial measurement of the liability is fair value. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We are currently evaluating the impact this pronouncement will have on our future
consolidated financial results but do not believe it will be material.



2)    Property and Equipment



Property and equipment consists of the following (in thousands):



|                                               |  | December 31, |        
|---------------------------------------------- |  | ------------ | -------
|                                               |  | 2002         |        
|Property and equipment at cost                 |  |              |        
|                                              
|Land                                           |  | $            | 3,671  
|Computer equipment and software                |  |              | 14,805 
|Furniture and fixtures                         |  |              | 4,115  
|Leasehold improvements                         |  |              | 5,163  
|Telecommunications equipment                   |  |              | 2,114  
|Construction in progress                       |  |              | 53     
|                                               |  |              |        
|                                               |  |              | 29,921 
|Less accumulated depreciation and amortization |  |              | (13,736
|                                               |  |              |        
|                                              
|Property and equipment, net                    |  | $            | 16,185 
|                                               |  |              |        



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2002, 2001 and 2000





3)    Income Taxes



Income tax expense (benefit) for the years ended December 31, 2002, 2001 and 2000 consists of the following (in thousands):



|                                       |  | December 31, |        
|-------------------------------------- |  | ------------ | -------
|                                       |  | 2002         |        
|Current income tax expense (benefit):  |  |              |        
|Federal                                |  | $            | (2,062 
|Foreign                                |  |              | 711    
|State                                  |  |              | (505   
|                                       |  |              |        
|                                       |  |              | (1,856 
|                                       |  |              |        
|Deferred income tax expense (benefit): |  |              |        
|Federal                                |  |              | (10,667
|State                                  |  |              | (1,522 
|                                       |  |              |        
|                                       |  |              | (12,189
|                                       |  |              |        
|Total expense (benefit)                |  | $            | (14,045
|                                       |  |              |        



During
2002, 2001, and 2000 income (loss) before income taxes included approximately $214,000, $27,000, and $451,000, respectively, of non-U.S. income. Income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax
rate of 35 percent in the years ended December 31, 2002, 2001 and 2000, as follows (in thousands):



|                                                          |  | December 31, |        
|--------------------------------------------------------- |  | ------------ | -------
|                                                          |  | 2002         |        
|Computed expected tax expense                           |  | $            | (28,294
|Expenses not deductible for tax purposes                  |  |              | 133    
|State and local taxes, net of federal benefit             |  |              | (2,658 
|Goodwill and acquired in process research and development |  |              | 2,231  
|Research and development tax credits                      |  |              | (119   
|Valuation allowance                                       |  |              | 14,466 
|Other                                                     |  |              | 196    
|                                                          |  |              |        
|Income tax expense (benefit)                              |  | $            | (14,045
|                                                          |  |              |        



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2002, 2001 and 2000





The tax
effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below (in thousands):



|                                                                     |  | December 31, |        
|-------------------------------------------------------------------- |  | ------------ | -------
|                                                                     |  | 2002         |        
|Deferred tax assets:                                                 |  |              |        
|Accrued expenses                                                     |  | $            | 4,078  
|Allowance for doubtful accounts                                      |  |              | 1,865  
|Research and development credit carryforward                         |  |              | 3,161  
|Investment valuation differences                                     |  |              | 1,323  
|Asset basis and depreciation                                         |  |              | 298    
|Technology rights, goodwill and amortization                         |  |              | 13,399 
|Net operating loss carryforward                                      |  |              | 6,397  
|                                                                     |  |              |        
|Total deferred tax assets                                            |  | $            | 30,521 
|Deferred tax liabilities:                                            |  |              |        
|Technology rights                                                    |  |              |       
|Property and equipment, due to differences in basis and depreciation |  |              |       
|                                                                     |  |              |        
|Total deferred tax liabilities                                       |  |              |       
|                                                                     |  |              |        
|Gross deferred tax asset                                             |  |              | 30,521 
|Valuation allowance                                                  |  |              | (14,466
|                                                                     |  |              |        
|                                                                    
|Net deferred tax asset                                               |  | $            | 16,056 
|                                                                     |  |              |        



The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. For financial reporting purposes, a valuation allowance exists at
December 31, 2002 to offset deferred tax assets based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are deductible.



The Company has aggregate U.S. and non-U.S. tax loss
carryforwards of approximately $16,582,000 and $3,151,000, which expire through the years 2023 and 2008, respectively.



4)    Accrued Expenses



Accrued expenses consist of the following (in thousands):



|                       |  | December 31,
|---------------------- |  | ------------
|                       |  | 2002        
|Accrued royalties      |  | $           
|Employee compensation  |  |             
|Income taxes payable   |  |             
|Sales tax payable      |  |             
|Restructuring expenses |  |             
|Other expenses         |  |             
|                       |  |             
|                       |  | $           
|                       |  |             



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2002, 2001 and 2000





5)    Stock Option Plan and Employee Stock Purchase Plan



In August 1999, the Company adopted the MetaSolv, Inc. Long-Term Incentive Plan pursuant to which the Board of Directors may grant options
to purchase company stock. The plan at its adoption authorized grants of options to purchase up to 9,320,000 shares of authorized but unissued common stock. The number of shares issuable under the plan increases by 5% of the Companys
outstanding common stock as of January 1 of each of the first five calendar years following adoption of the plan. Accordingly, as of January 1, 2003, the number of shares authorized under the plan was 16,591,326. At December 31, 2002, there were
1,325,869 additional shares available for grant under the plan.



Generally, stock options are granted with an exercise price equal to the stocks fair market value at the date of grant. All options have terms of ten years or less, and most options vest in four or five equal cumulative
installments beginning on the first anniversary of the grant date. The per share weighted-average fair value of stock options granted for the years ended December 31, 2002, 2001 and 2000 were $3.85, $7.09 and $21.13, respectively, as estimated using
the Black-Scholes option-pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 3.8% for 2002, 4.2% for 2001 and 6% for year 2000, an expected life of five years, and volatility of 118% for 2002, 107%
for 2001, and 80% for 2000.



Stock option
activity during the periods indicated is as follows:



|                                |  | Number of shares |   |  | Weighted- average exercise price
|------------------------------- |  | ---------------- | - |  | --------------------------------
|Balance as of December 31, 1999 |  | 6,315,112        |   |  | $                               
|Granted                         |  | 1,493,665        |   |  |                                 
|Exercised                       |  | (1,214,262       | ) |  |                                 
|Forfeited                       |  | (518,170         | ) |  |                                 
|                                |  |                  |   |  |                                 
|Balance as of December 31, 2000 |  | 6,076,345        |   |  |                                 
|Granted                         |  | 3,588,950        |   |  |                                 
|Exercised                       |  | (975,586         | ) |  |                                 
|Forfeited                       |  | (1,271,240       | ) |  |                                 
|                                |  |                  |   |  |                                 
|Balance as of December 31, 2001 |  | 7,418,469        |   |  |                                 
|Granted                         |  | 4,081,383        |   |  |                                 
|Exercised                       |  | (148,820         | ) |  |                                 
|Forfeited                       |  | (1,408,771       | ) |  |                                 
|                                |  |                  |   |  |                                 
|Balance as of December 31, 2002 |  | 9,942,261        |   |  | $                               
|                                |  |                  |   |  |                                 



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2002, 2001 and 2000





At
December 31, 2002, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $0.24 to $97.75 and 4.22 years, respectively. The following table presents information about outstanding stock options as of
December 31, 2002:



|                        |  | Number of options |                | Weighted average |                            | Options vested and exercisable
|----------------------- |  | ----------------- | -------------- | ---------------- | -------------------------- | ------------------------------
|Range of ExercisePrices |  |                   | Exercise price |                  | Remaining contractual life |                               
|$  0.24    3.50        |  | 2,850,970         |                | $                | 1.13                       |                               
|1.75    4.50           |  | 2,033,528         |                |                  | 3.81                       |                               
|5.00    7.63           |  | 2,210,923         |                |                  | 6.54                       |                               
|7.88  11.51            |  | 2,084,664         |                |                  | 9.29                       |                               
|11.69  97.75           |  | 762,1766          |                |                  | 32.86                      |                               
|                        |  |                   |                |                  |                            |                               
|Totals                  |  | 9,942,261         |                |                  |                            |                               
|                        |  |                   |                |                  |                            |                               



At
December 31, 2002, 2001 and 2000, 3,362,902, 1,832,618, and 1,588,677 options were vested and exercisable at a weighted-average exercise price of $7.55, $6.48, and $1.41, respectively.



In August 1999, the Company adopted the MetaSolv, Inc. Employee Stock Purchase Plan. The plan was authorized
to issue 600,000 shares of authorized and unissued common stock, and shares issuable under the plan increase annually during the first five years following adoption of the plan by 1% of the Companys outstanding common stock. Accordingly, as of
January 1, 2003, the number of shares authorized under the plan was 2,054,265. The plan allows employees to purchase common stock at a 15% discount from the lower of the fair market value of the common stock at the beginning of the enrollment period
or the purchase date. During 2002, there were 372,749 shares of common stock issued under the plan.



7)    Retirement and Savings Plans



The Company has various pension and savings plans under which employees are entitled to receive company contributions, subject to certain
regulatory limitations. In 2002, 2001 and 2000, the Company made contributions of approximately $1,438,000, $618,000, and $667,000, respectively, to these plans.



8)    Commitments and Contingencies



Leases



The Company leases its offices under operating leases, which expire through 2010. Future minimum annual rent
payments for leases having initial or remaining noncancelable lease terms in excess of one year are as follows (in thousands):



|Years ending December 31, |  | Total minimum lease payments
|------------------------- |  | ----------------------------
|2003                      |  | $                           
|2004                      |  |                             
|2005                      |  |                             
|2006                      |  |                             
|2007                      |  |                             
|Thereafter                |  |                             
|                          |  |                             
|                          |  | $                           
|                          |  |                             



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2002, 2001 and 2000





Rent
expense for the years ended December 31, 2002, 2001, and 2000 amounted to $8,534,000, $4,651,000, and $3,379,000, respectively.



Legal Proceedings



On November 1, 2001, Bernstein Liebhard & Lifshitz, LLP announced that it had filed a class action suit in the United States District
Court for the Southern District of New York against MetaSolv Software, Inc., James P. Janicki, Glenn A. Etherington, Morgan Stanley Dean Witter, Inc., BancBoston Robertson Stephens, Inc., and Jeffries & Company, Inc. It alleged violations of
Section 11 of the Securities Act of 1933 against all the defendants, violations of Section 15 of the Securities Act of 1933 against James P. Janicki and Glenn A. Etherington, and violations of Section 12(a)(2) of the Securities Act of 1933 and
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against Morgan Stanley Dean Witter, Inc., BancBoston Robertson Stephens, Inc., and Jeffries & Company, Inc. On April 19, 2002, the plaintiffs filed an
amended complaint that added a claim against the Company under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and a claim under Section 20(a) of the Securities Exchange Act of 1934 against James P. Janicki
and Glenn A. Etherington. On October 9, 2002, the Court dismissed the claims against James P. Janicki and Glenn A. Etherington from the case without prejudice based upon Stipulations of Dismissal filed by the plaintiffs and Messrs. Janicki and
Etherington. On February 19, 2003, the Court dismissed the Section 10(b) claim against the Company without prejudice and with leave to replead and dismissed all other remaining claims against the Company. Plaintiffs have indicated that they do not
intend to replead the Section 10(b) claim against the Company and did not replead the Section 10(b) claim by the deadline imposed by the Court. As a result, MetaSolv and its officers are no longer defendants in the above legal proceeding.



Letter of Credit



The Company had a standby letter of credit (in lieu of a
security deposit) of $1,300,000 as of December 31, 2002 and 2001.



9)    Earnings per Share



The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):



|                                                                                                           |  | Year ended December 31,
|---------------------------------------------------------------------------------------------------------- |  | -----------------------
|                                                                                                           |  | 2002                   
|Numerator:                                                                                                 |  |                        
|Net income (loss)                                                                                          |  | $                      
|                                                                                                           |  |                        
|                                                                                                          
|Denominator:                                                                                               |  |                        
|Denominator for basic earnings per share weighted-average commonshares
outstanding                         |  |                        
|Effect of dilutive securities:                                                                             |  |                        
|Employee stock options                                                                                     |  |                        
|                                                                                                           |  |                        
|Denominator for diluted earnings per share weighted average commonand common
equivalent shares outstanding |  |                        
|                                                                                                           |  |                        
|                                                                                                          
|Earnings (loss) per common share:                                                                          |  |                        
|Basic                                                                                                      |  | $                      
|                                                                                                           |  |                        
|Diluted                                                                                                    |  | $                      
|                                                                                                           |  |                        



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2002, 2001 and 2000





Securities
that were not included in the computation of diluted earnings per share because their effect was antidilutive consist of options to purchase 9,942,261 shares of common stock in 2002 and 1,458,055 shares of common stock in 2001.



10)    Segment Information and Concentration of Credit
Risk



SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to stockholders. The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operating
decisions and assessing financial performance.



The Companys chief operating decision-maker is considered to be the Chief Operating Officer (COO). The COO reviews financial information presented on a Company-wide basis accompanied by disaggregated information about revenues
by product and service line for purposes of making operating decisions and assessing financial performance. The financial information reviewed by the COO is identical to the information presented in the accompanying statements of operations.
Therefore, the Company operates in a single operating segment: communications software and related services.



Revenue information regarding operations for different products and services is as follows (in thousands):



|                               |  | Year ended December 31,
|------------------------------ |  | -----------------------
|                               |  | 2002                   
|Revenues:                      |  |                        
|Software license fees          |  | $                      
|Professional services          |  |                        
|Post-contract customer support |  |                        
|                               |  |                        
|                              
|Total revenues                 |  | $                      
|                               |  |                        



Total
revenue derived from non-U.S. locations was approximately $34,839,000, $26,922,000, and $12,156,000 in 2002, 2001, and 2000, respectively. Outside of the U.S., no individual country accounted for more than 10% of total revenues.



The Company licenses its communications software products to a
broad range of communication service providers. The Company performs ongoing credit evaluations of its customers financial condition but does not require collateral or other security to support its trade accounts receivable. In 2002, one
customer accounted for 15% of total revenues and 36% of the accounts receivable balance at December 31, 2002.



11)    Acquisitions



In February 2002, the Company completed the acquisition of certain OSS assets from Nortel Networks. With this acquisition, the Company extended its product portfolio by adding a leading carrier-class
service activation product and several point solutions that allow communications service providers to efficiently manage and deliver differentiated services for Internet Protocol (IP), data, and wireless communications. As a result of the
acquisition, the Company now offers a comprehensive suite of OSS solutions available for wireless, IP, data, and traditional networks and services. The purchase price was $35 million in cash, plus the assumption of certain liabilities of the
business.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2002, 2001 and 2000





The asset
purchase agreement provided for the reduction of the cash purchase price by $3 million, which was used to cover the cost related to the issuance of stock options and retention bonuses to key employees. This cash payment was treated as a reduction of
the purchase price. In addition, direct transaction costs were approximately $4.6 million.



The Company accounted for the acquisition as a business combination using the purchase method of accounting, as required by Statements of Financial Accounting Standards No. 141, Business
Combinations, and No. 142 Goodwill and Other Intangible Assets. The financial results of this acquisition have been included with those of the Company effective February 2, 2002.



The total purchase price was allocated to tangible assets and
liabilities based on their respective estimated fair values as of the closing date of the transaction. The tangible assets were inventoried and evaluated by an independent third party, and do not differ materially from the net book value in the
historical financial statements of Nortel Networks. Based on an evaluation by an independent third party, we allocated the excess of the purchase price over the fair value of the net tangible assets acquired to identifiable intangible assets,
including customer arrangements, the core technology related to the products, and in-process research and development costs, with the remainder being allocated to goodwill which will be deductible for tax purposes over the next fifteen years. In
addition, deferred taxes have been recognized for the difference between the book and tax basis of certain intangible assets.



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



|Cash paid to Nortel Networks upon closing   |  | $ | 35,000  |  
|------------------------------------------- |  | - | ------- | -
|Less retention fund                         |  |   | (3,000  | )
|Less cash for vacation liabilities assumed  |  |   | (1,037  | )
|Estimated transaction costs                 |  |   | 4,631   |  
|                                            |  |   |         |  
|Total purchase price                        |  | $ | 35,594  |  
|                                            |  |   |         |  
|                                           
|Allocation of the purchase price:           |  |   |         |  
|Tangible assets acquired                    |  | $ | 3,761   |  
|Liabilities assumed                         |  |   | (11,948 | )
|                                            |  |   |         |  
|Net tangible assets acquired                |  |   | (8,187  | )
|                                            |  |   |         |  
|                                           
|In-process research and development         |  |   | 4,060   |  
|Developed technology, including patents     |  |   | 12,236  |  
|Customer contracts                          |  |   | 5,118   |  
|                                            |  |   |         |  
|Net identifiable intangible assets acquired |  |   | 21,414  |  
|                                            |  |   |         |  
|Goodwill                                    |  |   | 22,367  |  
|                                            |  |   |         |  
|Total purchase price                        |  | $ | 35,594  |  
|                                            |  |   |         |  



The $4.1
million allocated to in-process research and development costs was charged to expense upon closing. The developed technology will be amortized over its useful life of two years and the customer contracts will be amortized over their useful life of
three years.



The following summary, which was
prepared on a pro forma basis, reflects the results of operations for years ended December 31, 2002 and 2001, as if the February 2002 acquisition had occurred at the beginning of



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2002, 2001 and 2000



the respective periods. The table includes the impact of certain adjustments, including the adjustment of interest income, intangible asset
amortization, and the Companys income tax benefit, but does not include a charge for in-process research and development (in thousands except per share data):



|                                     |  | Year Ended December 31, |        
|------------------------------------ |  | ----------------------- | -------
|                                     |  | 2002                    |        
|Revenues                             |  | $                       | 93,151 
|Net loss                             |  | $                       | (69,138
|Basic and diluted loss per share     |  | $                       | (1.84  
|Basic and diluted shares outstanding |  |                         | 37,658 



In July
2001, the Company, through its wholly owned subsidiary MetaSolv Canada Holdings Inc., acquired all of the outstanding shares of capital stock of Montreal based Lat45 Information Systems Inc., a developer of geospatial software for planning, design
and management of communications networks. The aggregate purchase price consisted of $6,195,000 in cash (excluding acquisition costs of $600,000) and 366,666 exchangeable shares of MetaSolv Canada Holdings Inc. valued at $2,805,000. Each of these
shares was exchangeable for one share of MetaSolv, Inc. common stock. In addition, the shareholders of Lat45 Information Systems Inc. were eligible to receive up to an additional $2,000,000 in cash upon the completion of certain revenue milestones
prior to December 31, 2001, and the absence of any misrepresentation or breach of warranty within one year from the closing of the acquisition. These revenue milestones were not achieved.



The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of
operations of Lat45 Information Systems Inc. have been included in the Companys consolidated financial statements since July 2001. The purchase price was allocated to the assets acquired and liabilities assumed based on an estimate of fair
values at the date of acquisition. The excess of the purchase price over the fair value of the net identifiable assets, totaling $6,375,000 was allocated to goodwill. Approximately $6,032,000 was allocated to intangible assets, primarily technology
rights, to be amortized over a three-year period. Amortization of acquired intangible assets was computed using the greater of straight-line over the estimated useful life of the asset or the ratio that current gross revenues for those assets bears
to the total current and anticipated future gross revenues related to those assets. The estimated useful life of these assets range from nine months to thirty-six months. Approximately $2,940,000 was allocated to purchase in-process research and
development. The purchased in-process research and development cost was charged to results of operations in the third quarter of 2001. Net obligations assumed upon acquisition were $5,683,000.



In the third quarter of 2002, the Company decided to
discontinue enhancements of the MetaSolv Network and Service Planning product and wrote off the balance of intangible assets ($3.6M) related to this product.



12)    Restructuring and Other Costs



In 2002, the Company recorded pre-tax restructuring charges of $12.1 million. These charges consisted of $5.0 million for a reduction in
force of approximately 190 positions, $5.8 million for lease commitments on office space that has been vacated, and approximately $2.3 million of related asset write-downs, partially offset by $1.0 million non recurring adjustments to accrued
royalties. At December 31, 2002, $7.2 million is included in accrued liabilities, which represents the remaining severance related payments of $1.5 million and $5.7 million of future minimum lease commitments, which expire through 2010. The
severance payments will be completed by year end 2003 and the lease payments will continue through 2010.



In 2001, the Company recorded a pre-tax restructuring charge of $3.1 million. The charge consisted of $2.0 million for a reduction in
force of approximately 100 positions, which was completed by the end of 2001, and approximately $1.1 million for lease commitments for certain field offices being closed and related fixed asset write-downs.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2002, 2001 and 2000





The
following table summarizes the status of the restructuring actions (in thousands):



|                                |  | Employee Severance |        |   | Exit Cost |   |        | Other |  |   | Total  |  
|------------------------------- |  | ------------------ | ------ | - | --------- | - | ------ | ----- |  | - | ------ | -
|Balance at December 31, 2001    |  | $                  |       |   |           | $ | 1,006  |       |  | $ |       |  
|Restructuring charges and other |  |                    | 5,064  |   |           |   | 8,066  |       |  |   | (1,004 | )
|Amounts utilized in 2002        |  | $                  | (3,567 | ) |           |   | (3,356 | )     |  |   | 1,004  |  
|                                |  |                    |        |   |           |   |        |       |  |   |        |  
|Balance at December 31, 2002    |  | $                  | 1,497  |   |           | $ | 5,716  |       |  | $ |       |  
|                                |  |                    |        |   |           |   |        |       |  |   |        |  



13)    Impairment of Goodwill and Intangible Assets



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



During 2002, the
market capitalization of the Company fell to a level well below its book value. The decline in the market capitalization indicated that a potential reduction in the value of goodwill existed; therefore, management performed an interim valuation
based on estimated future cash flows as of July 31, 2002. This valuation indicated that an impairment of goodwill existed. Accordingly, the Company recorded a charge of $28.7 million to eliminate the goodwill.



The changes in the carrying value of goodwill for the year
ended December 31, 2002, are as follows:



|Balance at December 31, 2001            |  | $ | 6,375   |  
|--------------------------------------- |  | - | ------- | -
|                                       
|Purchase of assets from Nortel Networks |  |   | 21,706  |  
|Purchase price adjustments              |  |   | 661     |  
|Impairment charge                       |  |   | (28,742 | )
|                                        |  |   |         |  
|Balance at December 31, 2002            |  | $ |        |  



The
following is a summary of intangible assets at December 31, 2002 and 2001 (in thousands):



|                        |  | 2002               
|----------------------- |  | -------------------
|                        |  | Gross Carrying Cost
|Developed technology    |  | $                  
|Customer contacts       |  |                    
|                        |  |                    
|Total intangible assets |  | $                  
|                       
|                        |  | 2001               
|                        |  | Gross Carrying Cost
|Developed technology    |  | $                  
|Customer contracts      |  |                    
|                        |  |                    
|Total intangible assets |  | $                  



During
2002, the Company reassessed the value of intangible assets and as a result reduced the value of these assets and recorded a non-cash charge of $7.2 million



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Amortization
expense related to intangible assets was approximately $8,659,000 and $1,417,000 for the years ended December 31, 2002 and 2001, respectively. Amortization expense related to intangible assets subject to amortization at December 31, 2002 will be
approximately $4,245,000 in 2003 and $1,882,000 in 2004.



14)    Subsequent Events



In December 2002, MetaSolv announced an offer to acquire all of the outstanding shares of Orchestream Holdings plc, a UK headquartered company whose core product is Service Activator, an IP service activation tool.
Orchestream also has a service assurance product, Resolve, which performs network performance and reporting primarily for ATM and frame relay-based networks. With this acquisition, MetaSolv gains an integrated IP VPN activation tool that has been
sold to numerous customers  both wire line and mobile. This acquisition not only supports the MetaSolv strategic thrust of both Mobile and IP, but also strengthens the global nature of the company through the addition of an engineering
presence and a headquarters facility in Europe.



This acquisition will be accounted for under the purchase method of accounting and, accordingly, the results of the business acquired will be included in the Companys consolidated financial statements beginning February 1,
2003. The purchase price of approximately $13.5 million, including $0.8 million of transaction costs, will be allocated to the assets acquired and liabilities assumed based on an estimate of fair values at the date of acquisition. The excess of the
purchase price over the fair value of the net identifiable assets, when determined, will be allocated to goodwill. The value assigned to intangible assets, primarily technology rights, will be amortized over the estimated useful life of the assets
using the greater of straight-line or the ratio that current gross revenues related to those assets bears to the total current and anticipated future gross revenues related to those assets. The value to be allocated to purchased in-process research
and development will be charged to earnings in the first quarter of 2003.



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SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

(In
thousands)



|Description                      |  | Balance at beginning of period |       | Charged to costs and expenses |   | Deductions |  | Balance at end of period
|-------------------------------- |  | ------------------------------ | ----- | ----------------------------- | - | ---------- |  | ------------------------
|Allowance for doubtful accounts: |  |                                |       |                               |   |            |  |                         
|Year ended December 31, 2002     |  | $                              | 3,171 |                               | $ | 3,692      |  | $                       
|Year ended December 31, 2001     |  | $                              | 5,200 |                               | $ | 8,638      |  | $                       
|Year ended December 31, 2000     |  | $                              | 1,523 |                               | $ | 6,847      |  | $                       



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|ITEM 9. |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- |  | ------------------------------------------------------------------------------------



Not
applicable.



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PART III



ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Directors



The information concerning Directors of the Company required by Item 401 and Item 405 of Regulation S-K will be contained in the Companys 2003 Proxy Statement under the heading Election of Directors
and Section 16(a) Beneficial Ownership Reporting Compliance and is incorporated herein by reference.



Executive Officers



The information concerning executive officers of the Company required by this Item is set forth in Item 1 hereof under the heading Executive Officers.



ITEM 11.    EXECUTIVE COMPENSATION



The information required by Item 402 of Regulation S-K will be contained in the Companys 2003 Proxy Statement under the headings Directors Compensation, Compensation
Committee Interlocks and Insider Participation, Compensation Committee Report, Management Compensation and Stock Performance Graph, and is incorporated herein by reference.



ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The following table provides information as of December 31, 2002, regarding the number of shares of the companys common stock that
may be issued under the companys equity compensation plans.



|                                                           |  | (a)                                                                                         |  | (b)                                                                         |      | (c)                                                                                                                                      
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | -----------------------------------------------------------------------------------------------------------------------------------------
|Plan Category                                              |  | Number of securities to be issued upon exercise of outstanding options, warrants and
rights |  | Weighted-average exercise price of outstanding options, warrants and
rights |      | Number of securities remaining available for future issuance under equity compensation
plans excluding securities reflected in column (a)
|                                                          
|Equity compensation plans approved by security holders     |  | 9,942,261                                                                                   |  | $                                                                           | 7.02 |                                                                                                                                          
|                                                          
|Equity compensation plans not approved by security holders |  |                                                                                            |  |                                                                             |     |                                                                                                                                          
|                                                           |  |                                                                                             |  |                                                                             |      |                                                                                                                                          
|                                                          
|                                                           |  | 9,942,261                                                                                   |  | $                                                                           | 7.02 |                                                                                                                                          



The
information required by Item 403 of Regulation S-K will be contained in the Companys 2003 Proxy Statement under the heading Stock Ownership of Certain Beneficial Owners and Management, and is incorporated herein by reference.



ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Our Certificate of Incorporation limits the liability of our directors for monetary damages arising from a breach of their fiduciary duty
as directors, except to the extent otherwise required by Delaware law. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission.



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Our Bylaws
provide that we shall indemnify our directors and officers to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. We have also entered into indemnification
agreements with our officers and directors containing provisions that may require us, among other things, to indemnify our officers and directors against certain liabilities that may arise by reason of their status or service as directors or
officers and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified.



Mr. Royce Holland, one of our directors, is Chairman of the Board, CEO and a 5% stockholder of Allegiance Telecom, a customer of ours.
Purchases by Allegiance from us in fiscal year 2002 accounted for $1,102,784 of our revenues.



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ITEM 14.    CONTROLS AND PROCEDURES



(a)  Disclosure Controls and Procedures



The Company maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to
disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the SEC rules and forms. Disclosure controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.



Based on their evaluation as of a date (the Evaluation Date) within 90 days of the filing date of
this Annual Report on Form 10-K, our CEO and CFO have concluded that our disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 are effective in alerting them on a timely basis to
material information that is required to be included in our periodic SEC reports.



(b)  Changes in Internal Controls



There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent
to the Evaluation Date, including any corrective actions with regard to significant deficiencies or material weaknesses.



(c)  Scope of the Controls Evaluation



The CEO and CFO evaluation of our disclosure controls and internal controls is performed with significant
participation from our management team. We are implementing a controls evaluation process that includes internal reports and letters of assurance from business unit vice presidents. We will perform this type of evaluation on a quarterly basis so
that the conclusions concerning overall control effectiveness can be reported in our quarterly reports on Form-10-Q and our annual reports on Form 10-K. Our internal controls are also evaluated throughout the year by our internal audit department.



PART IV



ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



(a)  The following documents are filed as part of this report:



| | (1) |  | Financial Statements.    The financial statements, notes and independent auditors report described in Item 8, to which reference is hereby
made.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) |  | Financial Statement Schedule.    The financial statement schedule described in Item 8, to which reference is hereby made.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------



| | (3) |  | Exhibits.    The following exhibits:
| | --- |  | ------------------------------------



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|2.1         |  | Agreement and Plan of Reorganization dated as of December 27, 2000 and effective as of January 1, 2001 by and among
MetaSolv Software, Inc., MS Merger, Inc., and the Registrant. Incorporated by reference to Exhibit 2 to the Registrants Annual Report on Form 10-K filed on March 29, 2001.
|           
|2.2         |  | Asset Purchase Agreement dated January 21, 2002, by and among Nortel Networks Limited, as vendor, MetaSolv Software,
Inc. as purchaser, and the Registrant as guarantor. Incorporated by reference to Exhibit 2.1 to the Registrants current report on Form 8-K filed on February 15, 2002.    
|           
|3.1         |  | Amended and Restated Certificate of Incorporation of the Registrant. Incorporated by reference to Exhibit 3.1 to the
Registrants Registration Statement on Form S-3 filed on August 13, 2001, registration number 333-67428.                                                                   



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|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|3.2         |  | Bylaws of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           
|3.3         |  | Certificate of Designation of Series A Junior Participating Preferred Stock setting forth the terms of the Series A
Junior Participating Preferred Stock, par value $0.01 per share, filed with the Delaware Secretary of State on October 25, 2001.                                                                                                                                                                                                                                                                                                    
|           
|4.1         |  | Investors Rights Agreement, dated June 2, 1998, among the Registrant and the shareholders named therein, as
amended. Incorporated by reference to exhibits to the Registrants Registration Statement on Form S-1 filed on September 10, 1999, registration number 333-86937.                                                                                                                                                                                                                                                                          
|           
|4.2         |  | Specimen Certificate of the Registrants common stock. Incorporated by reference to exhibits to the
Registrants Registration Statement on Form S-1 filed on September 10, 1999, registration number 333-86937.                                                                                                                                                                                                                                                                                                                                         
|           
|4.3         |  | Rights Agreement, dated as of October 24, 2001, between the Registrant and Mellon Investor Services LLC, as Rights
Agent, specifying the terms of the Rights, which includes the form of Certificate of Designation of Series A Junior Participating Preferred Stock as Exhibit A, the form of Right Certificate as Exhibit B and the form of the Summary of Rights to
Purchase Preferred Shares as Exhibit C. Incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-A filed on October 25, 2001, file number 000-28129.
|           
|4.4         |  | Form of Certificate of Designation of Series A Junior Participating Preferred Stock (included as Exhibit A to the
Rights Agreement filed as Exhibit 4.1 to the Registrants Current Report on Form 8-A filed on October 24, 2001) setting forth the terms of the Series A Junior Participating Preferred Stock, par value $.01 per share.                                                                                                                                                                                                               
|           
|4.5         |  | Form of Right Certificate (included as Exhibit B to the Rights Agreement filed as Exhibit 4.1 to the Registrants
Current Report on Form 8-A filed with the Securities and Exchange Commission on October 24, 2001). Pursuant to the Rights Agreement, printed Right Certificates will not be delivered until as soon as practicable after the Distribution
Date.                                                                                                                                                                                       
|           
|4.6         |  | Form of Summary of Rights to Purchase Preferred Shares (included as Exhibit C to the Rights Agreement filed as Exhibit
4.1 to the Registrants Current Report on Form 8-A filed on October 24, 2001), which, together with certificates representing the outstanding Common Shares of the Registrant, shall represent the Rights prior to the Distribution
Date.                                                                                                                                                                                        
|           
|4.7         |  | Specimen of legend to be placed, pursuant to Section 3(d) of the Rights Agreement, on all new Common Share
certificates issued by the Registrant after November 5, 2001 and prior to the Distribution Date upon transfer, exchange or new issuance. Incorporated by reference to Exhibit 4.5 to the Registrants Current Report on Form 8-A filed on October
24, 2001.                                                                                                                                                                                  
|           
|4.8         |  | Form of Indemnification Agreement entered into between the Registrant and its directors and executive officers.
Incorporated by reference to exhibits to the Registrants Registration Statement on Form S-1 filed on September 10, 1999, registration number 33386937.                                                                                                                                                                                                                                                                                
|           
|4.9         |  | Indemnification Agreement dated July 3, 2002, between MetaSolv, Inc. and Phillip C. Thrasher. Incorporated by
reference to Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q filed on November 14, 2002.                                                                                                                                                                                                                                                                                                                                   
|           
|10.1        |  | 1992 Stock Option Plan. Incorporated by reference to exhibits to the Registrants Registration Statement on Form
S-1 filed on September 10, 1999, registration number 333-86937.                                                                                                                                                                                                                                                                                                                                                                        
|           
|10.2        |  | Long-Term Incentive Plan. Incorporated by reference to exhibits to the Registrants Registration Statement on
Form S-1 filed on September 10, 1999, registration number 333-86937.                                                                                                                                                                                                                                                                                                                                                                      
|           
|10.3        |  | Employee Stock Purchase Plan. Incorporated by reference to exhibits to the Registrants Registration Statement on
form S-1 filed on September 10, 1999, registration number 333-86937.                                                                                                                                                                                                                                                                                                                                                                  
|           
|10.4        |  | Mutual Release between the Registrant and Michael J. Watters dated November 20, 1998. Incorporated by reference to
exhibits to the Registrants Registration Statement on Form S-1 filed on September 10, 1999, registration number 333-86937.                                                                                                                                                                                                                                                                                                          



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|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|10.5        |  | Commercial Lease Agreement between the Registrant and Crown Invest I, L.P., dated April 1, 1997, as amended to date.
Incorporated by reference to exhibits to the Registrants Registration Statement on Form S-1 filed on September 10, 1999, registration number 333-86937.                                                                                                                                                                                            
|           
|10.6        |  | Commercial Lease Agreement between the Registrant and William R. Cooper and Craig A. Cooper, dated August 21, 1998, as
amended to date. Incorporated by reference to exhibits to the Registrants Registration Statement on Form S-1 filed on September 10, 1999, registration number 333-86937.                                                                                                                                                                         
|           
|10.7        |  | Consent to Assignment of lease dated February 1, 202 by and between Architel Systems Corporation, MetaSolv Software
Canada Inc. and First Real Properties Limited, and associated Lease Agreement. Incorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q filed on May 15, 2002                                                                                                                                                     
|           
|10.8        |  | Indemnity Agreement dated February 1, 2002 by and between First Real Properties Limited and MetaSolv Software, Inc.
Incorporated by reference to Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q filed on May 15, 2002,                                                                                                                                                                                                                                   
|           
|10.9        |  | Sublease dated June 4, 2002 between Zarlink Semiconductor Inc. and MetaSolv Software Canada, Inc. Incorporated by
reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q filed on August 9, 2002.                                                                                                                                                                                                                                                   
|           
|10.10       |  | Consent to Sublease Agreement dated June 4, 2002 among Mitel Research Park Corporation, Zarlink Semiconductor Inc. and
MetaSolv Software Canada Inc. Incorporated by reference to Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q filed on August 9, 2002.                                                                                                                                                                                                
|           
|10.11       |  | Indemnity Agreement dated June 4, 2002 by MetaSolv, Inc. Incorporated by reference to Exhibit 10.3 to the
Registrants Quarterly Report on Form 10-Q filed on August 9, 2002.                                                                                                                                                                                                                                                                                            
|           
|10.12       |  | Master Software License and Service Agreement entered into between Registrant and Qwest Communications Corporation,
dated May 30, 1997. Incorporated by reference to exhibits to the Registrants Registration Statement on Form S-1 filed on September 10, 1999, registration number 333-86937.                                                                                                                                                                         
|           
|10.13       |  | Master Software License and Services Agreement entered into between Registrant and Allegiance Telecom, Inc., dated
December 19, 1997. Incorporated by reference to exhibits to the Registrants Registration Statement on Form S-1 filed on September 10, 1999, registration number 333-86937.                                                                                                                                                                           
|           
|10.14       |  | Terms of Exchangeable Shares of MetaSolv Canada Holdings Inc. adopted as a special resolution by its sole shareholder
on July 20, 2001. Incorporated by reference to Exhibit 10.1 to the Registrants Registration Statement on form S-3 filed on August 13, 2001, registration number 333-67428.                                                                                                                                                                        
|           
|10.15       |  | Share Purchase Agreement dated July 20, 2001, by and among the Registrant, MetaSolv Canada Inc., MetaSolv Canada
Holdings Inc., Lat45 Information Systems Inc., each of the shareholders of Lat45 Information Systems Inc. and each of Joseph Hatchuel, Toufik Abdallah, Serge Bouhadana and Jean-Nicolas Guet. Incorporated by reference to Exhibit 10.2 to the
Registrants Registration Statement on Form S-3 filed on August 13, 2001, registration number 333-67428.
|           
|10.16       |  | Exchange Agreement dated July 20, 2001, by and among the Registrant, MetaSolv Canada Inc., MetaSolv Canada Holdings
Inc. and each of the shareholders of Lat45 Information Systems Inc. Incorporated by reference to Exhibit 10.3 to the Registrants Registration Statement on form S-3 filed on August 13, 2001, registration number 333-67428.                                                                                                                        
|           
|10.17       |  | Registration Rights Agreement dated July 20, 2001, by and among the Registrant, each of the shareholders of Lat45
Information Systems Inc. and Joseph Hatchuel, as shareholders representative. Incorporated by reference to Exhibit 10.4 to the Registrants Registration Statement on Form S-3 filed on August 13, 2001, registration number
333-67428.                                                                                                               
|           
|10.18       |  | Amendment No. 1 to the Registration Rights Agreement dated August 3, 2001, by and between Registrant and Joseph
Hatchuel, as shareholders representative. Incorporated by reference to Exhibit 10.5 to the Registrants Registration Statement on Form S-3 filed on August 13, 2001, registration number 333-67428.                                                                                                                                                     



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|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                          
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|10.19       |  | Amendment No. 2 to the Registration Rights Agreement dated August 10, 2001, by and between Registrant and Joseph
Hatchuel, as shareholders representative. Incorporated by reference to Exhibit 10.6 to the Registrants Registration Statement on Form S-3 filed on August 13, 2001, registration number 333-67428.                                
|           
|10.20       |  | Amendment No. 1 to the Share Purchase Agreement dated August 20, 2001, by and between MetaSolv Canada Holdings Inc.
and Joseph Hatchuel, as shareholders representative. Incorporated by reference to Exhibit 10.8 to Amendment No. 1 to the Registrants Registrations Statement on Form S-3 filed on March 4, 2002, registration number
333-67428.
|           
|10.21       |  | Amendment No. 3 to the Registration Rights Agreement dated November 16, 2001, by and between the Registrant and Joseph
Hatchuel, as shareholders representative. Incorporated by reference to Exhibit 10.7 to Amendment No. 1 to the Registrants Registrations Statement on Form S-3 filed on March 4, 2002, registration number 333-67428.        
|           
|*10.22      |  | Employment Agreement dated as of December 1, 2002, by and between MetaSolv Software, Inc. and Michael J.
Cullen.                                                                                                                                                                                                                                     
|           
|*10.23      |  | Employment Agreement dated as of December 1, 2002, by and between MetaSolv Software, Inc. and Glenn A.
Etherington.                                                                                                                                                                                                                                  
|           
|*10.24      |  | Employment Agreement dated as of December 1, 2002, by and between MetaSolv Software, Inc. and T. Curtis Holmes,
Jr.                                                                                                                                                                                                                                  
|           
|*10.25      |  | Employment Agreement dated as of December 1, 2002, by and between MetaSolv Software, Inc. and Jonathan K.
Hustis.                                                                                                                                                                                                                                    
|           
|*10.26      |  | Employment Agreement dated as of December 1, 2002, by and between MetaSolv Software, Inc. and James P.
Janicki.                                                                                                                                                                                                                                      
|           
|*10.27      |  | Employment Agreement dated as of December 1, 2002, by and between MetaSolv Software, Inc. and Sam L.
Kelley.                                                                                                                                                                                                                                         
|           
|10.28       |  | Employment Agreement dated as of July 3, 2002, by and between MetaSolv Software, Inc. and Phillip C. Thrasher.
Incorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q filed on November 14, 2002.                                                                                                               
|           
|*10.29      |  | Amendment to Employment Agreement dated February 13, 2003 by and between MetaSolv Software, Inc. and Phillip C.
Thrasher.                                                                                                                                                                                                                            
|           
|10.30       |  | First Amendment to MetaSolv, Inc. Employee Stock Purchase Plan. Incorporated by reference to Exhibit 4.5 to the
Registrants Registration Statement on Form S-8 filed on March 11, 2003.                                                                                                                                                             
|           
|21          |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                       
|           
|            |  | (a)  MetaSolv Software, Inc., a Delaware corporation                                                                                                                                                                                                                                                                                                 
|           
|            |  | (b)  MetaSolv Software S.A.S., a French corporation                                                                                                                                                                                                                                                                                                  
|           
|            |  | (c)  MetaSolv Software do Brasil, Ltda., a Brazilian limited liability
company                                                                                                                                                                                                                                                                       
|           
|            |  | (d)  MetaSolv Canada Inc., a Canadian corporation                                                                                                                                                                                                                                                                                                    
|           
|            |  | (e)  MetaSolv Belgium SA, a Belgian SA                                                                                                                                                                                                                                                                                                               
|           
|            |  | (f)  MetaSolv Software GmbH, a German GmbH                                                                                                                                                                                                                                                                                                           
|           
|            |  | (g)  MetaSolv Holdings (UK) Limited, a British
corporation                                                                                                                                                                                                                                                                                           
|           
|*23.1       |  | Consent of KPMG LLP, independent auditors.                                                                                                                                                                                                                                                                                                           
|           
|*99.1       |  | Certification of Periodic Report.                                                                                                                                                                                                                                                                                                                    

---

|* |  | Filed herewith
|- |  | --------------



(b)  (i)  Current Report on Form 8-K of the Registrant, dated October 22, 2002, reporting the filing of a press
release.



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##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized.



|       |  |                |  | METASOLV, INC.
|------ |  | -------------- |  | --------------
|      
|Dated: |  | March 27, 2003 |  |               
|       |  |                |  |               
|      
|       |  |                |  |               
|       |  |                |  |               
|       |  |                |  |               



Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:



|Signature                                         |  | Title                                           |  | Date          
|------------------------------------------------- |  | ----------------------------------------------- |  | --------------
|                                                 
|/s/    JOHN W.
WHITEJohn W. White                 |  | Chairman of the Board                           |  | March 27, 2003
|                                                 
|/s/    JAMES P.
JANICKIJames P. Janicki           |  | Chief Executive Officer and Director            |  | March 27, 2003
|                                                 
|/s/    T. CURTIS HOLMES,
JR.T.
Curtis Holmes, Jr. |  | President, Chief Operating Officer and Director |  | March 27, 2003
|                                                 
|/s/    LAURENCE J.
BOUMANLaurence J. Bouman       |  | Director                                        |  | March 27, 2003
|                                                 
|/s/    ROYCE J.
HOLLANDRoyce J. Holland           |  | Director                                        |  | March 27, 2003
|                                                 
|/s/    JOHN E.
BERNDTJohn E. Berndt               |  | Director                                        |  | March 27, 2003
|                                                 
|/s/    TERRY L.
SCOTTTerry L. Scott               |  | Director                                        |  | March 27, 2003





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##### Table of Contents



Certifications



I, James P. Janicki, Chief Executive Officer, certify that:



|1. |  | I have reviewed the annual report for the period ended December 31, 2002 on Form 10-K of MetaSolv, Inc.;
|-- |  | --------------------------------------------------------------------------------------------------------



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



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



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



| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period this annual report is prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of the registrants Board of Directors:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|              
|--------------
|March 27, 2003
|              



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##### Table of Contents



I, Glenn A. Etherington, Chief
Financial Officer, certify that:



|1. |  | I have reviewed the annual report for the period ended December 31, 2002 on Form 10-K of MetaSolv, Inc.;
|-- |  | --------------------------------------------------------------------------------------------------------



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



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



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



| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period this annual report is prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of the registrants Board of Directors:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|              
|--------------
|March 27, 2003
|              



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