##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended September 30,
    2003                                            
|  
|or
|  
|o  |  | 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: 0-28900



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Rogue Wave Software, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                     
|------------------------------------------------------------------ |  | ------------------------------------
|Delaware                                                           |  | 93-1064214                          
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                                  
|5500 Flatiron Parkway, Boulder,
    Colorado                       |  | 80301                               
|(Address of principal executive
    offices)                       |  | (Zip code)                          

(303) 473-9118

(Registrants telephone number, including
area code)


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

None


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

Common Stock, $0.001 Par Value


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 periods as the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days.     Yes þ          No o

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. o

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

The aggregate
market value of voting stock held by non-affiliates of the
Registrant was approximately $10,338,188 based upon the closing
price of the Common Stock on March 31, 2003 on The NASDAQ
National Market. Shares of Common Stock held by each officer,
director and holder of five percent or more of the Common Stock
outstanding as of March 31, 2003 have been excluded in that
such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily conclusive.

As of
November 7, 2003, there were 10,549,469 shares of Common
Stock outstanding.



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TABLE OF CONTENTS



|                                                   |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | Item 1. Business                                                                             
|                                                   | Item 2. Properties                                                                           
|                                                   | Item 3. Legal Proceedings                                                                    
|                                                   | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                           
|                                                   | Item 5. Market for the Registrants Common Stock and Related Stockholder Matters             
|                                                   | Item 6. Selected Consolidated Financial Data                                                 
|                                                   | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                   | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                                   | Item 8. Consolidated Financial Statements and Supplementary Data                             
|                                                   | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 
|                                                   | Item 9A. Controls and Procedures                                                             
|PART III                                          
|                                                   | Item 10. Directors and Executive Officers of the Registrant                                  
|                                                   | Item 11. Executive Compensation                                                              
|                                                   | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                   | Item 13. Certain Relationships and Related Transactions                                      
|                                                   | Item 14. Principal Accounting Fees and Services                                              
|PART IV                                           
|                                                   | Item 15. Exhibits, Consolidated Financial Statements, Schedules and Reports on Form 8-K      
|SIGNATURES                                        
|EXHIBIT INDEX                                     
|EX-3.3 Amendment to Bylaws                        
|EX-4.6 Amendment to Rights Agreement              
|EX-14.1 Code of Ethics                            
|EX-21.1 List of Subsidiaries of Registrant        
|EX-23.1 Consent of KPMG LLP                       
|EX-31.1 Certification of CEO and Interim CFO - 302
|EX-32.1 Certification of CEO and Interim CFO - 906



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FORM 10-K

INDEX

|           |  |                                                                                           |          |  |          | 
|---------- |  | ----------------------------------------------------------------------------------------- | -------- |  | -------- | 
|PART I     |  |                                                                                           | Page 2   | 
|Item 1.    |  | Business                                                                                  |          |  | Page 2   | 
|Item 2.    |  | Properties                                                                                |          |  | Page  18 | 
|Item 3.    |  | Legal Proceedings                                                                         |          |  | Page  18 | 
|Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                   |          |  | Page  18 | 
|PART II    |  |                                                                                           | Page  19 | 
|Item 5.    |  | Market for the Registrants Common Stock and
    Related Stockholder Matters              |          |  | Page  19 | 
|Item 6.    |  | Selected Consolidated Financial Data                                                      |          |  | Page  21 | 
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |          |  | Page  22 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures about
    Market Risk                            |          |  | Page  30 | 
|Item 8.    |  | Consolidated Financial Statements and
    Supplementary Data                              |          |  | Page  31 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |          |  | Page  31 | 
|Item 9A.   |  | Controls and Procedures                                                                   |          |  | Page  31 | 
|PART III   |  |                                                                                           | Page  32 | 
|Item 10.   |  | Directors and Executive Officers of the Registrant                                        |          |  | Page  32 | 
|Item 11.   |  | Executive Compensation                                                                    |          |  | Page  35 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management                        |          |  | Page  37 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                            |          |  | Page  39 | 
|Item 14.   |  | Principal Accounting Fees and Services                                                    |          |  | Page  39 | 
|PART IV    |  |                                                                                           | Page  40 | 
|Item 15.   |  | Exhibits, Consolidated Financial Statements,
    Schedules and Reports on Form 8-K        |          |  | Page  40 | 
|SIGNATURES |  |                                                                                           | Page  41 | 

1



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PART I






|        |         
|------- | --------
|Item 1. | Business

The following discussion contains
forward-looking statements regarding Rogue Wave Software Inc.
(Rogue Wave or the Company), its
business, prospects and results of operations that are subject
to risks and uncertainties posed by many factors and events that
could cause the Companys actual business, prospects and
results of operations to differ materially from those that may
be anticipated by such forward-looking statements. Factors that
might cause such a difference include, but are not limited to,
those discussed herein as well as those discussed under the
captions Risk Factors and Managements
Discussion and Analysis of Financial Condition and Results of
Operations as well as those discussed elsewhere in this
Form 10-K. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only
as of the date of this report. The Company undertakes no
obligation to revise any forward-looking statements in order to
reflect events or circumstances that may subsequently arise.
Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the
Companys other reports filed with the Securities and
Exchange Commission (SEC).

Overview

Rogue Wave was founded in 1989, and develops,
markets and supports object-oriented and infrastructure software
technology. Customers around the world rely on Rogue Wave
products to build comprehensive application solutions. Rogue
Wave offers proven software components and frameworks that
enhance developer productivity when implementing common
application functionality across operating systems and database
platforms. Rogue Wave is committed to providing products and
services that reduce the effort, time to market, and overall
project risk associated with the development of comprehensive
application solutions.

The Companys products are marketed to
information technology (IT) development managers,
independent software vendors (ISV), value-added
resellers (VAR), original equipment manufacturers
(OEM) and professional programmers in all industry
and geography segments. The Companys products are designed
to enable customers to construct robust applications faster,
with higher quality, and lower risk, resulting in significant
cost savings. These products provide customers with greater
independence from hardware platforms, operating systems and
other vendor-specific dependencies.

On November 3, 2003, Rogue Wave signed a
definitive merger agreement for the acquisition of Rogue Wave by
Quovadx, Inc. (Quovadx). Quovadx is a global
platform software and vertical solutions company based in
Englewood, Colorado. Its common stock is traded on The NASDAQ
National Market under the symbol QVDX. The
acquisition, structured as an exchange offer, provides that
Quovadx will acquire all of the outstanding stock of Rogue Wave
for $4.09 in cash and 0.5292 of a share of Quovadx common stock
for each share of Rogue Wave Common Stock. Based on the average
closing price of Quovadx stock for the five trading days
surrounding the announcement of the transaction, the aggregate
consideration was valued at $6.76 per share. On
November 12, 2003, Quovadx, through a wholly owned
subsidiary, commenced the exchange offer for shares of Rogue
Wave Common Stock. The exchange offer is scheduled to expire on
December 10, 2003. If Quovadx acquires at least 90% of the
Rogue Wave shares in the exchange offer and other conditions to
the exchange offer are satisfied or waived, the Quovadx
subsidiary will be merged into Rogue Wave via a short form
merger under Delaware law. If Quovadx acquires at least a
majority, but less than 90%, of the Rouge Wave shares in the
exchange offer and other conditions to the exchange offer are
satisfied or waived, Quovadx will acquire the remaining
outstanding Rogue Wave Common Stock by effecting a long form
merger under Delaware law. This would require notice to and
approval by the Rogue Wave stockholder, which approval may be
obtained by Quovadxs approval as the majority stockholder
of Rogue Wave. In either case, the Quovadx subsidiary will be
merged with and into Rogue Wave, and Rogue Wave will become a
subsidiary of Quovadx. The Rogue Wave board of directors has
unanimously voted to recommend that Rogue Wave stockholders
accept the offer. For additional information, including a
discussion of the background and Rogue Waves reasons for
the transaction, Rogue Wave stockholders should review Rogue
Waves Solicitation/ Recommendation Statement on
Schedule 14D-9 that Rogue Wave has filed with the SEC and
mailed to its stockholders. The Schedule 14D-9 is available
on the SECs EDGAR system at

2



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www.sec.gov. The discussion in this report is
qualified in its entirety by the impact of this transaction on
Rogue Wave and its stockholders. See Risk
Factors  Risks Relating to the Quovadx
Transaction.


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The Rogue Wave Premise

Rogue Wave seeks to address the following
challenges that todays software development teams face:



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | Developing and maintaining complex applications,
    to specification, on schedule and on budget.                             
|
| |  | Remaining agile to quickly meet frequently
    changing business requirements.                                                
|
| |  | Integrating new and existing applications,
    including legacy systems, with disparate and rapidly changing
    technologies.

The Rogue Wave Strategy

The Companys strategic objective is to
provide technology and services that allow businesses to be as
productive as possible when building software solutions to
address their business objectives. Rogue Wave products provide
the core integration and platform technology critical for
customers to concentrate efforts on their business domain, with
the security of knowing that critical underlying technology is
safely handled. Using Rogue Wave products results in flexible
solutions that are maintainable and extendable to meet new
business needs.

Rogue Wave believes the productivity and
flexibility realized with skillfully designed and implemented
object-oriented software is at the core of achieving cost
effective, large-scale application development. With Rogue Wave
products and services, businesses can maintain their significant
investments in existing technology, while taking advantage of
the many benefits of object-oriented design and development for
new initiatives.

In conjunction with developing and marketing
object-oriented technology to its customers, Rogue Wave provides
comprehensive consulting, educational, and support services to
minimize the learning curve and provide expert assistance.
Relevant technology, coupled with Rogue Waves expertise,
provides the mutual successes that are the foundation for
lasting partnerships with our customers.

The Companys history is rich in
object-oriented C++, the language of choice for the foundation
of business critical applications.

In addition to the Companys investment in
C++, the Company has been aggressively investigating new product
development opportunities that are intended to leverage its
current cross-platform expertise, application development
expertise, sales channels and customer base. Based on extensive
research conducted through the third quarter of fiscal 2003, the
Company announced plans to create products that facilitate
application development in a service-based architecture. In a
service-based architecture, the goal is to create the
functionality of a full-scale application, traditionally
provided in a monolithic architecture, from an amalgam of
smaller applications. These smaller applications are
individually wrapped in a network layer and are invoked as
services. In this respect they function like reusable
components. When these services are connected or orchestrated,
they function like a full-scale application but they are much
more flexible and can be easily modified and enhanced. A benefit
of a service-based architecture is the ability to connect new
and old applications written in different languages and built on
different platforms. Currently, the Company sells Light Weight
Enterprise Integration Framework (LEIF), a product
that facilitates the development of service-based architectures
by creating Web services that can connect C++ applications to
Java/J2EE and .NET applications. The Company plans to deliver
significant enhancements to LEIF and also to introduce an
additional new product in calendar year 2004. Both of these
initiatives target facilitating the creation of applications for
a service-based architecture.

The Rogue Wave Business Model

Dynamic business drivers, combined with evolving
technology, have changed the buying practices of Rogue
Waves customers. Historically, Rogue Wave sold its
products directly to individual developers and built its revenue
base through the addition of new developers who purchased Rogue
Wave technology for use in multiple application initiatives.
Changes in the marketplace have resulted in customers being less
interested in atomic components and more interested in
technology suites and frameworks that solve a larger portion of

3



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their problem. Rogue Wave has migrated from an
individual developer license business model to one centered on
deployment of finished applications. Buying decisions have moved
away from the individual developer and are now handled at the
project, division, and enterprise levels. As such, Rogue Wave
has changed how it offers its products, including how its
products are licensed.


The Companys current business model has
evolved from that of a sole technology supplier to one of a true
partner with its customers, linking Rogue Waves success to
its customers success. Businesses have the ability to
fully empower a project team with Rogue Wave technology,
enhancing development initiatives with the services and support
required to ensure success. In addition, customers can make
clearer buying decisions when benefits are directly measurable
against and favorable to project costs.

Products

Rogue Wave products and services give development
teams a head start on building applications that solve business
problems, increasing their productivity and ability to deliver
projects on schedule. The Companys products and services
provide customers with the following benefits:

Multiplatform Support.Most of the Companys products
are cross-platform and the database products can be used with a
wide variety of databases. This flexibility allows programmers
to develop applications with minimal attention to the
environments in which they will be deployed. Businesses gain the
ability to deploy software systems in a wide variety of
environments with minimal modification required. Rogue Wave
products encapsulate fundamental operations, allowing developers
to focus on creating business logic rather than the low-level
details of their development environments.

Honor Legacy Investments.The Companys components easily
work with legacy systems, contributing to either all or part of
the solution. Rogue Wave honors legacy investments by offering
solutions that extend and enhance the functional life of legacy
investments.

Distributed
Applications.Programmers who develop
complicated, large and distributed applications can use the
Companys products to make their applications work in
concert, across multiple systems, interfacing seamlessly.

Scale to the Enterprise.Scalability and performance are great
strengths of C++. The Companys products help programmers
develop flexible, modular applications that can be more easily
modified and refined.

Highly Customizable.Rogue Wave products are written to
provide developers with a high degree of flexibility, offering
them the ability to freely customize the components for their
own specialized applications. Developers can use the standard
application programming interfaces (API) and avoid
granular programming details, or can drill down to the native
code, if necessary.



| |                         
| | ------------------------
| | Rogue Wave SourcePro C++

Rogue Wave SourcePro C++ gives development teams
a head start on building applications that solve business
problems and meet the needs of a global market, increasing
productivity and the ability to deliver products on schedule.
SourcePro C++ extends the life of existing C++ applications by
helping development teams deliver applications that use
extensible markup language (XML) and simple object
access protocol (SOAP) based Web services.
Higher-level, object-oriented interfaces to complex underlying
application programming interfaces across platforms shorten the
learning curve, facilitating a developers ability to be
productive quickly. All Rogue Wave SourcePro C++ components
provide the flexibility to deploy applications on multiple
hardware platforms and databases, allowing development teams to
easily support changing business needs.

Rogue Wave SourcePro C++ consists of four
products, each tailored for a specific area of C++ application
development.

4



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|  |               
|- | --------------
| | SourcePro Core

Rogue Wave SourcePro Core offers fundamental C++
components that enable rapid development of applications for
global markets and handle the low-level intricacies of the C++
language, which enhances developer productivity. By simplifying
the complexities of working with XML, SourcePro Core allows
developers to create C++ applications that share data with
diverse systems, including Sun Solaris, HP/UX, Linux, Windows
and IBM AIX.



|  |             
|- | ------------
| | SourcePro DB

Rogue Wave SourcePro DB is a complete solution
for object-oriented relational database access in C++, with a
layered architecture that abstracts away the complexity of
writing database applications, yet allows developers to drill
down to the native database client libraries if needed.
SourcePro DB encapsulates ANSI SQL 92 and supplies a consistent,
high-level C++ interface to relational databases, including DB2,
Informix, MSSQL, ODBC, Oracle 8, Oracle 9, Sybase and open
source databases MySQL and PostgreSQL, speeding development and
reducing complexity.



|  |              
|- | -------------
| | SourcePro Net

Rogue Wave SourcePro Net allows developers to
create secure and non-secure networked and Internet-enabled
applications, handling the granular details of socket
programming and Internet protocols to help developers deliver
quality applications on schedule. SourcePro Net allows
developers to use their existing C++ knowledge to implement
standard SOAP concepts, in order to create Web services and
extend their existing investments in C++ through XML.



|  |                   
|- | ------------------
| | SourcePro Analysis

Rogue Wave SourcePro Analysis is a solution for
object-oriented business and scientific analysis, containing a
wide range of C++ components for solving mathematical problems
in business and research. Developers use the algorithms in
SourcePro Analysis for accurate, precise calculations, allowing
them to focus on building appropriate business solutions.



| |                           
| | --------------------------
| | Rogue Wave Stingray Studio

Rogue Wave Stingray Studio offers higher-level
graphical user interface (GUI) components for
Microsoft® Windows® platforms providing ease of use,
shortening development time and making it easier to maintain GUI
applications. Rogue Wave Stingray Studio provides the graphical
components required to mimic the look and feel of Microsoft
applications, facilitating the creation of custom GUI
applications whose look and functionality are consistent with a
Microsoft standard, thereby increasing end user acceptance and
use. Stingray Studio lets developers rapidly build scalable,
distributed GUI applications that can be easily integrated with
current enterprise systems and applications.



| |                                                  
| | -------------------------------------------------
| | Light Weight Enterprise Integration
    Framework

In December 2002, the Company launched its LEIF
product. This product is designed to integrate C++ applications
with XML data and Web services, enabling C++ applications to
communicate with .NET and J2EE based applications, both within
an enterprise and with external partners or customers. LEIF
employs industry-standard networking, XML and Web services
technologies to expose the functionality of business-critical
C++ applications to other disparate application and business
processes. By easing the integration of XML with C++
applications, LEIF allows business-critical systems to work
seamlessly with XML documents and communicate using an XML-based
data format that spans platforms and languages.



| |                                                 
| | ------------------------------------------------
| | Rogue Wave Application Tuning System
    (ATS)

Rogue Wave ATS provides increased application
stability and performance by reducing heap contention and
optimizing memory allocation in multithreaded applications. ATS
offers development teams an opportunity to leverage their
current hardware and use a solution to increase high-end
processing efficiency, workflow

5



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efficiency and positive end-user experience. As
sales have been less than anticipated since its launch in the
third quarter of fiscal 2002, the Company plans to discontinue
the product on December 31, 2003.


Customers

While the Companys customer base is broad
and diverse, over 75% of it is represented by software and
information systems, telecommunications, defense and financial
services industries. To date, the Company has sold over 350,000
end-user licenses, both to individual programmers as well as
enterprises. No single customer accounted for 10% or more of
revenue in fiscal 2003.

Sales and Marketing

Rogue Wave has transitioned to a deployment-based
licensing and pricing model. In fiscal 2003, the Company
received 77% of its licensing revenue from deployment fees and
23% of its license revenue from development fees. The
Companys sales and marketing efforts are aligned to
support this business approach.

Rogue Wave has restructured its marketing
organization to include centralized product marketing and
marketing communications functions, with geographically focused
field-marketing teams. Product marketing and marketing
communications develop marketing messages and materials
addressing the impact Rogue Wave products can have on
application development efforts. The field marketing teams in
the Americas and in Europe, Middle East, Eastern Europe and
Africa (EMEA) further tailor the corporate messaging
and materials to develop lead generation and brand awareness
programs for a specific geographic region. Field marketing
programs include advertising, direct marketing, events, and
ongoing customer communication programs. In Asia Pacific, the
field marketing is done through third party distributors.

The Companys corporate communications
function focuses on relations with industry analysts and the
press as a channel for increasing awareness of Rogue Wave
products in the marketplace. Corporate communications also
pursues bylined articles and speaking opportunities for key
Rogue Wave technologists and architects. The Companys Web
site (www.roguewave.com) continues to be the primary
vehicle for communicating relevant messages to the target
audiences.

As of October 31, 2003, the Company had 45
worldwide sales and marketing employees. A team approach
comprised of both inside sales and direct field sales
representatives is utilized and are represented by the following:

Inside Sales.As of
October 31, 2003, the Company employed four domestic inside
sales representatives. The Companys inside sales force
generally supports the direct field sales in new opportunities
and targets new license and renewals from existing customers.
The Company maintains the inside sales operation at its
headquarters in Boulder, Colorado.

Direct Field Sales.As of October 31, 2003, the Company employed 10 domestic
direct field sales representatives, supported by six technical
sales representatives. The Companys domestic field sales
force targets Fortune 1000 customers. The field sales force
typically focuses on enterprise-wide technology customers. The
sales cycle for this top down approach typically
ranges from two to six months. The Company maintains domestic
direct sales offices in Colorado, Massachusetts, New York and
Texas.

The Companys international sales channel
development efforts are focused on two regions:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | EMEA.As of
    October 31, 2003, the Companys EMEA sales consisted
    of 13 individuals. The Company maintains EMEA sales and support
    offices in France, Germany, Italy, and the United Kingdom.                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Asia Pacific.Between 2000 and 2002, Rogue Wave opened offices in Japan, Hong
    Kong and Australia, and began to deliver localized products and
    services to these markets. Despite the Companys efforts
    and investment in expanding its international operations, the
    Company achieved only minimal success. As a result, the Company
    closed its offices in Australia and Hong Kong in fiscal 2003 and
    announced plans to close its Japan office in October 2003. The
    Company will continue to develop these regions through strategic
    partnerships with third party distributors and through

6



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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | development of Internet based channels.
    Currently, the Company has two distributors that cover countries
    in the Asia Pacific region. In addition, the Company is
    currently negotiating contracts with two distributors in India
    and China. There can be no assurance that the Company will be
    able to maintain or increase international market demand for its
    products. See Risk Factors for additional risk
    factors associated with the Companys international
    operations.

Strategic Alliances and Business
Partnerships

The Company has strategic alliances and
partnerships with a number of leading hardware and software
vendors, system integrators, software developers and
distributors, including Microsoft, Intel and Hewlett-Packard.
These relationships include technology licensing agreements and
cooperative marketing relationships, as well as exchange of
development plans and strategic direction. While each agreement
is unique, revenue is recognized only when the four revenue
recognition criteria outlined in Statement of Position
(SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9, have been met.
See Note 1 of Notes to Consolidated Financial Statements.
As new opportunities emerge, Rogue Wave intends to expand
partnerships with leading vendors to offer solutions to the
market place. Costs related to each agreement, if any, are
recognized when incurred. The following are summaries of various
current partnerships and alliance agreements.

On March 1, 2002, Rogue Wave and Microsoft
Corporation (Microsoft) entered into a Joint
Engineering and Promotion Agreement (the Microsoft
Agreement). Pursuant to the terms of the Microsoft
Agreement, Rogue Wave agreed to develop, release and market to
customers new versions of Rogue Waves SourcePro software
products designed to optimize the performance of such products
on Microsofts Windows-based servers. Microsoft agreed to
pay Rogue Wave $50,000 at the start of the project and $200,000
after acceptance of a final specification for the modifications
and additional incentives based on new licenses for the enhanced
products sold by Rogue Wave. Microsoft agreed to assist Rogue
Wave with the development, evaluation and testing of the new
products. The parties agreed to cooperate in marketing the new
products and to work together regarding Rogue Waves
potential interaction with Microsofts .NET initiatives.
During fiscal 2002, the Company recognized $250,000 in revenue
upon acceptance of the final specifications. No further revenue
has been recognized related to this contract. The Company
entered into a new technology and marketing agreement with
Microsoft in fiscal 2004.

Rogue Wave and Hewlett-Packard Company
(HP) have entered into a number of agreements dating
back to 1995. Most recently, in May 2003, the Company entered
into a porting agreement with HP, to port and certify Rogue
Waves SourcePro Edition 5 and 6 products to the Tru 64
5.1b operating system and the Compaq C++ 6.5 compiler. HP agreed
to pay a porting fee of $70,000, payable upon Rogue Wave meeting
defined milestones. In fiscal 2003, the Company recognized
$70,000 as defined by milestones and as the porting work was
completed and accepted by the customer. In April 2002, Rogue
Wave and HP entered into the Itanium Processor Family Porting
Agreement, pursuant to which Rogue Wave agreed to port certain
of its products to the HP-UX Itanium Processor platform and to
make the ported products available to customers. HP agreed to
pay Rogue Wave a porting fee in the amount of $400,000, payable
upon Rogue Wave meeting defined milestones. The Company has
recognized revenue as defined milestones and/or porting work was
completed and accepted by the customer. Rogue Wave recognized
$125,000 in support revenue related to this contract in fiscal
2003. In January 2002, Rogue Wave and HP entered into a letter
agreement pursuant to which Rogue Wave became a member of
HPs Extend and Enhance program. Member
benefits included the right to link to HPs website,
inclusion on HPs partner lists and technical marketing
assistance. No revenue or expense was recognized related to this
agreement.

Technical Support

The Company believes that a high level of
customer support is important to the successful marketing and
sale of its products. Mission-critical applications require
rapid support response and problem resolution. The
Companys sales and support presence allows quick response
and support in local languages. The Company delivers support
services through various channels such as telephone, electronic
mail and on-line support via the Web. By directly submitting a
support incident into the Companys call database, support
via the Web

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provides fast response and resolution. Online
support via the Web allows customers to report an incident and
see a history of all their Rogue Wave support incidents.
Telephone hotline support is offered worldwide at either a
standard or around-the-clock level, depending on customer
requirements. The Companys support offerings are as
follows:




| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Basic  Web-based support limited to 25
    support incidents per year and six-day response time.                                                                                                                                      
|
| |  | Premium  Web, e-mail and phone
    delivered services limited to 100 support incidents per year and
    a 24-hour response time.                                                                                                      
|
| |  | Enterprise  24x7 Web, e-mail and phone
    services limited to 100 support incidents per year and response
    times of 4 to 48 hours depending on the incident severity;
    dedicated technical account managers are also available.
|
| |  | Extended Lifecycle Product Support 
    Specialized support for customers requiring additional support
    after a product or version is in obsolescence or has been
    retired.                                                     

The Company maintains product and technology
experts, on call at all times, and has support call centers
located in Boulder, Colorado and the United Kingdom. As of
October 31, 2003, there were nine employees in the
Companys technical support group.

Professional Services

The Company believes that its professional
services organization plays an important role in facilitating
initial license sales by enabling customers to successfully
design, develop, deploy and manage systems and applications.
Fees for services are generally charged on a time and materials
basis and vary depending upon the nature and extent of services
to be performed. A sample of the technical consulting services
offered is provided below:



| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Assessment Service  Helping companies
    manage and understand their technology initiatives more
    effectively.                                   
|
| |  | Consulting Services  These services
    include intervention at critical phases of development or full
    lifecycle management of customer projects.
|
| |  | Education Services  Training
    development teams on the full power of Rogue Wave products.                                                         
|
| |  | Product Installation Service  Offering
    companies a way to smoothly transition to new versions of Rogue
    Wave products.                        

As of October 31, 2003, there were three
employees in the professional services group.

Product Development

Rogue Wave strives to continue to enhance its
current product line while developing new products that target
the service-based architecture opportunity. During fiscal year
2002, the Companys product development activities were
conducted in various sites throughout the United States,
including Corvallis, Oregon, Boulder, Colorado and Southboro,
Massachusetts. In the first quarter of fiscal 2003, the Company
consolidated certain operations in the U.S. to achieve cost
reductions and streamline operations. The Company relocated
certain development activities from the Companys
Corvallis, Oregon facility to its headquarters in Boulder,
Colorado and discontinued its development operations in
Southboro, Massachusetts. As of October 31, 2003, there
were 25 employees on the Companys product development
staff. The Companys product development expenditures in
fiscal 2003, 2002 and 2001 were $6.2 million,
$12.4 million and $13.8 million, respectively, and
represented 18.9%, 28.5%, and 23.9% of total revenue,
respectively.

The Company expects that it will continue to
commit substantial resources to product development in the
future. Although Rogue Wave has primarily developed products
internally, it may, based on timing and cost considerations,
acquire and/or license technologies or products from third
parties.

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Competition

The Companys products and professional
services face direct and indirect competition ranging from the
internal development operations of our target customers to
similar product offerings and alternative technologies designed
to address the same business problems.

Rogue Wave Stingray Studio targets developers
using Visual C++/MFC (Microsoft Foundation Classes), and Visual
Basic/ ActiveX software components for GUI development on
Windows platforms. Microsoft is a particularly strong competitor
due to its large installed base and the fact that it bundles its
MFC library with its own and other C++ compilers. Microsoft is
promoting the .NET development environment; however, it is
expected that the migration from MFC-based applications to .NET
may take up to five years to complete. Microsoft is facilitating
this migration with the introduction of the .NET development
environment and Winforms. Winforms is positioned as
Microsofts preferred method of performing GUI development
in the future and represents a divergence from MFC, the
technologies on which Stingray Studio is based.

The Companys SourcePro C++ products drive
the majority of Company revenue and target the maturing market
for C++ development components. Direct competitors in the C++
market include ILOG, Borland, several privately held companies,
and open source offerings. Direct competitors in the development
focused integration products market, the market served by LEIF,
include large vendors including IBM, Tibco, Webmethods and IONA,
as well as a number of smaller public and privately held
companies. IBM, Tibco, Webmethods and IONA are particularly
strong competitors because of their leadership positions in this
market and because they have significantly greater resources,
name recognition and larger installed bases of customers than
Rogue Wave.

The most significant threat to revenue for the
cross-platform foundation C++ components comes from internal
development operations within the Companys customer and
prospect base. Additional threats come from specialized C++
component vendors and, increasingly, open source projects that
produce freely available source code upon which companies can
build enterprise software.

Products and services that are indirectly
competitive include components from Microsoft, Oracle, and
DataDirect. Each of these companies provides or may provide in
the future solutions that may compete with Rogue Waves
object-oriented, distributed computing and database access
products. Only DataDirect currently offers the flexibility to
move between platform vendors. As a result, the Company believes
that its cross-platform value will continue to set it apart from
Microsoft, IBM, Oracle, Sybase and others.

Additional indirect competition comes from the
emergence of Java as a viable object-oriented, cross-platform
enterprise development language. The Java Development Kit is
freely distributed by Sun Microsystems and contains a
comprehensive set of foundation and GUI components upon which a
developer may begin development. These features directly compete
with Rogue Wave components in the C++ space. Higher level
Java-centric products, such as application servers provided by
Sun Microsystems (Iplanet), IBM (Websphere) and BEA (Web Logic),
also represent alternative technologies that can compete with
the Companys LEIF and SourcePro C++ components.
Microsofts .NET platform is also an indirect competitor
that provides much of the framework value companies look to
Rogue Wave for, although it is tied to Windows exclusively.

As previously mentioned, the Company announced
plans to create products that facilitate application development
in a service-based architecture. The Companys first
product released under this strategy is LEIF. The Company faces
competition from existing application vendors, such as
Microsoft, IBM, BEA, Sun Microsystems and Oracle. In addition,
the Company faces competition from middleware companies such as
IONA and Systinet. Finally, because this strategy is new, the
Company faces competition from a host of new companies or
start-ups targeting Web services.

For the most part, Rogue Wave works in
conjunction with systems integrators, as they tend to bring
industry-specific expertise rather than architectural level
expertise to software development projects. However, they may
also compete with Rogue Wave. This is because many systems
integrators possess industry-specific expertise that may enable
them to offer a single vendor solution more easily.
Additionally, they already have a reputation among potential
customers for offering enterprise-wide solutions to software
programming needs.

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Systems integrators may market competitive
software products in the future as Rogue Waves products
move up the functionality ladder to more complete frameworks and
potential vertical-market solutions.


Employees

As of October 31, 2003, the Company had 104
employees, of which 86 were based in the United States and 18
were based in Europe. Of the total, 45 were in sales and
marketing, 25 were in product development, three were in
professional services, nine were in technical services and 22
were in finance, administration and operations. The Company has
not experienced any work stoppages and considers relations with
its employees to be good.

Risk Factors

In evaluating the Companys business,
investors should carefully consider the following factors in
addition to the other information presented in this
report.



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our future operating results are difficult
    to predict and actual financial results may vary from our
    expectations, which could have an adverse effect on our stock
    price.

Our future operating results are difficult to
predict due to a variety of factors, many of which are outside
of our control. These factors include:



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | overall economic conditions of the U.S. and
    the rest of the world;                                                                     
|
| |  | overall economic conditions in the software and
    information systems, telecommunications, financial services and
    defense industries;
|
| |  | the demand for our products and services;                                                                                                  
|
| |  | the level of product and price competition;                                                                                                
|
| |  | the size, type and timing of individual license
    transactions;                                                                          
|
| |  | the adoption of new technologies;                                                                                                          
|
| |  | the delay or deferral of customer implementations;                                                                                         
|
| |  | our success in expanding our direct sales force
    and indirect distribution channels;                                                    
|
| |  | timing of new product introductions and product
    enhancements;                                                                          
|
| |  | levels of international sales;                                                                                                             
|
| |  | obsolescence of our products or the programming
    languages that our products are designed to enhance;                                   
|
| |  | changes in our pricing policy or that of our
    competitors;                                                                              
|
| |  | publication of opinions about us, our products
    and object-oriented and infrastructure component technology by
    industry analysts;   
|
| |  | our ability to retain key employees and hire new
    employees;                                                                            
|
| |  | our ability to develop and market new products
    and control costs; and                                                                  
|
| |  | our ability to effectively deploy our new
    strategy, including our current business model.                                              

One or more of the foregoing factors may cause
our operating expenses to be disproportionately high during any
given period or may cause our revenue and operating results to
fluctuate significantly. Based on the preceding factors, we may
experience a shortfall in revenue or earnings or otherwise fail
to meet public market expectations, which could materially
adversely affect our business, financial condition and the
market price of our Common Stock.

10



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| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We operate in an industry with rapidly
    changing technology and, if we do not successfully modify our
    products to incorporate new technologies or introduce new
    products, our sales will suffer.

The software market in which we compete is
characterized by (1) rapid technological change,
(2) frequent introductions of new products,
(3) changing customer needs and (4) evolving industry
standards. To keep pace with technological developments,
evolving industry standards and changing customer needs, Rogue
Wave must support existing products and develop new products. We
have been aggressively investigating new product development
opportunities, and we recently announced plans to create new
products and enhancements to existing products that facilitate
application development in a service-based architecture. We may
not be successful in developing, marketing and releasing new
products or new versions of our products that respond to
technological developments, evolving industry standards or
changing customer requirements. We may also experience
difficulties that could delay or prevent the successful
development, introduction and sale of these enhancements. In
addition, these new products or enhancements may not adequately
meet the requirements of the marketplace and may not achieve any
significant degree of market acceptance. If release dates of any
future products or enhancements are delayed, or if these
products or enhancements fail to achieve market acceptance when
released, our business, operating results and financial
condition could be materially adversely affected. In addition,
new products or enhancements by our competitors may cause
customers to defer or forgo purchases of our products, which
could have a material adverse effect on our business, financial
condition and results of operations.



| |                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our market is highly competitive, and if we
    are unable to compete successfully, our ability to grow our
    business or maintain revenue and operating results at current
    levels will be diminished.

Our products target the markets for C++
components and development focused integration products. Direct
competitors in the C++ components market include ILOG, and
Borland, several privately held companies and open source
offerings. Direct competitors in the development focused
integration products market, the market targeted by LEIF,
include large vendors like IBM, Tibco, Webmethods and IONA, as
well as a number of smaller public and privately held companies.
These competitors occupy leadership positions in this market and
have significantly greater resources, name recognition and
larger installed bases of customers than Rogue Wave.

Software applications can also be developed using
components and programming tools in languages other than C++,
including Java and Microsoft .NET languages such as Visual Basic
..NET and C#. Companies that provide components and tools for
these languages include Microsoft, BEA, IBM, Borland and Oracle.
These companies have significantly greater resources, name
recognition and larger installed bases of customers than Rogue
Wave and have established relationships with current and
potential customers. They may be able to respond more quickly to
new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development,
promotion and sales of their products than Rogue Wave can.

It is expected that new application development
will be higher for Java and .NET than C++ in the foreseeable
future. As a result, the widespread acceptance of Java and
Microsofts .NET could curtail the use of C++ and therefore
adversely affect the sales of our products. In addition, failure
to develop and market new products that will move us into new
technologies, could materially and adversely affect our
business, results of operations and financial condition.

We also face competition from systems integrators
and our customers internal information technology
departments. Many systems integrators possess industry specific
expertise that may enable them to offer a single vendor solution
more easily, and already have a reputation among potential
customers for offering enterprise-wide solutions to software
programming needs. Systems integrators may market competitive
software products in the future.

There are many factors that may increase
competition in the market for object-oriented software
components and programming tools, including (1) entry of
new competitors, (2) alliances among existing competitors
and (3) consolidation in the software industry. Increased
competition may result in price reductions, reduced gross
margins or loss of market share, any of which could materially
adversely affect our business, operating results and financial
condition. If we cannot compete successfully against current and

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future competitors or overcome competitive
pressures, our business, operating results and financial
condition may be adversely affected.




| |                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our historical financial information
    relates to the sale of products primarily based on C++ and as
    such may not be indicative of our future performance in
    developing and marketing software that targets other current or
    emerging technologies related to application
    development.

Our historical financial information is based on
sales of software designed to develop applications for C++.
While we continue to enhance the functionality of these products
and expect sales of these technologies to continue to generate a
significant percentage of our revenues, we expect to derive an
increasing percentage of our revenues from sales of products
that target the service-based architecture opportunity. Relative
to our traditional business, we do not have a lengthy operating
history in these markets upon which to evaluate our prospects,
which may make it difficult to predict our actual results in
future periods. Accordingly, actual results of our future
operations may not meet our anticipated results.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | Our sales volume is subject to fluctuations
    and unpredictable timing and may cause our operating results to
    fluctuate significantly.

We generally ship orders as received, which means
that quarterly revenue and operating results depend
substantially on the volume and timing of orders we receive
during the quarter. Sales volume is difficult to forecast due to
a number of reasons, many of which are outside our control. Such
reasons include:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | lack of a reliable means to assess overall
    customer demand;                                                                         
|
| |  | we typically earn a substantial portion of our
    revenue in the last weeks, or even days, of each quarter;                            
|
| |  | larger customer orders are subject to long sales
    cycles and are frequently delayed; and                                             
|
| |  | our service and maintenance revenue tends to
    fluctuate as consulting contracts are undertaken, renewed,
    completed or terminated.

We base operating expenses on anticipated revenue
trends. A high percentage of these expenses are relatively
fixed. As a result, a delay in the recognition of revenue from a
limited number of transactions could cause significant
variations in operating results from quarter to quarter and
could lead to significant losses. Accordingly, operating results
and growth rates for any particular quarter or other fiscal
period may not be indicative of future operating results.
Furthermore, fluctuations in our quarterly operating results may
result in volatility in the price of our Common Stock.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Failure to attract and retain key employees
    will adversely affect our business.

Our future performance depends significantly upon
the continued service of our key technical, sales and senior
management personnel. We believe that the technological and
creative skills of our personnel are essential to establishing
and maintaining a leadership position, particularly in light of
the fact that our intellectual property, once sold to the public
market, is easily replicated. The loss of the services of one or
more of our executive officers or key technical personnel may
have a material adverse effect on our business.

Our future success also depends on our continuing
ability to attract and retain highly qualified technical, sales
and managerial personnel. In the past, we have experienced some
difficulty in attracting key personnel. Competition for such
personnel is intense and there can be no assurance that we can
retain key employees or that we can attract, assimilate or
retain other highly qualified personnel in the future.



| |                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Variability of our sales cycles make it
    difficult to forecast quarterly and annual revenue and operating
    results, making it likely that period-to-period comparisons are
    not necessarily meaningful as an indicator of future
    results.

We distribute our products primarily through
direct sales channels, which are subject to a variable sales
cycle. The purchase of products is often an enterprise-wide
decision and may require the sales person to provide a
significant level of education to prospective customers
regarding the use and benefits of our products.

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For these and other reasons, the sales cycle
associated with the sale of our products typically ranges from
two to six months and is subject to a number of significant
delays over which we have little or no control. As a result,
quarterly revenue and operating results are variable and are
difficult to forecast, and we believe that period-to-period
comparisons of quarterly revenue are not necessarily meaningful
and should not be relied upon as an indicator of future revenue.




| |                                                                           
| | --------------------------------------------------------------------------
| | We face risks involving future business
    acquisitions and partnerships.

We frequently evaluate strategic opportunities
available to us and may in the future pursue acquisitions,
partnerships or the licensing of complementary technologies and
products or business acquisitions and partnerships. Future
acquisitions or partnerships may result in the diversion of
managements attention from the day-to-day operations of
our business and may include numerous other risks, including
difficulties in the integration of the operations, products and
personnel of the acquired companies. Future acquisitions may
also result in a dilutive issuance of equity securities, the
incurrence of debt and amortization expenses related to
intangible assets. Our failure to successfully manage future
acquisitions or partnerships may have a material adverse effect
on our business and financial results.



| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | Doing business outside the United States
    involves numerous factors that could negatively affect our
    financial results.

A significant portion of our revenue is derived
from international sources. To service the needs of our
international customers, we must provide worldwide product
support services. We may not be able to maintain or increase
international market demand for our products. If we do not, our
international sales will be limited, and our business, operating
results and financial condition could be materially and
adversely affected.

Our international operations are subject to a
variety of risks, including (1) foreign currency and
exchange rate fluctuations, (2) economic or political
instability, (3) shipping delays and (4) increases in
the level of customs duties, export quotas or other trade
restrictions. Any of these risks could have a significant impact
on our ability to deliver products on a competitive and timely
basis.



| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to adequately protect
    our intellectual property or operate our business without
    infringing on the intellectual property rights of
    others.

We rely primarily on a combination of copyright,
trademark and trade secret laws, confidentiality procedures and
contractual provisions to protect our proprietary rights. We
also believe that factors such as the technological and creative
skills of our personnel, new product developments, frequent
product enhancements, name recognition and reliable product
maintenance are essential to establishing and maintaining a
technological leadership position. We seek to protect our
software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection.
Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products
or to obtain and use information that we regard as proprietary.
The nature of many of our products requires the release of
source code to customers. Policing unauthorized use of our
products is difficult, and while we are unable to determine the
extent to which piracy of our products exists, software piracy
can be expected to be a persistent problem. In addition, the
laws of some foreign countries do not protect our proprietary
rights as fully as do the laws of the United States. There can
be no assurance that our means of protecting our proprietary
rights in the United States or abroad will be adequate or that
competition will not independently develop similar technology.

Although we do not believe that we are infringing
any proprietary rights of others, third parties may claim that
we have infringed their intellectual property rights.
Furthermore, employers of our former, current or future
employees may assert claims that such employees have improperly
disclosed to us the confidential or proprietary information of
such employers. Any such claims, with or without merit, could
(1) be time consuming to defend, (2) result in costly
litigation, (3) divert managements attention and
resources, (4) cause product shipment delays or
(5) require us to pay money damages or enter into royalty
or licensing agreements. A successful claim of intellectual
property infringement against us and our failure or inability to

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license or create a workaround for such infringed
or similar technology may materially and adversely affect our
business, operating results and financial condition.


Our license agreements with our customers
typically contain provisions designed to limit our exposure to
potential product liability claims. It is possible, however,
that the limitation of liability provisions contained in our
license agreements may not be effective under the laws of
certain jurisdictions. A successful product liability claim
brought against us could have a material adverse effect upon our
business, operating results and financial condition.



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | Our business will suffer if our products
    contain defects or do not function as intended, which would
    cause our revenue to decline.

Software products frequently contain errors or
failures, especially when first introduced or when new versions
are released. Also, new products or enhancements may contain
undetected errors, or bugs, or performance problems
that, despite testing, are discovered only after a product has
been installed and used by customers. Errors or performance
problems could cause delays in product introduction and
shipments or require design modifications, either of which could
lead to a loss in revenue or increase in costs. Our products are
typically intended for use in applications that may be critical
to a customers business. As a result, we expect that our
customers and potential customers have a greater sensitivity to
product defects than the market for software products generally.
Despite extensive testing by us and by current and potential
customers, errors may be found in new products or releases after
commencement of commercial shipments, resulting in loss of
revenue or delay in market acceptance, diversion of development
resources, the payment of monetary damages, damage to our
reputation, or increased service and warranty costs, any of
which could have a material adverse effect on our business and
results of operations.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Potential new accounting pronouncements may
    cause our net income to decrease.

We currently account for the issuance of stock
options under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. If
proposals currently under consideration by accounting standards
organizations and governmental authorities are adopted, we may
be required to change our practice and treat the value of stock
options granted to employees as a compensation expense. If we
change our method of accounting for employee stock options,
whether voluntarily or as a result of changes in accounting
rules, our net income could materially decrease.



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | Legislative and regulatory actions may
    cause our operating expenses to increase.

The Sarbanes-Oxley Act of 2002 and newly proposed
or enacted rules and regulations of the SEC or Nasdaq, impose
duties on the Company and its executives, directors, attorneys
and auditors. In order to comply with the Sarbanes-Oxley Act and
any new rules promulgated by the SEC or Nasdaq, we may be
required to hire additional personnel and use additional outside
legal, accounting and advisory services in the future. Any of
these developments could materially increase our operating
expenses and, accordingly, reduce our net income.



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions in our charter documents, our
    rights agreement and Delaware law could prevent or delay a
    change in control of the Company and may reduce the market price
    of our Common Stock.

Provisions of our certificate of incorporation,
by-laws and rights agreement may discourage, delay or prevent a
merger, acquisition or other business combination that a
stockholder may consider favorable. These provisions include:



| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | authorizing the issuance of preferred stock
    without stockholder approval;
|
| |  | limiting the persons who may call special
    meetings of stockholders;      
|
| |  | prohibiting stockholder action by written consent;                           

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| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | establishing advance notice requirements for
    nominations for election to the board of directors and for
    proposing other matters that can be acted on by stockholders at
    stockholder meetings;
|
| |  | requiring super-majority voting to effect certain
    amendments to our certificate of incorporation or to amend our
    by-laws; and                                                                    
|
| |  | requiring parties to request board approval prior
    to acquiring 15% or more of the voting power of our Common Stock
    to avoid economic and voting dilution of their stock holdings.                

We are incorporated in Delaware and certain
provisions of Delaware law may also discourage, delay or prevent
someone from acquiring or merging with us, which may cause the
market price of our Common Stock to decline.

Risks Relating to the Quovadx
Transaction

On November 3, 2003, Rogue Wave, entered
into an agreement and plan of merger with Quovadx in which
Quovadx through a wholly owned subsidiary, has offered to
exchange cash in the amount of $4.09 and 0.5292 of a share of
Quovadx common stock for each outstanding share of Rogue Wave
Common Stock. The following are the risks associated with this
transaction:



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Failure to complete the offer or the merger
    could harm the market price of Rogue Wave Common Stock and Rogue
    Waves future business operations.

If the merger is not completed, Rogue Wave may be
subject to the following risks:



| |   |                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if the merger agreement is terminated under
    certain circumstances, Rogue Wave will be required to pay
    Quovadx a termination fee of $2.3 million;                                                                                                                                            
|
| |  | the price of Rogue Waves Common Stock may
    decline to the extent that the current market price of Rogue
    Wave Common Stock reflects a market assumption that the offer
    and the merger will be completed;                                                                                 
|
| |  | costs related to the offer and the merger, such
    as legal, accounting and certain financial advisory fees; must
    be paid even if the offer and the merger are not completed;                                                                                                                  
|
| |  | if the merger is terminated and Rogue Waves
    board of directors elects to seek another merger or business
    combination, Rogue Wave may not be able to find a partner
    willing to pay an equivalent or more attractive price than that
    which would be paid in the offer and merger; and
|
| |  | failure to complete the merger could have an
    adverse effect on Rogue Waves relationships with
    employees, suppliers, distributors, customers, licensors and
    other business partners.                                                                                                    



| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The value of the consideration to be
    received by Rogue Wave stockholders upon completion of the offer
    will depend on the market value of Quovadx common stock at the
    completion of the offer.

Upon completion of the offer and the merger, each
share of Common Stock of Rogue Wave will be exchanged for cash
in the amount of $4.09 and 0.5292 of a share of Quovadx common
stock. The stock portion of the offer price and merger
consideration will not change, except in circumstances provided
for in the merger agreement, even if the market price of either
or both the Rogue Wave and Quovadx common stock fluctuates. The
specific dollar value of Quovadx common stock that a Rogue Wave
stockholder will receive upon completion of the offer or the
merger will depend on the market value of Quovadx common stock
at that time. Quovadxs stock price has been volatile, and
stockholders should expect it to continue to fluctuate.

Neither party may terminate the merger agreement
and the Rogue Wave board may not change its recommendation, in
each case, solely because of changes in the market price of
either Companys stock. The value of the consideration to
be received by Rogue Wave stockholders upon completion of the
offer will depend on the market value of Quovadx common stock at
the completion of the offer. As the market price of Quovadx
common stock decreases, the value received for each share of
Rogue Wave Common Stock exchanged for Quovadx common stock
decreases. Conversely, as the market price of Quovadx common
stock

15



---



##### Table of Contents



increases, the value received for each share of
Rogue Wave Common Stock exchanged for Quovadx common stock
increases.




| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Benefits expected from the merger may not
    be realized because of integration and other
    challenges.

The benefits of the merger may not be realized
and could have a material adverse effect on the combined
business and results of operations because of the following
challenges:



| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | incorporating Rogue Wave technology and products
    into Quovadx product offerings;              
|
| |  | preserving Rogue Wave technical knowledge within
    the engineering organization;                
|
| |  | coordinating the efforts of the Rogue Wave sales
    organization with Quovadx sales organization;
|
| |  | persuading Rogue Wave and Quovadx employees that
    the business cultures are compatible;        
|
| |  | maintaining momentum in the sales growth of Rogue
    Waves product offerings;                   
|
| |  | realizing anticipated cost savings in a timely
    manner; and                                    
|
| |  | incurring unanticipated expenses related to the
    integration of Rogue Wave and Quovadx.        



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Expenses related to the merger could
    adversely affect Rogue Wave and Quovadx combined financial
    results.

Rogue Wave and Quovadx expect to incur direct
transaction costs in connection with the merger of approximately
$3.7 million. If Quovadx does not achieve the expected
benefits of the merger, the combined companys financial
results, including earnings per share, could be adversely
affected.



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | The integration process may disrupt
    Quovadxs businesses and internal resources.

The integration of Rogue Wave and Quovadx will be
complex, time consuming and expensive and may disrupt both
businesses. Some of Rogue Waves suppliers, distributors,
customers and licensors may be Quovadxs competitors or may
work with Quovadxs competitors and as a result terminate
the business relationships with the combined company as a result
of the merger. In addition, the integration process may strain
the combined companys financial and managerial controls
and reporting systems and procedures. This may result in the
diversion of management and financial resources from the
combined companys core business objectives. There can be
no assurance that Rogue Wave and Quovadx will successfully
integrate or that the combined company will realize any of the
anticipated benefits of the merger.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | The directors and officers may have
    interests that could have affected their decision to support or
    approve the Quovadx transaction.

The Rogue Wave officers and directors may have
interests in the Quovadx transaction that differ from, or are in
addition to, their interests as Rogue Wave stockholders. The
interests of Rogue Wave officers include:



| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | current and future employment arrangements;                                                                                                                       
|
| |  | bonuses earned upon completion of the offer;                                                                                                                      
|
| |  | severance benefits if the officers
    employment is terminated without cause upon or after the merger;                                                          
|
| |  | accelerated vesting of stock options under change
    of control agreements upon consummation of the offer;                                                       
|
| |  | indemnification of Rogue Waves officers
    against certain liabilities arising both before and after the
    merger;                                            
|
| |  | continuation of certain Rogue Waves health
    and welfare, leave and severance plans; and                                                                       
|
| |  | increased liquidity for Rogue Waves
    officers under Rule 144 of the Securities Act of 1933 with
    respect to sales of Quovadx shares acquired in the merger.

16



---



##### Table of Contents



The interests of Rogue Wave directors include:



| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | with respect to one director, Marc H. Sternfeld,
    accelerated vesting of stock options upon consummation of the
    offer;                                      
|
| |  | indemnification of Rogue Waves directors
    against certain liabilities arising both before and after the
    merger; and                                        
|
| |  | increased liquidity for Rogue Waves
    directors under Rule 144 of the Securities Act of 1933 with
    respect to sales of Quovadx shares acquired in the merger.



| |                                                                               
| | ------------------------------------------------------------------------------
| | General uncertainty related to the merger
    could harm the combined company.

Rogue Wave and Quovadx customers may, in response
to the announcement of the proposed merger, delay or defer
purchasing decisions. If Rogue Wave or Quovadx customers delay
or defer purchasing decisions, the combined companys
revenue could materially decline or any increases in revenue
could be lower than expected. Similarly, Rogue Wave and Quovadx
employees may experience uncertainty about their future roles
with the combined company. This may harm the combined
companys ability to attract and retain key management,
sales and technical personnel. Also, speculation regarding the
likelihood of the closing of the offer and the merger could
increase the volatility of Rogue Wave and Quovadx share prices.



| |                                                                             
| | ----------------------------------------------------------------------------
| | Third parties may terminate or alter
    existing contracts with Rogue Wave.

Rogue Wave has contracts with its suppliers,
distributors, customers, licensors and other business partners,
some of which may require Rogue Wave to obtain the consent of
the other contracting parties in connection with the merger. If
these consents cannot be obtained, Rogue Wave may suffer a loss
of future revenue and may lose rights to facilities or
intellectual property that are or may be material to Rogue Wave
business and the business of the combined company. Furthermore,
these third parties may have an unfavorable reaction to the
merger and may not wish to continue their relationships with
Rogue Wave once the merger is completed, which could result in
the combined company being unable to rely on these relationships.



| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Risks related to the combined company and
    unanticipated fluctuations in the combined companys
    quarterly operating results could affect the combined
    companys stock price.

Each of Rogue Wave and Quovadx believes that
quarter-to-quarter comparisons of financial results are not
necessarily meaningful indicators of the future operating
results of the combined company and should not be relied on as
an indication of future performance. If the combined
companys quarterly operating results fail to meet the
expectations of analysts, the trading price of Quovadx common
stock following the merger could be negatively affected. Each of
the Rogue Wave and Quovadx quarterly operating results have
varied substantially in the past and those of the combined
company may vary substantially in the future depending upon a
number of factors. Neither Rogue Wave nor Quovadx can be certain
that it will successfully manage these risks or that the
business strategy of the combined company will be successful. If
the combined company fails to adequately address any of these
risks or difficulties, its business would likely suffer.



| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | Rogue Wave and Quovadx have experienced
    losses in the past, and the combined company may experience
    losses in the future.

Rogue Wave and Quovadx have experienced losses in
the past. Rogue Wave and Quovadx expect that the combined
company will continue to incur significant sales and marketing,
product development and administrative expenses. As a result,
the combined company will need to generate significant revenue
and gross margin to achieve profitability. Neither Rogue Wave
nor Quovadx can be certain that the combined company will
achieve and maintain profitability in the future. Any failure to
significantly increase revenue and gross margin as the combined
company implements its product and distribution strategies would
adversely affect its business.

17



---



##### Table of Contents








|        |           
|------- | ----------
|Item 2. | Properties

The Companys principal domestic
administrative, sales, marketing, support, consulting and
product development offices are located in facilities consisting
of approximately 37,000 square feet in Boulder, Colorado and
11,000 square feet in Corvallis, Oregon. The leases on the
Boulder and Corvallis facilities expire on various dates through
2005. The Company currently leases other domestic sales offices
in New York, Texas and Massachusetts. The Company also rents
space for its international offices in Europe. As of
September 30, 2003, future minimum lease payments under
operating leases were $3.1 million. Note 5 of Notes to
Consolidated Financial Statements describes the amount of the
Companys lease obligations. The Company believes that
these facilities are adequate for its current needs and that
suitable additional or alternative space will be available in
the future on commercially reasonable terms as needed.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

None.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

No matters were submitted to a vote of security
holders during the fourth quarter of fiscal 2003.

18



---



##### Table of Contents






PART II






|        |                                                                             
|------- | ----------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common
    Stock and Related Stockholder Matters

Market Information

The Companys Common Stock trades on The
NASDAQ National Market under the symbol RWAV. The
following table sets forth the high and low closing sales prices
for the Companys Common Stock for the quarters ended in
fiscal 2003 and 2002, as furnished by Nasdaq. These prices
reflect prices between dealers, without retail markups,
markdowns or commissions, and may not represent actual
transactions.

|                              |             |      |   |      |  |  |   |      | 
|----------------------------- | ----------- | ---- | - | ---- |  |  | - | ---- | 
|                              |             | High |   | Low 
|                              |             |      |   |     
|Year ended September 30, 2003 |             |      |   |      |  |  |   |     
|                              | 1st Quarter |      | $ | 2.10 |  |  | $ | 1.55 | 
|                              | 2nd Quarter |      |   | 2.57 |  |  |   | 1.75 | 
|                              | 3rd Quarter |      |   | 3.15 |  |  |   | 1.95 | 
|                              | 4th Quarter |      |   | 4.29 |  |  |   | 2.89 | 
|Year ended September 30, 2002 |             |      |   |      |  |  |   |     
|                              | 1st Quarter |      | $ | 3.37 |  |  | $ | 2.46 | 
|                              | 2nd Quarter |      |   | 3.80 |  |  |   | 3.00 | 
|                              | 3rd Quarter |      |   | 3.75 |  |  |   | 2.70 | 
|                              | 4th Quarter |      |   | 2.80 |  |  |   | 1.67 | 

As of November 7, 2003, there were
approximately 144 stockholders of record of the Companys
Common Stock (which number does not include the number of
stockholders whose shares are held of record by a brokerage
house or clearing agency but does include such brokerage house
or clearing agency as one record holder). The Company believes
it has in excess of 6,000 beneficial holders of the
Companys Common Stock.

Dividend Policy

The Company has not historically paid cash
dividends and intends to retain any future earnings for use in
its business for the foreseeable future.

In September 2001, the Board of Directors
authorized the Company to repurchase up to an aggregate of
$5.0 million or 2.5 million shares of its Common
Stock. Since September 2001, the Company has purchased
approximately 1.4 million shares for approximately
$3.4 million at prices ranging from $1.72 - $3.65
per share. During the fiscal year ended September 30, 2003,
the Company repurchased 585,000 shares for $1.2 million at
prices ranging from $1.72 - $2.67 per share; issued
73,000 shares of treasury stock to satisfy $125,000 of stock
purchased under the Employee Stock Purchase Plan and issued
298,000 shares of treasury stock to satisfy stock option
exercises having exercise prices ranging from
$0.15 - $3.53. As the market value of the
Companys Common Stock was less than the weighted-average
cost of the treasury stock at the time of issuance, the
aforementioned issuances of treasury stock resulted in charges
being recorded to additional paid-in capital as reflected in the
accompanying consolidated statements of stockholders
equity.

19



---



##### Table of Contents



Equity Compensation Plans

The following table shows certain information as
of September 30, 2003 with respect to compensation plans
under which shares of Common Stock of the Company are authorized
for issuance:

|                                                             |  |                      |           |                      |  |                         |      |  |  |  |           | 
|------------------------------------------------------------ |  | -------------------- | --------- | -------------------- |  | ----------------------- | ---- |  |  |  | --------- | 
|                                                             |  |                      |           |                      |  | (c)                    
|                                                             |  |                      |           |                      |  | Number of shares of    
|                                                             |  | (a)                  |           |                      |  | Common Stock           
|                                                             |  | Number of shares of  |           |                      |  | remaining available for
|                                                             |  | Common Stock to be   |           | (b)                  |  | future issuance under  
|                                                             |  | issued upon exercise |           | Weighted-average     |  | equity compensation    
|                                                             |  | of outstanding       |           | exercise price of    |  | plans (excluding       
|                                                             |  | options, warrants    |           | outstanding options, |  | securities reflected in
|                                                             |  | and rights           |           | warrants and rights  |  | column (a))            
|                                                             |  |                      |           |                      |  |                        
|1996 Equity Incentive Plan approved by
    stockholders:     |  |                      | 418,893   |                      |  | $                       | 4.63 |  |  |  | 1,372,035 | 
|1997 Equity Incentive Plan not approved by
    stockholders: |  |                      | 1,758,523 |                      |  | $                       | 3.99 |  |  |  | 4,785,891 | 
|                                                             |  |                      |           |                      |  |                         |      |  |  |  |           | 
|Total                                                        |  |                      | 2,177,416 |                      |  | $                       | 4.12 |  |  |  | 6,157,926 | 
|                                                             |  |                      |           |                      |  |                         |      |  |  |  |           | 

A description of the material features of the
1996 Equity Incentive Plan and the 1997 Equity Incentive Plan is
contained in Note 7 of Notes to the Consolidated Financial
Statements. Copies of the 1996 Equity Incentive Plan and the
1997 Equity Incentive Plan are incorporated by reference as
Exhibits 10.1 and 10.12 in Item 15 (c) to this
report.

20



---



##### Table of Contents








|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

The following selected historical consolidated
financial data should be read in conjunction with our
consolidated financial statements and the notes to such
statements and Managements Discussion and Analysis
of Financial Condition and Results of Operations included
elsewhere in this Annual Report on Form 10-K. The
consolidated statement of operations data for each of the years
in the five year period ended September 30, 2003, and the
balance sheet data for each of the years in the five year period
ended September 30, 2003, are derived from our financial
statements, which have been audited by KPMG LLP, independent
auditors. Historical results are not necessarily indicative of
the results to be expected in the future.

|                                                          |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |        |        | 
|--------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------- | ------- | - | ------ | ------ | ------ | 
|                                                          |                                                                     |                                      
|                                                          |                                                                     | Year Ended September 30,             
|                                                          |                                                                     |                                      
|                                                          |                                                                     | 2003                                  |        | 2002   |        | 2001 |        | 2000   |        | 1999
|                                                          |                                                                     |                                       |        |        |        |      |        |        |        |     
|                                                          |                                                                     |                                      
|                                                          |                                                                     | (in thousands, except per share data)
|Consolidated Statement of Operations
    Data:            |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |       
|Revenue:                                                  |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |       
|                                                          | License revenue                                                     |                                       | $      | 19,041 |        |      | $      | 22,877 |        |      | $      | 30,549 |        |   | $      | 30,724  |         |   | $      | 32,394 |       
|                                                          | Service and maintenance revenue                                     |                                       |        | 13,867 |        |      |        | 20,422 |        |      |        | 27,104 |        |   |        | 23,718  |         |   |        | 20,710 |       
|                                                          |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |       
|                                                          |                                                                     | Total revenue                         |        |        | 32,908 |      |        |        | 43,299 |      |        |        | 57,653 |   |        |         | 54,442  |   |        |        | 53,104 | 
|                                                          |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |       
|Cost of revenue:                                          |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |       
|                                                          | Cost of license revenue                                             |                                       |        | 644    |        |      |        | 942    |        |      |        | 788    |        |   |        | 1,710   |         |   |        | 2,149  |       
|                                                          | Cost of service and maintenance revenue                             |                                       |        | 2,700  |        |      |        | 6,213  |        |      |        | 11,781 |        |   |        | 7,981   |         |   |        | 7,306  |       
|                                                          |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |       
|                                                          |                                                                     | Total cost of revenue                 |        |        | 3,344  |      |        |        | 7,155  |      |        |        | 12,569 |   |        |         | 9,691   |   |        |        | 9,455  | 
|                                                          |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |       
|                                                          |                                                                     | Gross profit                          |        |        | 29,564 |      |        |        | 36,144 |      |        |        | 45,084 |   |        |         | 44,751  |   |        |        | 43,649 | 
|                                                          |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |       
|Operating expenses:                                       |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |       
|                                                          | Product development                                                 |                                       |        | 6,233  |        |      |        | 12,355 |        |      |        | 13,759 |        |   |        | 14,072  |         |   |        | 11,512 |       
|                                                          | Sales and marketing                                                 |                                       |        | 13,560 |        |      |        | 22,739 |        |      |        | 25,140 |        |   |        | 24,668  |         |   |        | 23,510 |       
|                                                          | General and administrative                                          |                                       |        | 3,828  |        |      |        | 5,377  |        |      |        | 5,908  |        |   |        | 5,491   |         |   |        | 5,354  |       
|                                                          | Restructuring, severance, acquisition and
    goodwill amortization |                                       |        | 4,123  |        |      |        | 1,315  |        |      |        | 2,192  |        |   |        | 1,661   |         |   |        | 1,170  |       
|                                                          | Goodwill impairment charge(1)                                       |                                       |        |       |        |      |        |       |        |      |        |       |        |   |        | 10,493  |         |   |        |       |       
|                                                          |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |       
|                                                          |                                                                     | Total operating expenses              |        |        | 27,744 |      |        |        | 41,786 |      |        |        | 46,999 |   |        |         | 56,385  |   |        |        | 41,546 | 
|                                                          |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |       
|                                                          |                                                                     | Income (loss) from operations         |        |        | 1,820  |      |        |        | (5,642 | )    |        |        | (1,915 | ) |        |         | (11,634 | ) |        |        | 2,103  | 
|Other income (expense), net                               |                                                                     |                                       | (75    | )      |        |      | 412    |        |        |      | 1,085  |        |        |   | 1,877  |         |         |   | 1,182  |       
|                                                          |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |       
|                                                          | Income (loss) before income taxes                                   |                                       |        | 1,745  |        |      |        | (5,230 | )      |      |        | (830   | )      |   |        | (9,757  | )       |   |        | 3,285  |       
|Income tax expense (benefit)                              |                                                                     |                                       | 196    |        |        |      | 2,065  |        |        |      | (219   | )      |        |   | 746    |         |         |   | 1,274  |       
|                                                          |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |       
|                                                          | Net income (loss)                                                   |                                       | $      | 1,549  |        |      | $      | (7,295 | )      |      | $      | (611   | )      |   | $      | (10,503 | )       |   | $      | 2,011  |       
|                                                          |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |       
|Basic and diluted earnings (loss) per share               |                                                                     | $                                     | 0.15   |        |        | $    | (0.68  | )      |        | $    | (0.06  | )      |        | $ | (1.00  | )       |         | $ | 0.19   |       
|                                                          |                                                                     |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |         |         |   |        |       
|Basic weighted average number of shares
    outstanding   |                                                                     |                                       | 10,113 |        |        |      | 10,742 |        |        |      | 10,983 |        |        |   | 10,512 |         |         |   | 10,383 |       
|Diluted weighted average number of shares
    outstanding |                                                                     |                                       | 10,172 |        |        |      | 10,742 |        |        |      | 10,983 |        |        |   | 10,512 |         |         |   | 10,860 |       

|                                                  |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                  |  |               
|                                                  |  | September 30, 
|                                                  |  |               
|                                                  |  | 2003           |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                                  |  |                |        |      |  |      |        |      |  |     
|                                                  |  |               
|                                                  |  | (in thousands)
|Consolidated Balance Sheet Data:                  |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Cash, cash equivalents and short-term investments |  | $              | 32,728 |      |  | $    | 28,256 |      |  | $    | 34,197 |  |  | $ | 33,526 |  |  | $ | 27,664 | 
|Total assets                                      |  |                | 40,698 |      |  |      | 42,942 |      |  |      | 56,837 |  |  |   | 55,619 |  |  |   | 59,470 | 
|Total stockholders equity                        |  |                | 30,851 |      |  |      | 28,742 |      |  |      | 37,288 |  |  |   | 37,293 |  |  |   | 42,342 | 



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the impairment of goodwill associated
    with the NobleNet acquisition, following the decision by the
    Company to discontinue the Nouveau product line.

21



---



##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Overview

Rogue Wave Software, Inc. was founded in 1989 to
provide reusable software components for the development of
object-oriented software applications. The Company operated as a
Subchapter S Corporation until June 1994. In October
1995, Rogue Wave merged with Inmark Development Corporation, a
privately held corporation specializing in the development,
distribution and support of an object-oriented graphical user
interface library written in the C++ programming language. In
February 1998, the Company merged with Stingray Software, Inc.,
a privately held corporation specializing in the development and
distribution of object-oriented development tools for Windows
programmers and a leading provider of Visual C++ class
libraries. Both transactions were accounted for using the
pooling-of-interests method of accounting. In March 1999, the
Company merged with NobleNet, Inc., in a transaction utilizing
the purchase method of accounting. NobleNet specialized in
building and marketing software products that allow existing
information technology systems to communicate and interoperate
across corporate networks and the Internet. Following the fourth
quarter 2000 decision to discontinue marketing of the Noveau
product line, the investment in Noblenet, which consisted
primarily of goodwill, was written off in fiscal 2000. In
addition, during fiscal 2001, as a part of an ongoing effort to
optimize its corporate organizational structure and in
conjunction with continuing cost containment programs, the
Company restructured its Stingray business unit and discontinued
the Fornova project. The Stingray products, which primarily
consist of development tools for Windows programmers, continue
to be sold by the Company. See Note 2 of Notes to
Consolidated Financial Statements.

The Rogue Wave Strategy and Business
Model

Rogue Wave Software develops, markets and
supports object-oriented software technology. Rogue Waves
strategic objective is to provide technology and services that
allow customers to maximize productivity when building software
solutions to address their business requirements.

The Company markets its products primarily
through its direct sales force and an indirect channel
consisting of original equipment manufacturers, value added
resellers and on-line and traditional distributors. The Company
makes certain of its products available for sale and
distribution over the Internet.



| |                                    
| | -----------------------------------
| | Core Technology 
    SourceProC++

The Companys history is rich in
object-oriented C++, the language of choice for large scale,
business critical applications. During fiscal 2001, Rogue Wave
announced the launch of the SourcePro C++ product line,
reflecting an alteration to the Companys core products and
business model from a license per developer approach
to a customer value model. The SourcePro C++ products, which
integrate the majority of formerly offered Rogue Wave C++
component technology as well as features not previously
available, are designed to provide more comprehensive solutions
while optimizing the use of the Companys core C++
products. SourcePro C++ is comprised of four products: SourcePro
Core, SourcePro DB, SourcePro Net and SourcePro Analysis.
Pricing of the SourcePro C++ products is based on a customer
value model, which considers scope of deployment, including
operating systems.

The migration from an individual developer
license business model to one centered on the deployment of
finished applications has not affected our revenue recognition
policies and procedures. License revenue consists of two
components, development fees and deployment fees. The
development license grants a perpetual license that allows the
customer to use the software purchased to develop end user
applications. In general, the deployment license allows the
customer to install or reproduce the Companys product that
has been either embedded in or is used in the execution of end
user applications and to use the applications perpetually.
Assuming the four criteria of revenue recognition outlined in
SOP 97-2, as amended, have been met, under either the
previous or new business model, both development and deployment
fees are recognized upon completion of delivery.

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| |                        
| | -----------------------
| | New Product Initiatives

Since the first quarter of fiscal 2003, the
Company has been aggressively investigating new product
development opportunities that are intended to leverage its
current cross-platform expertise, application development
expertise, sales channels and customer base. Based on extensive
research conducted through the third quarter of fiscal 2003, the
Company announced its plans to create products that facilitate
application development in a service-based architecture.

Modern businesses must respond rapidly to
changing marketing requirements as well as emerging customer
segments. Over time, businesses evolve and transform through
mergers, partnerships, downsizing and outsourcing. As business
functions change, its supporting software must also evolve to
meet new requirements and new interoperability with partners.
This is a challenge for many companies because of the lack of
interoperability between incompatible, but necessary data
formats, and the inflexibility of vendor-specific
implementations and platforms. Products that facilitate
development in a service-based architecture are a solution to
this problem.

The first product that the Company has launched
under the new product strategy is LEIF. LEIF enables C++
applications to interact with J2EE and .NET, within the
enterprise and with customers or partners. LEIF provides modern
solutions based on standards such as HTTP (client and server),
SOAP, WSDL and XML. With LEIF, developers can expose C++
business logic as Web services and finally achieve integration
between J2EE and .NET, and crucial C++ applications. Pricing of
the LEIF product considers scope of deployment, including
operating systems. The Company plans to deliver significant
enhancements to LEIF and also to introduce an additional new
product in calendar year 2004. Both of these initiatives target
facilitating the creation of applications for a service-based
architecture.



| |                                        
| | ---------------------------------------
| | Large-Scale Object Solutions
    (LSOS)

LSOS was a set of technologies the Company
licensed and in part, developed to target customers with
specific needs related to running very high throughput systems
deployed against a relational database. The Companys first
implementation of this technology was an application that the
Company developed, in partnership with JPMorgan Chase, known as
Global Market Reference Data. The Company planned to market this
product to worldwide financial institutions that were facing T+1
compliance requirements.

Because of global economic uncertainties, which
have resulted in significant spending constraints for
information technology, and the postponement of the T+1
compliance requirements by the Securities Industry Association,
the Company suspended all future investment related to this
product line. Additionally, in connection with overall cost
containment initiatives and the uncertainty of the marketplace
for these products, the Company terminated its LSOS operations
in Southboro, Massachusetts in November 2002 and incurred a
related restructuring charge during the quarter ended
December 31, 2002. The Company has also discontinued all
marketing and other related activities associated with this
product line. See Note 2 of Notes to Condensed Consolidated
Financial Statements.



| |                                          
| | -----------------------------------------
| | Strategic Realignment 
    Globalization

During fiscal 2002, Rogue Wave aggressively
focused on expansion in EMEA, Asia Pacific and Latin America. In
conjunction with this action and to better align its cost
structure with its international business focus, the Company
restructured certain areas of its global operations, which
resulted in severance related charges of approximately $480,000
in fiscal 2002.

As part of this 2002 restructuring plan and to
better meet the needs of its customers, the Company established
three separate regional operations, the Americas, EMEA and Asia
Pacific, in an effort to drive autonomy and greater
accountability. During the second fiscal quarter of 2002, the
Company opened an office in Sydney, Australia and increased its
resources in other areas of the Asia Pacific and EMEA regions.
Despite the Companys efforts and investment in expanding
its international operations, the Company achieved only minimal
success during the subsequent months. As a result, the Company
closed its Sydney, Australia and Amsterdam, Netherlands offices
during the third quarter of fiscal 2003 and announced plans to
close the Japan

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office in October 2003. The Company expects to
incur restructuring costs between $100,000  $200,000
to close the Japan office. Currently, Rogue Wave has not
announced plans to close additional international offices.
However, the Company continually evaluates the performance of
all offices and this could result in future office closures.


The Company will continue to develop all regions
through strategic partnerships with third party distributors and
through development of Internet based channels. There can be no
assurance, however, that the Company will be able to maintain or
increase international market demand for its products. See
Risk Factors for additional risk factors associated
with the Companys international operations.

Critical Accounting Policies

The preparation of the consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires estimates and assumptions
that affect the reported amounts of assets and liabilities,
revenue and expenses, and related disclosures of contingent
assets and liabilities in the consolidated financial statements
and accompanying notes. The Securities and Exchange Commission
has defined a companys most critical accounting policies
as those that are most important to the portrayal of the
companys financial condition and results of operations,
and which require the company to make its most difficult and
subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on
this definition, the Company has identified the following
critical accounting policies and judgments and assumptions.
Actual results may differ significantly from these estimates
under different assumptions or conditions. For all financial
statement periods presented, there have been no material
modifications to the application of these critical accounting
policies.



| |                    
| | -------------------
| | Revenue Recognition

The Companys revenue is derived from
licenses of its software products and related maintenance,
training and consulting services. License, maintenance and most
services are recognized in accordance with SOP No. 97-2,
Software Revenue Recognition, as amended by SOP
No. 98-9, which permits revenue recognition when
(1) persuasive evidence of an arrangement exists,
(2) delivery of the product has occurred, (3) the fee
is fixed or determinable and (4) collectibility is
probable. The Company defines each of the four criteria above as
follows:

Persuasive evidence of an arrangement exists.Related to all sales transactions,
Rogue Waves customary practice is to execute a written
contract, signed by both the customer and the Company, or obtain
a purchase order issued by the customer, depending on the type
of sale.

Delivery.The
Companys software may be either physically or
electronically delivered to the customer. Delivery is deemed to
have occurred upon the shipment of the product or delivery of
the authorization code, in accordance with the underlying
license and sale agreement If undelivered products or services
exist in an arrangement that are essential to the functionality
of the delivered product, delivery is not considered to have
occurred until these products or services are delivered.

The fee is fixed or
determinable.Rogue Wave negotiates
the fee for its products at the outset of an arrangement. In
these arrangements, the majority of the development licenses are
perpetual and nonrefundable. The fees are generally due within
one to twelve months depending on the length of the contract.
The Company considers fees relating to arrangements with payment
terms extending beyond twelve months not to be fixed or
determinable. If the fee is not fixed or determinable, revenue
is recognized as payments become due from the customer.

Collectibility is
probable.Collectibility is evaluated
on a customer-by-customer basis. New and existing customers are
subject to a credit review process, which evaluates the
customers financial position (e.g. cash position and
credit rating) and their ability to pay. If collectibility is
not considered probable at the outset of an arrangement in
accordance with the Companys credit review process,
revenue is recognized when the fee is collected.

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SOP No. 97-2, as amended, generally requires
revenue earned on software arrangement involving multiple
elements to be allocated to each element based on the relative
fair values of the elements. The determination of fair value of
each element in multiple-element arrangements is based on
vendor-specific objective evidence (VSOE). The VSOE
for license, consulting and training fees is established when
the same element is sold separately. VSOE for maintenance and
support is determined based upon the customers annual
renewal rates with revenue recognized for remaining delivered
items using the residual method as provided for by SOP
No. 98-9.

Assuming all other revenue recognition criteria
are met, revenue from licenses is recognized upon delivery.
Maintenance and support revenue is deferred and recognized on a
straight-line basis over the contractual service periods, which
are typically one to three years. Consulting services, which
include training, are not considered essential to the
functionality of the other elements of the arrangement. The
revenue allocable to the consulting services is generally
recognized as the services are performed. In instances where the
Company enters into customized software consulting contracts,
the fees are recognized using the percentage of completion or
completed contract method of accounting in accordance with SOP
No. 81-1, Accounting for Performance of
Construction-Type and Certain Product-Type Contracts.
There were no customized software consulting contracts entered
into in fiscal 2003.



| |                                                      
| | -----------------------------------------------------
| | Sales Returns and Allowance for Doubtful
    Accounts

The Companys management must make estimates
of potential future product returns related to current period
product revenue in accordance with Statement of Financial
Accounting Standards (SFAS) No. 48,
Revenue Recognition When Right of Return Exists.
Management analyzes historical returns, current economic trends,
and changes in customer demand and acceptance of the products
when evaluating the adequacy of the allowance for sales returns.
Significant management judgments must be made and used in
connection with establishing the estimated sales returns in any
accounting period.

The Companys allowance for doubtful
accounts is intended to reduce the value of customer accounts
receivable to amounts expected to be collected. In determining
the required allowance, the Company considers factors such as
customer credit history, overall and industry economic
conditions and the customers current financial
performance. Rogue Wave performs ongoing credit evaluations of
its customers and adjusts credit limits based upon payment
history and the customers current credit worthiness, as
determined by the review of their current credit information.
The Company continuously monitors collections and payments from
the customers. While such credit losses have historically been
within expectations and the provisions established, we cannot
guarantee that we will continue to experience the same credit
loss rates that we have in the past.



| |                            
| | ---------------------------
| | Accounting for Income Taxes

As part of the process of preparing the
Companys consolidated financial statements, Rogue Wave is
required to estimate income taxes in each of the jurisdictions
in which it operates. This process involves preparing estimates
of the actual current tax exposure together with assessing
temporary differences resulting from differing treatment of
items for tax and financial accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. Rogue Wave
records a valuation allowance to reduce its deferred tax assets
to the amount that it believes is more likely than not to be
realized. In assessing the need for a valuation allowance, the
Company estimates future taxable income, considering the
feasibility of ongoing tax planning strategies and the
realizability of tax changes to tax laws, changes to statutory
tax rates and future anticipated taxable income levels.

The Company has reported net operating losses for
all but one of the past three years, in part due to cost
restructuring efforts coupled with an overall continued decline
in revenue. As a result, the Company determined that it did not
meet the applicable accounting requirements for such assets in
fiscal 2002 and, during the fourth quarter of fiscal 2002,
increased its income tax valuation allowance by approximately
$4.3 million through a charge to income. Even though the
Company has had three quarters of profits, the Company has
determined that it currently has not met the standards to
decrease the recorded valuation

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allowance. However, if, in the future, the
Company were to determine that such standards are met, the
Company would decrease the recorded valuation allowance through
an increase to income in the period that such determination is
made. See Note 6 of Notes to Consolidated Financial
Statements.


Results of Operations

The following table sets forth certain operating
data expressed as a percentage of total revenue for each period
indicated:

|                              |                                                                     |                                   |      |      |       |      |     |      |       |    |      |      |       |   
|----------------------------- | ------------------------------------------------------------------- | --------------------------------- | ---- | ---- | ----- | ---- | --- | ---- | ----- | -- | ---- | ---- | ----- | --
|                              |                                                                     |                                  
|                              |                                                                     | Year Ended September 30,         
|                              |                                                                     |                                  
|                              |                                                                     | 2003                              |      | 2002 |       | 2001
|                              |                                                                     |                                   |      |      |       |     
|Statements of
    Operations: |                                                                     |                                   |      |      |       |      |     |      |       |    |      |     
|Revenue:                      |                                                                     |                                   |      |      |       |      |     |      |       |    |      |     
|                              | License revenue                                                     |                                   |      | 57.9 | %     |      |     | 52.8 | %     |    |      | 53.0 | %    
|                              | Service and maintenance revenue                                     |                                   |      | 42.1 |       |      |     | 47.2 |       |    |      | 47.0 |      
|                              |                                                                     |                                   |      |      |       |      |     |      |       |    |      |     
|                              |                                                                     | Total revenue                     |      |      | 100.0 |      |     |      | 100.0 |    |      |      | 100.0 |   
|Cost of revenue:              |                                                                     |                                   |      |      |       |      |     |      |       |    |      |     
|                              | Cost of license revenue                                             |                                   |      | 2.0  |       |      |     | 2.2  |       |    |      | 1.4  |      
|                              | Cost of service and maintenance revenue                             |                                   |      | 8.2  |       |      |     | 14.3 |       |    |      | 20.4 |      
|                              |                                                                     |                                   |      |      |       |      |     |      |       |    |      |     
|                              |                                                                     | Total cost of revenue             |      |      | 10.2  |      |     |      | 16.5  |    |      |      | 21.8  |   
|                              |                                                                     |                                   |      |      |       |      |     |      |       |    |      |     
|                              |                                                                     | Gross profit                      |      |      | 89.8  |      |     |      | 83.5  |    |      |      | 78.2  |   
|Operating expenses:           |                                                                     |                                   |      |      |       |      |     |      |       |    |      |     
|                              | Product development                                                 |                                   |      | 18.9 |       |      |     | 28.5 |       |    |      | 23.9 |      
|                              | Sales and marketing                                                 |                                   |      | 41.2 |       |      |     | 52.5 |       |    |      | 43.6 |      
|                              | General and administrative                                          |                                   |      | 11.6 |       |      |     | 12.4 |       |    |      | 10.2 |      
|                              | Restructuring, severance, acquisition and
    goodwill amortization |                                   |      | 12.5 |       |      |     | 3.0  |       |    |      | 3.8  |      
|                              |                                                                     |                                   |      |      |       |      |     |      |       |    |      |     
|                              |                                                                     | Total operating expenses          |      |      | 84.3  |      |     |      | 96.4  |    |      |      | 81.5  |   
|                              |                                                                     |                                   |      |      |       |      |     |      |       |    |      |     
|                              |                                                                     | Income (loss) from operations     |      |      | 5.5   |      |     |      | (12.9 | )  |      |      | (3.3  | ) 
|Other income (expense), net   |                                                                     |                                   | (0.2 | )    |       |      | 1.0 |      |       |    | 1.9  |     
|                              |                                                                     |                                   |      |      |       |      |     |      |       |    |      |     
|                              |                                                                     | Income (loss) before income taxes |      |      | 5.3   |      |     |      | (11.9 | )  |      |      | (1.4  | ) 
|Income tax expense (benefit)  |                                                                     |                                   | .6   |      |       |      | 4.8 |      |       |    | (0.4 | )   
|                              |                                                                     |                                   |      |      |       |      |     |      |       |    |      |     
|                              |                                                                     | Net income (loss)                 |      |      | 4.7   | %    |     |      | (16.7 | )% |      |      | (1.0  | )%
|                              |                                                                     |                                   |      |      |       |      |     |      |       |    |      |     

Revenue.The
Companys total revenue decreased 24% to $32.9 million
in fiscal 2003 from $43.3 million in fiscal 2002. Total
revenue in fiscal 2002 decreased 25% from $57.7 million in
fiscal 2001. License revenue decreased 17% to $19.0 million
in fiscal 2003 from $22.9 million in fiscal 2002. License
revenue in fiscal 2002 decreased 25% from $30.5 million in
fiscal 2001. The decrease in license revenue in both periods is
due to the softness in overall demand, resulting primarily from
the weakened economy and an overall decrease in sales volume for
our C++ based products.

Service and maintenance revenue decreased 32% to
$13.9 million in fiscal 2003 from $20.4 million in
fiscal 2002. Service and maintenance revenue in fiscal 2002
decreased 25% from $27.1 million in fiscal 2001. As most of
our support revenue is recognized over a term of one year, the
decrease in service and maintenance revenue was primarily
attributable to the overall decline in gross sales during
several previous quarters, coupled with minimal new consulting
contracts. The decline in service and maintenance revenue
between fiscal 2002 and 2001 was primarily attributable to the
decrease in revenue received from two significant customized
consulting contracts totaling $5.2 million that were signed
in the first quarter of fiscal 2001, of which $4.7 million
was recognized during the fiscal year ending September 30,
2001.

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Cost of Revenue.Cost of license revenue consists primarily of purchased
software, royalty fees paid to third parties, materials,
packaging and freight expenses. Cost of license revenue was
$644,000, $942,000, and $788,000 in fiscal 2003, 2002, and 2001,
respectively, representing 3.4%, 4.1% and 2.6% of the license
revenue for the respective years. The increase in costs between
fiscal 2001 and fiscal 2002 was primarily the result of an
increase in royalties associated with certain technology
licensing rights in the last half of fiscal 2002 due to the
Companys strategic focus on acquiring complementary
products, specifically LSOS and ATS. The decrease in cost of
license revenue since fiscal 2002 was the result of the
cancellation of a contract due to the discontinuance of the LSOS
product in the second quarter of fiscal 2003 that had required
the Company to pay royalties for technology licensing rights.

Cost of service and maintenance revenue consists
primarily of personnel and facilities related costs incurred in
providing customer support and training services as well as
third-party costs incurred in providing training services. Cost
of service and maintenance revenue was $2.7 million,
$6.2 million and $11.8 million in fiscal 2003, 2002
and 2001, respectively, representing 19.5%, 30.4% and 43.5%, of
service and maintenance revenue for the respective years. This
decrease was due primarily to staff reductions resulting from
cost management actions instituted during the last several
quarters and a decline in the utilization of third-party
consulting services that were associated with the two
significant customized software consulting contracts entered
into in fiscal 2001.

Product Development.Product development expenses consist primarily of personnel
related costs. Product development expenses were
$6.2 million, $12.4 million and $13.8 million in
fiscal 2003, 2002 and 2001, respectively. As a percentage of
total revenue, product development expenses were 18.9%, 28.5%
and 23.9%, in each respective year. The overall decrease in
product development expense in fiscal 2002 from fiscal 2001 was
primarily attributable to staffing reductions achieved during
the third fiscal quarter of 2002. The overall decline in product
development expenses during fiscal 2003 was primarily
attributable to the relocation of certain technology functions
in the first quarter of fiscal 2003 as well as staff reduction
measures taken over the first, second and third quarters of
fiscal 2003. These actions included the closure of the LSOS
operations in Southboro, Massachusetts in November 2002 and the
reduction of the staff in Corvallis, Oregon by approximately
75%, in part as a result of the relocation of certain functions
to Boulder, Colorado. The Company anticipates that it will
continue to devote substantial resources to product development
and that product development expenses will increase as a
percentage of revenue for fiscal 2004. All costs incurred in the
research and development of software products and enhancements
to existing products have been expensed as incurred as the
amount of costs incurred between the point in time that
technological feasibility is established and general release is
not material.

Sales and Marketing.Sales and marketing expenses consist primarily of salaries,
commissions and bonuses earned by sales and marketing personnel,
field office expenses, travel, entertainment and promotional
expenses. Sales and marketing expenses were $13.6 million,
$22.7 million and $25.1 million in fiscal 2003, 2002
and 2001, respectively. As a percentage of total revenue, sales
and marketing expenses were 41.2%, 52.5% and 43.6% in each
respective year. The decrease in sales and marketing expense is
due to the decrease in advertising expenditures and a decrease
in sales and marketing personnel and related costs associated
with the implementation of cost containment programs. In
addition, the Company reduced the allowance for bad debt by
$436,000, as a result of a decrease in accounts receivable and a
decrease in actual write offs. This reduced sales and marketing
expenses in fiscal 2003. The Company expects that sales and
marketing expenses will grow as a percentage of total revenue
for fiscal 2004 as the Company plans for implementation of its
new product strategy.

General and
Administrative.General and
administrative expenses were $3.8 million,
$5.4 million and $5.9 million, in fiscal 2003, 2002
and 2001, respectively. As a percentage of total revenue,
general and administrative expenses were 11.6%, 12.4% and 10.2%
in each respective year. Although the total 2002 general and
administrative costs have declined, as a percent of revenue, the
proportionate decline in expense has not been as great as the
decline in revenue. The decrease in general and administrative
expenses in 2003 and 2002 is primarily due to cost containment
programs the Company implemented, including the reduction of
personnel. Additionally, during fiscal 2003, the Company
determined that a previously recorded accrual of approximately
$153,000 related to certain employee bonuses was no longer
expected to be paid. This amount

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was reversed, which reduced general and
administrative expenses in fiscal 2003. The Company believes
that its general and administrative expenses will remain flat or
decline slightly during fiscal 2004.


Restructuring, Severance, Acquisition and
Goodwill Amortization.Restructuring,
severance, acquisition and goodwill amortization costs were
$4.1 million, $1.3 million and $2.2 million in
fiscal 2003, 2002 and 2001, respectively. As a percentage of
total revenue, restructuring, severance, acquisition and
goodwill amortization were 12.5%, 3.0% and 3.8% in the
respective years.

In fiscal 2003, the Company incurred employee
severance of $2.4 million, executive severance of $433,000,
site closure costs of $976,000, relocation costs of $187,000, an
LSOS and office closure asset impairment charge net of a
contract termination benefit of $28,000 and other related costs
of $111,000 associated with the consolidation of facilities in
the Americas, EMEA and Asia Pacific and the streamlining of
operating functions. These actions resulted in an overall
personnel reduction of 136, and are expected to reduce annual
expenses by approximately $17.3 million.

Restructuring, severance, asset impairment and
goodwill expenses totaling approximately $1.3 million were
recognized during fiscal 2002. The Company incurred severance of
$617,000 associated with the termination of certain senior
managers and $88,000 for the finalization of lease closure costs
and severance for the Stingray facility and $54,000 related to
an asset impairment charge initiated in fiscal 2001. In
addition, $76,000 of goodwill amortization was recognized in the
first half of fiscal 2002.

During the second quarter of fiscal 2002, the
Company announced a realignment of its corporate strategy for
EMEA, Asia Pacific and Latin America. In conjunction with this
action and to better align its cost structure with its new
international business focus, in March 2002, the Company
announced plans to restructure certain areas of its global
operations, which resulted in severance related charges of
approximately $480,000 in the second and third fiscal quarters
of 2002. This cost reduction initiative resulted in a workforce
reduction of approximately 47 employees. All severance
expenses were paid in the third fiscal quarter of 2002.

Restructuring, severance, asset impairment and
goodwill expenses totaling approximately $2.2 million were
recognized during fiscal 2001. The Company recognized
approximately $1.3 million in restructuring charges for
Stingray and Fornova and incurred executive severance of
approximately $634,000, primarily for the termination of certain
executives. In addition, $228,000 of goodwill amortization was
recognized in fiscal 2001.

During fiscal 2001, as part of an ongoing effort
to optimize its corporate organizational structure and in
conjunction with continuing cost containment programs, the
Company restructured its Stingray business unit. The
restructuring was designed to integrate certain operations of
the Stingray division with other corporate functions, resulting
in estimated annual cost savings of $2.9 million. As part
of this reorganization, the Company recognized approximately
$1.1 million in charges related primarily to severance
costs associated with the resulting termination of approximately
50 employees as well as costs associated with the closure
of the Stingray facility in North Carolina. In relation to the
closure of this facility, an asset impairment charge was
recognized for the furniture and fixtures. The Stingray products
continue to be sold and supported by the Company.

Following a decision to discontinue the Fornova
project, the Company recognized a restructuring charge of
approximately $253,000 during fiscal 2001. Fornova, a venture
focused on developing technology that facilitated the exchange
of information among businesses over the internet, had been
pursuing obtaining third party expansion capital with an initial
investment commitment of $2.0 million from the Company. As
a result of the overall softening of the U.S. economy,
coupled with the slowing of third party investment in such
ventures, the project was abandoned resulting in the termination
of 12 employees. The Company recognized expenses of
approximately $1.6 million of product development costs
associated with the Fornova project during 2001.

Other Income (Expense),
Net.Other income (expense), net
consists of interest income earned on the Companys cash,
cash equivalents and short-term investments and foreign currency
transaction gains/ losses. Other expense, net was $75,000 in
fiscal 2003. Other income, net was $412,000 and
$1.1 million in fiscal 2002 and 2001, respectively. As a
percentage of total revenue, other income (expense), net was
(0.2%), 1.0% and

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1.9%, in the respective years. The other expense,
net incurred in fiscal 2003 was a result of reduced earnings
received from other income due to a net decrease in cash and
short-term investments coupled with foreign currency losses
realized from the settlement of certain foreign transactions.


Income Tax Expense.The Companys effective tax rates
were 11%, (39.5%) and 26.4%, for fiscal 2003, 2002 and 2001,
respectively. The difference in the rate for fiscal 2003
primarily relates to net operating loss utilization compared to
an increase in the deferred tax asset valuation allowance in
fiscal 2002, as a result of uncertainties associated with future
realization of the Companys deferred tax assets. Under
SFAS No. 109, deferred tax assets and liabilities are
determined based on differences 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. SFAS No. 109 provides
for the recognition of deferred tax assets if realization of
such assets is considered to be more likely than not. Based upon
the requirements of SFAS No. 109, the Company recognized an
additional $4.3 million valuation allowance against certain
deferred tax assets in fiscal 2002. The decrease in the rate for
fiscal 2002 primarily relates to an increase in the deferred tax
asset valuation allowance, as a result of uncertainties
associated with future realization.

As of September 30, 2003 and 2002, the
Company had net operating loss carryforwards for federal and
foreign income tax purposes of $659,000 and $2.8 million
and $7.8 million and $1.0 million, respectively. The
federal losses expire from 2007 to 2022.

Liquidity and Capital Resources

As of September 30, 2003, the Company had
cash, cash equivalents and short-term investments of
$32.7 million. Net cash provided by operating activities
was $4.0 million for fiscal 2003 compared to
$2.9 million used in operating activities in fiscal 2002.
The overall increase in cash provided by operating activities
was primarily attributable to the implementation of cost
containment programs, strong accounts receivable collections and
receipt of state and federal tax refunds. Net cash used in
operating activities was $2.9 million in fiscal 2002. The
decrease in cash in fiscal 2002 was attributable to an increase
in the net loss and a significant decrease in deferred revenue,
accounts payable and accrued expenses, when compared to fiscal
2001, offset by higher non-cash charges for depreciation and
amortization, as well as a decline in accounts receivable.

In fiscal 2003 and 2002, the Companys
investing activities consisted primarily of purchases of
equipment including those under capital leases and purchases and
maturities of short-term investments, resulting in net proceeds
of cash of $8.4 million and net use of cash of
$1.8 million, respectively. In fiscal 2003 the Company had
net maturities of $8.5 million in short-term investments
and purchased $37,000 in equipment. In fiscal 2002, the Company
purchased $581,000 in short-term investments and
$1.3 million in equipment.

Net cash used in financing activities in fiscal
2003 was $465,000 primarily as a result of the Company
repurchasing $1.2 million of its Common Stock, offset by
proceeds from the employee stock purchase plan and from the
exercise of stock options of $730,000. Net cash used in
financing activities in fiscal 2002 was $1.8 million
primarily as a result of the Company repurchasing
$2.2 million of its Common Stock offset by proceeds from
the employee stock purchase plan and from the exercise of stock
options. In September 2001, the Board of Directors authorized
the Company to repurchase up to an aggregate of
$5.0 million or 2.5 million shares of its Common
Stock. During the fiscal year ended September 30, 2003, the
Company repurchased 585,000 shares for $1.2 million at
prices ranging from $1.72 - $2.67 per share; issued 73,000
shares of treasury stock to satisfy stock of $125,000 purchased
under the Employee Stock Purchase Plan; and issued 298,000
shares of treasury stock to satisfy stock option exercises
having exercise prices ranging from $0.15 - $3.53. As the
market value of the Companys Common Stock was less than
the weighted-average cost of the treasury stock at the time of
issuance, the aforementioned issuances of treasury stock
resulted in charges being recorded to additional paid-in capital
as reflected in the accompanying consolidated statements of
stockholders equity. Since September 2001, the Company has
purchased approximately 1.4 million shares for
approximately $3.4 million at prices ranging from
$1.72 - $3.65 per share.

29



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##### Table of Contents



The Company believes that expected cash flows
from operations combined with existing cash and cash equivalents
and short-term investments will be sufficient to meet its cash
requirements for the twelve months following September 30,
2003. See Risk Factors under Item 1 Business.

In the future, the Companys capital
purchases will relate primarily to replacement of computer
equipment and are not expected to be significant. The Company
frequently evaluates strategic opportunities available to it and
may in the future pursue acquisitions of complementary
technologies, products or businesses. Any such acquisitions
would use cash, Common Stock or other securities, or a
combination of cash and securities. The Company does not
currently have any agreements for any such acquisitions, and has
entered into an agreement and plan of merger to be acquired by
Quovadx as discussed above.

The Company leases certain equipment and office
space through non-cancelable operating lease arrangements that
require future cash payments. The table below summarizes these
future obligations (in thousands):

|                        |  |       |       |           |  |           |       |           |  |               |       |  |  |   |    |  |  |   |   | 
|----------------------- |  | ----- | ----- | --------- |  | --------- | ----- | --------- |  | ------------- | ----- |  |  | - | -- |  |  | - | - | 
|                        |  |       |       | Less than |  |           |       |           |  |              
|Contractual Obligations |  | Total |       | 1 year    |  | 1-3 years |       | 4-5 years |  | After 5 years
|                        |  |       |       |           |  |           |       |           |  |              
|Operating leases        |  | $     | 3,092 |           |  | $         | 1,658 |           |  | $             | 1,343 |  |  | $ | 91 |  |  | $ |  | 

2004 Outlook

The world economy has experienced a significant
slowdown in the last few years. The financial services and
technology sectors, including telecommunications and computer/
software, which represent approximately 75% of the
Companys customer base, have been severely impacted.
Significant information technology spending constraints have
resulted, with fewer new product initiations expected in the
near term and spending limited to mission critical
functions. Additionally, the continued maturation of the
Companys core products coupled with greater focus by our
customers on competitive technologies, including Java as well as
others, have resulted in further uncertainties. Finally, while
interest in our new LEIF product has been encouraging, we expect
that 2004 LEIF sales will be modest as we continue to build a
foundation of customers. As a result, we expect revenues for
fiscal 2004 to be between $28 million to $30 million.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

The Companys market risk exposure is the
potential loss arising from changes in interest rates and its
impact on short-term investments and foreign currency exchange
rate fluctuations.

As of September 30, 2003, the Company had
short-term investments of $9.3 million, which are
classified as held to maturity and are carried at their
amortized cost. All investments have acquired maturities of less
than 360 days. Short-term investments consist primarily of
high credit and highly liquid corporate notes and commercial
paper. A reduction in overall interest rates would not have a
material affect on the fair value of the investments or the
financial position of the Company.

Exposure to variability in foreign currency
exchange rates is managed primarily through the use of natural
hedges, whereby funding obligations and assets are both managed
in the local currency. In addition, the Company will from time
to time enter into foreign currency exchange agreements to
manage its exposure arising from fluctuating exchange rates,
primarily in the Euro. The Company does not enter into any
derivative transactions for speculative purposes. The
sensitivity of earnings and cash flows to variability in
exchange rates is assessed by applying an appropriate range of
potential rate fluctuations to the Companys assets,
obligations and projected results of operations denominated in
foreign currencies. Based on the Companys overall foreign
currency rate exposure at September 30, 2003, movements in
foreign currency rates would not materially affect the financial
position of the Company. At September 30, 2003, there were
no outstanding forward exchange contracts. At September 30,
2002, the Company had outstanding short-term forward exchange
contracts to exchange Euros for U.S. dollars in the amount
of $1.5 million.

30



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##### Table of Contents








|        |                                                             
|------- | ------------------------------------------------------------
|Item 8. | Consolidated Financial Statements and
    Supplementary Data

See Item 15(a) for an index to the
consolidated financial statements and supplementary financial
information, which are attached hereto.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

The Company carried out an evaluation, under the
supervision and with the participation of management, including
our Chief Executive Officer, who is currently serving as interim
Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based on that evaluation, our
Chief Executive Officer concluded that our controls and
procedures were effective as of the end of the period covered by
this report. There were no changes in the Companys
internal control over financial reporting that occurred during
the period covered by this report that have materially affected,
or that are reasonably likely to materially affect, the
Companys internal control over financial reporting.

Disclosure controls and procedures are controls
and other procedures that are designed to ensure that
information required to be disclosed in the Companys
reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time period
specified in the SECs rules and forms. Disclosure controls
and procedures include controls and procedures designed to
ensure that information required to be disclosed in Company
reports filed under the Exchange Act is accumulated and
communicated to management, including the Companys Chief
Executive Officer or Chief Financial Officer, as appropriate, to
allow timely decisions regarding disclosure.

The Company has confidence in its internal
controls and procedures. Nevertheless, the Companys
management, including the Chief Executive Officer, does not
expect that our internal controls will prevent all errors or
intentional fraud. An internal control system, no matter how
well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of such internal
controls are met. Further, the design of an internal control
system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in
all internal control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances
of fraud within the Company, if any, have been detected.

31



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##### Table of Contents






PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The executive officers and directors of the
Company and their ages and positions as of November 21,
2003, are as follows:

|                      |  |     |    |          |  |                                                                           
|--------------------- |  | --- | -- | -------- |  | --------------------------------------------------------------------------
|Name                  |  | Age |    | Position
|                      |  |     |    |         
|Kathleen E. Brush     |  |     | 47 |          |  | President, Chief Executive Officer and Interim
    Chief Financial Officer
|Mary Kreidler Walker  |  |     | 34 |          |  | Vice President, Human Resources and Administration                        
|Michael R. Bundred    |  |     | 51 |          |  | Vice President Sales, EMEA                                                
|Thomas E. Gaunt       |  |     | 44 |          |  | Vice President Sales, America                                             
|Scott J. Lasica       |  |     | 31 |          |  | Director of Technical Services                                            
|Thomas M. Atwood(2)   |  |     | 53 |          |  | Director                                                                  
|Louis C. Cole(1)(2)   |  |     | 60 |          |  | Director                                                                  
|Margaret M. Norton(1) |  |     | 49 |          |  | Director                                                                  
|Marc H. Sternfeld(2)  |  |     | 56 |          |  | Director                                                                  



---



|    |                                     
|--- | ------------------------------------
|(1) | Member of the Compensation Committee
|   
|(2) | Member of the Audit Committee       

Kathleen E Brush,Ph.D., President and Chief Executive Officer of Rogue Wave
Software. Ms. Brush brings more than 25 years of
successful experience in the software industries in the United
States, Europe and Asia Pacific regions, and 15 years of
executive management including several turnaround assignments.
Ms. Brush first joined the Company in 1999 where she served
as Vice President of Marketing for the Company from 1999 to
2000. Ms. Brush most recently joined the Company in October
2002, as General Manager of the Companys Corvallis, Oregon
office and in January 2003 became the Companys Vice
President of Marketing and Engineering. Prior to joining the
Company again, she was a Strategy Consultant and Vice President
of Sales, Marketing, and Business Development for Stamps.com.
She also held executive level positions with Seagate Software,
Ceridian Corporation, Boole & Babbage (now part of BMC),
Websence Inc., and Computer Network Technology. Ms. Brush
has a Ph.D in management and international studies from The
Union Institute, an MBA from Florida Atlantic University, and a
BA in pre-law from University of Central Florida. Ms. Brush
has also authored and co-authored several articles and a book on
topics related to strategy, management and technology.

Mary Kreidler
Walker,Vice President, Human
Resources and Administration, has been with the Company since
August 1998. Between April 1999 and April 2002, Ms. Walker
served as the Companys Director of Human Resources. From
August 1998 to April 1999, Ms. Walker was the
Companys Human Resources Manager. Prior to joining Rogue
Wave, she was employed for four years at Population Services
International, where she last served as Director of Human
Resources and Administration. Ms. Walker received her BA
from George Mason University.

Michael R. Bundred,Vice President Sales for EMEA, has been with Rogue Wave Software
since February 1997 and served as Sales Director for the United
Kingdom operations until September 2001 when he was promoted to
Northern European Sales Director. In October 2002,
Mr. Bundred was appointed Vice President of Sales for EMEA
and is responsible for managing the Companys sales and
business activities throughout EMEA. Mr. Bundred has more
than 20 years of sales and business development experience,
and has held senior sales and marketing positions with
Tektronix, Lockheed Sanders and Metheus Corporation. He
graduated from the University of Surrey with a First
Class Honors degree in Engineering.

Thomas E. Gaunt,Vice President Sales for America, joined Rogue Wave in 2001 with
more than 20 years sales and business development
experience. From July 1999 until 2001, he was Vice President of
Business Development for Netpliance. Between June 1996 and July
1999, Mr. Gaunt served as Regional Vice

32



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President for Inprise Corporation. Prior to
joining Inprise Corporation, Mr. Gaunt founded several high
tech start-up companies and has held senior sales positions at
Macromedia, Inc. and Sage Software Inc. He graduated from the
University of Kansas with a BS in Computer Science.


Scott J. Lasica,Director of Technical Services, has been with the Company since
January 2001. Mr. Lasica served in various sales roles for
Rogue Wave between January 2001 and February 2003, when he was
appointed to his current position. From December 1999 to
December 2000, Mr. Lasica served as a Senior Lead Software
Engineer at Raindance, Inc. Prior to joining Raindance, Inc.,
Mr. Lasica was employed by Research Systems Inc. as a Lead
Software Engineer. Mr. Lasica received his BS in Computer
Science from the University of Colorado.

Thomas M. Atwood,Director, has served as a member of our Board of Directors since
October 1994. Since 1999, Mr. Atwood has served as the
Chief Executive Officer of Mission Broadband, a broadband media
services company. Prior to 1999, he served as President and
Chief Operations Officer of Site/X3, an internet professional
services firm and as Executive Vice President of emotion, Inc.,
a software company that was sold in early 1999 to Cinebase
Software. Mr. Atwood was Chief Executive Officer of
Cinebase Software, a software company, from June 1996 until June
1997. Prior to June 1996, he founded Object Design, a software
company, in 1988 and served as its Chairman through December
1995.

Louis C. Cole,Director, has served as a member of our Board of Directors since
July 1997. Between June 1995 and October 2000, Mr. Cole
served as Chairman of the Board, and from June 1998 to March
2001, Mr. Cole served as the President and Chief Executive
Officer, of Legato Systems, Inc., a network storage management
software company, at which time he retired. Prior to that, from
March 1987 until July 1988, Mr. Cole served as Executive
Vice President of Novell, Inc., a manufacturer of computer
networking equipment and software. Mr. Cole also serves as
a director of Peerless Systems Inc.

Margaret M. Norton,Director, has served as a member of our Board of Directors since
January 2000. Since February 2003, Ms. Norton has served as
the President and Chief Executive Officer of Mobiletec, Inc., a
software company that sells download server and provisioning
software to wireless carriers for over the air content services.
From September 2002 to February 2003, Ms. Norton was
employed as the Chief Marketing Officer of Mobiletec Inc. From
1998 to 2002, Ms. Norton was a self-employed consultant.
From 1994 to 1998, Ms. Norton served as the General
Manager, Senior Vice President of Octel Communications, which
was acquired by Lucent Technologies in 1997. Between 1988 and
1994, Ms. Norton served in various business development and
marketing roles for Octel Communications. Prior to joining Octel
Communications, Ms. Norton worked for Southern New England
Telephone Company for approximately 11 years, where she
last served as the Director of Marketing.

Marc H. Sternfeld,Director, has served as a member of our Board of Directors since
April 2001. Mr. Sternfeld joined Duetsche Bank in 1996
where he served as a Managing Director as well as head of its
Global Technology and Operations Division until his retirement
in December 2000. From 1987 to 1996, Mr. Sternfeld was
employed by Salomon Brothers as head of its Information
Technology Division and later as head of the Operations
Division. Prior to working for Salomon Brothers,
Mr. Sternfeld joined Andersen Consulting in 1975 as a
Senior Analyst and in 1982 became a Partner. As a partner he
lead the audit and tax practices in the Investment Banking
industry.

Directors Terms

All directors hold office until the next annual
meeting of stockholders or until their successors have been duly
elected and qualified.

Committees of the Board

Compensation Committee.The Compensation Committee is composed
of Ms. Norton and Mr. Cole. It is responsible for
continually reviewing the Companys compensation and
benefit programs and making recommendations regarding these
programs to the Board of Directors from time to time. During the
fiscal year ended September 30, 2003, the Compensation
Committee held one meeting.

33



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##### Table of Contents



Audit Committee.The
Audit Committee is composed of Mr. Atwood, Mr. Cole
and Mr. Sternfeld. None of the Audit Committee members are
employees of the Company. During the fiscal year ended
September 30, 2003, the Audit Committee held six meetings.

The Audit Committee meets with the independent
public accountants and management to assure that all are
carrying out their respective responsibilities. The Audit
Committee is responsible for selecting and appointing the
independent public accountants, and reviews the performance and
fees of the independent public accountants prior to appointing
them. The Audit Committee also meets with the independent public
accountants, without management present, to discuss the scope
and results of their audit work, including the adequacy of
internal controls and the quality of financial reporting. The
independent public accountants have full access to the Audit
Committee. An amended written charter for the Audit Committee
was approved by the Audit Committee effective October 31,
2003.

The Board of Directors has determined that Marc
H. Sternfeld qualifies as an audit committee financial expert
and is independent as that term is used in Item 7(d)
(3) (14) of Schedule 14A under the Securities Exchange
Act of 1934 (the 1934 Act).

Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the 1934 Act requires the
Companys directors and executive officers, and persons who
own more than ten percent of a registered class of the
Companys equity securities, to file with the SEC initial
reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company.
Officers, directors and greater than ten percent stockholders
are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.

To the Companys knowledge, based solely on
a review of the copies of such reports furnished to the Company
and written representations that no other reports were required,
during the fiscal year ended September 30, 2003, all
Section 16(a) filing requirements applicable to its
officers, directors and greater than ten percent beneficial
owners were timely filed, except as follows: Thomas M. Atwood,
Louis C. Cole, Margaret M. Norton and Marc H. Sternfeld were
each granted 3,500 options on January 9, 2003 and these
were not reported to the SEC in a timely manner.

Code of Ethics

The Company has adopted a Code of Ethics that
applies to our principal executive officer and principal
financial and accounting officer. The Code of Ethics is posted
on our website at www.roguewave.com and is filed as
Exhibit 14.1 to this Annual Report on Form 10-K. The
Company intends to satisfy the requirements under Item 10
of Form 8-K regarding disclosure of amendments to, or
waivers from, provisions of the Code of Ethics that apply to our
principal executive officer and principal financial and
accounting officer by posting such information on our website.
Copies of the Code of Ethics will be provided free of charge
upon written request directed to Investor Relations, Rogue Wave
Software, Inc., 5500 Flatiron Parkway, Boulder, Colorado 80301.

34



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##### Table of Contents






Item
11.Executive
Compensation

Summary Compensation Table

|                            |                                  |             |      |                     |  |            |         |              |  |        |        |        |  |  |         |         |  |   |         |        | 
|--------------------------- | -------------------------------- | ----------- | ---- | ------------------- |  | ---------- | ------- | ------------ |  | ------ | ------ | ------ |  |  | ------- | ------- |  | - | ------- | ------ | 
|                            |                                  |             |      |                     |  |            |         | Long-Term    |  |       
|                            |                                  |             |      |                     |  |            |         | Compensation |  |       
|                            |                                  |             |      |                     |  |            |         |             
|                            |                                  |             |      | Annual Compensation |  | Securities |         | All Other   
|                            |                                  |             |      |                     |  | Underlying |         | Compensation
|Name and Principal Position |                                  | Fiscal Year |      | Salary ($)          |  | Bonus ($)  |         | Options (#)  |  | ($)(1)
|                            |                                  |             |      |                     |  |            |         |              |  |       
|Kathleen E. Brush(2)        |                                  |             | 2003 |                     |  | $          | 225,602 |              |  | $      | 62,500 |        |  |  | 500,000 |         |  | $ | 49,217  |       
|                            | President and Chief Executive    |             |      | 2002                |  |            | $       |             |  |        | $      |       |  |  |         |        |  |   | $       |       | 
|                            | Officer                          |             |      | 2001                |  |            | $       | 24,585       |  |        | $      | 16,667 |  |  |         |        |  |   | $       |       | 
|John Floisand(3)            |                                  |             | 2003 |                     |  | $          | 140,295 |              |  | $      |       |        |  |  |        |         |  | $ | 371,576 |       
|                            | Former Chairman of the Board and |             |      | 2002                |  |            | $       | 307,257      |  |        | $      |       |  |  |         | 502,625 |  |   | $       | 24,052 | 
|                            | Chief Executive Officer          |             |      | 2001                |  |            | $       |             |  |        | $      |       |  |  |         |        |  |   | $       |       | 
|Mary Kreidler Walker(4)     |                                  |             | 2003 |                     |  | $          | 130,438 |              |  | $      | 5,000  |        |  |  |        |         |  | $ | 4,646   |       
|                            | Vice President, Human Resources  |             |      | 2002                |  |            | $       | 120,000      |  |        | $      |       |  |  |         | 100,000 |  |   | $       | 3,758  | 
|                            | and Administration               |             |      | 2001                |  |            | $       | 120,000      |  |        | $      | 25,000 |  |  |         | 75,650  |  |   | $       | 5,746  | 
|Michael R. Bundred(5)       |                                  |             | 2003 |                     |  | $          | 112,415 |              |  | $      | 64,411 |        |  |  |        |         |  | $ | 14,283  |       
|                            | Vice President Sales, EMEA       |             |      | 2002                |  |            | $       | 103,186      |  |        | $      | 59,046 |  |  |         | 20,000  |  |   | $       | 12,325 | 
|                            |                                  |             |      | 2001                |  |            | $       | 84,376       |  |        | $      | 87,850 |  |  |         | 5,000   |  |   | $       | 12,147 | 
|Thomas E. Gaunt(6)          |                                  |             | 2003 |                     |  | $          | 150,000 |              |  | $      | 69,474 |        |  |  |        |         |  | $ | 25,714  |       
|                            | Vice President Sales, America    |             |      | 2002                |  |            | $       | 150,000      |  |        | $      | 71,947 |  |  |         | 35,000  |  |   | $       | 8,900  | 
|                            |                                  |             |      | 2001                |  |            | $       | 25,000       |  |        | $      | 12,000 |  |  |         | 75,000  |  |   | $       |       | 
|Scott J. Lasica(7)          |                                  |             | 2003 |                     |  | $          | 110,000 |              |  | $      | 33,127 |        |  |  |        |         |  | $ | 4,309   |       
|                            | Director of Technical Services   |             |      | 2002                |  |            | $       | 110,000      |  |        | $      | 63,207 |  |  |         | 5,000   |  |   | $       | 3,305  | 
|                            |                                  |             |      | 2001                |  |            | $       | 71,702       |  |        | $      | 34,005 |  |  |         | 10,000  |  |   | $       |       | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of amounts received pursuant to the
    Companys profit sharing plan, 401(k) Company matching
    funds, pension contributions, relocation compensation, employee
    stock purchase plan proceeds and severance payments, as
    applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(2) | Ms. Brush was appointed Chief Executive
    Officer in February 2003. Ms. Brush first joined Rogue Wave
    in 1999, and she served as Vice President of Marketing until
    November 2000. Ms. Brush most recently joined Rogue Wave in
    October 2002 as General Manager of the Companys Corvallis,
    Oregon office until she was promoted to Vice President of
    Marketing and Engineering in January 2003. In fiscal 2003,
    Ms. Brush received 401(k) matching funds of $7,917,
    relocation compensation of $2,092 and a housing allowance of
    $39,208. Ms. Brush is currently being paid an annual salary
    of $250,000 with a potential performance bonus of $250,000.                                                                                                                                                                                                                                                                    
|   
|(3) | Mr. Floisand resigned from the Company in
    February 2003. In fiscal 2003, Mr. Floisand received 401(k)
    Company matching funds of $5,530, employee stock purchase plan
    proceeds of $9,046 and a housing and automobile allowance of
    $32,000. In fiscal 2002, Mr. Floisand received 401(k)
    Company matching funds of $5,841, employee stock purchase plan
    proceeds of $2,211 and a housing and automobile allowance of
    $16,000. In addition, on June 5, 2002, the Company entered
    into a $500,000 non-interest bearing loan with Mr. Floisand
    in connection with his relocation to Boulder, Colorado. The loan
    matures on the earlier of June 5, 2006 or 180 days
    after termination of employment with the Company.
    Mr. Floisands employment with the Company terminated
    on February 21, 2003, and he repaid the loan in March 2003.
    Upon Mr. Floisands resignation, he was paid $325,000
    in severance.
|   
|(4) | Ms. Walker received 401(k) Company matching
    funds $4,646, $3,722 and $4,913 in fiscal 2003, 2002 and 2001,
    respectively. Ms. Walker received employee stock purchase
    plan proceeds of $36 and $487 in fiscal 2002 and 2001,
    respectively. Ms. Walker also received profit sharing
    compensation of $346 in fiscal 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(5) | Mr. Bundred received an automobile allowance
    of $9,636, $8,088 and $7,971 for fiscal 2003, 2002 and 2001,
    respectively. Mr. Bundred received a pension contribution
    of $4,647, $4,237 and $4,176 for fiscal 2003, 2002 and 2001,
    respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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|    |                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6) | Mr. Gaunt received 401(k) Company matching
    funds of $7,698 and $6,824 for fiscal 2003 and 2002,
    respectively. Mr. Gaunt also received employee stock
    purchase plan proceeds of $18,016 and $2,076 for fiscal 2003 and
    2002, respectively.
|   
|(7) | Mr. Lasica received 401(k) Company matching
    funds of $4,309 and $3,068 for fiscal 2003 and 2002,
    respectively. Mr. Lasica also received employee stock
    purchase plan proceeds of $237 in fiscal 2002.                                        

Option Grants in Last Fiscal Year

The Company has granted incentive stock options
to its executive officers under the 1997 and 1996 Equity
Incentive Plans. As of September 30, 2003, options to
purchase a total of 1,758,523 and 418,893 shares were
outstanding under the 1997 and 1996 Equity Incentive Plans,
respectively, and options to purchase 4,785,891 and 1,372,035
shares remain available for grant thereunder, respectively. The
following table shows for the fiscal year ended
September 30, 2003, certain information regarding options
granted to and held at year-end by, the named executive officer:

|                  |  |                   |         |                            |  |           |      |                |  |                         |      |     |  |  |          |  |  |   |         |  |  |   |           | 
|----------------- |  | ----------------- | ------- | -------------------------- |  | --------- | ---- | -------------- |  | ----------------------- | ---- | --- |  |  | -------- |  |  | - | ------- |  |  | - | --------- | 
|                  |  |                   |         |                           
|                  |  | Individual Grants |         | Potential Realizable Value
|                  |  |                   |         | at Assumed Annual Rates   
|                  |  | Number of         |         | % of Total                 |  |           |      | of Stock Price
|                  |  | Securities        |         | Options                    |  | Exercise  |      |                |  | Appreciation for Option
|                  |  | Underlying        |         | Granted to                 |  | or Base   |      |                |  | Term ($)(4)            
|                  |  | Options           |         | Employees in               |  | Price     |      | Expiration     |  |                        
|Name              |  | Granted (#)(1)    |         | Fiscal Year(2)             |  | ($/Sh)(3) |      | Date           |  | 5%                      |      | 10%
|                  |  |                   |         |                            |  |           |      |                |  |                         |      |    
|Kathleen E. Brush |  |                   | 500,000 |                            |  |           | 85.3 | %              |  | $                       | 2.25 |     |  |  | 02/21/13 |  |  | $ | 707,506 |  |  | $ | 1,792,960 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Options shown were granted under the
    Companys 1997 Equity Incentive Plan. Options have a
    maximum term of 10 years measured from the date of grant,
    subject to earlier termination upon the optionees
    cessation of service with the Company. One hundred percent
    (100%) of any unvested options become immediately exercisable if
    there is a change in control.                                                                                                                                                                                                                                                                                                                                                        
|   
|(2) | Based on options to purchase 586,000 shares
    granted to employees in fiscal year 2003, including grants to
    the named executive officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(3) | The exercise price is equal to the fair market
    value of the Common Stock on the date of grant, based on the
    closing sales price as reported on the Nasdaq National Market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(4) | The potential realizable value is calculated
    based on the term of the option at its time of grant
    (10 years). It is calculated assuming that the stock price
    on the date of grant appreciates at the indicated annual rate,
    compounded annually for the entire term of the option and that
    the option is exercised and sold on the last day of its term for
    the appreciated stock price. These amounts represent certain
    assumed rates of appreciation only, in accordance with the rules
    of the SEC, and do not reflect the Companys estimate or
    projection of future stock price performance. Actual gains, if
    any, are dependent on the actual future performance of the
    Companys Common Stock.

Aggregated Option Exercises in Last Fiscal
Year, and September 30, 2003 Option Values

The following table sets forth information
concerning option exercises and unexercised options for the
fiscal year ended September 30, 2003, with respect to each
of the executive officers of the Company. The value realized
represents the difference between the deemed value of the Common
Stock on the date of exercise used by the Company for accounting
purposes and the exercise price of the option. The value of
unexercised in-the-money options was calculated based on the
difference between closing sale price of the Common Stock

36



---



##### Table of Contents



on The NASDAQ National Market on
September 30, 2003 of $4.19 per share and the exercise
price of the options.


|                   |  |                    |        |              |  |                      |        |                      |  |  |                   |  |  |  |                     | 
|------------------ |  | ------------------ | ------ | ------------ |  | -------------------- | ------ | -------------------- |  |  | ----------------- |  |  |  | ------------------- | 
|                   |  |                    |        |              |  | Number of Securities |        |                     
|                   |  |                    |        |              |  | Underlying           |        | Value of Unexercised
|                   |  |                    |        |              |  | Unexercised Options  |        | In-the-Money Options
|                   |  |                    |        |              |  | at FY-End (#)        |        | at FY-End ($)       
|                   |  | Shares Acquired on |        | Value        |  | Exercisable /        |        | Exercisable /       
|Name               |  | Exercise (#)       |        | Realized ($) |  | Unexercisable        |        | Unexercisable       
|                   |  |                    |        |              |  |                      |        |                     
|Kathleen E. Brush  |  |                    | 0      |              |  |                      | N / A  |                      |  |  | 165,000 / 375,000 |  |  |  | $242,500 / $727,500 | 
|Mary K. Walker     |  |                    | 49,999 |              |  | $                    | 54,166 |                      |  |  | 98,750 / 51,251   |  |  |  | $0 / $75,501        | 
|Michael R. Bundred |  |                    | 8,000  |              |  | $                    | 8,300  |                      |  |  | 43,438 / 7,500    |  |  |  | $5,355 / $10,525    | 
|Thomas E. Gaunt    |  |                    | 0      |              |  |                      | N / A  |                      |  |  | 95,625 / 14,375   |  |  |  | $80,863 / $13,737   | 
|Scott J. Lasica    |  |                    | 0      |              |  |                      | N / A  |                      |  |  | 12,500 / 2,500    |  |  |  | $8,815 / $3,775     | 

Compensation of Directors and Management
Agreements

The Companys non-employee directors receive
$1,500 for each Board of Directors quarterly meetings attended
in addition to being reimbursed for certain expenses in
connection with their attendance at Board and committee
meetings. In fiscal year ended September 30, 2003, the
total compensation paid to non-employee directors was $19,500.
On the date of each annual meeting of the stockholders of the
Company, each non-employee director who has continuously served
as a non-employee director since the last annual meeting will be
granted an option to purchase 3,500 shares of Common Stock, and
each other person who is then a non-employee director will be
granted an option to purchase a prorated number of shares of
Common Stock, based on the number of days such person has
continuously served as a non-employee director since the last
annual meeting. These options are fully vested when granted.

In September 2003, Rogue Wave entered into change
of control agreements with each of Ms. Brush,
Ms. Walker and Mr. Gaunt that provide that all
unvested options to purchase Rogue Wave Common Stock each holds
will vest upon a change of control.

In September 2003, Rogue Wave entered into
separation and release agreements with each of Ms. Brush,
Ms. Walker and Mr. Gaunt. These agreements provide
that, in the event the employment of the applicable individual
is terminated without cause within one year of a change of
control event, Rogue Wave will pay the individuals as follows:
(1) if Ms. Brush is terminated, she will receive
52 weeks base salary; (2) if Ms. Walker is
terminated, she will receive 39 weeks base salary; and
(3) if Mr. Gaunt is terminated, he will receive
39 weeks base salary. In addition, if Ms. Brush is
terminated, she will receive continuation of health, welfare and
similar benefits at the expense of Rogue Wave for the lesser of
one year or until she gains other employment and is entitled to
health benefits. If Ms. Walker or Mr. Gaunt are
terminated, each will receive continuation of health, welfare
and similar benefits at the expense of Rogue Wave for the lesser
of nine months or until she or he gains other employment and is
entitled to health benefits. The obligation to pay severance is
conditioned upon the named officers execution of an
agreement releasing any claims they may have against Rogue Wave.

Compensation Committee Interlocks and Insider
Participation

The Companys Compensation Committee
consists of Ms. Norton and Mr. Cole. No member of the
Compensation Committee of the Company serves as a member of the
board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of the
Companys Board of Directors or Compensation Committee.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The following table sets forth certain
information regarding the ownership of the Companys Common
Stock as of November 7, 2003, by: (i) each director
and nominee for director; (ii) each of the Named Executive
Officers identified in the Summary Compensation Table;
(iii) all executive officers and directors of

37



---



##### Table of Contents



the Company as a group; and (iv) all those
known by the Company to be beneficial owners of more than five
percent of its Common Stock.


|                                                                    |  |                              |         |                  |  |  |    | 
|------------------------------------------------------------------- |  | ---------------------------- | ------- | ---------------- |  |  | -- | 
|                                                                    |  |                             
|                                                                    |  | Shares Beneficially Owned(1)
|                                                                    |  |                             
|Principal Stockholders, Directors and Executive Officers(2)         |  | Number of Shares             |         | Percent of Total
|                                                                    |  |                              |         |                 
|Thomas Keffer(3)                                                    |  |                              | 962,260 |                  |  |  | 9% | 
|Paradigm Capital Management, Inc.(4)                                |  |                              | 869,400 |                  |  |  | 8% | 
|Dimensional Fund Advisors, Inc.(5)                                  |  |                              | 706,800 |                  |  |  | 7% | 
|Austin W. Marxe and David Greenhouse(6)                             |  |                              | 694,504 |                  |  |  | 7% | 
|William D. Witter, Inc.(7)                                          |  |                              | 685,108 |                  |  |  | 6% | 
|Kathleen E. Brush(8)                                                |  |                              | 231,892 |                  |  |  | 2% | 
|John Floisand(9)                                                    |  |                              |        |                  |  |  | *  | 
|Mary Kreidler Walker(10)                                            |  |                              | 113,446 |                  |  |  | 1% | 
|Thomas E. Gaunt(11)                                                 |  |                              | 122,297 |                  |  |  | 1% | 
|Michael R. Bundred(12)                                              |  |                              | 31,750  |                  |  |  | *  | 
|Scott J. Lasica(13)                                                 |  |                              | 3,453   |                  |  |  | *  | 
|Thomas M. Atwood(14)                                                |  |                              | 44,333  |                  |  |  | *  | 
|Louis C. Cole(15)                                                   |  |                              | 29,312  |                  |  |  | *  | 
|Margaret M. Norton(16)                                              |  |                              | 20,500  |                  |  |  | *  | 
|Marc H. Sternfeld(17)                                               |  |                              | 14,721  |                  |  |  | *  | 
|All executive officers and directors as a group
    (9 persons)(18) |  |                              | 611,704 |                  |  |  | 5% | 



---

*     Less than one
percent



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | This table is based upon information supplied by
    officers, directors and principal stockholders and
    Schedules 13D and 13G (if any) and Forms 4 filed with
    the SEC. Unless otherwise indicated in the footnotes to this
    table and subject to community property laws where applicable,
    the Company believes that each of the stockholders named in this
    table has sole voting and investment power with respect to the
    shares indicated as beneficially owned. Applicable percentages
    are based on 10,549,469 shares outstanding on November 7,
    2003, adjusted as required by rules promulgated by the SEC.         
|
| | (2) | Except as otherwise indicated, the address of
    each beneficial owner is c/o Rogue Wave Software, Inc., 5500
    Flatiron Parkway, Boulder, Colorado 80301.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (3) | Based on Form 4 filed by Thomas Keffer on
    July 25, 2003. Mr. Keffers address is 1201
    Country Club Road, Hood River, Oregon 97031.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (4) | Based on Schedule 13G/A filed by Paradigm
    Capital Management, Inc. on February 14, 2003. Paradigm
    Capital Management, Inc.s address is 9 Elk Street, Albany,
    NY 12007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (5) | Based on schedule 13G/A filed by Dimensional
    Fund Advisors, Inc. (Dimensional) on
    February 11, 2003. Dimensionals address is 1299 Ocean
    Avenue, 11th Floor, Santa Monica, California 90401.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (6) | Based on Schedule 13G/A filed by Austin W.
    Marxe and David M. Greenhouse on November 10, 2003.
    Mr. Marxes and Mr. Greehouses addresses
    are 153 East 53rd Street, 55th Floor, New York, New York 10022.
    Mr. Marxe and Mr. Greenhouse share voting and
    investment power over 138,874 shares of Common Stock owned by
    Special Situations Cayman Funds, L.P., 433,730 shares of Common
    Stock owned by Special Situations Fund III, L.P., 18,749 shares
    of Common Stock owned by Special Situations Technology Fund,
    L.P., and 103,151 shares of Common Stock owned by Special
    Situations Technology Fund II, L.P.
|
| | (7) | Based on Schedule 13G/A filed by William D.
    Witter, Inc. on January 3, 2003. William D. Witter,
    Inc.s address is 153 East 53rd Street, 55th Floor, New
    York, New York 10022.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | (8) | Includes 227,500 shares issuable pursuant to
    options exercisable within 60 days of November 7, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

38



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##### Table of Contents





| |     |                                                                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (9) | At the time of Mr. Floisands
    resignation, he held 528,042 options to purchase Common Stock.
    As a result of his resignation on February 21, 2003, Mr
    Floisands options expired unexercised on May 21, 2003.



|     |                                                                                                                                                                                                                                                                                                                        
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 112,501 shares issuable pursuant to
    options exercisable within 60 days of November 7, 2003.                                                                                                                                                                                                               
|    
|(11) | Includes 103,125 shares issuable pursuant to
    options exercisable within 60 days of November 7, 2003.                                                                                                                                                                                                               
|    
|(12) | Includes 31,750 shares issuable pursuant to
    options exercisable within 60 days of November 7, 2003.                                                                                                                                                                                                                
|    
|(13) | Includes 3,453 shares issuable pursuant to
    options exercisable within 60 days of November 7, 2003.                                                                                                                                                                                                                 
|    
|(14) | Includes 44,333 shares issuable pursuant to
    options exercisable within 60 days of November 7, 2003.                                                                                                                                                                                                                
|    
|(15) | Includes 29,312 shares issuable pursuant to
    options exercisable within 60 days of November 7, 2003.                                                                                                                                                                                                                
|    
|(16) | Includes 20,500 shares issuable pursuant to
    options exercisable within 60 days of November 7, 2003.                                                                                                                                                                                                                
|    
|(17) | Includes 14,721 shares issuable pursuant to
    options exercisable within 60 days of November 7, 2003.                                                                                                                                                                                                                
|    
|(18) | Includes 24,509 shares of Common Stock and
    587,195 shares of Common Stock that are subject to options
    exerciseable within 60 days of November 7, 2003, held
    by directors and executive officers of the Company and entities
    affiliated with such persons. See Note 8 and Notes 10
    through 17 above.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

In May 2003, the Company entered into a
Separation and Release Agreement with Merle A. Waterman, Vice
President and Chief Financial Officer, pursuant to which the
Company paid Mr. Waterman $100,000 in severance.

In February 2003, the Company entered into a
Separation and Release Agreement with John Floisand, Chairman of
the Board and Chief Executive Officer, pursuant to which the
Company paid Mr. Floisand $325,000 in severance.

The Company believes that all of the transactions
set forth above were made on terms no less favorable to the
Company than could have been otherwise obtained from
unaffiliated third parties.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

Audit Fees.The aggregate fees billed for
professional services rendered by KPMG LLP for fiscal 2003 and
2002 for the audit of the Companys annual financial
statements for 2003 and 2002 and for the review of the financial
statements included in the Companys Form 10-Q for
2003 and 2002 were $97,300 and $99,000, respectively.

Audit-Related Fees.The aggregate fees billed by KPMG
LLP for products and services provided by the principal
accountant, other than the services described above under
Audit Fees and Tax Fees for the fiscal
year ended September 30, 2003 and 2002 were $0 and $10,750.
These fees were primarily for the audit of the Companys
401(k) benefit plan, which has not been billed yet for 2003.

Tax Fees.The
aggregate fees billed by KPMG LLP for professional services
rendered by the principal accountant for tax compliance, tax
advice and tax planning for the fiscal year ended
September 30, 2003 and 2002 were $57,405 and $128,200,
respectively. These fees were primarily for tax return
preparation and consultations on the effects of various tax
issues.

The Audit Committee of the Companys Board
of Directors considered whether the provision of non-audit
services by the independent public accountants is compatible
with maintaining the accountants independence.

The Audit Committee of the Companys Board
of Directors considers each engagement of the independent
auditor on a case-by-case basis. The Audit Committee
pre-approved the performance of the services described above.

39



---



##### Table of Contents






PART IV






|         |                                                                                   
|-------- | ----------------------------------------------------------------------------------
|Item 15. | Exhibits, Consolidated Financial
    Statements, Schedules and Reports on Form 8-K

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

(1) Index To Consolidated Financial
Statements

|                                                    |  |      |     | 
|--------------------------------------------------- |  | ---- | --- | 
|                                                    |  | Page
|                                                    |  |     
|Report of KPMG LLP                                  |  |      | F-1 | 
|Consolidated Balance Sheets                         |  |      | F-2 | 
|Consolidated Statements of Operations               |  |      | F-3 | 
|Consolidated Statements of Stockholders
    Equity |  |      | F-4 | 
|Consolidated Statements of Cash Flows               |  |      | F-5 | 
|Notes to Consolidated Financial Statements          |  |      | F-6 | 

(b) Reports on Form 8-K:

Current report dated July 16, 2003,
furnished July 17, 2003, with respect to the companys
earnings release for the three and nine months ended
June 30, 2003.

(c) Exhibits:

See Exhibits listed under Exhibit Index.

(d) Financial Statement
Schedules:

None.

40



---



##### 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 to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                                           
| | ------------------------------------------
| | ROGUE WAVE SOFTWARE, INC.                 
|
| | /s/ KATHLEEN E. BRUSH                     
| |                                           
| | Kathleen E. Brush                         
| | President, Chief Executive Officer
    and
| | Interim Chief Financial Officer           

Date: November 21, 2003

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Kathleen E. Brush and each of them, as his or her true and
lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him or her and in his or
her name, place, and stead, in any and all capacities, to sign
any and all amendments to this Report on Form 10-K, and to
file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming
that all said attorneys-in-fact and agents, or any of them or
their or his substitute or substituted, may lawfully do or cause
to be done by virtue hereof.

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

|                                         |  |                                                                                                                                                                            |  |                   |  | 
|---------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | 
|                                         |  |                                                                                                                                                                            |  |                  
|Signature                                |  | Title                                                                                                                                                                      |  | Date             
|                                         |  |                                                                                                                                                                            |  |                  
|                                        
|/s/ KATHLEEN E. BRUSHKathleen E. Brush   |  | President, Chief Executive Officer and Interim
    Chief Financial Officer (Principal Executive Officer, Principal
    Financial Officer and Principal Accounting Officer) |  | November 21, 2003
|                                        
|/s/ THOMAS M. ATWOODThomas M. Atwood     |  | Director                                                                                                                                                                   |  | November 21, 2003
|                                        
|/s/ LOUIS C. COLELouis C. Cole           |  | Director                                                                                                                                                                   |  | November 21, 2003
|                                        
|/s/ MARGARET M. NORTONMargaret M. Norton |  | Director                                                                                                                                                                   |  | November 21, 2003
|                                        
|/s/ MARC H. STERNFELDMarc H. Sternfeld   |  | Director                                                                                                                                                                   |  | November 21, 2003

41



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors

Rogue Wave Software, Inc.:


We have audited the accompanying consolidated
balance sheets of Rogue Wave Software, Inc. and subsidiaries as
of September 30, 2003 and 2002, and the related
consolidated statements of operations and comprehensive income
(loss), stockholders equity and cash flows for each of the
years in the three-year period ended September 30, 2003.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
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 Rogue Wave Software, Inc.
and subsidiaries as of September 30, 2003 and 2002, and the
results of their operations and their cash flows for each of the
years in the three-year period ended September 30, 2003, in
conformity with accounting principles generally accepted in the
United States of America.



| |         
| | --------
| | KPMG LLP

Boulder, Colorado

October 28, 2003,


except as to Note 16, which is as of
November 12, 2003.


F-1



---



##### Table of Contents



ROGUE WAVE SOFTWARE, INC.

AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS

|                                                   |                                                                                                                                                                |                                            |     |        |        |  |       |         |        | 
|-------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --- | ------ | ------ |  | ----- | ------- | ------ | 
|                                                   |                                                                                                                                                                |                                           
|                                                   |                                                                                                                                                                | September 30,                             
|                                                   |                                                                                                                                                                |                                           
|                                                   |                                                                                                                                                                | 2003                                       |     | 2002  
|                                                   |                                                                                                                                                                |                                            |     |       
|                                                   |                                                                                                                                                                |                                           
|                                                   |                                                                                                                                                                | (in thousands, except                     
|                                                   |                                                                                                                                                                | per share data)                           
|ASSETS                                            
|Current assets:                                    |                                                                                                                                                                |                                            |     |        |        |  |       |        
|                                                   | Cash and cash equivalents                                                                                                                                      |                                            | $   | 23,470 |        |  | $     | 10,525  |       
|                                                   | Short-term investments                                                                                                                                         |                                            |     | 9,258  |        |  |       | 17,731  |       
|                                                   | Accounts receivable, net                                                                                                                                       |                                            |     | 6,162  |        |  |       | 8,144   |       
|                                                   | Prepaid expenses and other current assets                                                                                                                      |                                            |     | 444    |        |  |       | 641     |       
|                                                   | Deferred income taxes                                                                                                                                          |                                            |     |       |        |  |       | 1,416   |       
|                                                   |                                                                                                                                                                |                                            |     |        |        |  |       |        
|                                                   |                                                                                                                                                                | Total current assets                       |     |        | 39,334 |  |       |         | 38,457 | 
|Furniture, fixtures and equipment, net             |                                                                                                                                                                |                                            | 968 |        |        |  | 2,933 |        
|Intangibles, net                                   |                                                                                                                                                                |                                            |    |        |        |  | 467   |        
|Other assets, net                                  |                                                                                                                                                                |                                            | 396 |        |        |  | 1,085 |        
|                                                   |                                                                                                                                                                |                                            |     |        |        |  |       |        
|                                                   |                                                                                                                                                                | Total assets                               |     | $      | 40,698 |  |       | $       | 42,942 | 
|                                                   |                                                                                                                                                                |                                            |     |        |        |  |       |        
|                                                  
|LIABILITIES AND STOCKHOLDERS
    EQUITY          
|Current liabilities:                               |                                                                                                                                                                |                                            |     |        |        |  |       |        
|                                                   | Accounts payable                                                                                                                                               |                                            | $   | 80     |        |  | $     | 137     |       
|                                                   | Accrued expenses                                                                                                                                               |                                            |     | 3,087  |        |  |       | 4,961   |       
|                                                   | Deferred revenue                                                                                                                                               |                                            |     | 6,680  |        |  |       | 9,102   |       
|                                                   |                                                                                                                                                                |                                            |     |        |        |  |       |        
|                                                   |                                                                                                                                                                | Total liabilities                          |     |        | 9,847  |  |       |         | 14,200 | 
|Commitments and contingencies (notes 5
    and 13) |                                                                                                                                                                |                                            |     |        |        |  |       |        
|Stockholders equity:                              |                                                                                                                                                                |                                            |     |        |        |  |       |        
|                                                   | Preferred Stock, $0.01 par value. Authorized
    4,000 shares, none issued and outstanding                                                                     |                                            |     |       |        |  |       |        |       
|                                                   | Common stock, $0.001 par value. Authorized 35,000
    shares; Issued and outstanding 10,267 and 10,481 shares at
    September 30, 2003 and 2002, respectively |                                            |     | 10     |        |  |       | 10      |       
|                                                   | Additional paid-in capital                                                                                                                                     |                                            |     | 41,376 |        |  |       | 42,045  |       
|                                                   | Treasury stock at cost, 831 and 617 shares at
    September 30, 2003 and 2002, respectively                                                                    |                                            |     | (1,670 | )      |  |       | (1,652  | )     
|                                                   | Deferred compensation                                                                                                                                          |                                            |     |       |        |  |       | (449    | )     
|                                                   | Accumulated deficit                                                                                                                                            |                                            |     | (9,776 | )      |  |       | (11,325 | )     
|                                                   | Accumulated other comprehensive income                                                                                                                         |                                            |     | 911    |        |  |       | 113     |       
|                                                   |                                                                                                                                                                |                                            |     |        |        |  |       |        
|                                                   |                                                                                                                                                                | Total stockholders equity                 |     |        | 30,851 |  |       |         | 28,742 | 
|                                                   |                                                                                                                                                                |                                            |     |        |        |  |       |        
|                                                   |                                                                                                                                                                | Total liabilities and stockholders equity |     | $      | 40,698 |  |       | $       | 42,942 | 
|                                                   |                                                                                                                                                                |                                            |     |        |        |  |       |        

The accompanying notes to the consolidated
financial statements are an integral part of these statements.

F-2



---



##### Table of Contents



ROGUE WAVE SOFTWARE, INC.

AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF
OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)


|                                                                              |                                                    |                                          |        |        |        |      |        |        |        |   |        |        |        |  
|----------------------------------------------------------------------------- | -------------------------------------------------- | ---------------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                                                              |                                                    |                                         
|                                                                              |                                                    | Year Ended September 30,                
|                                                                              |                                                    |                                         
|                                                                              |                                                    | 2003                                     |        | 2002   |        | 2001
|                                                                              |                                                    |                                          |        |        |        |     
|                                                                              |                                                    |                                         
|                                                                              |                                                    | (in thousands,                          
|                                                                              |                                                    | except per share data)                  
|Revenue:                                                                      |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|                                                                              | License revenue                                    |                                          | $      | 19,041 |        |      | $      | 22,877 |        |   | $      | 30,549 |       
|                                                                              | Service and maintenance revenue                    |                                          |        | 13,867 |        |      |        | 20,422 |        |   |        | 27,104 |       
|                                                                              |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|                                                                              |                                                    | Total revenue                            |        |        | 32,908 |      |        |        | 43,299 |   |        |        | 57,653 |  
|                                                                              |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|Cost of revenue:                                                              |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|                                                                              | Cost of license revenue                            |                                          |        | 644    |        |      |        | 942    |        |   |        | 788    |       
|                                                                              | Cost of service and maintenance revenue            |                                          |        | 2,700  |        |      |        | 6,213  |        |   |        | 11,781 |       
|                                                                              |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|                                                                              |                                                    | Total cost of revenue                    |        |        | 3,344  |      |        |        | 7,155  |   |        |        | 12,569 |  
|                                                                              |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|                                                                              |                                                    | Gross profit                             |        |        | 29,564 |      |        |        | 36,144 |   |        |        | 45,084 |  
|                                                                              |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|Operating expenses:                                                           |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|                                                                              | Product development                                |                                          |        | 6,233  |        |      |        | 12,355 |        |   |        | 13,759 |       
|                                                                              | Sales and marketing                                |                                          |        | 13,560 |        |      |        | 22,739 |        |   |        | 25,140 |       
|                                                                              | General and administrative                         |                                          |        | 3,828  |        |      |        | 5,377  |        |   |        | 5,908  |       
|                                                                              | Restructuring, severance and goodwill amortization |                                          |        | 4,123  |        |      |        | 1,315  |        |   |        | 2,192  |       
|                                                                              |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|                                                                              |                                                    | Total operating expenses                 |        |        | 27,744 |      |        |        | 41,786 |   |        |        | 46,999 |  
|                                                                              |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|                                                                              |                                                    | Income (loss) from operations            |        |        | 1,820  |      |        |        | (5,642 | ) |        |        | (1,915 | )
|Other income (expense), net                                                   |                                                    |                                          | (75    | )      |        |      | 412    |        |        |   | 1,085  |       
|                                                                              |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|                                                                              |                                                    | Income (loss) before income taxes        |        |        | 1,745  |      |        |        | (5,230 | ) |        |        | (830   | )
|Income tax expense (benefit)                                                  |                                                    |                                          | 196    |        |        |      | 2,065  |        |        |   | (219   | )     
|                                                                              |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|                                                                              |                                                    | Net income (loss)                        |        | $      | 1,549  |      |        | $      | (7,295 | ) |        | $      | (611   | )
|                                                                              |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|Basic and diluted earnings (loss) per share                                   |                                                    | $                                        | 0.15   |        |        | $    | (0.68  | )      |        | $ | (0.06  | )     
|                                                                              |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|Weighted average shares outstanding used in basic
    per share calculation   |                                                    |                                          | 10,113 |        |        |      | 10,742 |        |        |   | 10,983 |       
|Weighted average shares outstanding used in
    diluted per share calculation |                                                    |                                          | 10,172 |        |        |      | 10,742 |        |        |   | 10,983 |       
|                                                                              |                                                    | Net income (loss)                        |        | $      | 1,549  |      |        | $      | (7,295 | ) |        | $      | (611   | )
|Other comprehensive income (loss):                                            |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|                                                                              |                                                    | Foreign currency translation gain (loss) |        |        | 798    |      |        |        | 379    |   |        |        | (166   | )
|                                                                              |                                                    |                                          |        |        |        |      |        |        |        |   |        |       
|                                                                              |                                                    | Total comprehensive income (loss)        |        | $      | 2,347  |      |        | $      | (6,916 | ) |        | $      | (777   | )
|                                                                              |                                                    |                                          |        |        |        |      |        |        |        |   |        |       

The accompanying notes to the consolidated
financial statements are an integral part of these statements.

F-3



---



##### Table of Contents



ROGUE WAVE SOFTWARE, INC.

AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                              |                                             |                |        |            |  |          |    |              |   |               |        |                |   |               |      |        |   |        |         |        |   |   |      |      |   |  |     |      |   |   |        |        |   |   |        |        |  
|----------------------------- | ------------------------------------------- | -------------- | ------ | ---------- |  | -------- | -- | ------------ | - | ------------- | ------ | -------------- | - | ------------- | ---- | ------ | - | ------ | ------- | ------ | - | - | ---- | ---- | - |  | --- | ---- | - | - | ------ | ------ | - | - | ------ | ------ | -
|                              |                                             |                |        |            |  |          |    |              |   |               |        |                |   |              
|                              |                                             | Common Stock   |        | Additional |  |          |    | Retained     |   | Accum. Other  |        | Treasury Stock |   | Total        
|                              |                                             |                |        | Paid-in    |  | Deferred |    | Earnings     |   | Comprehensive |        |                |   | Stockholders
|                              |                                             | Shares         |        | Amount     |  | Capital  |    | Compensation |   | (Deficit)     |        | Income (Loss)  |   | Shares        |      | Amount |   | Equity
|                              |                                             |                |        |            |  |          |    |              |   |               |        |                |   |               |      |        |   |       
|                              |                                             |               
|                              |                                             | (in thousands)
|Balance at October 1, 2000    |                                             |                | 10,909 |            |  | $        | 11 |              |   | $             | 40,801 |                |   | $             |     |        |   | $      | (3,419  | )      |   | $ | (100 | )    |   |  |    |      |   | $ |       |        |   | $ | 37,293 |       
|                              | Issuance of common stock, net               |                |        | 169        |  |          |    |             |   |               |        | 676            |   |               |      |       |   |        |         |       |   |   |      |     |   |  |     |     |   |   |        |       |   |   |        | 676    |  
|                              | Exercise of stock options                   |                |        | 12         |  |          |    |             |   |               |        | 10             |   |               |      |       |   |        |         |       |   |   |      |     |   |  |     |     |   |   |        |       |   |   |        | 10     |  
|                              | Tax benefit from stock option exercises     |                |        |           |  |          |    |             |   |               |        | 20             |   |               |      |       |   |        |         |       |   |   |      |     |   |  |     |     |   |   |        |       |   |   |        | 20     |  
|                              | Accelerated vesting of stock options        |                |        |           |  |          |    |             |   |               |        | 66             |   |               |      |       |   |        |         |       |   |   |      |     |   |  |     |     |   |   |        |       |   |   |        | 66     |  
|                              | Net loss                                    |                |        |           |  |          |    |             |   |               |        |               |   |               |      |       |   |        |         | (611   | ) |   |      |     |   |  |     |     |   |   |        |       |   |   |        | (611   | )
|                              | Foreign currency translation adjustment     |                |        |           |  |          |    |             |   |               |        |               |   |               |      |       |   |        |         |       |   |   |      | (166 | ) |  |     |     |   |   |        |       |   |   |        | (166   | )
|                              |                                             |                |        |            |  |          |    |              |   |               |        |                |   |               |      |        |   |        |         |        |   |   |      |      |   |  |     |      |   |   |        |        |   |   |        |       
|Balance at September 30, 2001 |                                             |                | 11,090 |            |  |          | 11 |              |   |               | 41,573 |                |   |               |     |        |   |        | (4,030  | )      |   |   | (266 | )    |   |  |    |      |   |   |       |        |   |   | 37,288 |       
|                              | Purchase of common stock                    |                |        |           |  |          |    | (1           | ) |               |        |               |   |               |      |       |   |        |         |       |   |   |      |     |   |  |     | 810  |   |   |        | (2,203 | ) |   |        | (2,204 | )
|                              | Issuance of common stock, net               |                |        |           |  |          |    |             |   |               |        | (129           | ) |               |      |       |   |        |         |       |   |   |      |     |   |  |     | (193 | ) |   |        | 551    |   |   |        | 422    |  
|                              | Exercise of stock options                   |                |        | 8          |  |          |    |             |   |               |        | 1              |   |               |      |       |   |        |         |       |   |   |      |     |   |  |     |     |   |   |        |       |   |   |        | 1      |  
|                              | Deferred stock based compensation           |                |        |           |  |          |    |             |   |               |        | 669            |   |               |      | (669   | ) |        |         |       |   |   |      |     |   |  |     |     |   |   |        |       |   |   |        |       |  
|                              | Amortization of deferred stock compensation |                |        |           |  |          |    |             |   |               |        | (69            | ) |               |      | 220    |   |        |         |       |   |   |      |     |   |  |     |     |   |   |        |       |   |   |        | 151    |  
|                              | Net loss                                    |                |        |           |  |          |    |             |   |               |        |               |   |               |      |       |   |        |         | (7,295 | ) |   |      |     |   |  |     |     |   |   |        |       |   |   |        | (7,295 | )
|                              | Foreign currency translation adjustment     |                |        |           |  |          |    |             |   |               |        |               |   |               |      |       |   |        |         |       |   |   |      | 379  |   |  |     |     |   |   |        |       |   |   |        | 379    |  
|                              |                                             |                |        |            |  |          |    |              |   |               |        |                |   |               |      |        |   |        |         |        |   |   |      |      |   |  |     |      |   |   |        |        |   |   |        |       
|Balance at September 30, 2002 |                                             |                | 11,098 |            |  |          | 10 |              |   |               | 42,045 |                |   |               | (449 | )      |   |        | (11,325 | )      |   |   | 113  |      |   |  | 617 |      |   |   | (1,652 | )      |   |   | 28,742 |       
|                              | Purchase of common stock                    |                |        |           |  |          |    |             |   |               |        |               |   |               |      |       |   |        |         |       |   |   |      |     |   |  |     | 585  |   |   |        | (1,195 | ) |   |        | (1,195 | )
|                              | Issuance of common stock, net               |                |        |           |  |          |    |             |   |               |        | (116           | ) |               |      |       |   |        |         |       |   |   |      |     |   |  |     | (73  | ) |   |        | 241    |   |   |        | 125    |  
|                              | Exercise of stock options                   |                |        |           |  |          |    |             |   |               |        | (195           | ) |               |      |       |   |        |         |       |   |   |      |     |   |  |     | (298 | ) |   |        | 800    |   |   |        | 605    |  
|                              | Tax benefit from stock option exercises     |                |        |           |  |          |    |             |   |               |        |               |   |               |      |       |   |        |         |       |   |   |      |     |   |  |     |     |   |   |        | 136    |   |   |        | 136    |  
|                              | Amortization of deferred stock compensation |                |        |           |  |          |    |             |   |               |        | (358           | ) |               |      | 449    |   |        |         |       |   |   |      |     |   |  |     |     |   |   |        |       |   |   |        | 91     |  
|                              | Net income                                  |                |        |           |  |          |    |             |   |               |        |               |   |               |      |       |   |        |         | 1,549  |   |   |      |     |   |  |     |     |   |   |        |       |   |   |        | 1,549  |  
|                              | Foreign currency translation adjustment     |                |        |           |  |          |    |             |   |               |        |               |   |               |      |       |   |        |         |       |   |   |      | 798  |   |  |     |     |   |   |        |       |   |   |        | 798    |  
|                              |                                             |                |        |            |  |          |    |              |   |               |        |                |   |               |      |        |   |        |         |        |   |   |      |      |   |  |     |      |   |   |        |        |   |   |        |       
|Balance at September 30, 2003 |                                             |                | 11,098 |            |  | $        | 10 |              |   | $             | 41,376 |                |   | $             |     |        |   | $      | (9,776  | )      |   | $ | 911  |      |   |  | 831 |      |   | $ | (1,670 | )      |   | $ | 30,851 |       
|                              |                                             |                |        |            |  |          |    |              |   |               |        |                |   |               |      |        |   |        |         |        |   |   |      |      |   |  |     |      |   |   |        |        |   |   |        |       

The accompanying notes to the consolidated
financial statements are an integral part of these statements.

F-4



---



##### Table of Contents



ROGUE WAVE SOFTWARE, INC.

AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                 |                                                                                                        |                                    |                                                   |                                                         |       |        |        |         |       |        |        |         |       |        |        |  
|---------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ---------------------------------- | ------------------------------------------------- | ------------------------------------------------------- | ----- | ------ | ------ | ------- | ----- | ------ | ------ | ------- | ----- | ------ | ------ | -
|                                                                 |                                                                                                        |                                   
|                                                                 |                                                                                                        | Year Ended September 30,          
|                                                                 |                                                                                                        |                                   
|                                                                 |                                                                                                        | 2003                               |                                                   | 2002                                                    |       | 2001  
|                                                                 |                                                                                                        |                                    |                                                   |                                                         |       |       
|                                                                 |                                                                                                        |                                   
|                                                                 |                                                                                                        | (in thousands)                    
|Cash flows provided by (used in) operating
    activities:       |                                                                                                        |                                    |                                                   |                                                         |       |        |        |         |       |        |        |        
|                                                                 | Net income (loss)                                                                                      |                                    | $                                                 | 1,549                                                   |       |        | $      | (7,295  | )     |        | $      | (611    | )    
|                                                                 | Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities: |                                    |                                                   |                                                         |       |        |        |         |       |        |        |         |      
|                                                                 |                                                                                                        | Depreciation and amortization      |                                                   |                                                         | 1,975 |        |        |         | 3,321 |        |        |         | 4,086 |       
|                                                                 |                                                                                                        | Tax benefit from stock options     |                                                   |                                                         | 136   |        |        |         |      |        |        |         | 20    |       
|                                                                 |                                                                                                        | Loss on disposal of equipment      |                                                   |                                                         | 62    |        |        |         | 59    |        |        |         | 99    |       
|                                                                 |                                                                                                        | Changes in assets and liabilities: |                                                   |                                                         |       |        |        |         |       |        |        |         |       |       
|                                                                 |                                                                                                        |                                    | Accounts receivable                               |                                                         |       | 2,176  |        |         |       | 4,581  |        |         |       | (920   | )     
|                                                                 |                                                                                                        |                                    | Prepaid expenses and other current assets         |                                                         |       | 176    |        |         |       | (87    | )      |         |       | 559    |       
|                                                                 |                                                                                                        |                                    | Deferred income taxes                             |                                                         |       | 1,416  |        |         |       | 2,596  |        |         |       | (1,266 | )     
|                                                                 |                                                                                                        |                                    | Other assets, net                                 |                                                         |       | 1,215  |        |         |       | (665   | )      |         |       | 205    |       
|                                                                 |                                                                                                        |                                    | Accounts payable and accrued expenses             |                                                         |       | (2,103 | )      |         |       | (2,747 | )      |         |       | 1,229  |       
|                                                                 |                                                                                                        |                                    | Amortization of deferred stock based compensation |                                                         |       | 91     |        |         |       | 151    |        |         |       |       |       
|                                                                 |                                                                                                        |                                    | Deferred revenue                                  |                                                         |       | (2,683 | )      |         |       | (2,848 | )      |         |       | 217    |       
|                                                                 |                                                                                                        |                                    |                                                   |                                                         |       |        |        |         |       |        |        |        
|                                                                 |                                                                                                        |                                    |                                                   | Net cash provided by (used in) operating
    activities |       |        | 4,010  |         |       |        | (2,934 | )       |       |        | 3,618  |  
|                                                                 |                                                                                                        |                                    |                                                   |                                                         |       |        |        |         |       |        |        |        
|Cash flows provided by (used in) investing
    activities:       |                                                                                                        |                                    |                                                   |                                                         |       |        |        |         |       |        |        |        
|                                                                 | Purchase of equipment                                                                                  |                                    |                                                   | (37                                                     | )     |        |        | (1,259  | )     |        |        | (3,364  | )    
|                                                                 | Maturities of short-term investments                                                                   |                                    |                                                   | 24,105                                                  |       |        |        | 22,714  |       |        |        | 54,694  |      
|                                                                 | Purchase of short-term investments                                                                     |                                    |                                                   | (15,632                                                 | )     |        |        | (23,295 | )     |        |        | (60,141 | )    
|                                                                 |                                                                                                        |                                    |                                                   |                                                         |       |        |        |         |       |        |        |        
|                                                                 |                                                                                                        |                                    |                                                   | Net cash provided by (used in) investing
    activities |       |        | 8,436  |         |       |        | (1,840 | )       |       |        | (8,811 | )
|                                                                 |                                                                                                        |                                    |                                                   |                                                         |       |        |        |         |       |        |        |        
|Cash flows provided by (used in) financing
    activities:       |                                                                                                        |                                    |                                                   |                                                         |       |        |        |         |       |        |        |        
|                                                                 | Treasury stock purchases                                                                               |                                    |                                                   | (1,195                                                  | )     |        |        | (2,204  | )     |        |        |        |      
|                                                                 | Proceeds from Employee Stock Purchase Plan                                                             |                                    |                                                   | 125                                                     |       |        |        | 422     |       |        |        | 406     |      
|                                                                 | Proceeds from exercise of stock options                                                                |                                    |                                                   | 605                                                     |       |        |        | 1       |       |        |        | 280     |      
|                                                                 |                                                                                                        |                                    |                                                   |                                                         |       |        |        |         |       |        |        |        
|                                                                 |                                                                                                        |                                    |                                                   | Net cash provided by (used in) financing
    activities |       |        | (465   | )       |       |        | (1,781 | )       |       |        | 686    |  
|                                                                 |                                                                                                        |                                    |                                                   |                                                         |       |        |        |         |       |        |        |        
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                                        |                                    | 964                                               |                                                         |       |        | 33     |         |       |        | (269   | )      
|                                                                 |                                                                                                        |                                    |                                                   |                                                         |       |        |        |         |       |        |        |        
|                                                                 |                                                                                                        |                                    |                                                   | Net change in cash and cash equivalents                 |       |        | 12,945 |         |       |        | (6,522 | )       |       |        | (4,776 | )
|Cash and cash equivalents at beginning of year                   |                                                                                                        |                                    | 10,525                                            |                                                         |       |        | 17,047 |         |       |        | 21,823 |        
|                                                                 |                                                                                                        |                                    |                                                   |                                                         |       |        |        |         |       |        |        |        
|Cash and cash equivalents at end of year                         |                                                                                                        | $                                  | 23,470                                            |                                                         |       | $      | 10,525 |         |       | $      | 17,047 |        
|                                                                 |                                                                                                        |                                    |                                                   |                                                         |       |        |        |         |       |        |        |        
|Supplemental disclosure of cash flow information:                |                                                                                                        |                                    |                                                   |                                                         |       |        |        |         |       |        |        |        
|                                                                 | Cash paid for interest                                                                                 |                                    | $                                                 |                                                        |       |        | $      | 4       |       |        | $      |        |      
|                                                                 | Cash paid for income taxes                                                                             |                                    |                                                   | 36                                                      |       |        |        | 313     |       |        |        | 302     |      

The accompanying notes to the consolidated
financial statements are an integral part of these statements.

F-5



---



##### Table of Contents



ROGUE WAVE SOFTWARE, INC.

AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|    |                                                                           
|--- | --------------------------------------------------------------------------
|(1) | Description of Business and Summary of
    Significant Accounting Policies



| |                        
| | -----------------------
| | Description of Business

Rogue Wave Software, Inc. and its subsidiaries
(the Company) are primarily engaged in the
development, sale and support of object-oriented software
solutions. The Company markets its products primarily through
its direct sales organization and, to a lesser extent, through
outside sales representatives and indirect channel partners to
business and government customers. The Companys customers
operate in many industry segments across geographically diverse
markets.



| |                      
| | ---------------------
| | Basis of Presentation

The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated.



| |                 
| | ----------------
| | Use of Estimates

The preparation of the financial statements in
conformity with accounting principles generally accepted in the
United States requires the Companys management to make
estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.



| |                             
| | ----------------------------
| | Foreign Currency Translation

The Company translates the assets and liabilities
of its non-U.S. functional currency subsidiaries into
dollars at the rates of exchange in effect at the end of the
period. Revenue and expenses are translated using the average
rate in effect during the period. Gains and losses from foreign
currency translation are recognized as other comprehensive
income or loss and are included as a component of
stockholders equity in the accompanying consolidated
balance sheets.



| |                                                
| | -----------------------------------------------
| | Cash Equivalents and Short-Term
    Investments

Cash equivalents consist of investments in highly
liquid investment instruments with maturities of less than three
months at the date of acquisition. Short-term investments
consist primarily of commercial paper and corporate notes with
acquired maturities of 360 days or less. As of
September 30, 2003, the Company had short-term investments
of $9.3 million, which are classified as held to maturity
and are carried at amortized cost. The market value of the
short-term investments at September 30, 2003 was
$9.3 million with an unrealized net loss of approximately
$2,000. Interest recognized in fiscal 2003 was $266,000.



| |                                      
| | -------------------------------------
| | Furniture, Fixtures and
    Equipment

Furniture, fixtures and equipment are stated at
cost. Maintenance and repairs are expensed as incurred.
Depreciation of furniture, fixtures and equipment is calculated
using the straight-line method over the estimated useful lives
of the assets, ranging from three to seven years.



| |                  
| | -----------------
| | Intangible Assets

Intangible assets include purchased software
rights and a covenant not to compete, and are amortized over
their respective estimated useful lives of three to ten years
using the straight-line method. 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 the asset held and used is
evaluated by a comparison of the carrying amount of the asset to
future net cash flows expected to be generated by the asset. If
the carrying amount of the asset is less than the future net
cash flows expected to be generated by the asset,

F-6



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##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

an impairment charge is recognized and measured
as the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Assets to be disposed of are
reported at the lower of their carrying amount or fair value
less cost to sell. The Company adopted SFAS No. 141,
Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets for the fiscal
year beginning October 1, 2002. As a result of adopting
SFAS No. 141 and 142, there was not a material impact on
the financial position, results of operations or cash flows as
the Companys goodwill was fully amortized as of the date
of adoption.



| |                           
| | --------------------------
| | Foreign Exchange Contracts

Effective October 1, 2000, the Company
adopted SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS
No. 137 and SFAS No. 138, which establishes accounting
and reporting standards for derivative instruments, including
foreign exchange forward contracts.

The Company enters into foreign exchange forward
contracts to hedge certain operational and balance sheet
exposures to loss as a result of changes in foreign currency
exchange rates, primarily related to intercompany royalty fees.
At inception, such forward contracts are designated as cash flow
hedges. In order to achieve hedge accounting, contracts must
reduce the foreign currency exchange rate risk otherwise
inherent in the amount and duration of the hedged exposure and
comply with the Companys established risk management
policies. The Company does not enter into any derivative
transactions for speculative purposes. Hedging contracts
generally mature within 60 to 425 days.

When hedging the intercompany receivable
exposure, the effective portion of the derivatives gain or
loss is initially reported as a component of other comprehensive
income and subsequently reclassified into earnings in the period
in which earnings are impacted by the variability of the cash
flow of the hedged item. The ineffective portion of the hedge is
reported in current period earnings immediately. Realized gains
and losses on either the settlement of foreign exchange forward
contracts or the ineffective portion of the hedges are recorded
in Other income (expense), net in the accompanying
statements of operations.

There were no foreign exchange contracts
outstanding at September 30, 2003. The notional amount of
foreign exchange contracts outstanding at September 30,
2002 was $1.5 million with a derivative related fair value
of $9,000. The fair value of the forward contracts was estimated
based on quoted exchange rates at September 30, 2002. The
effective portion, or unrealized gain, related to the
outstanding contracts was $6,000 at September 30, 2002.
Also during the fiscal year ended September 30, 2003,
certain foreign currency contracts were rolled over at the
maturity date, which resulted in a total realized net loss of
$18,000. During the fiscal year ended September 30, 2002,
certain foreign currency contracts matured resulting in a
realized net gain of $62,000.



| |                    
| | -------------------
| | Revenue Recognition

The Company derives revenue from licensing its
software products and providing related maintenance and support,
and training and consulting services. License revenue is
recognized according to the criteria of SOP No. 97-2,
Software Revenue Recognition, as amended by SOP
No. 98-9. Revenue is recognized upon execution of a license
agreement or signed written contract with fixed or determinable
fees, upon shipment or electronic delivery of the product and
managements determination that collection of the resulting
receivable is probable. The Company considers fees related to
arrangements with payment terms extending beyond twelve months
not to be fixed or determinable. If the fee is not fixed or
determinable, revenue is recognized as payments become due from
the customer. Maintenance and service revenue includes
previously deferred maintenance revenue that has been recognized
ratably over the maintenance period. Service revenue, including
training and consulting services, is recognized as services are
performed.

F-7



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##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Revenue from reseller arrangements is recognized
on a sell through basis, that is, when the Company obtains
persuasive evidence that the reseller has sold the products to
an end-use customer. In instances where the Company enters into
customized software consulting contracts, the fees are
recognized using the percentage of completion method of
accounting in accordance with SOP No. 81-1,
Accounting for Performance of Construction-Type and
Certain Product-Type Contracts. The Company generally
provides a 30 day right of return policy for software
sales. The allowance for returns has been established based upon
historical rates of return and was $363,000 and $395,000 at
September 30, 2003 and 2002, respectively.

The deferred revenue balance at
September 30, 2003 and 2002 was $6.7 million and
$9.1 million, respectively, and represents revenue
attributable to support and maintenance. Consistent with
paragraphs 56-62 of SOP 97-2 and SOP 98-9,
support and maintenance is considered part of
post-contract customer support, and in accordance
with SOP 97-2, is initially deferred and amortized ratably
over the life of the contract or term of the agreement.



| |                  
| | -----------------
| | Advertising Costs

Advertising costs are charged to expense when
incurred and amounted to $471,000, $1.5 million, and
$1.8 million in the years ended September 31, 2003,
2002 and 2001, respectively.



| |                             
| | ----------------------------
| | Concentration of Credit Risk

Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally
of cash equivalents, short-term investments and accounts
receivable. The counter parties to the agreements relating to
the Companys cash equivalents and short-term investments
consist of various corporations and financial institutions of
high credit standing. The Companys receivables are derived
primarily from the sales of software products and services to
customers in diversified industries as well as distributors in
the U.S. and foreign markets. As of September 30, 2003
and 2002, the accounts receivable balance was $6.8 million
and $9.4 million, respectively, before allowance for
doubtful accounts and sales returns of $658,000 and
$1.3 million, respectively. At September 30, 2003,
there were no customers that accounted for 10% or more of the
combined accounts receivable balance. In addition, there were no
customers that accounted for 10% or more of total revenue for
the years ended September 30, 2003 or 2001. One customer
accounted for 11% of the consolidated gross accounts receivable
balance and 30% of the European gross accounts receivable
balance at September 30, 2002. This customer also accounted
for 2% and 10% of the consolidated revenue and European revenue
for the year ended September 30, 2002, respectively.
International revenue was approximately 30%, 28% and 30% of the
Companys total revenue for the years ended
September 30, 2003, 2002 and 2001, respectively. The
Company performs ongoing credit evaluations of its
customers financial condition and limits the amount of
credit extended when deemed necessary, but the Company generally
does not require collateral to support credit granted to
customers. The Company has recorded an allowance for doubtful
accounts of $296,000 and $897,000 at September 30, 2003 and
2002, respectively.



| |                         
| | ------------------------
| | Research and Development

Software development costs have been accounted
for in accordance with SFAS No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. Under the standard, the capitalization of
software development costs begins upon the establishment of
technological feasibility, subject to net realizable value
considerations. To date, such capitalizable costs have been de
minimis. Accordingly, the Company has charged all such costs to
product development expense.

F-8



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##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                
| | -----------------------------------------------
| | Basic and Diluted Earnings (Loss) Per
    Share

Basic earnings (loss) per share is computed on
the basis of the weighted average number of common shares
outstanding. Diluted earnings (loss) per share is computed on
the basis of the weighted average number of common shares
outstanding plus the effect of outstanding stock options using
the treasury stock method, unless the impact is
anti-dilutive. The difference between basic and diluted earnings
per share is due to the effect of outstanding stock options.
Diluted earnings per share include 59,000 shares of dilutive
stock options for fiscal 2003. As a result of the net loss
incurred during the fiscal years ending September 30, 2002
and 2001, all options are anti-dilutive and, accordingly, the
number of shares used in computing the basic and diluted shares
is the same. During the year ended September 30, 2002, and
2001, options to acquire 43,000 and 59,000 shares, respectively,
calculated using the treasury stock method, were
excluded from the calculation because of their anti-dilutive
effect. The Company had approximately 2.2 million and
5.2 million options outstanding at September 30, 2003
and 2002, respectively, of which approximately 1.3 million
and 62,000, respectively, were considered in the
money.

Calculation of basic and diluted earnings (loss)
per share is as follows (in thousands, except per share data):

|             |                                                                                                                    |                          |   |        |   |      |   |        |   |  |   |        |  
|------------ | ------------------------------------------------------------------------------------------------------------------ | ------------------------ | - | ------ | - | ---- | - | ------ | - |  | - | ------ | -
|             |                                                                                                                    |                         
|             |                                                                                                                    | Year Ended September 30,
|             |                                                                                                                    |                         
|             |                                                                                                                    | 2003                     |   | 2002   |   | 2001
|             |                                                                                                                    |                          |   |        |   |     
|Numerator:   |                                                                                                                    |                          |   |        |   |      |   |        |   |  |   |       
|             | Net income (loss)                                                                                                  |                          | $ | 1,549  |   |      | $ | (7,295 | ) |  | $ | (611   | )
|             |                                                                                                                    |                          |   |        |   |      |   |        |   |  |   |       
|Denominator: |                                                                                                                    |                          |   |        |   |      |   |        |   |  |   |       
|             | Common shares outstanding at beginning of year                                                                     |                          |   | 10,481 |   |      |   | 11,090 |   |  |   | 10,909 |  
|             | Weighted average common shares issued during the
    year                                                          |                          |   | 101    |   |      |   | 74     |   |  |   | 74     |  
|             | Weighted average common shares purchased during
    the year                                                       |                          |   | (469   | ) |      |   | (422   | ) |  |   |       |  
|             |                                                                                                                    |                          |   |        |   |      |   |        |   |  |   |       
|             | Denominator for basic earnings (loss) per
    share  weighted average shares                                      |                          |   | 10,113 |   |      |   | 10,742 |   |  |   | 10,983 |  
|             |                                                                                                                    |                          |   |        |   |      |   |        |   |  |   |       
|             | Incremental common shares attributable to shares
    issuable under equity incentive plans (treasury stock method) |                          |   | 59     |   |      |   |       |   |  |   |       |  
|             |                                                                                                                    |                          |   |        |   |      |   |        |   |  |   |       
|             | Denominator for diluted earnings (loss) per
    share  weighted average shares                                    |                          |   | 10,172 |   |      |   | 10,742 |   |  |   | 10,983 |  
|             |                                                                                                                    |                          |   |        |   |      |   |        |   |  |   |       
|             | Basic and diluted earnings (loss) per share                                                                        |                          | $ | 0.15   |   |      | $ | (0.68  | ) |  | $ | (0.06  | )
|             |                                                                                                                    |                          |   |        |   |      |   |        |   |  |   |       



| |                                            
| | -------------------------------------------
| | Accounting for Stock-Based
    Compensation

The Company has stock option plans for employees
and directors that provide for the granting of incentive and
nonqualified stock options. Under the plans, options are granted
at an exercise price equal to the fair value of the underlying
Common Stock on the date of grant, and may be exercisable for up
to 10 years. The Company applies APB No. 25 and
related interpretations in accounting for its stock option
plans, as permitted under SFAS No. 123, Accounting
for Stock-Based Compensation and SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure. Accordingly, no compensation
cost has been recognized for its stock option plans. Assuming
the compensation cost for the Companys option plans had
been determined based on the fair value at the grant dates for
awards under those plans consistent

F-9



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##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

with the fair-value methodology of SFAS
No. 123, the Companys net income (loss) and earnings
(loss) per share would have been reduced to the following
amounts (in thousands, except per share data):

|                                                                                                                                      |  |                          |       |      |  |      |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                                      |  |                         
|                                                                                                                                      |  | Year Ended September 30,
|                                                                                                                                      |  |                         
|                                                                                                                                      |  | 2003                     |       | 2002 |  | 2001
|                                                                                                                                      |  |                          |       |      |  |     
|Reported net income (loss)                                                                                                            |  | $                        | 1,549 |      |  | $    | (7,295 | ) |  | $ | (611   | )
|Stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    related tax effects |  |                          | (908  | )    |  |      | (2,682 | ) |  |   | (3,276 | )
|                                                                                                                                      |  |                          |       |      |  |      |        |   |  |   |        |  
|Pro forma net income (loss)                                                                                                           |  | $                        | 641   |      |  | $    | (9,977 | ) |  | $ | (3,887 | )
|                                                                                                                                      |  |                          |       |      |  |      |        |   |  |   |        |  
|Reported basic and diluted earnings (loss) per
    share                                                                              |  | $                        | 0.15  |      |  | $    | (0.68  | ) |  | $ | (0.06  | )
|                                                                                                                                      |  |                          |       |      |  |      |        |   |  |   |        |  
|Pro forma basic and diluted earnings (loss) per
    share                                                                             |  | $                        | 0.06  |      |  | $    | (0.93  | ) |  | $ | (0.35  | )
|                                                                                                                                      |  |                          |       |      |  |      |        |   |  |   |        |  

The fair value of each stock option is estimated
as of the grant date using the Black-Scholes option-pricing
model. The assumptions used are as follows:

|              |  |               |      |                  |  |                |   |                |  |  |   |   |  |  |    |  
|------------- |  | ------------- | ---- | ---------------- |  | -------------- | - | -------------- |  |  | - | - |  |  | -- | -
|              |  | Risk Free     |      | Expected Life of |  | Expected       |   | Expected Stock
|Year of Grant |  | Interest Rate |      | Option in Years  |  | Dividend Yield |   | Volatility    
|              |  |               |      |                  |  |                |   |               
|FY 2003       |  |               | 3.13 | %                |  |                | 5 |                |  |  | 0 | % |  |  | 76 | %
|FY 2002       |  |               | 3.13 | %                |  |                | 5 |                |  |  | 0 | % |  |  | 55 | %
|FY 2001       |  |               | 3.61 | %                |  |                | 5 |                |  |  | 0 | % |  |  | 74 | %

The following table summarizes stock option
activity (in thousands, except per share data):

|                                          |           |        |       |                 |   |   |      |      | 
|----------------------------------------- | --------- | ------ | ----- | --------------- | - | - | ---- | ---- | 
|                                          |           |        |       | Weighted avg.  
|                                          |           | Shares |       | price per share
|                                          |           |        |       |                
|Outstanding options at October 1, 2000    |           |        | 3,404 |                 |   | $ | 6.39 |     
|                                          | Granted   |        |       | 2,313           |   |   |      | 4.94 | 
|                                          | Exercised |        |       | (12             | ) |   |      | 0.94 | 
|                                          | Canceled  |        |       | (1,791          | ) |   |      | 6.07 | 
|                                          |           |        |       |                 |   |   |      |     
|Outstanding options at September 30, 2001 |           |        | 3,914 |                 |   |   | 5.57 |     
|                                          | Granted   |        |       | 2,487           |   |   |      | 2.99 | 
|                                          | Exercised |        |       | (8              | ) |   |      | 0.15 | 
|                                          | Canceled  |        |       | (1,160          | ) |   |      | 4.98 | 
|                                          |           |        |       |                 |   |   |      |     
|Outstanding options at September 30, 2002 |           |        | 5,233 |                 |   |   | 4.48 |     
|                                          | Granted   |        |       | 781             |   |   |      | 2.22 | 
|                                          | Exercised |        |       | (299            | ) |   |      | 2.49 | 
|                                          | Canceled  |        |       | (3,538          | ) |   |      | 4.41 | 
|                                          |           |        |       |                 |   |   |      |     
|Outstanding options at September 30, 2003 |           |        | 2,177 |                 |   | $ | 4.12 |     
|                                          |           |        |       |                 |   |   |      |     

F-10



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##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Options vested and exercisable were 1,391,625,
2,771,131 and 1,815,999 at September 30, 2003, 2002 and
2001, respectively. For various price ranges, weighted average
characteristics of outstanding stock options at
September 30, 2003 were as follows (number of shares in
thousands):

|               |  |                     |       |                     |  |            |     |        |  |            |      |  |  |  |       |  |  |   |      | 
|-------------- |  | ------------------- | ----- | ------------------- |  | ---------- | --- | ------ |  | ---------- | ---- |  |  |  | ----- |  |  | - | ---- | 
|               |  |                     |       |                    
|               |  | Outstanding Options |       | Exercisable Options
|               |  |                     |       |                    
|               |  |                     |       | Remaining           |  | Weighted   |     |        |  | Weighted  
|Exercise Price |  | Shares              |       | life (years)        |  | avg. price |     | Shares |  | avg. price
|               |  |                     |       |                     |  |            |     |        |  |           
|$0.15-$2.25    |  |                     | 558   |                     |  |            | 9.0 |        |  | $          | 2.14 |  |  |  | 168   |  |  | $ | 1.93 | 
|$2.28-$3.13    |  |                     | 561   |                     |  |            | 8.7 |        |  | $          | 2.80 |  |  |  | 191   |  |  | $ | 2.87 | 
|$3.16-$5.44    |  |                     | 838   |                     |  |            | 6.9 |        |  | $          | 4.83 |  |  |  | 818   |  |  | $ | 4.86 | 
|$5.63-$17.00   |  |                     | 220   |                     |  |            | 4.9 |        |  | $          | 9.76 |  |  |  | 215   |  |  | $ | 9.79 | 
|               |  |                     |       |                     |  |            |     |        |  |            |      |  |  |  |       |  |  |   |      | 
|               |  |                     | 2,177 |                     |  |            | 7.7 |        |  | $          | 4.12 |  |  |  | 1,392 |  |  | $ | 5.00 | 
|               |  |                     |       |                     |  |            |     |        |  |            |      |  |  |  |       |  |  |   |      | 



| |                            
| | ---------------------------
| | Accounting for Income Taxes

The Company uses the asset and liability method
of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. A valuation
allowance is recorded to reduce the carrying amount of deferred
tax assets to an amount where realization is considered more
likely than not.



|    |                                                                                     
|--- | ------------------------------------------------------------------------------------
|(2) | Restructuring, Severance, Relocation, Asset
    Impairment and Goodwill Amortization



| |              
| | -------------
| | 2003 Activity



| |                                 
| | --------------------------------
| | First Quarter 2003 Restructuring

During the first quarter of fiscal 2003, the
Company initiated several actions designed to mitigate the
adverse financial impact attributable to the overall weakness in
the world economy and the maturing of its SourcePro product
line. The Company implemented several cost reduction initiatives
to achieve operating efficiencies, including the consolidation
of facilities in the U.S. and international operations.
Consolidation activities included termination of employees at
the Companys Corvallis, Oregon facility and the
discontinuance of Large Scale Object Solutions development
operations in Southboro, Massachusetts as a result of
anticipated reduced market demand for LSOS products. As a part
of the consolidation of facilities, during the three months
ended December 31, 2002, the Company recognized a
restructuring charge of $1.7 million, related primarily to
severance costs associated with the termination of approximately
75 employees as well as certain site closure costs, including
those related to facility lease costs. The Company revised its
estimate of the initial restructuring costs by $4,000 in the
second quarter of fiscal 2003, as actual severance costs were
slightly less than originally anticipated. These actions are
expected to reduce future operating expenses by approximately
$11.0 million. The remaining liability associated with
these actions of $36,000 at September 30, 2003 is expected
to be paid by December 31, 2003.

F-11



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##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes restructuring
costs by primary component and related reserve at
September 30, 2003 (in thousands):

|                                                                             |  |             |        |         |  |       |      |       |  |   |     |   |  |   |        |  
|---------------------------------------------------------------------------- |  | ----------- | ------ | ------- |  | ----- | ---- | ----- |  | - | --- | - |  | - | ------ | -
|                                                                             |  | Employee    |        | Site    |  |       |      |      
|                                                                             |  | Severance & |        | Closure |  |       |      |      
|                                                                             |  | Related     |        | Costs   |  | Other |      | Total
|                                                                             |  |             |        |         |  |       |      |      
|Consolidation costs incurred in the three months
    ended December 31, 2002 |  | $           | 1,239  |         |  | $     | 404  |       |  | $ | 70  |   |  | $ | 1,713  |  
|Cash paid                                                                    |  |             | (1,231 | )       |  |       | (368 | )     |  |   | (74 | ) |  |   | (1,673 | )
|Adjustments for revised estimates                                            |  |             | (8     | )       |  |       |     |       |  |   | 4   |   |  |   | (4     | )
|                                                                             |  |             |        |         |  |       |      |       |  |   |     |   |  |   |        |  
|Balance at September 30, 2003                                                |  | $           |       |         |  | $     | 36   |       |  | $ |    |   |  | $ | 36     |  
|                                                                             |  |             |        |         |  |       |      |       |  |   |     |   |  |   |        |  



| |                                                   
| | --------------------------------------------------
| | Second Quarter 2003 Cost Reduction
    Initiatives

In the second quarter of fiscal 2003, the Company
implemented additional cost reduction measures that resulted in
workforce reductions of 24 employees. As a result of these
actions, the Company recognized a severance charge of
approximately $374,000. The Company revised its original
estimate of the severance costs by $3,000 in the third quarter
of fiscal 2003, as actual severance costs were less than
anticipated. These actions are expected to reduce future
operating expenses by approximately $2.4 million. As of
September 30, 2003, all amounts due under employee
severance obligations resulting from the second quarter 2003
cost reduction initiative had been paid.

The following table summarizes restructuring
costs at September 30, 2003 (in thousands):

|                                                                                   |  |             |      |  
|---------------------------------------------------------------------------------- |  | ----------- | ---- | -
|                                                                                   |  | Employee   
|                                                                                   |  | Severance &
|                                                                                   |  | Related    
|                                                                                   |  |            
|Employee reduction costs incurred during the
    three months ended March 31, 2003 |  | $           | 374  |  
|Cash paid                                                                          |  |             | (371 | )
|Adjustments for revised estimates                                                  |  |             | (3   | )
|                                                                                   |  |             |      |  
|Balance at September 30, 2003                                                      |  | $           |     |  
|                                                                                   |  |             |      |  



| |                                             
| | --------------------------------------------
| | Third Quarter 2003 Strategic
    Realignment

In response to the continuing sluggish economy
and a change in product strategy, the Company realigned certain
U.S. operations and closed its Sydney, Australia and
Amsterdam, Netherlands offices in the third quarter of fiscal
2003. As a result of these cost reduction actions, the Company
recognized a restructuring charge of approximately
$1.4 million, related primarily to severance costs
associated with the termination of approximately 39 employees as
well as certain site closure costs, including those related to
facility lease costs. These actions are expected to reduce
future operating expenses by approximately $3.9 million.
The remaining accrued balance of $502,000 at September 30,
2003, is expected to be paid by March 31, 2004.

F-12



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##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes restructuring
costs by primary component and the related reserve at
September 30, 2003 (in thousands):

|                                                                         |  |             |      |         |  |       |     |       |  |   |     |   |  |   |       |  
|------------------------------------------------------------------------ |  | ----------- | ---- | ------- |  | ----- | --- | ----- |  | - | --- | - |  | - | ----- | -
|                                                                         |  | Employee    |      | Site    |  |       |     |      
|                                                                         |  | Severance & |      | Closure |  |       |     |      
|                                                                         |  | Related     |      | Costs   |  | Other |     | Total
|                                                                         |  |             |      |         |  |       |     |      
|Consolidation costs incurred in the three months
    ended June 30, 2003 |  | $           | 786  |         |  | $     | 572 |       |  | $ | 37  |   |  | $ | 1,395 |  
|Cash paid                                                                |  |             | (786 | )       |  |       | (70 | )     |  |   | (37 | ) |  |   | (893  | )
|                                                                         |  |             |      |         |  |       |     |       |  |   |     |   |  |   |       |  
|Balance at September 30, 2003                                            |  | $           |     |         |  | $     | 502 |       |  | $ |    |   |  | $ | 502   |  
|                                                                         |  |             |      |         |  |       |     |       |  |   |     |   |  |   |       |  



| |           
| | ----------
| | Relocation

As described above, the Company consolidated
certain operations in the U.S. and international facilities
in the first quarter of fiscal 2003 to achieve cost reductions
and streamline operations. The Company relocated certain
development functions from the Companys Corvallis, Oregon
facility to its headquarters in Boulder, Colorado. As a result
of the consolidation, the Company recognized a relocation
expense of $217,000 during the three months ended
December 31, 2002. In the second quarter of fiscal 2003,
the Company adjusted these costs, which resulted in a less than
anticipated cost of $40,000. In the third fiscal quarter of
fiscal 2003, the Company finalized these costs and recognized an
additional $10,000 of expense.



| |                 
| | ----------------
| | Asset Impairment

The Company incurred an asset impairment charge
of $165,000 during the first quarter of fiscal 2003. The asset
impairment charge resulted primarily from the closure of its
Southboro, Massachusetts facility and was related to software,
furniture and fixtures. During the third quarter of fiscal 2003,
the Company incurred an additional asset impairment charge of
$44,000 for other software, furniture and fixtures as a result
of the closure of its Amsterdam, Netherlands office.



| |                          
| | -------------------------
| | LSOS Contract Termination

During the second quarter of fiscal 2003, in
conjunction with the discontinuance of the LSOS product line,
the Company terminated a software license agreement related to
these products. The software contract included provisions for
minimum royalty payments that had been accrued in previous
periods, which were expected to be paid subsequent to the first
year anniversary of the contract. Upon termination of the
contract, the Company determined that an estimated $181,000
obligation for minimum royalties was no longer required and
reversed the accrual during the second quarter of fiscal 2003,
which reduced operating expense.



| |                        
| | -----------------------
| | Other Severance Charges

During fiscal 2003, the employment of three
Company executives was terminated, which resulted in severance
costs of approximately $433,000.

The following table summarizes severance costs at
September 30, 2003 (in thousands):

|                                                                      |  |           |      |  
|--------------------------------------------------------------------- |  | --------- | ---- | -
|                                                                      |  | Employee 
|                                                                      |  | Severance
|                                                                      |  | & Related
|                                                                      |  |          
|Executive and senior manager severance accrued
    during fiscal 2003 |  | $         | 433  |  
|Cash paid                                                             |  |           | (433 | )
|                                                                      |  |           |      |  
|Balance at September 30, 2003                                         |  | $         |     |  
|                                                                      |  |           |      |  

F-13



---



##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                       
| | ----------------------
| | 2002 and 2001 Activity



| |                                 
| | --------------------------------
| | Strategic Realignment 
    2002

During the second quarter of fiscal 2002, the
Company announced a realignment of its corporate strategy for
EMEA, Asia Pacific and Latin America. In conjunction with this
action and to better align its cost structure with its new
international business focus, on March 29, 2002, the
Company announced plans to restructure certain areas of its
global operations, which resulted in severance related charges
of approximately $352,000 in the second fiscal quarter of 2002.
During the third fiscal quarter of 2002, the Company revised its
initial estimate by $47,000, primarily due to the successful
negotiation of certain employee severance arrangements. During
the third fiscal quarter of 2002, the Company decided to
eliminate an additional 17 positions, which resulted in a
related severance charge of approximately $175,000. The cost
reductions in the second and third fiscal quarters of 2002,
which resulted in a total workforce reduction of
47 employees or 16%, were expected to reduce future
operating expenses by approximately $2.0 million quarterly,
or 15% of total expenses. All severance expenses were paid in
the third and fourth fiscal quarters of 2002.

The following tables summarizes the restructuring
costs at September 30, 2002 (in thousands):

|                                                       |  |           |      |  
|------------------------------------------------------ |  | --------- | ---- | -
|                                                       |  | Employee 
|                                                       |  | Severance
|                                                       |  | & Related
|                                                       |  |          
|Strategic restructuring estimate at
    March 31, 2002 |  | $         | 352  |  
|Cash paid                                              |  |           | (305 | )
|Adjustments for revised estimates                      |  |           | (47  | )
|                                                       |  |           |      |  
|Balance at September 30, 2002                          |  | $         |     |  
|                                                       |  |           |      |  

|                                                      |  |           |      |  
|----------------------------------------------------- |  | --------- | ---- | -
|                                                      |  | Employee 
|                                                      |  | Severance
|                                                      |  | & Related
|                                                      |  |          
|Strategic restructuring estimate at June 30,
    2002 |  | $         | 175  |  
|Cash paid                                             |  |           | (175 | )
|                                                      |  |           |      |  
|Balance at September 30, 2002                         |  | $         |     |  
|                                                      |  |           |      |  



| |                        
| | -----------------------
| | Stingray Restructurings



| |                                                              
| | -------------------------------------------------------------
| | 3rd Quarter FY 2001 
    Consolidation of Certain Operations

In early May 2001, as part of an ongoing effort
to optimize its corporate organizational structure and in
conjunction with continuing cost containment programs, the
Company restructured its Stingray business unit in order to
achieve greater profitability by eliminating certain development
and marketing resources, which resulted in the termination of 27
employees. As part of this restructuring, during the three
months ended June 30, 2001, the Company recognized a
restructuring charge of $621,000, related primarily to severance
costs as well as certain closure costs, including those
associated with facility lease costs.



| |                                                       
| | ------------------------------------------------------
| | 4th Quarter FY 2001  Closure of
    Stingray Facility

During the fourth fiscal quarter of 2001, the
Company decided to close the entire Stingray facility as a
result of the termination of all new product research activities
at the North Carolina facility coupled with the economies of
scale gained from the consolidation of the Stingray processes
into the Companys overall operation. As a result, the
Company terminated 23 employees and recorded a severance charge
of $132,000. As a result of subleasing the Stingray facility in
fiscal 2002, the Company revised its estimate and incurred

F-14



---



##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

additional costs of $7,000 and $88,000 in the
second and third fiscal quarters of 2002, respectively, for
certain final lease closure costs and early lease termination
penalties, resulting in a total of $841,000 restructuring charge
for both fiscal 2001 and 2002.

The Stingray products, which consist of
development tools for Windows programmers will be continued to
be sold and supported by the Company. These cost reduction
initiatives have resulted in an estimated cost saving of
approximately $2.9 million a year.

The following table summarizes restructuring
costs by primary component at September 30, 2002 (in
thousands):

|                                     |  |           |      |         |  |       |      |       |  |   |     |   |  |   |      |  
|------------------------------------ |  | --------- | ---- | ------- |  | ----- | ---- | ----- |  | - | --- | - |  | - | ---- | -
|                                     |  | Employee  |      | Site    |  |       |      |      
|                                     |  | Severance |      | Closure |  |       |      |      
|                                     |  | & Related |      | Costs   |  | Other |      | Total
|                                     |  |           |      |         |  |       |      |      
|Q301 Stingray restructuring estimate |  | $         | 432  |         |  | $     | 154  |       |  | $ | 35  |   |  | $ | 621  |  
|Cash paid                            |  |           | (398 | )       |  |       | (69  | )     |  |   | (35 | ) |  |   | (502 | )
|Q401 Stingray restructuring estimate |  |           | 132  |         |  |       |     |       |  |   |    |   |  |   | 132  |  
|                                     |  |           |      |         |  |       |      |       |  |   |     |   |  |   |      |  
|Balance at September 30, 2001        |  | $         | 166  |         |  | $     | 85   |       |  | $ |    |   |  | $ | 251  |  
|Cash paid                            |  |           | (159 | )       |  |       | (180 | )     |  |   |    |   |  |   | (339 | )
|Adjustment for revised estimates     |  |           | (7   | )       |  |       | 95   |       |  |   |    |   |  |   | 88   |  
|                                     |  |           |      |         |  |       |      |       |  |   |     |   |  |   |      |  
|Balance at September 30, 2002        |  | $         |     |         |  | $     |     |       |  | $ |    |   |  | $ |     |  
|                                     |  |           |      |         |  |       |      |       |  |   |     |   |  |   |      |  

In addition to the Stingray restructuring charge,
as part of the closing of the Stingray facility, the Company
incurred an asset impairment charge of $324,000 in the fourth
fiscal quarter of 2001. The asset impairment charge was related
to the estimated realization of its furniture and fixtures at
the Stingray facility. The carrying amount of the assets prior
to the asset impairment charge was $402,000. The Company
disposed of the assets in the third fiscal quarter of 2002,
which resulted in an additional asset impairment charge of
$54,000.



| |        
| | -------
| | Fornova

Following a decision to discontinue the Fornova
project, in March 2001 the Company recognized a restructuring
charge of approximately $447,000. Fornova, a venture focused on
developing Internet information exchange technology for the
business-to-business market, had been pursuing third party
expansion capital with an initial investment commitment of
$2.0 million from the Company. As a result of the overall
softening of the U.S economy, coupled with the slowing of third
party investment in such ventures, the project was abandoned
with the termination of 12 employees. In the third fiscal
quarter of 2001, the Company revised its estimate of the initial
restructuring costs by $194,000, as a result of the successful
renegotiation of certain contract termination fees as well as
the finalization of severance costs.

The following table summarizes restructuring
costs by primary component at September 30, 2001 (in
thousands):

|                               |  |           |      |             |  |       |      |       |  |   |     |   |  |   |      |  
|------------------------------ |  | --------- | ---- | ----------- |  | ----- | ---- | ----- |  | - | --- | - |  | - | ---- | -
|                               |  | Employee  |      | Contract    |  |       |      |      
|                               |  | Severance |      | Termination |  |       |      |      
|                               |  | & Related |      | Fees        |  | Other |      | Total
|                               |  |           |      |             |  |       |      |      
|Fornova restructuring estimate |  | $         | 133  |             |  | $     | 305  |       |  | $ | 9   |   |  | $ | 447  |  
|Cash paid                      |  |           | (103 | )           |  |       | (132 | )     |  |   | (18 | ) |  |   | (253 | )
|Adjustment of revised estimate |  |           | (30  | )           |  |       | (173 | )     |  |   | 9   |   |  |   | (194 | )
|                               |  |           |      |             |  |       |      |       |  |   |     |   |  |   |      |  
|Balance at September 30, 2001  |  | $         |     |             |  | $     |     |       |  | $ |    |   |  | $ |     |  
|                               |  |           |      |             |  |       |      |       |  |   |     |   |  |   |      |  

F-15



---



##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                        
| | -----------------------
| | Other Severance Charges

During fiscal year 2001, the employment of three
Company executives was terminated. As a result, the Company
recognized approximately $634,000 in severance costs. During
fiscal 2002, the employment of certain senior managers was
terminated, which resulted in the recognition of approximately
$617,000 in severance costs in the first half of fiscal 2002.
The following table summarizes severance costs at
September 30, 2002 (in thousands):

|                                                                      |  |           |      |  
|--------------------------------------------------------------------- |  | --------- | ---- | -
|                                                                      |  | Employee 
|                                                                      |  | Severance
|                                                                      |  | & Related
|                                                                      |  |          
|Executive cash severance accrued during fiscal
    2001               |  | $         | 634  |  
|Cash paid                                                             |  |           | (309 | )
|                                                                      |  |           |      |  
|Balance at September 30, 2001                                         |  |           | 325  |  
|Cash paid                                                             |  |           | (325 | )
|                                                                      |  |           |      |  
|Balance at September 30, 2002                                         |  | $         |     |  
|                                                                      |  |           |      |  
|Executive and senior manager severance accrued
    during fiscal 2002 |  | $         | 617  |  
|Cash paid                                                             |  |           | (617 | )
|                                                                      |  |           |      |  
|Balance at September 30, 2002                                         |  | $         |     |  
|                                                                      |  |           |      |  



| |                      
| | ---------------------
| | Goodwill Amortization

Goodwill amortization for the years ended
September 30, 2002 and 2001 was $76,000 and $228,000,
respectively.

(3) Balance Sheet Components



| |                                  
| | ---------------------------------
| | Furniture, Fixtures and Equipment

Furniture, fixtures and equipment at
September 30, 2003 and 2002, consist of the following (in
thousands):

|                                               |                                        |      |        |      |  |   |         |       | 
|---------------------------------------------- | -------------------------------------- | ---- | ------ | ---- |  | - | ------- | ----- | 
|                                               |                                        | 2003 |        | 2002
|                                               |                                        |      |        |     
|Computer equipment                             |                                        | $    | 9,476  |      |  | $ | 12,699  |      
|Furniture, fixtures and equipment              |                                        |      | 960    |      |  |   | 3,477   |      
|                                               |                                        |      |        |      |  |   |         |      
|                                               |                                        |      | 10,436 |      |  |   | 16,176  |      
|Less accumulated depreciation and amortization |                                        |      | (9,468 | )    |  |   | (13,243 | )    
|                                               |                                        |      |        |      |  |   |         |      
|                                               | Furniture, fixtures and equipment, net |      | $      | 968  |  |   | $       | 2,933 | 
|                                               |                                        |      |        |      |  |   |         |      

Depreciation and amortization expense for the
years ended September 30, 2003, 2002 and 2001 was
$2.1 million, $3.3 million and $3.1 million,
respectively. In fiscal year 2001, related to the restructuring
of the Stingray operation, the Company recognized an asset
impairment charge of approximately $324,000 for furniture and
fixtures.

F-16



---



##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                 
| | ----------------
| | Accrued Expenses

The Companys accrued expenses at
September 30, 2003 and 2002, include the following (in
thousands):

|                                        |                  |      |       |       |  |   |       |       | 
|--------------------------------------- | ---------------- | ---- | ----- | ----- |  | - | ----- | ----- | 
|                                        |                  | 2003 |       | 2002 
|                                        |                  |      |       |      
|Accrued payroll and related liabilities |                  | $    | 928   |       |  | $ | 1,221 |      
|Restructuring expenses                  |                  |      | 538   |       |  |   |      |      
|Other accrued expenses                  |                  |      | 1,621 |       |  |   | 3,740 |      
|                                        |                  |      |       |       |  |   |       |      
|                                        | Accrued expenses |      | $     | 3,087 |  |   | $     | 4,961 | 
|                                        |                  |      |       |       |  |   |       |      

(4) Valuation and Qualifying
Accounts

|                    |                                            |              |   |           |  |            |   |         |  |  |   |      |   |  |   |       | 
|------------------- | ------------------------------------------ | ------------ | - | --------- |  | ---------- | - | ------- |  |  | - | ---- | - |  | - | ----- | 
|                    |                                            | Balance      |   |           |  |            |   | Balance
|                    |                                            | at Beginning |   |           |  |            |   | at End 
|                    |                                            | of Year      |   | Additions |  | Deductions |   | of Year
|                    |                                            |              |   |           |  |            |   |        
|September 30, 2003: |                                            |              |   |           |  |            |   |         |  |  |   |      |   |  |   |      
|                    | Allowance for doubtful accounts            |              | $ | 897       |  |            | $ |        |  |  | $ | (601 | ) |  | $ | 296   | 
|                    | Sales returns and allowance                |              |   | 395       |  |            |   | 488     |  |  |   | (520 | ) |  |   | 363   | 
|                    | Valuation allowance for deferred tax asset |              |   | 5,869     |  |            |   |        |  |  |   | (482 | ) |  |   | 5,387 | 
|September 30, 2002: |                                            |              |   |           |  |            |   |         |  |  |   |      |   |  |   |      
|                    | Allowance for doubtful accounts            |              |   | 692       |  |            |   | 626     |  |  |   | (421 | ) |  |   | 897   | 
|                    | Sales returns and allowance                |              |   | 390       |  |            |   | 65      |  |  |   | (60  | ) |  |   | 395   | 
|                    | Valuation allowance for deferred tax asset |              |   | 1,560     |  |            |   | 4,309   |  |  |   |     |   |  |   | 5,869 | 
|September 30, 2001: |                                            |              |   |           |  |            |   |         |  |  |   |      |   |  |   |      
|                    | Allowance for doubtful accounts            |              |   | 575       |  |            |   | 415     |  |  |   | (298 | ) |  |   | 692   | 
|                    | Sales returns and allowance                |              |   | 575       |  |            |   | 248     |  |  |   | (433 | ) |  |   | 390   | 
|                    | Valuation allowance for deferred tax asset |              |   | 813       |  |            |   | 747     |  |  |   |     |   |  |   | 1,560 | 

(5) Leases

The Company leases certain equipment and office
space through noncancelable operating lease arrangements. The
leases expire in 2004 through 2008 and are net leases with the
Company paying all executory costs, including insurance,
utilities and maintenance. Rent expense for operating leases
during the years ended September 30, 2003, 2002 and 2001
was $1.8 million, $2.4 million and $2.3 million,
respectively.

Future minimum lease payments under operating
leases are as follows (in thousands):

|                          |      |                              |   |       |       | 
|------------------------- | ---- | ---------------------------- | - | ----- | ----- | 
|Year ending September 30: |      |                              |   |      
|                          | 2004 |                              | $ | 1,658 |      
|                          | 2005 |                              |   | 742   |      
|                          | 2006 |                              |   | 384   |      
|                          | 2007 |                              |   | 217   |      
|                          | 2008 |                              |   | 91    |      
|                          |      |                              |   |      
|                          |      | Total minimum lease payments |   | $     | 3,092 | 
|                          |      |                              |   |      

F-17



---



##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(6) Income Taxes

The provision for income taxes consists of the
following (in thousands):

|          |                 |                          |        |        |     |      |       |       |       |  |        |        |      |  
|--------- | --------------- | ------------------------ | ------ | ------ | --- | ---- | ----- | ----- | ----- |  | ------ | ------ | ---- | -
|          |                 |                         
|          |                 | Year Ended September 30,
|          |                 |                         
|          |                 | 2003                     |        | 2002   |     | 2001
|          |                 |                          |        |        |     |     
|Current:  |                 |                          |        |        |     |      |       |       |       |  |        |       
|          | Federal         |                          | $      | (1,241 | )   |      | $     | (181  | )     |  | $      | 1,047  |     
|          | State and local |                          |        | 21     |     |      |       | 45    |       |  |        |       |     
|          |                 |                          |        |        |     |      |       |       |       |  |        |       
|          |                 |                          | (1,220 | )      |     |      | (136  | )     |       |  | 1,047  |       
|          |                 |                          |        |        |     |      |       |       |       |  |        |       
|Deferred: |                 |                          |        |        |     |      |       |       |       |  |        |       
|          | Federal         |                          |        | 1,174  |     |      |       | 1,749 |       |  |        | (1,005 | )   
|          | State and local |                          |        | 242    |     |      |       | 452   |       |  |        | (261   | )   
|          |                 |                          |        |        |     |      |       |       |       |  |        |       
|          |                 |                          | 1,416  |        |     |      | 2,201 |       |       |  | (1,266 | )     
|          |                 |                          |        |        |     |      |       |       |       |  |        |       
|          |                 | Total                    |        | $      | 196 |      |       | $     | 2,065 |  |        | $      | (219 | )
|          |                 |                          |        |        |     |      |       |       |       |  |        |       

Income tax expense differs from the expected tax
expense (computed by applying the U.S. Federal corporate
income tax rate of 34% to net income before income taxes) as
follows (in thousands):

|                                                 |                              |                          |      |      |  |      |        |       |  |   |      |      |  
|------------------------------------------------ | ---------------------------- | ------------------------ | ---- | ---- |  | ---- | ------ | ----- |  | - | ---- | ---- | -
|                                                 |                              |                         
|                                                 |                              | Year Ended September 30,
|                                                 |                              |                         
|                                                 |                              | 2003                     |      | 2002 |  | 2001
|                                                 |                              |                          |      |      |  |     
|Computed expected income tax expense (benefit)   |                              | $                        | 593  |      |  | $    | (1,778 | )     |  | $ | (282 | )   
|Difference in income tax expense resulting from: |                              |                          |      |      |  |      |        |       |  |   |      |     
|State and other income tax expense (benefit)     |                              |                          | 157  |      |  |      | (70    | )     |  |   | (186 | )   
|Research and experimentation credit              |                              |                          | (135 | )    |  |      | (199   | )     |  |   | (746 | )   
|Change in valuation allowance                    |                              |                          | (482 | )    |  |      | 4,309  |       |  |   | 747  |     
|Prior year tax return adjustments                |                              |                          | 309  |      |  |      | (312   | )     |  |   |     |     
|Foreign NOL utilization                          |                              |                          |     |      |  |      | 97     |       |  |   |     |     
|Non-deductible meals and entertainment           |                              |                          | 21   |      |  |      | 52     |       |  |   | 79   |     
|Non-deductible intangible asset amortization     |                              |                          |     |      |  |      | 29     |       |  |   | 88   |     
|Extraterritorial income exclusion                |                              |                          | (265 | )    |  |      | (100   | )     |  |   |     |     
|Non-deductible ISO                               |                              |                          |     |      |  |      |       |       |  |   | (8   | )   
|Non-deductible accelerated options               |                              |                          | 34   |      |  |      | 58     |       |  |   |     |     
|International rate difference                    |                              |                          | (36  | )    |  |      | 19     |       |  |   | 179  |     
|Other, net                                       |                              |                          |     |      |  |      | (40    | )     |  |   | (90  | )   
|                                                 |                              |                          |      |      |  |      |        |       |  |   |      |     
|                                                 | Income tax expense (benefit) |                          | $    | 196  |  |      | $      | 2,065 |  |   | $    | (219 | )
|                                                 |                              |                          |      |      |  |      |        |       |  |   |      |     

F-18



---



##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                     |                                                  |                                 |   |        |       |  |   |        |       | 
|-------------------- | ------------------------------------------------ | ------------------------------- | - | ------ | ----- |  | - | ------ | ----- | 
|                     |                                                  |                                
|                     |                                                  | September 30,                  
|                     |                                                  |                                
|                     |                                                  | 2003                            |   | 2002  
|                     |                                                  |                                 |   |       
|Deferred tax assets: |                                                  |                                 |   |        |       |  |   |       
|                     | Accounts receivable                              |                                 | $ | 149    |       |  | $ | 331    |      
|                     | Intangible assets                                |                                 |   | 144    |       |  |   | 182    |      
|                     | Accrued expenses                                 |                                 |   | 129    |       |  |   | 324    |      
|                     | Fixed assets                                     |                                 |   | 194    |       |  |   | 447    |      
|                     | Charitable contributions                         |                                 |   | 31     |       |  |   |       |      
|                     | Foreign operating loss carryforwards             |                                 |   | 1,022  |       |  |   | 381    |      
|                     | Federal operating loss carryforwards             |                                 |   | 301    |       |  |   | 2,649  |      
|                     | State operating loss carryforwards               |                                 |   | 484    |       |  |   | 636    |      
|                     | Research and experimentation credit carryforward |                                 |   | 2,040  |       |  |   | 1,914  |      
|                     | Equity losses of unconsolidated subsidiary       |                                 |   | 503    |       |  |   |       |      
|                     | AMT credit carryforward                          |                                 |   |       |       |  |   | 100    |      
|                     | Foreign tax withholding credit                   |                                 |   | 390    |       |  |   | 321    |      
|                     |                                                  |                                 |   |        |       |  |   |       
|                     |                                                  | Total gross deferred tax assets |   |        | 5,387 |  |   |        | 7,285 | 
|                     | Valuation allowance                              |                                 |   | (5,387 | )     |  |   | (5,869 | )    
|                     |                                                  |                                 |   |        |       |  |   |       
|                     |                                                  | Net deferred tax assets         |   | $      |      |  |   | $      | 1,416 | 
|                     |                                                  |                                 |   |        |       |  |   |       

At September 30, 2003, the Company had net
operating loss carryforwards for federal and foreign income tax
purposes of $659,000 and $2.8 million, respectively. The
federal net operating loss carryforwards expire from 2007 to
2022. The Company also had $2.4 million of tax credit
carryforwards that expire from 2004 to 2022.

Recognition of deferred tax assets will require
generation of future taxable income. As there can be no
assurance that the Company will generate earnings in future
years sufficient to utilize the net deferred tax asset, the
Company has established a valuation allowance on deferred tax
assets of approximately $5.4 million and $5.9 million
as of September 30, 2003 and 2002, respectively.



|    |                       
|--- | ----------------------
|(7) | Equity Incentive Plans

In June 1996, the Companys Board of
Directors adopted the 1996 Equity Incentive Plan (the
Equity Incentive Plan). The Company has reserved
3,500,000 shares of Common Stock for issuance under the Equity
Incentive Plan. The Equity Incentive Plan replaced the
Companys 1994 Stock Option Plan and the Inmark Stock
Option Plan. The Equity Incentive Plan provides for grants of
incentive stock options to employees (including officers and
employee directors) and nonstatutory stock options to employees
(including officers and employee directors), directors and
consultants of the Company.

The terms of a stock option granted under the
Equity Incentive Plan generally may not exceed ten years (five
years in the case of holders of more than 10% of the
Companys capital stock). The exercise price of options
granted under the Equity Incentive Plan is determined by the
Board of Directors but, in the case of an incentive stock
option, cannot be less than 100% of the fair value of the Common
Stock on the date of grant. Options granted under the Equity
Incentive Plan vest at the rate specified in the option
agreement.

F-19



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##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In October 1997, the Companys Board of
Directors adopted the 1997 Non-Officer Equity Incentive Plan. In
October 2000, the Companys Board of Directors amended the
Plan changing its name to the 1997 Equity Incentive Plan and
modified the Plan to allow the granting of non-statutory stock
options to officer employees. On July 10, 2002, the Board
of Directors approved an increase to the amount of the
Companys Common Stock issuable under the 1997 Equity
Incentive Plan from 4,850,000 to 6,850,000.

The terms of a stock option granted under the
1997 Equity Incentive Plan may not exceed ten years. The
exercise price of options granted under the plan shall not be
less than 85% of the fair value of the stock subject to the
option on the date the option is granted. Options granted under
the 1997 Equity Incentive Plan vest at the rate specified in the
option agreement.

The Equity Incentive Plan and the Non-Officer
Equity Incentive Plan are administered by a committee appointed
by the Board of Directors, which determines recipients, types of
awards to be granted, including exercise price, number of shares
subject to the award and the exercisability thereof.

On July 10, 2002, the Board of Directors
approved the grant of stock options for employees and officers
to purchase 1,046,234 shares of the Companys Common Stock
at $2.68 per share, the closing price of Rogue Waves
Common Stock on the day of grant. The options vest over a period
of two years and are exercisable until the tenth anniversary of
the grant. The grants were made under the 1996 and 1997 Equity
Incentive Plans.



|    |                            
|--- | ---------------------------
|(8) | Treasury Stock Transactions

In September 2001, the Board of Directors
authorized the Company to repurchase up to an aggregate of
$5.0 million or 2.5 million shares of its Common
Stock. During the fiscal year ended September 30, 2003, the
Company repurchased 585,000 shares for $1.2 million at
prices ranging from $1.72 - $2.67 per share; issued 73,000
shares of treasury stock to satisfy stock of $125,000 purchased
under the Employee Stock Purchase Plan; and issued 298,000
shares of treasury stock to satisfy stock option exercises
having exercise prices ranging from $0.15 - $3.53. As the
fair value of the Companys Common Stock was less than the
weighted-average cost of the treasury stock at the time of
issuance, the aforementioned issuances of treasury stock
resulted in charges being recorded to additional paid-in capital
as reflected in the accompanying consolidated statements of
stockholders equity. Since September 2001, the Company has
purchased approximately 1.4 million shares for
approximately $3.4 million at prices ranging from
$1.72 - $3.65 per share.



|    |                        
|--- | -----------------------
|(9) | Stockholder Rights Plan

On January 3, 2003, the Board of Directors
declared a dividend of one right for each share of Common Stock
outstanding on January 16, 2003. Each right represents the
right to purchase one one-hundredth of a share of Series A
Junior Participating Preferred Stock, $0.01 par value, at a
price of $14.16 per one one-hundredth share, subject to
adjustment. In the event any person or group acquires 15% or
more of the Companys Common Stock or announces a tender
offer or exchange offer for 15% or more of the Companys
Common Stock, subject to certain exceptions, the holders of the
rights generally will be entitled to receive, upon exercise,
Common Stock of the Company having a value equal to two times
the exercise price of the right. The Board of Directors may, at
its option after a person or group acquires 15% or more of the
Companys Common Stock or announces a tender offer or
exchange offer for 15% or more of the Companys Common
Stock, exchange all or part of the rights for shares of the
Companys Common Stock. In the event that the Company is
acquired in a merger or other business combination or 50% or
more of the Companys assets or earning power is sold or
transferred, the holders of the rights have the right to
receive, upon exercise, Common Stock. On November 3, 2003,
the Company amended the rights agreement to exclude the merger
agreement with Quovadx, Inc. from the rights agreement. See
Note 16, Subsequent Events.

F-20



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##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|     |                             
|---- | ----------------------------
|(10) | Employee Stock Purchase Plan

In June 1996, the Board of Directors adopted the
Employee Stock Purchase Plan (the Purchase Plan)
covering an aggregate of 450,000 shares of Common Stock. The
Purchase Plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the
Internal Revenue Code. Under the Purchase Plan, the Board of
Directors may authorize participation by eligible employees,
including officers, in periodic offerings following the adoption
of the Purchase Plan. The offering period for any offering will
be no more than 27 months.

Employees are eligible to participate if they are
employed by the Company or an affiliate of the Company
designated by the Board of Directors. Employees who participate
in an offering can have up to 15% of their earnings withheld
pursuant to the Purchase Plan and applied, on specific dates
determined by the Board of Directors, to the purchase of shares
of Common Stock. The price of Common Stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair
value of the Common Stock on the commencement date of each
offering period or the relevant purchase date. Employees may end
their participation in the offering at any time during the
offering period, and participation ends automatically on
termination of employment with the Company. During the years
ended September 30, 2003, 2002 and 2001, approximately
73,000, 193,000 and 169,000 shares respectively, were purchased
under this plan.



|     |                              
|---- | -----------------------------
|(11) | Qualified Profit Sharing Plan

The Company has a 401(k) profit sharing plan,
which is offered to eligible employees and calls for a
discretionary employer match of employee contributions, which
are approved by the Board of Directors. To participate in the
plan, the person has to be an employee of the Company. The
Company matches all employee contributions up to 3% of earnings
and half of employee contributions from 3% to 5%. Company
contributions expensed in the years ended September 30,
2003, 2002 and 2001 were $414,000, $640,000 and $717,000,
respectively.



|     |                     
|---- | --------------------
|(12) | Worldwide Operations

Revenue by geographic area for fiscal years 2003,
2002 and 2001 was 70%, 72% and 70% in the United States; 25%,
24% and 29% in EMEA; and 5%, 4% and 1% in Asia Pacific,
respectively.

F-21



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##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Information regarding worldwide operations is as
follows (in thousands):

|                                                     |                                   |             |   |        |        |         |   |              |        |       |   |       |       |  |   |        |        |   |   |        |        | 
|---------------------------------------------------- | --------------------------------- | ----------- | - | ------ | ------ | ------- | - | ------------ | ------ | ----- | - | ----- | ----- |  | - | ------ | ------ | - | - | ------ | ------ | 
|                                                     |                                   | United      |   |        |        | Asia(1) |   |              |        |      
|                                                     |                                   | States      |   | EMEA   |        | Pacific |   | Eliminations |        | Total
|                                                     |                                   |             |   |        |        |         |   |              |        |      
|September 30, 2003, and for the year then
    ended: |                                   |             |   |        |        |         |   |              |        |       |   |       |       |  |   |        |        |   |   |       
|                                                     | Revenue to unaffiliated customers |             | $ | 22,956 |        |         | $ | 8,147        |        |       | $ | 1,805 |       |  | $ |       |        |   | $ | 32,908 |       
|                                                     | Intercompany transfers            |             |   | 5,769  |        |         |   | 666          |        |       |   |      |       |  |   | (6,435 | )      |   |   |       |       
|                                                     |                                   |             |   |        |        |         |   |              |        |       |   |       |       |  |   |        |        |   |   |       
|                                                     |                                   | Net revenue |   |        | 28,725 |         |   |              | 8,813  |       |   |       | 1,805 |  |   |        | (6,435 | ) |   |        | 32,908 | 
|                                                     | Operating income (loss)           |             |   | 3,705  |        |         |   | (1,342       | )      |       |   | (543  | )     |  |   |       |        |   |   | 1,820  |       
|                                                     | Long-lived assets                 |             |   | 785    |        |         |   | 180          |        |       |   | 3     |       |  |   |       |        |   |   | 968    |       
|September 30, 2002, and for the year then
    ended: |                                   |             |   |        |        |         |   |              |        |       |   |       |       |  |   |        |        |   |   |       
|                                                     | Revenue to unaffiliated customers |             | $ | 31,028 |        |         | $ | 10,498       |        |       | $ | 1,773 |       |  | $ |       |        |   | $ | 43,299 |       
|                                                     | Intercompany transfers            |             |   | 4,471  |        |         |   |             |        |       |   |      |       |  |   | (4,471 | )      |   |   |       |       
|                                                     |                                   |             |   |        |        |         |   |              |        |       |   |       |       |  |   |        |        |   |   |       
|                                                     |                                   | Net revenue |   |        | 35,499 |         |   |              | 10,498 |       |   |       | 1,773 |  |   |        | (4,471 | ) |   |        | 43,299 | 
|                                                     | Operating income (loss)           |             |   | (5,246 | )      |         |   | 242          |        |       |   | (638  | )     |  |   |       |        |   |   | (5,642 | )     
|                                                     | Long-lived assets                 |             |   | 2,626  |        |         |   | 291          |        |       |   | 16    |       |  |   |       |        |   |   | 2,933  |       
|September 30, 2001, and for the year then
    ended: |                                   |             |   |        |        |         |   |              |        |       |   |       |       |  |   |        |        |   |   |       
|                                                     | Revenue to unaffiliated customers |             | $ | 40,580 |        |         | $ | 16,517       |        |       | $ | 556   |       |  | $ |       |        |   | $ | 57,653 |       
|                                                     | Intercompany transfers            |             |   | 6,456  |        |         |   |             |        |       |   |      |       |  |   | (6,456 | )      |   |   |       |       
|                                                     |                                   |             |   |        |        |         |   |              |        |       |   |       |       |  |   |        |        |   |   |       
|                                                     |                                   | Net revenue |   |        | 47,036 |         |   |              | 16,517 |       |   |       | 556   |  |   |        | (6,456 | ) |   |        | 57,653 | 
|                                                     | Operating income (loss)           |             |   | (5,349 | )      |         |   | 3,669        |        |       |   | (235  | )     |  |   |       |        |   |   | (1,915 | )     
|                                                     | Long-lived assets                 |             |   | 4,681  |        |         |   | 352          |        |       |   | 81    |       |  |   |       |        |   |   | 5,114  |       



---



|    |                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Japan was the only country reported in Asia
    Pacific for fiscal 2001. Due to the Companys realignment
    in fiscal 2002, Asia Pacific now includes Japan, Hong Kong,
    Australia and India.

For the fiscal year ended September 30,
2003, there were no customers or individual countries outside of
the U.S. that accounted for 10% or more of revenue or
long-lived assets.



|     |              
|---- | -------------
|(13) | Contingencies

The Company is involved in various claims and
legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the Companys
financial position, results of operations or cash flows.

F-22



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##### Table of Contents



ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|     |                                  
|---- | ---------------------------------
|(14) | Quarterly Information (Unaudited)

The following table presents unaudited quarterly
operating results for each of the Companys eight quarters
in the two-year period ended September 30, 2003 (in
thousands, except per share data).

|                 |                                   |               |   |          |   |          |   |           |   |  |   |        |   |  |   |        |  
|---------------- | --------------------------------- | ------------- | - | -------- | - | -------- | - | --------- | - |  | - | ------ | - |  | - | ------ | -
|                 |                                   |              
|                 |                                   | Quarter Ended
|                 |                                   |              
|                 |                                   | Dec. 31,      |   | Mar. 31, |   | Jun. 30, |   | Sept. 30,
|                 |                                   |               |   |          |   |          |   |          
|Fiscal year 2003 |                                   |               |   |          |   |          |   |           |   |  |   |        |   |  |   |       
|                 | Total revenue                     |               | $ | 9,589    |   |          | $ | 8,428     |   |  | $ | 7,285  |   |  | $ | 7,606  |  
|                 | Gross margin                      |               |   | 8,234    |   |          |   | 7,589     |   |  |   | 6,718  |   |  |   | 7,023  |  
|                 | Income (loss) from operations     |               |   | (1,677   | ) |          |   | 542       |   |  |   | 35     |   |  |   | 2,920  |  
|                 | Net income (loss)                 |               |   | (1,638   | ) |          |   | 512       |   |  |   | 22     |   |  |   | 2,653  |  
|                 | Basic earnings (loss) per share   |               |   | (0.16    | ) |          |   | 0.05      |   |  |   | 0.00   |   |  |   | 0.26   |  
|                 | Diluted earnings (loss) per share |               |   | (0.16    | ) |          |   | 0.05      |   |  |   | 0.00   |   |  |   | 0.25   |  
|Fiscal year 2002 |                                   |               |   |          |   |          |   |           |   |  |   |        |   |  |   |       
|                 | Total revenue                     |               | $ | 11,946   |   |          | $ | 12,032    |   |  | $ | 10,054 |   |  | $ | 9,267  |  
|                 | Gross margin                      |               |   | 9,771    |   |          |   | 9,994     |   |  |   | 8,534  |   |  |   | 7,845  |  
|                 | Loss from operations              |               |   | (1,700   | ) |          |   | (797      | ) |  |   | (1,435 | ) |  |   | (1,710 | )
|                 | Net loss                          |               |   | (956     | ) |          |   | (484      | ) |  |   | (1,022 | ) |  |   | (4,833 | )
|                 | Basic and diluted loss per share  |               |   | (0.09    | ) |          |   | (0.05     | ) |  |   | (0.10  | ) |  |   | (0.44  | )



|     |                          
|---- | -------------------------
|(15) | Related Party Transaction

On June 5, 2002, the Company entered into a
$500,000 non-interest bearing home loan with its Chief Executive
Officer in connection with his relocation to Boulder, Colorado.
The loan matured on the earlier of June 5, 2006 or
180 days after termination of employment with the Company.
The loan was secured by the property purchased. The Chief
Executive Officer resigned on February 21, 2003 and repaid
the loan in March 2003.



|     |                 
|---- | ----------------
|(16) | Subsequent Event

On November 3, 2003, the Company, entered
into an agreement and plan of merger with Quovadx, Inc. in which
Quovadx, Inc., through a wholly owned subsidiary, will offer to
exchange cash in the amount of $4.09 (unaudited) and 0.5292 of a
share (unaudited) of Quovadx common stock for each outstanding
share of Rogue Wave Common Stock. If the offer is completed, the
Quovadx subsidiary will merge with and into Rogue Wave and Rogue
Wave will become a wholly owned subsidiary of Quovadx. The offer
commenced on November 12, 2003 and is scheduled to expire
at 12:00 midnight, Eastern standard time, December 10,
2003. The offer may be extended from time to time under certain
circumstances, but not beyond February 15, 2004.

F-23



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##### Table of Contents






EXHIBIT INDEX

|        |           |                         |  |                                                                                                                                                                                                                                                                                                                      
|------- | --------- | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |                        
|Number  |           | Description of Document
|        |           |                        
|        | 2.1(1)    |                         |  | Agreement and Plan of Reorganization between
    Registrant, Inmark Development Corporation and RW Acquisitions,
    Inc. dated as of September 19, 1995.                                                                                                                                                            
|        | 2.2(1)    |                         |  | Agreement and Plan of Merger between the
    Registrant and Rogue Wave Software, Inc., an Oregon corporation,
    dated November 21, 1996.                                                                                                                                                                           
|        | 2.3(3)    |                         |  | Agreement and Plan of Merger and Reorganization
    among Rogue Wave Software, Inc., a Delaware corporation, SR
    Acquisition Corp., a North Carolina corporation, Stingray
    Software, Inc., a North Carolina corporation and the
    shareholders of Stingray Software, Inc., dated as of
    January 19, 1998.
|        | 2.4(4)    |                         |  | Articles of Merger and Plan of Merger dated
    February 27, 1998 filed with the Secretary of State of
    North Carolina on February 27, 1998.                                                                                                                                                                      
|        | 2.5(6)    |                         |  | Agreement and Plan of Merger and Reorganization
    among Rogue Wave Software, Inc., a Delaware corporation, NN
    Acquisition Corp., a Delaware corporation, NobleNet, Inc., a
    Delaware corporation and Steve Lemmo, as agent for the
    stockholders of NobleNet, dated as of February 11, 1999.             
|        | 2.6(6)    |                         |  | Certificate of Merger and Plan of Merger dated
    March 1,1998, filed with the Secretary of State of the
    State of Delaware on March 1, 1999.                                                                                                                                                                    
|        | 3.1(2)    |                         |  | Amended and Restated Certificate of Incorporation
    of Rogue Wave Software, Inc., a Delaware corporation.                                                                                                                                                                                                          
|        | 3.2(1)    |                         |  | Bylaws of Rogue Wave Software, Inc., a Delaware
    corporation.                                                                                                                                                                                                                                                     
|        | 3.3(18)   |                         |  | Amendment to Bylaws of Rogue Wave Software, Inc.,
    effective as of November 3, 2003.                                                                                                                                                                                                                              
|        | 4.1(1)    |                         |  | Reference is made to Exhibits 3.1 and 3.2.                                                                                                                                                                                                                                                                           
|        | 4.2(1)    |                         |  | Specimen Stock Certificate.                                                                                                                                                                                                                                                                                          
|        | 4.3(1)    |                         |  | Amended and Restated Investors Rights
    Agreement between the Registrant and certain investors, dated
    November 10, 1995, as amended June 27, 1996.                                                                                                                                                            
|        | 4.4(5)    |                         |  | Form of Registration Rights Agreement between
    Rogue Wave Software, Inc. and the former shareholders of
    Stingray Software, Inc. and the former shareholders of Stingray
    Software, Inc., dated February 22, 2000.                                                                                          
|        | 4.5(16)   |                         |  | Rights Agreement dated as of January 6, 2003
    between Rogue Wave Software, Inc. and Mellon Investor Services,
    LLC.                                                                                                                                                                                            
|        | 4.6(18)   |                         |  | Amendment to Rights Agreement dated as of
    November 3, 2003.                                                                                                                                                                                                                                                      
|        | 10.1(7)   |                         |  | 1996 Equity Incentive Plan.*                                                                                                                                                                                                                                                                                         
|        | 10.2(8)   |                         |  | Amended and Restated Employee Stock Purchase Plan
    dated June 6, 1996, as amended January 25, 2000.*                                                                                                                                                                                                              
|        | 10.3(1)   |                         |  | Form of Indemnity Agreement to be entered into
    between the Registrant and its officers and directors.*                                                                                                                                                                                                           
|        | 10.12(9)  |                         |  | 1997 Equity Incentive Plan, as amended on
    January 18, 2001.*                                                                                                                                                                                                                                                     
|        | 10.13(10) |                         |  | Separation & Release Agreement between
    Registrant and John D. Iacobucci, dated October 9, 2001.*                                                                                                                                                                                                                 
|        | 10.14(11) |                         |  | Separation & Release Agreement between
    Registrant and James M. Smith, dated January 7, 2002.*                                                                                                                                                                                                                    
|        | 10.15(12) |                         |  | Home Loan Agreement between Registrant and John
    Floisand, dated June 5, 2002.*                                                                                                                                                                                                                                   
|        | 10.16(12) |                         |  | Separation & Release Agreement between
    Registrant and David A. Rice, dated April 25, 2002.*                                                                                                                                                                                                                      
|        | 10.17(13) |                         |  | Separation & Release Agreement between
    Registrant and Marc Manley, dated October 7, 2002.*                                                                                                                                                                                                                       
|        | 10.18(13) |                         |  | Separation & Release Agreement between
    Registrant and Charles M. ONeill dated November 12,
    2002.*                                                                                                                                                                                                           
|        | 10.19(14) |                         |  | Separation & Release Agreement between
    Registrant and John Floisand dated March 24, 2003.*                                                                                                                                                                                                                       
|        | 10.20(14) |                         |  | Separation & Release Agreement between
    Registrant and John A. Racioppi dated April 14, 2003.*                                                                                                                                                                                                                    



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##### Table of Contents



|        |           |                         |  |                                                                                                                                                                                                              
|------- | --------- | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |                        
|Number  |           | Description of Document
|        |           |                        
|        | 10.21(15) |                         |  | Separation & Release Agreement between
    Registrant and Merle A. Waterman dated May 8, 2003.*                                                                                                              
|        | 10.22(17) |                         |  | Separation & Release Agreement between
    Registrant and Kathleen E. Brush dated September 17, 2003.*                                                                                                       
|        | 10.23(17) |                         |  | Change of Control Agreement between Registrant
    and Kathleen E. Brush dated September 17, 2003.*                                                                                                          
|        | 10.24(17) |                         |  | Separation & Release Agreement between
    Registrant and Mary Kreidler Walker dated September 17,
    2003.*                                                                                                
|        | 10.25(17) |                         |  | Change of Control Agreement between Registrant
    and Mary Kreidler Walker dated September 17, 2003.*                                                                                                       
|        | 10.26(17) |                         |  | Separation & Release Agreement between
    Registrant and Thomas E. Gaunt dated September 17, 2003.*                                                                                                         
|        | 10.27(17) |                         |  | Change of Control Agreement between Registrant
    and Thomas E. Gaunt dated September 17, 2003.*                                                                                                            
|        | 14.1(18)  |                         |  | Code of Ethics.                                                                                                                                                                                              
|        | 21.1(18)  |                         |  | List of Subsidiaries of Registrant.                                                                                                                                                                          
|        | 23.1(18)  |                         |  | Consent of KPMG LLP.                                                                                                                                                                                         
|        | 24.1(18)  |                         |  | Power of Attorney (reference is made to signature
    page).                                                                                                                                                 
|        | 31.1(18)  |                         |  | Certification of Chief Executive Officer and
    interim Chief Financial Officer pursuant to Item 601(b)(31)
    of Regulation S-K, as adopted pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002.
|        | 32.1(18)  |                         |  | Certification of Chief Executive Officer and
    interim Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.           



---



| |     |                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------
| | (1) | Filed as an Exhibit to the Registrants
    Registration Statement on Form SB-2, as amended
    (No. 333-13517).      
|
| | (2) | Filed as an Exhibit to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    December 31, 1996.
|
| | (3) | Filed as Exhibit 2.1 to the
    Registrants Form 8-K dated February 27, 1998,
    and filed on March 9, 1998.        
|
| | (4) | Filed as Exhibit 2.2 to the
    Registrants Form 8-K dated February 27, 1998,
    and filed on March 9, 1998.        
|
| | (5) | Filed as Exhibit 4.1 to the
    Registrants Form 8-K dated February 27, 1998,
    and filed on March 9, 1998.        
|
| | (6) | Filed as an Exhibit to the Registrants
    Form 8-K dated March 1, 1999 and filed on
    March 9, 1999.              
|
| | (7) | Filed as an Exhibit to the Registrants
    Proxy Statement on Schedule 14A and filed on
    December 10, 1998.       
|
| | (8) | Filed as an Exhibit to the Registrants
    quarterly report on Form 10-Q for the quarter ended
    December 31, 1999.
|
| | (9) | Filed as an Exhibit to the Registrants
    quarterly report on Form 10-Q for the quarter ended
    December 31, 2000.



|     |                                                                                                                       
|---- | ----------------------------------------------------------------------------------------------------------------------
|(10) | Filed as an Exhibit to the Registrants
    quarterly report on Form 10-Q for the quarter ended
    December 31, 2001.
|    
|(11) | Filed as an Exhibit to the Registrants
    quarterly report on Form 10-Q for the quarter ended
    March 31, 2002.   
|    
|(12) | Filed as an Exhibit to the Registrants
    quarterly report on Form 10-Q for the quarter ended
    June 30, 2002.    
|    
|(13) | Filed as an Exhibit to the Registrants
    annual report on Form 10-K for the year ended
    September 30, 2002.     
|    
|(14) | Filed as an Exhibit to the Registrants
    quarterly report on Form 10-Q for the quarter ended
    March 31, 2003.   



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##### Table of Contents





|     |                                                                                                                                     
|---- | ------------------------------------------------------------------------------------------------------------------------------------
|(15) | Filed as an Exhibit to the Registrants
    quarterly report on Form 10-Q for the quarter ended
    June 30, 2003.                  
|    
|(16) | Filed as an Exhibit to the Registrants
    Form 8-A filed January 6, 2003.                                                         
|    
|(17) | Field as an Exhibit to the Registrants
    Solicitation/ Recommendation Statement on Schedule 14D-9
    filed on November 12, 2003.
|    
|(18) | Filed herewith.                                                                                                                     



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| | * | Constitutes a management contract or compensatory
    plan or arrangement.