##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington DC 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 December 31,
    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 0-23067

CONCORD COMMUNICATIONS, INC.


(Exact name of registrant as specified in its
charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Massachusetts            |  | 04-2710876                          
|(State of incorporation) |  | (IRS Employer Identification Number)

600 Nickerson Road

Marlborough, Massachusetts 01752


(508) 460-4646


(Address and telephone number of principal
executive offices)




---

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

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

Common Stock, par value $0.01 per
share


(Title of class)


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

The aggregate market value of the voting stock
held by non-affiliates of the Registrant, based on the closing
sale price of the registrants common stock on
June 30, 2003, as reported on the NASDAQ National Market
was approximately $240,366,304.

The number of shares outstanding of Common Stock
as of March 8, 2004 was 18,173,173.

DOCUMENTS INCORPORATED BY REFERENCE

|                                                                                                                       |  |                              
|---------------------------------------------------------------------------------------------------------------------- |  | -----------------------------
|Document                                                                                                               |  | Form 10-K Reference          
|                                                                                                                       |  |                              
|Portions of the Registrants Proxy Statement
    for its Annual Meeting of Stockholders to be held on May 5,
    2004. |  | Part III, Items 10, 11 and 12



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TABLE OF CONTENTS

|                                                  |  |                                                                                           |  |  |    | 
|------------------------------------------------- |  | ----------------------------------------------------------------------------------------- |  |  | -- | 
|PART I                                           
|Item 1.                                           |  | Business                                                                                  |  |  | 1  | 
|Item 2.                                           |  | Properties                                                                                |  |  | 21 | 
|Item 3.                                           |  | Legal Proceedings                                                                         |  |  | 21 | 
|Item 4.                                           |  | Submission of Matters to a
    Vote of Security Holders                                   |  |  | 21 | 
|PART II                                          
|Item 5.                                           |  | Market for the
    Registrants Common Stock and Related Stockholder
    Matters          |  |  | 22 | 
|Item 6.                                           |  | Selected Financial Data                                                                   |  |  | 23 | 
|Item 7.                                           |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |  |  | 26 | 
|Item 7A.                                          |  | Quantitative and Qualitative
    Disclosures about Market Risk                            |  |  | 45 | 
|Item 8.                                           |  | Financial Statements and
    Supplementary Data                                           |  |  | 46 | 
|Item 9.                                           |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |  |  | 46 | 
|Item 9A.                                          |  | Controls and Procedures                                                                   |  |  | 46 | 
|PART III                                         
|Item 10.                                          |  | Directors and Officers of
    the Registrant                                              |  |  | 47 | 
|Item 11.                                          |  | Executive Compensation                                                                    |  |  | 48 | 
|Item 12.                                          |  | Security Ownership of
    Certain Beneficial Owners and Management                        |  |  | 48 | 
|Item 13.                                          |  | Certain Relationships and
    Related Transactions                                        |  |  | 48 | 
|Item 14.                                          |  | Principal Accountant Fees
    and Services                                                |  |  | 48 | 
|PART IV                                          
|Item 15.                                          |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                       |  |  | 48 | 
|                                                  |  | Signatures                                                                                |  |  | 74 | 
|                                                  |  | Exhibit Index                                                                             |  |  |    | 
|Ex-10.39 Ellen (Kokos) Rogers agreement, 10/22/03
|Ex-21.01 Subsidiaries of the Company             
|Ex-23.01 Consent of PricewaterhouseCoopers LLP   
|Ex-31.1 Section 302 CEO Certification            
|Ex-31.2 Section 302 CFO Certification            
|Ex-32.1 Section 906 CEO Certification            
|Ex-32.2 Section 906 CFO Certification            







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##### Table of Contents






PART I

This document contains forward-looking
statements. Any statements contained herein that do not describe
historical facts are forward-looking statements. Concord
Communications, Inc. (Concord) makes such
forward-looking statements under the provisions of the
safe harbor section of the Private Securities
Litigation Reform Act of 1995. The forward-looking statements
contained herein are based on current expectations, but are
subject to a number of risks and uncertainties. Concords
actual future results may differ significantly from those stated
in any forward-looking statements. Factors that may cause such
differences include, but are not limited to, the factors
discussed elsewhere in this Form 10-K under the heading
Factors That Could Affect Future Results.





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

Overview and General Development of
Business

Concord is a software company that provides a
Business Service Management (BSM) solution to
enterprise customers, managed service providers and
telecommunication carriers. Our solution, the
eHealth® Suite of products, maps information
technology (IT) services to business needs, measures
the actual end user experience and manages application, system
and network infrastructures.

In 2003, we took steps to augment our product
portfolio by licensing technology from Tavve Software Company
(Tavve) and by acquiring and beginning to integrate
netViz Corporation (netViz). We also raised gross
proceeds of $86.25 million in a convertible debt offering
of 3.0% Convertible Senior Notes due 2023
(Convertible Senior Notes), which significantly
increased our cash reserves.

On July 11, 2003, we entered into a license
agreement with Tavve whereby Concord licensed components of
Tavves technology. We licensed Tavves root cause
analysis and discovery of layer 2 and 3 network topology to
build upon our current position in optimizing application
availability and performance across networks and systems. The
transaction, valued at $1.2 million, included
$0.2 million of prepaid maintenance and $1.0 million
of in-process research and development. This was expensed as
in-process research and development as an integrated product has
not reached technological feasibility and has no alternative
future use. (see Note 4 of the Notes to Consolidated
Financial Statements).

On July 17, 2003, we completed the
acquisition of privately-held netViz. netVizs software
enables users to visualize business processes and allows them to
map relationships within the supporting technology
infrastructure through data-driven icons. Consideration for the
acquisition totaled $10.3 million, including transaction
costs of $0.3 million. The consideration paid to
netVizs stockholders consisted of $5.0 million in
cash paid at closing and $5.0 million of our common stock.
(see Note 2 of the Notes to Consolidated Financial
Statements).

On December 8, 2003, we completed an
offering of $86.25 million of the Convertible Senior Notes
in a private placement. We intend to use the net proceeds of the
offering for working capital and general corporate purposes and
potentially for future acquisitions of complementary businesses
and technologies. The Convertible Senior Notes bear interest at
a rate of 3.0% per year and will rank equally with our future
unsecured senior indebtedness. The Convertible Senior Notes are
contingently convertible into shares of our common stock at an
initial conversion price of approximately $26.87 per share which
converts into 3,209,776 shares of common stock. We may redeem
some or all of the Convertible Senior Notes, at any time, on or
after December 15, 2008. Holders of the Convertible Senior
Notes may elect to convert the notes into shares of our common
stock upon the occurrence of certain events. Holders have the
right to require the Company to purchase all or a portion of
their notes for cash on December 15, 2008,
December 15, 2013 and December 15, 2018. (see
Note 5 of the Notes to Consolidated Financial Statements).

We were organized as a Massachusetts corporation
in 1980 under the name Concord Data Systems, Inc., and changed
our name to Concord Communications, Inc. in 1986. Our principal
executive offices are located at 600 Nickerson Road,
Marlboro, Massachusetts 01752 and our telephone number is
508-460-4646. Our web site is www.concord.com. We make
available, free of charge, through our website, Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to those reports filed
or furnished as soon as reasonably practicable after we have
filed with the Securities and Exchange Commission. The
information posted on our web site is not incorporated into this
Annual Report.

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The public can also obtain access to such reports
at the Securities and Exchange Commissions Public
Reference Room at 450 Fifth Street, NW, Washington, DC
20549, by calling the SEC at 1-800-SEC-0330 or by accessing the
SECs website which is www.sec.gov.


General

We develop, market and support a family of
software products, the eHealth® Suite. Our software
solution links IT services to business needs by proactively
managing the technology that IT services depend upon and
detecting problems before they impact critical business services.

Our software maps IT services to business needs,
measures the actual end-user experience, and manages
applications, systems, and networks. It does this by collecting
data from the underlying infrastructure of network devices,
desktop/server systems and applications. This information is
stored in a database where it is consolidated and analyzed.
Business unit managers and IT personnel use our
eHealth® solution to gain a better understanding of
the availability or performance of applications and IT services.

High performing applications and technology
services are essential for many corporations as these support
critical business services. The business dependency on
applications and IT services requires corporations to closely
measure the impact that IT slowness or downtime has on their
applications and ultimately their business, by managing the
devices like desktop/server systems, the network
infrastructures, as well as the business applications. Our
eHealth® Suite helps businesses by providing
information that businesses use to keep their applications and
IT services highly performing and available. Specific business
market segments that we target are enterprises, service
providers and telecommunication carriers.

Enterprises use our eHealth® Suite of
products to protect their revenue by ensuring that critical
applications are available when needed. Our software also allows
them to reduce expenses by limiting the need for incremental IT
administrators and equipment as their business and IT
infrastructures expand. IT personnel can also use our software
to plan the future capacity of their IT infrastructure.

Service providers, who provide IT services to
enterprises for a fee, use the eHealth® Suite to
monitor compliance with service level agreements, maintain the
quality of their services and to introduce new services for
their business customers.

Telecommunication carriers that provide services
like cable, broadband internet and wireless services to
residential and commercial businesses rely on the
eHealth® Suite to maintain the quality of their
services such as network and bandwidth services, web hosting,
data center/co-location services or providing internet services.

We market to our customers through our own sales
force, sales agents, value-added resellers, distributors,
network service providers, telecommunication carriers, and
original equipment manufacturers (OEMs). As of
December 31, 2003, we had over 3,000 customer accounts
operating in and serving a broad variety of industries. No
single customer accounted for more than 10% of our revenues
during the last three years.

The eHealth® Solution

We provide businesses a software-only solution.
Our eHealth®Suite software is a family of automated,
scalable, web-based management solutions for business-critical
applications, systems, and networks.

Our eHealth® product family
incorporates the following features:

Out-of-the-Box Deployment.Our software can be installed, in
many instances, in a few hours, and for certain products,
installation can actually occur remotely, over the web. Once
installed, our products provide real-time information as well as
historical reports on critical areas of the infrastructure.

Scalable, Software-Only Solution.The eHealth® product
family is designed to simplify management of the heterogeneous
mix of network devices, client and server operating systems,
hardware platforms, technologies, and applications that
typically comprise todays IT infrastructures. Our solution
is capable of data collection, consolidation, analysis and
reporting for up to 80,000 elements by a single console. Our
distributed architecture allows configurations, viewable from a
single console, that supports collection and reporting of up to
1,000,000 elements. In addition, our distributed systems and
application management agents can work autonomously on any
number of systems. Our products are scaleable to meet the
demands of

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management as an organizations IT
infrastructure expands; add-on software licenses or additional
agent software can be purchased as needed.


Multi-Level Reporting.Our software solution generates a
comprehensive package of graphical reports. Information is
provided in these reports for use at multiple levels of
management: chief information officers can get a general
overview of application availability and performance while IT
personnel can get detailed analysis of specific transactions,
client and server components, hardware equipment components,
bandwidth components and network services.

Broad Technology Coverage.Our eHealth® product
family provides embedded intelligence, detailed knowledge, and
automated analysis for over 2,000 different types of devices. It
enables management across a broad spectrum of industry standard
applications like Microsoft Exchange and Information Internet
Server; open source Apache; CRM systems from Siebel; industry
standard operating systems like UNIX, Microsoft Windows NT and
Windows 2000, and Linux; and industry standard networking
technologies such as ATM, Frame Relay, VoIP, Quality of Service
(QoS), DSL, Cable, and Wireless.

Products and Technology

Our eHealth® Suite software is
composed of the eHealth® E2E console and three
solution sets that contain products designed to manage
applications, systems and networks. Our eHealth®
solution also contains a number of cross-technology, suite-wide
products that operate across all technology areas such as Fault
Management and Distributed eHealth®.

eHealth® E2E Console

This solution provides high-level business
managers and IT personnel with a centralized view of
availability and performance data across applications, systems
and networks. The eHealth® E2E Console combines
a user interface for end-users and administrators, an efficient
engine for collecting data, an industry standard database, and
flexible reporting capabilities. The console collects vital
information from workstations, servers, and network devices. Our
software, spanning a range of over 140 different vendors,
currently supports more than 2,000 devices. Once collected, this
data is processed, analyzed and then stored in the database. Our
analysis of information in the database provides information on
which IT personnel can take action. In addition to this
information available via the console, it is also accessible
through a web based user interface or through scheduled reports.

eHealth®  Application
Performance Management Solution

This solution enables IT personnel to manage the
availability and performance of applications by active testing,
passive monitoring and managing applications from a server
perspective.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Active testingis the execution of repeatable,
    scheduled simulated application transactions. Active testing can
    take place at the desktop, server, or router, providing
    availability or performance data about an application from these
    strategic locations in customers infrastructures.                                                                                                     
|
| |  | Passive (or observational) monitoringcollects application performance
    information from actual users in a non-intrusive, observational
    manner; it occurs at the client desktop and measures the actual
    experience of the end user.                                                                                                                                                                  
|
| |  | Managing applications from a server
    perspective This
    solution helps IT personnel optimize the performance and
    availability of applications running on systems, such as
    Microsoft Exchange and SQL Server, Oracle, and Check Point
    FireWall-1. Our solution works by collecting vital application
    metrics from eHealth®application insight modules
    residing on application servers.

Based on data from these three types of
application management, IT personnel from the
eHealth® E2E Console can analyze the historical
availability and performance of applications. The information is
also delivered to our eHealth®  Live
Health product for real-time detection of degrading performance,
service level breaches, and declining availability.

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eHealth®  Systems Management
Solution

This solution provides IT personnel information
and analysis about their business-critical systems and
applications that run on these systems. It enables IT personnel
to manage the performance and availability of systems, such as
workstations and servers. Our software collects key metrics such
as available memory and disk space from our eHealth®
SystemEDGETM agents and other third party agents
residing on NT or UNIX systems. The information collected from
systems and applications is brought back to the
eHealth® E2E Console, where it is stored. IT
personnel can then perform comprehensive analyses on various
combinations of metrics and time periods. The information
collected is also delivered to Concords
eHealth® Live Health application for real-time
detection of system failures, potential outages, and delays.

eHealth®  Network Management
Solution

This solution set helps IT personnel manage
performance and optimize availability of key network resources
including LANs, WANs, Frame Relay, ATM, QoS, Wireless LAN, DSL,
VoIP, cable technologies and Remote Access Equipment. It also
integrates with technologies and operational support systems
(OSS) from Lucent, Newbridge, Hewlett-Packard,
Micromuse and Ciscos VPN Solutions Center. Our solution
automatically discovers, collects information, analyzes, and
reports on network resources enabling network managers to track
performance, plan capacity, and detect sources of service delay
across their networks. Information provided by our solution
permits network managers to understand service levels,
proactively address potential network failures, manage bandwidth
and capacity, watch for security violations, and understand the
usage patterns of the network and the networks various
elements.

Suite Wide Solutions



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | eHealth®
    Fault Management  This real time fault
    management solution identifies outages, potential outages and
    sources of delay across applications and the IT infrastructure
    for rapid problem diagnosis. The Fault Manager module, which
    processes and filters raw data and displays a low number of
    intelligent alarms; thus, reducing noise and displaying alarms
    indicating important problems. These alarms are automatically
    forwarded by our software, via e-mail or pager to the
    appropriate IT personnel, to a network management system or to a
    user-specified action. Upon notification, IT personnel can
    associate the alarms to elements managed by eHealth®
    E2E Console and identify who is at risk for an outage or service
    degradation by delivering correlated impact analysis organized
    by customers, services, technologies, and location. Within fault
    management, our eHealth® Live Health solution
    provides out-of-the-box profiles that detect application
    slowdowns and IT service degradation. Our Live Health Live
    Status diagram highlights customers business topology with
    current alarm status and is a navigation point to review current
    and historical reports. The Live Health browser shows details of
    alarms that result from our trap analysis algorithms. The Live
    Health Live Trend feature enables IT personnel to monitor
    performance patterns of the IT infrastructure.
|
| |  | Distributed
    eHealth®  This
    solution provides the ability to run and manage supported
    eHealth® applications across multiple
    eHealth® systems in a truly distributed fashion. Our
    distributed architecture solution allows configurations,
    viewable from a single console, which supports collection and
    reporting of up to 1,000,000 data elements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Sales and Marketing

We sell our products in the United States,
through a direct sales force, sales agents and value added
resellers (VARs). Internationally, we sell primarily
through distributors.

As of December 31, 2003, we had 28 North
America sales teams, each composed of one direct sales person
and one or two technical support people. The North America sales
teams rolled up into 10 regions targeting the following
four divisions: East, Central, West and Federal Government. We
had 19 international sales teams, also composed of one direct
sales person and one or two technical support people. The
international sales teams rolled up into 8 regions targeting the
following three geographic divisions: Europe, Middle East and
Africa; Asia/ Pacific; and Latin America. In addition, we
employed 26 inside sales, technical

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and management individuals who support both the
North America and International sales teams. As of
December 31, 2003, we employed 128 sales personnel.


We also had relationships with 8 North American
VARs and 49 international distributors. It is the responsibility
of each sales team to manage all sales within its geographic
territory by managing sales agents, VARs, distributors, network
service providers and outsourcers, as well as selling directly
to customers. In 2003, we introduced the Concord Authorized
Reseller (CAR) program, which provides, for a fixed
annual fee, product, services and sales training to our VARs and
distributors. With this program, we purposely reduced the number
of VARs and distributors from 139 to 58 in order to improve the
ability of the indirect channel to better penetrate
international markets, such as Europe and the Asia/ Pacific
region.

Additionally, we had relationships with over 591
telecommunication carriers and managed service providers. These
carriers and service providers offer our products as part of
their service offerings. As of December 31, 2003, we also
had relationships with development partners that work with our
direct sales force, including Alcatel SA, Cap Gemini Ernst &
Young, Cisco Systems, Inc., Dimension Data, Hewlett-Packard Co.,
KPMG Consulting, Juniper Networks, Inc., Micromuse, Inc., Nortel
Networks Corp. and Siemens AG. We also have a professional
services referral program aimed at our key network-consulting
partners. Under this program, we will provide professional
services through these partners directly to our customers.

We generate sales leads through seminars, trade
shows, Internet postings, press articles, referrals, mass
mailings and cold calling as well as through relationships with
sales agents, distributors, VARs, network service providers and
outsourcers. As of December 31, 2003, we employed
32 marketing personnel who position, promote and market our
products. These individuals are engaged in a variety of
activities, including direct marketing, public relations,
tradeshows, advertising, Internet postings, and seminars.

Customer Service

Our post-sales support organization is
responsible for providing ongoing technical support,
professional service and training for our customers. For an
annual maintenance fee, a customer receives telephone, email and
web-based support, as well as updated product releases. We offer
support coverage 24 hours a day, seven days a week to customers
for an additional annual fee. We offer a web-based tool, Service
Express, which enables customers to find, via our website,
answers to questions and solutions to technical support issues.
We also provide a toll-free customer support line to all
customers via our call center located in the United States.
Support personnel are on call to answer the technical support
calls and generally provide same-day responses to questions that
cannot be resolved during the initial call. All calls are
logged, opened, tracked, and closed with regular updates to the
customer, our sales teams and our executive management team. In
early 2003, we opened a call center in Australia in order to
improve our ability to support our customers and resellers in
the Asia-Pacific region. Concords CAR partners typically
provide first line support, with Concords technical
support organization providing second line support.

As of December 31, 2003, we employed
47 technical post-sales support personnel, 5 inside
sales representatives and one administrative customer service
person. In addition, we also had 41 professional service and
training personnel who provide services to our customers on a
fee-for-service basis.

Research and Product Development

Our future success depends in large part on our
ability to enhance existing products and develop new products
that maintain technological competitiveness and deliver value to
existing and new customers. We have made and intend to continue
to make substantial investments in product development.
Extensive product development input is obtained through
customers, our monitoring of end user needs and changes in the
marketplace.

During 2001, we introduced our second fault
management solution, Fault Manager, which combines embedded
intelligence and analysis algorithms to create a filtered number
of intelligent alarms; this enables IT personnel to focus on
taking corrective action rather than researching potential
issues. We also introduced our real-time display tool, Live
StatusTM, which provides individual users an overview
of the business topology of

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the IT infrastructure in a fishbone display.
These two products, Fault Manager and Live StatusTM,
along with our application management solutions, were fully
integrated into the eHealth® Suite. During 2002, we
introduced a new distributed infrastructure with a focus on
large-scale installations and ease of administration. The
introduction of new technologies like DSL, VPN, SAN, Wireless,
and others rounded out the end-to-end solution set in that same
year. During 2003, we integrated the Oracle database software
into our products, which enabled us to replace the Ingres
database with the Oracle product. We now offer one single
database solution to our customers. We also added significant
enhancements to our Wireless offerings and introduced our VoIP
product.


We are currently developing our new Business
Services Console, which will supplement our current E2E Console,
by providing our customers senior managers with a
top-level view of key IT business services. We will also be
integrating the technology we acquired from Tavve and netViz
into our products and are continuing to add enhancements across
our product line.

Research and product development expenses,
excluding in process research & development
(IPRD) expenses, were $22.8 million,
$21.9 million and $24.0 million in 2003, 2002 and 2001,
respectively, representing 21.9%, 23.3% and 27.2% of total
revenues for those 3 years. IPRD expenses were
$1.0 million, $0 and $0 in 2003, 2002 and 2001,
respectively, representing 1.0%, 0.0% and 0.0% of total revenues
for those 3 years. IPRD relates to the licensing of
components of Tavves technology. We licensed Tavves
root cause analysis and discovery of layer 2 and 3 network
topology to build upon Concords our current position in
optimizing application availability and performance across
networks and systems. We anticipate that we will continue to
commit substantial resources to research and development in the
future and that product development expenses may increase in
absolute dollars in future periods. To date, our development
efforts have not resulted in any capitalized software
development costs. As of December 31, 2003, our product
development organization consisted of 136 people.

License and Service Revenues

Our revenues are generated from license revenues
and service revenues. License revenues represent fees earned
from licensing our software. License revenues accounted for
52.1%, 54.6% and 61.8% of total revenues in 2003, 2002 and 2001,
respectively. Concords service revenues consist of fees
for maintenance, training and professional services. Service
revenues accounted for 47.9%, 45.4% and 38.2% of total revenues
in 2003, 2002 and 2001, respectively. See Results of
Operations in the Managements Discussion and
Analysis of Financial Condition and Results of Operations for a
more complete discussion of license and service revenues.

Competition

We compete in the BSM market. This market is
characterized by rapid change and by intense competition.
Although we have experienced competition to date from products
with comparable capabilities, we expect competition to increase
in the future. Further development by our principal competitors,
and acquisitions of smaller companies by large established
vendors and the integration of their products may be the main
source of future competition for us.

The principal competitive factors in the markets
in which we presently compete and may compete in the future
include: (i) The ability to provide an integrated solution;
(ii) product performance; (iii) product features and
functionality, and (iv) price. While we believe that we
currently compete favorably overall with respect to these
factors, there can be no assurance that we will be able to
continue to do so.

We compete or may compete directly or indirectly
with the following categories of companies: (i) application
performance software vendors such as Mercury Interactive;
(ii) fault management software vendors such as
Hewlett-Packard Company; (iii) enterprise management
software, framework and platform providers such as BMC Software,
Inc. and Computer Associates, Inc; (iv) large, well
established management framework companies such as International
Business Machines Corporation and Lucent Technologies Inc., that
have developed network management platforms; (v) wireless
vendors like Metrica, a division of ADC and TTI Telecom
(vi) developers of network element management solutions
such as Cisco Systems,

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Inc., 3Com Corporation and Nortel Networks, Inc.;
(vii) probe vendors such as NetScout Systems, Inc. and
Visual Networks, Inc. and (viii) reporting niche vendors
such as InfoVista.


Additional competitors, including large
networking or telecommunication equipment manufacturers,
telecommunication service providers, and computer hardware and
software companies, may enter this market, thereby further
intensifying competition. Additionally, there can be no
assurance that one or more of our customers may not attempt to
develop competing products internally or that one or more of the
companies we have developed relationships with, such as the
network management platform developers and probe vendors, will
not try to develop one or more products that compete more
directly with our products.

Many of our current and prospective competitors
have significantly greater financial, sales and marketing,
technical and other resources than we do. As a result, these
competitors may be able to devote greater resources than us to
the development, promotion, sale and support of their products.
Moreover, these companies may introduce additional products that
are competitive with or better than our products or may enter
into strategic relationships to offer better products than those
currently offered. There can be no assurance that our products
would effectively compete with such new products. In addition to
the risk that other products will be developed, current and
prospective competitors may be able to market, sell and support
their products more effectively.

To remain competitive, we must continue to invest
in research and development, sales and marketing, and customer
service and support. In addition, as we enter new markets and
utilize different distribution channels, the technical
requirements and levels and bases of competition may be
different than those experienced in our current market. There
can be no assurance that we will be able to successfully compete
against either current or potential competitors in the future.

Intellectual Property and Other Proprietary
Rights

Our success depends significantly upon our
proprietary technology. We rely on a combination of patent,
copyright, trademark and trade secret laws, non-disclosure
agreements, and other contractual provisions to establish,
maintain, and protect our proprietary rights; however, use of
contractual, statutory and common law protections of our
proprietary technologies offer only limited protection.

We have nine issued U.S. patents, thirteen
pending U.S. patent applications and various foreign
counterparts. We cannot ensure that patents will issue from our
pending applications or from any future applications or that, if
issued, any claims allowed will be sufficiently broad to protect
our technology. In addition, we cannot ensure that any patents
that have been or may be issued will not be challenged,
invalidated or circumvented, or that any rights granted by those
patents would protect our proprietary rights. Failure of any
patents to protect our technology may make it easier for our
competitors to offer equivalent or superior technology.

We also continue to protect our intellectual
property through the use of copyright, trademark, and trade
secret laws. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise
misappropriate aspects of our products or services, or to obtain
and use information that we regard as proprietary. Third parties
may also independently develop similar technology without breach
of our proprietary rights.

The laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the
United States. In addition, many of our products are licensed
under end user license agreements (also known as shrink-wrap
licenses) that are not signed by licensees. The law governing
the enforceability of shrink-wrap license agreements is not
settled in most jurisdictions. There can be no guarantee that we
would achieve success in enforcing one or more shrink-wrap
license agreements if we sought to do so in a court of law.

7



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##### Table of Contents



Revenue by Geographic region

The following table presents Concords
revenue by major geographic regions (in thousands):

|                            |       |                         |        |                |  |      |      |                |   |      |        |        |  |  |      |     |   |   |        |        | 
|--------------------------- | ----- | ----------------------- | ------ | -------------- |  | ---- | ---- | -------------- | - | ---- | ------ | ------ |  |  | ---- | --- | - | - | ------ | ------ | 
|                            |       |                        
|                            |       | Year Ended December, 31
|                            |       |                        
|                            |       | 2003                    |        | Percent Change |  | 2002 |      | Percent Change |   | 2001
|                            |       |                         |        |                |  |      |      |                |   |     
|                            |       |                        
|                            |       | (Dollars in thousands) 
|United States               |       | $                       | 59,325 |                |  |      | 2.6  | %              |   | $    | 57,812 |        |  |  | 5.6  | %   |   | $ | 54,746 |       
|United Kingdom              |       |                         | 10,412 |                |  |      | 81.7 | %              |   |      | 5,731  |        |  |  | 3.3  | %   |   |   | 5,546  |       
|Europe (excluding the U.K.) |       |                         | 19,907 |                |  |      | 19.6 | %              |   |      | 16,640 |        |  |  | 14.0 | %   |   |   | 14,596 |       
|Rest of the World           |       |                         | 14,419 |                |  |      | 5.5  | %              |   |      | 13,661 |        |  |  | 4.4  | %   |   |   | 13,090 |       
|                            |       |                         |        |                |  |      |      |                |   |      |        |        |  |  |      |     |   |   |        |       
|                            | Total |                         | $      | 104,063        |  |      |      | 10.9           | % |      | $      | 93,844 |  |  |      | 6.7 | % |   | $      | 87,978 | 
|                            |       |                         |        |                |  |      |      |                |   |      |        |        |  |  |      |     |   |   |        |       
|Percent of Revenues         |       |                         |        |                |  |      |      |                |   |      |        |        |  |  |      |     |   |   |        |       
|United States               |       |                         | 57.0%  |                |  |      |      |                |   |      | 61.6   | %      |  |  |      |     |   |   | 62.2   | %     
|United Kingdom              |       |                         | 10.0%  |                |  |      |      |                |   |      | 6.1    | %      |  |  |      |     |   |   | 6.3    | %     
|Europe (excluding the U.K.) |       |                         | 19.1%  |                |  |      |      |                |   |      | 17.7   | %      |  |  |      |     |   |   | 16.6   | %     
|Rest of the World           |       |                         | 13.9%  |                |  |      |      |                |   |      | 14.6   | %      |  |  |      |     |   |   | 14.9   | %     

No one country, except the United States and the
United Kingdom, accounted for greater than 10% of total revenues
in 2003. No one country, except the United States, accounted for
greater than 10% of total revenues in 2002 and 2001.

Business Segment Data

Enterprise customers comprised 55.0%, 57.8% and
55.5% of revenues in 2003, 2002 and 2001, respectively. Managed
service providers and telecommunication carriers comprised
45.0%, 42.2% and 44.5% of revenues in 2003, 2002 and 2001,
respectively. See Note 13 of Notes to Consolidated
Financial Statements for information regarding revenue by
segment. Also See Results of Operations in the
Managements Discussion and Analysis of Financial Condition
and Results of Operations for a more complete discussion of
segment revenues.

Employees

As of December 31, 2003, we had a total of
461 employees, all but 46 of whom were based in the United
States. Of the total, 136 were in research and development, 94
were in customer service, 128 were in sales, 32 were in
marketing, 32 were in operations and information technology and
39 were in finance, human resources and administration. Our
future performance depends in part, upon the continued service
of our key engineering, technical support and sales personnel.
Competition for such personnel can be intense and there can be
no assurance that we will be successful in attracting or
retaining such personnel in the future. None of our employees
are represented by a labor union; however, in France, our
employees are represented by workers councils or other
representational organizations. We have not experienced any work
stoppages and believe that our employee relations are good.

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FACTORS THAT COULD AFFECT FUTURE
RESULTS

References in these risk factors to
we, our, the Company,
Concord, and us refer to Concord
Communications, Inc., a Massachusetts corporation. Any
investment in our common stock involves a high degree of risk.
If any of the following risks actually occur, our business,
results of operations and financial condition would likely
suffer.

This annual report includes or incorporates by
reference forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended (the Securities Act), and Section 21E
of the Securities Exchange Act of 1934 (the Exchange
Act). For example, statements in this Annual Report
regarding our financial position, business strategy and other
plans and objectives for future operations, and assumptions and
predictions about future product demand, supply, manufacturing,
costs, marketing and pricing factors are all forward-looking
statements. We make such forward-looking statements under the
provisions of the safe harbor section of the Private
Securities Litigation Reform Act of 1995. When we use words like
intend, anticipate, believe,
estimate, plan, will or
expect, and other terms of like import, we are
making forward-looking statements. We believe that the
assumptions and expectations reflected in such forward-looking
statements are reasonable, based on information available to us
on the date hereof, but we cannot assure you that these
assumptions and expectations will prove to have been correct or
that we will take any action that we may presently be planning.
We have disclosed certain important factors that could cause our
actual future results to differ materially from our current
expectations, including:



| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | variations in our quarterly operating results;                                                                          
|
| |  | integration of acquired products and technologies;                                                                      
|
| |  | announcements of technological innovations or new
    products by us or our competitors;                                
|
| |  | introduction of new products or new pricing
    policies by us or our competitors;                                      
|
| |  | announcements by us or our competitors of
    significant customer orders;                                              
|
| |  | acquisitions or strategic alliances by us or
    others in our industry;                                                
|
| |  | changes in global economic and political
    conditions;                                                                
|
| |  | relationships with strategic partners and other
    evolving distribution channels;                                     
|
| |  | the hiring or departure of key personnel;                                                                               
|
| |  | our failure to continue to expand into
    international markets;                                                       
|
| |  | failure to obtain or protect our intellectual
    property rights;                                                      
|
| |  | changes in the software industry cycle;                                                                                 
|
| |  | changes in the market for our products and
    services;                                                                
|
| |  | changes in market valuations of companies within
    the software industry;                                             
|
| |  | changes in estimates of our performance or
    recommendations by financial analysts; and                               
|
| |  | the other risks and uncertainties described in
    this prospectus under Factors That Could Affect Future
    Results.

You should understand that forward-looking
statements made in connection with this annual report are
necessarily qualified by these factors. We are not undertaking
to publicly update or revise any forward-looking statement if we
obtain new information or upon the occurrence of future events
or otherwise.

Our future operating results are
uncertain.

Our product functionality has expanded to include
business service management features to penetrate the networks,
systems and application performance markets. We have a limited
operating history in these expanded markets upon which we can
evaluate our business. These markets are highly competitive and

9



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rapidly evolving. Additionally, many of our
competitors in these markets have longer operating histories and
greater resources. Our limited operating history, intense
competition in the market, and an uncertain economic climate
make the accurate prediction of future results of operations
difficult or impossible.


In addition to sales of our eHealth®
Suite, we will continue to sell netViz® products,
which enable customers to visualize business processes and map
relationships within the supporting technology infrastructure
through data-driven icons. We have a limited operating history
in this market making the accurate prediction of future results
of operations difficult or impossible.

Our future operating results must be considered
in light of these factors.

Failure to successfully integrate netViz and
future acquisitions may adversely impact our business.

In July 2003, we completed the acquisition
of netViz, a developer of software that enables customers to
visualize business processes and allows them to map
relationships within the supporting technology infrastructure
through data-driven icons. The acquisition of netViz provides us
the opportunity to integrate the netViz products and our
existing products and to continue to market and sell the netViz
products as a distinct product set. Additionally, we must
integrate the netViz personnel, manage operations and personnel
in multiple locations, and retain netViz customers. Our efforts
to integrate netViz may not be successful, which could adversely
impact our business. Future acquisition targets will likely
present integration challenges similar to the challenges
encountered in connection with the acquisition of netViz. The
netViz acquisition and future acquisitions, if any, therefore
may adversely impact our business through:



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | failure to successfully integrate the acquired
    products;                                                                                    
|
| |  | failure to successfully integrate personnel and
    management structures;                                                                      
|
| |  | failure to retain key customers;                                                                                                                
|
| |  | loss of key employees;                                                                                                                          
|
| |  | failure to effectively control costs associated
    with the integration (including research and development costs);                            
|
| |  | failure to meet expected timelines for product
    development and commercialization; and                                                       
|
| |  | exposure to liabilities of the acquired company
    that were not known or accurately evaluated by us prior to
    consummating the acquisition.

Even if our acquisitions are fully and
successfully integrated, we may not fully realize all of the
expected benefits of such acquisitions, including the expected
financial results or the expected benefits to our product line.

Failure to successfully incorporate new
technologies may adversely impact our business.

During the third fiscal quarter of 2003, we
completed the acquisition of netViz and entered into a license
agreement with Tavve to acquire Tavves technology relating
to root cause analysis and discovery of layers 2 and 3 of
the network topology. We plan to integrate the netViz
technology, the eHealth®Suite technology, and the
Tavve technology to enable customers to employ data-driven icons
to visualize and take action on the critical relationships
between business processes, application services, and network
and system infrastructures.

During the fourth fiscal quarter of 2003, we
launched an enhanced VoIP solution which is designed to enable
customers to manage the voice traffic carried on their IP
network.

While we believe the incorporation of these
technologies into our products will increase our products and
services revenue, the markets for these integrated products are
at an early stage of development and is evolving, thereby making
it difficult to assess:



| |   |                           
| | - | --------------------------
| |  | the size of the market;   
|
| |  | the competitive landscape;

10



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| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | the appropriate features and prices for products
    to address this market;           
|
| |  | the optimal distribution and marketing strategy;
    and                               
|
| |  | the market that will develop and the impact of
    large competitors within the market.

Failure to successfully market and sell our
integrated product may adversely impact our business.

We cannot ensure that our revenues will grow
or that we will continue to be profitable.

We have expended considerable resources to the
research and development of new technologies and new or improved
product features that have enabled us to retain existing
customers and penetrate new markets both in the United States
and internationally. This investment in product development
allowed us to achieve revenue growth and profitability for the
fiscal year ended December 31, 2003. Despite our results,
we cannot ensure that we can continue to generate revenue growth
on a quarterly or annual basis, or that we can achieve or
sustain any revenue growth in the future.

In an effort to retain profitability and
adequately fund research and development, we continue to work to
reduce or maintain our operating expenses as a percentage of
total revenues while maintaining funding for product
development. However, competition in the marketplace may require
us to increase our operating expenses in the future in order to:



| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | fund higher levels of research and development;                 
|
| |  | increase our sales and marketing efforts;                       
|
| |  | increase sales staff and sales training programs;               
|
| |  | develop new distribution channels;                              
|
| |  | broaden our customer support capabilities; and                  
|
| |  | respond to unforeseeable economic or business
    circumstances.

To the extent that increases in our operating
expenses precede or are not followed by increased revenues, our
profitability will be at risk.

Our operating results may fluctuate.

We are likely to experience significant
fluctuations in our operating results caused by many factors,
including, but not limited to:



| |   |                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in the demand for our products by
    customers or groups of customers;                                                                                                                                    
|
| |  | the timing, composition, and size of orders from
    our customers, including the tendency for significant bookings
    to occur in the final two weeks of each fiscal quarter
    (including the fiscal year end);
|
| |  | difficulties penetrating new markets for our
    products;                                                                                                                                                         
|
| |  | costs associated with the integration of acquired
    companies and/or new technologies;                                                                                                                           
|
| |  | our customers spending patterns and
    budgetary resources for our products;                                                                                                                                     
|
| |  | geopolitical conditions in the world;                                                                                                                                                                              
|
| |  | the success of our new customer generation
    activities;                                                                                                                                                         
|
| |  | introductions or enhancements of products, or
    delays in the introductions or enhancements of products, by us
    or our competitors;                                                                           
|
| |  | changes in our pricing policies or those of our
    competitors;                                                                                                                                                   
|
| |  | changes in the distribution channels through
    which our products are sold;                                                                                                                                      

11



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| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | our success in anticipating and effectively
    adapting to developing markets and rapidly changing technologies;                    
|
| |  | our success in attracting, retaining, and
    motivating qualified personnel;                                                        
|
| |  | the publication of opinions about us and our
    products, or our competitors and their products, by industry
    analysts or others;
|
| |  | changes in general economic conditions; and                                                                                          
|
| |  | changes in accounting rules.                                                                                                         

Though our service revenues have been increasing
as a percentage of total revenues, we do not have a significant
ongoing revenue stream that may mitigate quarterly fluctuations
in operating results.

Due to all of the foregoing factors, we believe
that our quarterly operating results are likely to vary
significantly in the future. Therefore, in some future quarter
our results of operations may fall below the expectations of
securities analysts and investors. In such event, the trading
price of our common stock will likely suffer.

We have increased our leverage as a result of
the sale of the Convertible Senior Notes.

In connection with the sale of the Convertible
Senior Notes, we have incurred $86.25 million of
indebtedness. As a result of this indebtedness, our interest
payment obligations have increased. The degree to which we are
now leveraged could adversely affect our ability to obtain
further financing for working capital, acquisitions or other
purposes and could make us more vulnerable to industry downturns
and competitive pressures. Our ability to meet our debt service
obligations will be dependent upon our future performance, which
may be subject to the financial, business and other factors
affecting our operations, many of which are beyond our control.

Our debt service obligations may adversely
affect our cash flow.

A higher level of indebtedness increases the risk
that we may default on our debt obligations. We cannot assure
you that we will be able to generate sufficient cash flow to pay
the interest on our debt or that future working capital,
borrowings or equity financing will be available to pay or
refinance such debt. If we are unable to generate sufficient
cash flow to pay the interest on our debt, we may have to delay
or curtail our research and development programs.

The level of our indebtedness among other things,
could:



| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | make it difficult for us to make payments on the
    Convertible Senior Notes;                                                                                          
|
| |  | make it difficult for us to obtain any necessary
    financing in the future for working capital, capital
    expenditures, debt service requirements or other purposes;
|
| |  | limit our flexibility in planning for, or
    reacting to, changes in our business and the industry in which
    we compete; and                                        
|
| |  | make us more vulnerable in the event of a
    downturn in our business.                                                                                                 

Our success is dependent upon sales to
telecommunication carriers, service providers, and enterprise
customers.

We derive and likely will continue to derive a
significant portion of our revenues from the sales of our
products to telecommunication carriers, service providers, and
enterprise customers. Sales to service providers in Europe have
increased based upon an increased demand for outsourced services
by European enterprise customers. Despite this increase in sales
to European service providers, we have been negatively affected
by the general weakness in capital spending within the
aforementioned markets, particularly in the telecommunications
industry, making future results difficult to predict. The volume
of sales of our products and services to

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telecommunication carriers, service providers,
and enterprise customers may increase at a slower rate than we
expect or our sales to these customers may decrease.


The market for business service management
software is emerging.

The market for our business service management
software is in an early stage of development. Targeting this
market is central to the development and marketing of our
products, but this market is emerging, and it is difficult to
assess:



| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | the size of the business service management
    market;                                
|
| |  | the appropriate features and prices for products
    to address this market;           
|
| |  | the optimal distribution strategy; and                                                 
|
| |  | the market that will develop and the impact of
    large competitors within the market.

Presently, this market is very competitive and we
are in direct competition with larger companies that have
substantially greater resources to fund the development of
competitive products and the creation and maintenance of direct
and indirect sales channels. The rapidly evolving application
performance market and the continued presence of larger
companies in this market may impact our ability to retain or
increase our market share.

Increased royalty costs could adversely impact
our business.

We license from third parties, generally on a
non-exclusive basis, certain technologies used in our products,
including TavveTM technology and the Oracle®
database. The incorporation of third party technology is an
important component of our product development and an increase
in royalty costs associated with our distribution of third party
technologies could adversely impact our business. Additionally,
the termination of any such licenses, or the failure of the
third-party licensors to adequately maintain or update their
products, could require us to implement technology offered by
alternative sources, and any required replacement licenses and
associated royalties could prove costly and adversely impact our
business.

The market for application availability and
performance management software is emerging.

The market for our application availability and
performance products is in an early stage of development.
Although the rapid expansion and increasing complexity of
computer applications, systems, and networks in recent years
have increased the demand for availability (i.e. fault) and
performance management software products, the awareness of, and
the demand for, an integrated fault and performance solution is
a recent development; therefore, it is difficult to assess:



| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | the size of this market;                                                               
|
| |  | the appropriate features and prices for products
    to address this market;           
|
| |  | the optimal distribution strategy; and                                                 
|
| |  | the market that will develop and the impact of
    large competitors within the market.

The development of this market and our growth
will depend significantly upon the desire and success of
telecommunication carriers, managed services providers, and
enterprise customers to integrate availability and performance
management functionality into their applications, systems, and
networks. Moreover, this market is very competitive and we are
in direct competition with larger companies that have
substantially greater resources to fund the development of
competitive products and the creation and maintenance of direct
and indirect sales channels. The integration of availability and
performance management functionality into the applications,
systems, and networks of telecommunication carriers, managed
services providers, and enterprise customers and the presence of
larger competitors in this market may impact our ability to
retain or increase our market share.

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The markets for our products are intensely
competitive and rapidly evolving.

We sell software products designed to help
companies effectively manage their applications, systems, and
networks. As we offer application availability and performance
products to manage the IT infrastructure, we compete both
with companies that market comprehensive products to manage the
IT infrastructure and with companies that market products
for particular segments of the IT infrastructure
(e.g. applications and networks). The markets for our
products are intensely competitive and rapidly evolving. Our
competitors include:



| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | application performance software vendors;                                                                                      
|
| |  | fault management software vendors;                                                                                             
|
| |  | IT visualization software vendors;                                                                                             
|
| |  | application availability and performance
    management software vendors;                                                      
|
| |  | report toolset niche vendors;                                                                                                  
|
| |  | enterprise management software, framework and
    platform providers;                                                          
|
| |  | software vendors providing service assurance for
    the wireless market;                                                      
|
| |  | large, well-established management framework
    companies that have developed network or application management
    platforms;
|
| |  | developers of network element management
    solutions;                                                                        
|
| |  | probe vendors;                                                                                                                 
|
| |  | telecommunications vendors;                                                                                                    
|
| |  | system agent vendors; and                                                                                                      
|
| |  | vendors that provide, as a service, some of the
    functionality of our products.                                             

We expect competition to persist, increase, and
intensify in the future, which will likely result in price
competition within our relevant market. If we do not provide
products that achieve success in our market in the short term,
we could suffer an insurmountable loss in market share and brand
name acceptance. We cannot ensure that we will compete
effectively with current and future competitors.

Market acceptance of our eHealth®
products and services is critical to our success.

We currently derive significant revenues from the
sale of eHealth® Suite products and services, and we
expect that revenues from these products and services will
continue to account for a significant portion of our revenues in
the foreseeable future. Broad market acceptance of these
products and services is critical to our future success. We
cannot ensure that market acceptance of our eHealth®
Suite products and services will increase or even remain at
current levels. Factors that may affect the market acceptance of
our products and services include:



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | the availability and price of competing
    integrated solutions, products and technologies;                          
|
| |  | our ability to continue to provide product
    functionality and related services to meet the needs of our
    market;
|
| |  | our ability to continue research and development
    at levels necessary for the growth of our business;              
|
| |  | the demand for integrated, as opposed to
    stand-alone, solutions; and                                              
|
| |  | the success of our sales efforts and those of our
    marketing partners.                                             

Moreover, if demand for integrated availability
and performance management software products and services
increases, we anticipate that our competitors will introduce
additional competitive products and

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services and new competitors could enter our
market and offer alternative products and services resulting in
decreased market acceptance of our products and services.


Market acceptance of our
netViz® products is critical
to our success.

We market and sell netViz products and services.
Our revenue is derived primarily from the sale of
eHealth® Suite products and services, but revenue
derived from the sale of netViz products and services
constitutes an important component of our quarterly and annual
results. Market acceptance of the netViz products and services
is critical to our future success. We cannot ensure that market
acceptance of netViz products and services will increase or even
remain at current levels. Factors that may affect the market
acceptance of netViz products and services include:



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | the availability and price of competitive
    products and services;                                                  
|
| |  | the ability of others to develop products and
    services that meet the needs of the market;                         
|
| |  | our ability to continue to provide product
    functionality and related services to meet the needs of our
    market;
|
| |  | our ability to continue research and development
    at levels necessary for the growth of our business;              
|
| |  | the demand for data-driven visualization
    software; and                                                            
|
| |  | the success of our sales efforts and those of our
    channel partners.                                               

Moreover, if demand for data-driven visualization
products increases, we anticipate increased competition in the
market from existing and new competitors that could enter our
market and offer alternative products resulting in decreased
market acceptance of our products.

We may need future capital funding.

We plan to continue to expend substantial funds
on the continued development, marketing, and sale of our
products. While we have approximately $161.9 million in
short term investments (cash, cash equivalents and marketable
securities), excluding restricted cash totaling
$0.2 million as of December 31, 2003, we cannot ensure
that our existing capital resources and any funds that may be
generated from future operations together will be sufficient to
finance our future operations or that other sources of funding
will be available on terms acceptable to us, if at all. In
addition, future sales of substantial amounts of our securities
in the public market could adversely affect prevailing market
prices and could impair our future ability to raise capital
through the sale of our securities.

We must introduce product enhancements and new
products on a timely basis.

Because of rapid technological change in the
software industry, potential changes in the architecture of the
IT infrastructure, changes in the software markets in which
our product and services are sold, and changes in industry
standards, the market acceptance of updated versions of our
products is difficult to estimate. We cannot ensure that:



| |   |                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we will successfully develop and market
    enhancements to our products or successfully develop new
    products that respond to technological changes, evolving
    industry standards, or customer requirements;
|
| |  | we will not experience difficulties that could
    delay or prevent the successful development, introduction, and
    sale of enhancements or new products; or                                                     
|
| |  | enhancements or new products will adequately
    address the requirements of the marketplace and achieve market
    acceptance.                                                                                    

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The need for our products may decrease if
manufacturers incorporate our product features into their
product offerings.

Our products manage the performance of computer
applications, systems, and networks. Presently, manufacturers of
both hardware and software have not implemented these management
functions into their products in any significant manner. These
products typically include, but are not limited to, operating
systems, workstations, network devices, and software. If
manufacturers begin to incorporate these management functions
into their products it may decrease the value of our products
and have a substantial impact on our business.

Current geopolitical instability and the
continuing threat of domestic and international terrorist
attacks may adversely impact our revenues.

International tensions, exacerbated by the war in
Iraq and the war against global terrorism, contribute to an
uncertain political and economic climate, both in the United
States and globally, which may affect our ability to generate
revenue on a predictable basis. As we sell products both in the
United States and internationally, the threat of future
terrorist attacks may adversely affect our business.

Our common stock price could experience
significant volatility.

The market price of our common stock may be
highly volatile and could be subject to wide fluctuations in
response to:



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | variations in results of operations;                                                                                               
|
| |  | announcements of technological innovations or new
    products by us or our competitors;                                           
|
| |  | changes in financial estimates by securities
    analysts;                                                                         
|
| |  | announcements of results of operations by other
    companies;                                                                     
|
| |  | announcements by government or other agencies
    regarding the economic health of the United States and the rest
    of the world;
|
| |  | announcements relating to financial improprieties
    by public companies; or                                                      
|
| |  | other events or factors.                                                                                                           

In addition, the financial markets have
experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of
many high technology companies and that often have been
unrelated to the operating performance of such companies or have
resulted from the failure of the operating results of such
companies to meet market expectations in a particular quarter.
Broad market fluctuations or any failure of our operating
results in a particular quarter to meet market expectations may
adversely affect the market price of our common stock leading to
an increased risk of securities class action litigation. Such
litigation could result in substantial costs and a diversion of
our attention and resources.

Our industry is subject to rapid technological
change. Our success depends upon maintenance of standard
protocols.

The software industry is characterized by:



| |   |                                        
| | - | ---------------------------------------
| |  | rapid technological change;            
|
| |  | frequent introductions of new products;
|
| |  | changes in customer demands; and       
|
| |  | evolving industry standards.           

The introduction of products embodying new
technologies and the emergence of new industry standards can
render existing products and integrated product solutions
obsolete and unmarketable. While we actively

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work to develop products that operate with
standard protocols, any change in industry standards or the
emergence of new network technologies could affect the
compatibility of our products, which in turn could affect the
demand for, or the pricing of, our products and services.


We rely on strategic partners and other
evolving distribution channels.

Our distribution strategy is to develop multiple
distribution channels, including sales through:



| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | strategic marketing partners;                                   
|
| |  | value added resellers;                                          
|
| |  | service providers;                                              
|
| |  | system integrators;                                             
|
| |  | telecommunication carriers;                                     
|
| |  | original equipment manufacturers; and                           
|
| |  | independent software vendors and international
    distributors.

We have developed a number of these relationships
and intend to continue to develop new channel
partner relationships. We have focused on identifying and
developing our key distribution partners worldwide to maximize
the success of our indirect sales. As part of this process, we
have decreased the total number of distributors selling our
products and services, but increased the quality and focus of
our most valuable distributors through improved training and
development programs. Our success will depend in large part on
our development of these more focused distribution relationships
and on the performance and success of other third parties that
distribute our products and services, particularly
telecommunication carriers and other network service providers.
We sell our products and services in the United States through
both direct sales to customers and indirect sales to customers
through our channel partners. Outside the United States, we sell
our products and services primarily through indirect sales via
our channel partners, but direct sales to customers have been
increasing as we have expanded our sales personnel in our
markets. Our international channel partners are located in
Europe, the Middle East, Africa, Asia, and North and South
America and are subject to local laws, regulations, and customs
that may make it difficult to accurately assess the potential
revenues that can be generated from a certain market. Our
success depends upon our ability to attract and retain valuable
channel partners and to accurately assess the size and vitality
of the markets in which our products and services are sold.
While we have implemented policies and procedures to achieve
this, we cannot predict the extent to which we are able to
attract and retain financially stable, motivated channel
partners. Additionally, our channel partners may not be
successful in marketing and selling our products and services.
We may:



| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fail to attract important and effective channel
    partners;                                                                                                                                                                            
|
| |  | fail to penetrate our targeted market segments
    through the use of channel partners; or                                                                                                                                               
|
| |  | lose any of our channel partners, as a result of
    competitive products and services offered by other companies,
    products and services developed internally by these channel
    partners, their financial insolvency or otherwise.

We may fail to manage successfully the growth
of our business.

We have experienced employee turnover in our
sales and operations personnel; our products and services have
become increasingly complex, and our distribution channels are
being developed and expanded. The rapid evolution of our markets
and the increasing complexity of our products and services have
placed, and is likely to continue to place, significant strains
on our administrative, operational, and financial resources and
increase demands on our internal systems, procedures, and
controls that may impact our ability to grow our business.

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Our success depends on our retention of key
personnel.

Our performance depends substantially on the
performance of our key technical, senior management, and sales
and marketing personnel. We may lose the services of any of such
persons. Despite current weak economic conditions, we experience
intense competition for such personnel and are constantly
exploring new avenues for attracting and retaining key
personnel. However, we cannot ensure that we will successfully
attract, assimilate, or retain highly qualified technical,
managerial or sales and marketing personnel in the future.

Our failure to continue to expand into
international markets could harm our business.

We intend to continue to expand our operations
outside of the United States and enter additional international
markets, primarily through the establishment of channel partner
arrangements. As mentioned above, we have concentrated recently
on developing more focused relationships with fewer key
distributors. We expect to commit additional time and
development resources to customizing our products and services
for selected international markets and to developing
international sales and support channels. We cannot ensure that
such efforts will be successful.

We face certain difficulties and risks inherent
in doing business internationally, including, but not limited to:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | costs of customizing products and services for
    international markets;                   
|
| |  | dependence on independent resellers;                                                        
|
| |  | multiple and conflicting regulations;                                                       
|
| |  | exchange controls;                                                                          
|
| |  | longer payment cycles;                                                                      
|
| |  | unexpected changes in regulatory requirements;                                              
|
| |  | import and export restrictions and tariffs;                                                 
|
| |  | difficulties in staffing and managing
    international operations;                         
|
| |  | greater difficulty or delay in accounts
    receivable collections;                         
|
| |  | potentially adverse tax consequences;                                                       
|
| |  | compliance with a variety of laws outside the
    United States;                            
|
| |  | the impact of possible recessionary environments
    in economies outside the United States;
|
| |  | political and economic instability; and                                                     
|
| |  | exposure to foreign currency fluctuations.                                                  

Our successful expansion into certain countries
will require additional modification of our products and
services, particularly national language support. Presently, the
majority of our current export sales are denominated in United
States dollars. To the extent that international sales continue
to be denominated in United States dollars, an increase in the
value of the United States dollar relative to other currencies
could make our products and services more expensive and,
therefore, potentially less competitive in international
markets. In certain European Union countries, however, we have
introduced pricing in Euros. While we do maintain a foreign
currency-hedging program on accounts receivable, to the extent
that future international sales are denominated in foreign
currency, our operating results will be subject to risks
associated with foreign currency fluctuation. Additionally, as
we increase our international sales, seasonal fluctuations in
revenue generation resulting from lower sales that typically
occur during the summer months in Europe and other parts of the
world may affect our total revenues.

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Our failure to protect our intellectual
property rights may harm our competitive position.

Our success depends significantly upon our
proprietary technology. We rely on a combination of patent,
copyright, trademark and trade secret laws, product and services
agreements, non-disclosure agreements, and other contractual
provisions to establish, maintain, and protect our proprietary
rights. These means afford only limited protection.

We cannot ensure that patents will issue from our
pending applications or from any future applications or that, if
issued, any claims allowed will be sufficiently broad to protect
our technology. In addition, we cannot ensure that any patents
that have been or may be issued will not be challenged,
invalidated or circumvented, or that any rights granted by those
patents would protect our proprietary rights. Failure of any
patents to protect our technology may make it easier for our
competitors to offer equivalent or superior technology.

We have sought also to protect our intellectual
property through the use of copyright, trademark, and trade
secret laws. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our
products or services, or to obtain and use information that we
regard as proprietary. Third parties may also independently
develop similar technology without breach of our proprietary
rights.

In addition, the laws of some foreign countries
do not protect proprietary rights to as great an extent as do
the laws of the United States. In addition, some of our products
are licensed under end user license agreements (also known as
shrink-wrap licenses) that are not signed by licensees. The law
governing the enforceability of shrink-wrap license agreements
is not settled in most jurisdictions. There can be no guarantee
that we would achieve success in enforcing one or more
shrink-wrap license agreements if we sought to do so in a court
of law.

We license certain technologies from third
parties.

We license from third parties, generally on a
non-exclusive basis, certain technologies used in our products,
including the root cause analysis and discovery of layer 2
and 3 network topology technology from Tavve that is expected to
be integrated with Concord technology to expand the
functionality of our products. The incorporation of third party
technology is an important component of our product development
and the termination of any such licenses, or the failure of the
third-party licensors to adequately maintain or update their
products, could result in delay in our shipment of certain of
our products while we seek to implement technology offered by
alternative sources, and any required replacement licenses could
prove costly. While it may be necessary or desirable in the
future to obtain other licenses relating to one or more of our
products or relating to current or future technologies, we
cannot ensure that we will be successful in doing so on
commercially reasonable terms or at all.

Recently, we started shipping Oracle®
software as the database on which the eHealth® Suite
runs. While we believe the switch to Oracle will make our
products even more robust and we are comfortable with the choice
of Oracle as a database vendor, there is no guarantee that our
customers will readily accept this change. As with any vendor,
there also is no guarantee that Oracle will be able to continue
to deliver to us an acceptable database solution, nor that the
product Oracle delivers will continue to interface effectively
with our eHealth® Suite of products.

Intellectual property infringement claims
would harm our business.

Although we do not believe that we are infringing
upon the intellectual property rights of others, claims of
infringement are becoming increasingly common as the software
industry develops legal protections for software products.
Litigation may be necessary to protect our proprietary
technology, and third parties may assert infringement claims
against us with respect to their proprietary rights. Any claims
or litigation can be time-consuming and expensive regardless of
their merit. Infringement claims against us can cause product
release delays, require us to redesign our products, or require
us to enter into royalty or license agreements which may not be
available on terms acceptable to us or at all.

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We may not have sufficient protection against
product liability claims.

Because our products are used by our customers to
identify and predict current and future application, system, and
network problems and to avoid failures of the IT infrastructure
to support critical business functions, design defects, software
errors, misuse of our products, incorrect data from network
elements, or other potential problems, within or out of our
control, may arise from the use of our products and could result
in financial or other damages to our customers. Our license
agreements with our customers typically contain provisions
designed to limit our exposure to potential claims as well as
any liabilities arising from such claims. As a matter of
practice, our license agreements limit our liability in regards
to product liability claims, and in many agreements, our maximum
liability for product liability claims is limited to the
equivalent of the cost of the products licensed under that
agreement. However, any litigation or similar procedure related
to a product liability claim may require considerable resources
to be expended that could adversely affect our business and
financial condition and decrease future revenues.

The conviction of Arthur Andersen LLP may
limit potential recoveries related to their prior service as our
independent auditors.

Arthur Andersen LLP served as our independent
auditors until June 10, 2002. On June 10, 2002, we
dismissed Arthur Andersen LLP and on June 11, 2002, we
retained PricewaterhouseCoopers LLP as our independent auditors.
On June 15, 2002, Arthur Andersen LLP was found guilty
on federal obstruction of justice charges arising from the
governments investigation of Enron Corporation. Following
this conviction, on August 31, 2002, Arthur
Andersen LLP ceased operations and can no longer reissue
its audit reports or provide its consent to include the
financial statements to be included in this annual report.
Accordingly, Arthur Andersen LLP has not performed any
procedures in connection with the preparation and filing of this
annual report. Events arising out of the indictment and
conviction will likely preclude Arthur Andersen LLP from
satisfying any claims arising from the provision of auditing
services to us, including claims that may arise out of Arthur
Andersen LLPs audit of financial statements
incorporated by reference in this annual report.

Securities and Exchange Commission
(SEC) rules require us to present historical audited
financial statements in various SEC filings, along with consents
from Arthur Andersen LLP to include its audit report in
those filings. In light of the cessation of Arthur
Andersen LLPs SEC practice, we will not be able
to obtain the consent of Arthur Andersen LLP for the
inclusion of its audit report in our relevant current and future
filings. The SEC has provided regulatory relief designed to
allow companies that file reports with the SEC to dispense with
the requirement to file a consent of Arthur Andersen LLP in
certain circumstances, but purchasers of securities sold under
our registration statements, which were not filed with the
consent of Arthur Andersen LLP for the inclusion of its
audit report will not be able to file suit against Arthur
Andersen LLP pursuant to Section 11(a)(4) of the
Securities Act and therefore their right of recovery under that
section may be limited as a result of the lack of our ability to
obtain the consent of Arthur Andersen LLP. If the SEC
ceases to accept financial statements from a prior period
audited by Arthur Andersen LLP for which Arthur
Andersen LLP will not reissue an audit report prior to the
date on which our periodic reports are due, our ability to make
timely filings with the SEC and access the capital markets could
be impaired. In that case, we would not be able to make timely
filings with the SEC or access the public capital markets unless
another independent accounting firm were able to audit the
financial statements originally audited by Arthur Andersen LLP.

Limitations on the effectiveness of
controls.

The Companys management, including the
Chief Executive Officer and the Chief Financial Officer, does
not expect that our disclosure controls or our internal controls
will prevent all errors and intentional misrepresentations. A
control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of
a 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 control systems, no evaluation of controls can provide
absolute assurance that all control issues, if any, within the
Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty,
and that

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breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of
any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions,
or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or
intentional conduct may occur and not be detected.





Item 2.     Properties

Our corporate headquarters and principal
facilities are located in approximately 142,400 square feet of
office space in Marlborough, Massachusetts under lease
arrangements that expire in August 2007. These principal
facilities accommodate our finance, administration and
operations, research and development, customer support,
marketing and sales departments. We also lease office space in
Atlanta, GA and Gaithersburg, MD. In addition, we lease sales
office space in Dallas, TX; Plymouth, MI; Seattle, WA; Vienna,
VA; Palo Alto, CA; Phoenix, AZ; Canada; United Kingdom; France;
Germany; the Netherlands; Spain; Sweden; Australia; Hong Kong;
Japan; Singapore; Mexico; Brazil; South Africa; Italy; and
China. We believe that our current facilities are adequate for
our needs through the next twelve months and that, should it be
needed, suitable additional or substitute space will be
available to accommodate expansion of our operations on
commercially reasonable terms, although there can be no
assurance in this regard.

The Companys reportable segments are
determined by customer type: managed service providers/
telecommunication carriers and enterprise. The Company evaluates
segment performance based on revenue only. Accordingly, all of
the Companys facilities are used by each of the
Companys operating segments.




Item 3.     Legal
Proceedings

We are not a party to any legal proceedings that
we believe could have a material adverse effect on our business,
results of operations or financial condition.




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 the fiscal year ended
December 31, 2003.

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PART II




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

Our Common Stock trades on the Nasdaq National
Market under the symbol CCRD. The following table
sets forth, for the period indicated, the high and low intraday
sales prices for the Common Stock, all as reported by the Nasdaq
National Market.

Price Range of Common Stock

|             |                |      |   |       |  |  |   |       | 
|------------ | -------------- | ---- | - | ----- |  |  | - | ----- | 
|Period       |                | High |   | Low  
|             |                |      |   |      
|Fiscal 2002: |                |      |   |       |  |  |   |      
|             | First Quarter  |      | $ | 24.62 |  |  | $ | 16.41 | 
|             | Second Quarter |      |   | 21.20 |  |  |   | 12.75 | 
|             | Third Quarter  |      |   | 16.70 |  |  |   | 4.96  | 
|             | Fourth Quarter |      |   | 12.49 |  |  |   | 4.83  | 
|Fiscal 2003: |                |      |   |       |  |  |   |      
|             | First Quarter  |      | $ | 11.50 |  |  | $ | 6.60  | 
|             | Second Quarter |      |   | 15.38 |  |  |   | 8.58  | 
|             | Third Quarter  |      |   | 16.95 |  |  |   | 11.67 | 
|             | Fourth Quarter |      |   | 23.12 |  |  |   | 13.18 | 

As of March 8, 2004, Concord had
approximately 328 holders of record of our common stock. This
number does not include beneficial owners holding shares of our
Common Stock through nominee names.

Dividend Policy

We did not declare or pay any cash dividends on
our capital stock during the fiscal years ended 2003 or 2002. We
currently anticipate that we will retain all future earnings for
use in our business and we do not anticipate that we will pay
any cash dividends in the foreseeable future. The payment of any
future dividends will be at the discretion of our Board of
Directors and will depend upon, among other things, future
earnings, operations, capital requirements and the general
financial condition of the Company, general business conditions
and contractual restrictions on payment of dividends, if any.

Use of Proceeds

On October 16, 1997, Concord commenced an
initial public offering (IPO) of 2,900,000 shares of
our Common Stock pursuant to the Companys final prospectus
dated October 15, 1997 (the Prospectus). The
Prospectus was contained in the Companys Registration
Statement on Form S-1, which was declared effective by the
Securities and Exchange Commission (SEC File No. 333-33227)
on October 15, 1997. Of the 2,900,000 shares of common
stock registered, 2,300,000 shares were offered and sold by the
Company and 600,000 shares were offered and sold by certain
stockholders of the Company. As part of the IPO, the Company
granted the several underwriters an over allotment option to
purchase up to an additional 435,000 shares of common stock
(the Underwriters Option). The IPO closed on
October 21, 1997 upon the sale of 2,900,000 shares of
Common Stock to the underwriters. The managing underwriters for
the IPO were Nationsbanc Montgomery Securities Inc., BancAmerica
Robertson Stephens and Wessels, Arnold and Henderson, L.L.C (the
Representatives). On October 24, 1997, the
Representatives, on behalf of the several underwriters,
exercised the Underwriters Option, purchasing
435,000 additional shares of Common Stock from the Company.
The aggregate offering price of the IPO to the public was
$40,600,000 (exclusive of the Underwriters Option), with
proceeds to the Company and selling shareholders, after
deduction of the underwriting discount, of $29,946,000 (before
deducting offering expenses payable by the Company) and
$7,812,000, respectively. The aggregate offering price of the
Underwriters Option exercised was $6,090,000, with
proceeds to the Company, after deduction of the underwriting
discount, of $5,663,700 (before deducting

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offering expenses payable by the Company). The
aggregate amount of expenses incurred by the Company in
connection with the issuance and distribution of the shares of
Common Stock offered and sold in the IPO were approximately
$3.6 million, including $2.7 million in underwriting
discounts and commissions and $950,000 in other offering
expenses.


None of the expenses paid by the Company in
connection with the IPO or the exercise of the
Underwriters Option was paid, directly or indirectly, to
directors, officers, persons owning ten percent or more of the
Companys equity securities, or affiliates of the Company.

The net proceeds to the Company from the IPO,
after deducting underwriting discounts and commissions and other
offering expenses were approximately $34.7 million. To date, the
Company has not utilized any of the net proceeds from the IPO.
The Company has invested all such net proceeds primarily in US
treasury obligations and other interest bearing investment grade
securities. None of the net proceeds from the IPO was used to
pay, directly or indirectly, directors, officers, persons owning
ten percent or more of the Companys equity securities, or
affiliates of the Company.

Issuance of Securities

On July 17, 2003, we completed the
acquisition of netViz. We issued an aggregate of 340,996 shares
of our Common Stock to the stockholders of netViz as partial
consideration of the merger of netViz with a wholly-owned
subsidiary of Concord. The shares were offered in accordance
with Rule 506 under the Securities Act. No underwriter
participated in the offering.

A Form S-3 Registration Statement to cover
the resale of the securities issued in the merger was declared
effective by the Securities and Exchange Commission.

On December 8, 2003, we completed an
offering of $86.25 million of Convertible Senior Notes in a
private placement. The Convertible Senior Notes bear interest at
a rate of 3.0% per year and will rank equally to future
unsecured senior indebtedness. The Convertible Senior Notes are
contingently convertible into shares of our common stock at an
initial conversion price of approximately $26.87 per share which
converts into 3,209,776 shares of common stock. We may redeem
some or all of the Convertible Senior Notes at any time on or
after December 15, 2008. Holders of the notes may elect to
convert the notes into shares of our common stock upon the
occurrence of certain events. Holders have the right to require
the Company to purchase all or a portion of their notes for cash
on December 15, 2008, December 15, 2013 and
December 15, 2018. A Form S-3 Registration Statement
to cover the sale of the securities issued was filed with the
Securities and Exchange Commission but has not yet been declared
effective.



Item 6.     Selected
Financial Data

The following selected consolidated financial
data should be read in conjunction with our consolidated
financial statements and related notes to those statements and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this Form 10-K. The selected financial data as of and for
each of the five fiscal years in the period ended
December 31, 2003 have been derived from our audited
consolidated financial statements. The historical results are
not necessarily indicative of the operating results to be
expected in the future.

The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 145,
Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical
Correctionsas of January 1, 2003. The adoption of SFAS
No. 145 retroactively changes guidance related to the
reporting of gains and losses from extinguishment of debt as
extraordinary items. The effect of SFAS No. 145 on the
Companys consolidated statement of operations data for the
five years ended December 31, 2003 is for amounts
previously recorded as Extraordinary loss on early
extinguishment of debt to instead be recorded as a
component of Other income, net. The Company has
reclassified extraordinary loss of $216, net of tax benefit of
$72, for the year ended December 31, 2000. There were no
extraordinary items in the years ended December 31, 2003,
2002, 2001, 2000 and 1999.

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|                                                                                           |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |        |        | 
|------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------ | ------ | ------- | ---- | ----- | ------ | ------ | ---- | ------- | ------- | ------- | - | ----- | ------ | ------ | - | ----- | ------ | ------ | 
|                                                                                           |                                                                                                                     |                                      
|                                                                                           |                                                                                                                     | Fiscal Year Ended December 31,       
|                                                                                           |                                                                                                                     |                                      
|                                                                                           |                                                                                                                     | 2003                                  |        | 2002   |         | 2001 |       | 2000   |        | 1999
|                                                                                           |                                                                                                                     |                                       |        |        |         |      |       |        |        |     
|                                                                                           |                                                                                                                     |                                      
|                                                                                           |                                                                                                                     | (in thousands, except per share data)
|Consolidated Statements of Operations
    Data:                                            |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|Revenues:                                                                                  |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|                                                                                           | License revenues                                                                                                    |                                       | $      | 54,267 |         |      | $     | 51,230 |        |      | $       | 54,406  |         |   | $     | 69,464 |        |   | $     | 53,924 |       
|                                                                                           | Service revenues                                                                                                    |                                       |        | 49,796 |         |      |       | 42,614 |        |      |         | 33,572  |         |   |       | 22,020 |        |   |       | 14,896 |       
|                                                                                           |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|                                                                                           |                                                                                                                     | Total revenues                        |        |        | 104,063 |      |       |        | 93,844 |      |         |         | 87,978  |   |       |        | 91,484 |   |       |        | 68,820 | 
|                                                                                           |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|Cost of Revenues:                                                                          |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|                                                                                           | Cost of license revenues                                                                                            |                                       |        | 3,117  |         |      |       | 1,850  |        |      |         | 2,272   |         |   |       | 1,997  |        |   |       | 2,300  |       
|                                                                                           | Cost of service revenues                                                                                            |                                       |        | 16,127 |         |      |       | 15,120 |        |      |         | 15,544  |         |   |       | 11,104 |        |   |       | 6,202  |       
|                                                                                           |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|                                                                                           |                                                                                                                     | Total cost of revenues                |        |        | 19,244  |      |       |        | 16,970 |      |         |         | 17,816  |   |       |        | 13,101 |   |       |        | 8,502  | 
|                                                                                           |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|                                                                                           |                                                                                                                     | Gross profit                          |        |        | 84,819  |      |       |        | 76,874 |      |         |         | 70,162  |   |       |        | 78,383 |   |       |        | 60,318 | 
|                                                                                           |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|Operating Expenses:                                                                        |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|                                                                                           | Research and development (excluding stock-based
    compensation of $60, $106, $315, $522 and $2,549, respectively) |                                       |        | 22,767 |         |      |       | 21,867 |        |      |         | 23,969  |         |   |       | 21,102 |        |   |       | 14,432 |       
|                                                                                           | Sales and marketing                                                                                                 |                                       |        | 48,352 |         |      |       | 47,383 |        |      |         | 51,041  |         |   |       | 42,996 |        |   |       | 29,442 |       
|                                                                                           | General and administrative (excluding stock-based
    compensation of $0, $0, $5, $290 and $490, respectively)      |                                       |        | 9,035  |         |      |       | 7,665  |        |      |         | 8,700   |         |   |       | 8,113  |        |   |       | 5,337  |       
|                                                                                           | Asset impairment charge                                                                                             |                                       |        |       |         |      |       |       |        |      |         |        |         |   |       | 2,337  |        |   |       |       |       
|                                                                                           | Stock-based compensation                                                                                            |                                       |        | 60     |         |      |       | 106    |        |      |         | 320     |         |   |       | 812    |        |   |       | 3,039  |       
|                                                                                           | Acquisition-related charges                                                                                         |                                       |        | 40     |         |      |       |       |        |      |         |        |         |   |       | 4,300  |        |   |       | 551    |       
|                                                                                           | In-process research and development                                                                                 |                                       |        | 994    |         |      |       |       |        |      |         |        |         |   |       |       |        |   |       |       |       
|                                                                                           |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|                                                                                           |                                                                                                                     | Total operating expenses              |        |        | 81,248  |      |       |        | 77,021 |      |         |         | 84,030  |   |       |        | 79,660 |   |       |        | 52,801 | 
|                                                                                           |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|                                                                                           | Operating income (loss)                                                                                             |                                       |        | 3,571  |         |      |       | (147   | )      |      |         | (13,868 | )       |   |       | (1,277 | )      |   |       | 7,517  |       
|Other income, net                                                                          |                                                                                                                     |                                       | 2,084  |        |         |      | 2,916 |        |        |      | 3,161   |         |         |   | 2,850 |        |        |   | 2,964 |       
|                                                                                           |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|                                                                                           |                                                                                                                     | Income (loss) before income taxes     |        |        | 5,655   |      |       |        | 2,769  |      |         |         | (10,707 | ) |       |        | 1,573  |   |       |        | 10,481 | 
|(Benefit from) provision for income taxes                                                  |                                                                                                                     |                                       | (2,015 | )      |         |      | 568   |        |        |      | 447     |         |         |   | 447   |        |        |   | 4,286 |       
|                                                                                           |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|Net income (loss)                                                                          |                                                                                                                     |                                       | 7,670  |        |         |      | 2,201 |        |        |      | (11,154 | )       |         |   | 1,126 |        |        |   | 6,195 |       
|Accretion of redeemable preferred stock                                                    |                                                                                                                     |                                       |       |        |         |      |      |        |        |      |        |         |         |   |      |        |        |   | 125   |       
|                                                                                           |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|Net income (loss) available to common
    shareholders                                     |                                                                                                                     | $                                     | 7,670  |        |         | $    | 2,201 |        |        | $    | (11,154 | )       |         | $ | 1,126 |        |        |   | 6,070 |       
|                                                                                           |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|Pro forma provision for income taxes on
    Subchapter S-Corporation income (unaudited)(1) |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   | 146   |       
|                                                                                           |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|Pro forma net income (unaudited) (1)                                                       |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        | $ | 5,924 |       
|                                                                                           |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|Net income (loss) per common and potential
    common share:                               |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|                                                                                           | Basic                                                                                                               |                                       | $      | 0.44   |         |      | $     | 0.13   |        |      | $       | (0.67   | )       |   | $     | 0.07   |        |   | $     | 0.42   |       
|                                                                                           | Diluted                                                                                                             |                                       | $      | 0.42   |         |      | $     | 0.12   |        |      | $       | (0.67   | )       |   | $     | 0.07   |        |   | $     | 0.36   |       
|                                                                                           | Pro forma diluted (unaudited) (1)                                                                                   |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   | $     | 0.35   |       
|Weighted average common and potential common
    shares outstanding:                       |                                                                                                                     |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       |       
|                                                                                           | Basic                                                                                                               |                                       |        | 17,534 |         |      |       | 17,057 |        |      |         | 16,683  |         |   |       | 16,144 |        |   |       | 14,395 |       
|                                                                                           | Diluted                                                                                                             |                                       |        | 18,208 |         |      |       | 17,627 |        |      |         | 16,683  |         |   |       | 16,746 |        |   |       | 16,722 |       
|                                                                                           | Pro forma diluted (unaudited) (1)                                                                                   |                                       |        |        |         |      |       |        |        |      |         |         |         |   |       |        |        |   |       | 16,722 |       

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---



|    |                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Pro forma information assumes that the pre-merger
    earnings from Empire Technologies, Inc., a Subchapter
    S-Corporation acquired and accounted for as a pooling of
    interests, were taxed at the Companys effective tax rate.

|                                                                              |  |                                |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |        | 
|----------------------------------------------------------------------------- |  | ------------------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------ | 
|                                                                              |  |                               
|                                                                              |  | Fiscal Year Ended December 31,
|                                                                              |  |                               
|                                                                              |  | 2003                           |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                                                              |  |                                |         |      |  |      |         |      |  |     
|                                                                              |  |                               
|                                                                              |  | (In thousands)                
|Consolidated Balance Sheet Data:                                              |  |                                |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |        | 
|Cash, cash equivalents and marketable securities
    (net of restricted cash) |  | $                              | 161,891 |      |  | $    | 72,831  |      |  | $    | 68,344  |  |  | $ | 63,251  |  |  | $ | 63,569 | 
|Working capital                                                               |  |                                | 149,433 |      |  |      | 57,792  |      |  |      | 48,966  |  |  |   | 54,131  |  |  |   | 55,213 | 
|Total assets                                                                  |  |                                | 218,426 |      |  |      | 105,930 |      |  |      | 102,480 |  |  |   | 102,276 |  |  |   | 89,787 | 
|Long-term debt, net of current portion                                        |  |                                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   | 2,064  | 
|Redeemable convertible preferred stock                                        |  |                                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   | 11,723 | 
|Convertible senior notes                                                      |  |                                | 86,250  |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 
|Total stockholders equity                                                    |  | $                              | 87,841  |      |  | $    | 68,936  |      |  | $    | 63,507  |  |  | $ | 70,746  |  |  | $ | 52,476 | 

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

Overview

We are a software company that provides a
solution to enterprise customers, managed service providers and
telecommunication carriers. Our solution, the
eHealth® Suite of products, maps IT services to
business needs, measures the actual end user experience and
manages application, system and network infrastructure.

For the fiscal year ended December 31, 2003,
we increased our revenue and profitability year over year. Our
total revenues are generated from license revenue and service
revenue. In 2003, total revenues were $104.1 million, up
11% from $93.8 million in 2002. Our diluted earnings per
share improved to $0.42 per share in 2003 from $0.12 per share
in fiscal 2002. After the low point in 2001, the gradual
economic recovery, which started in the second quarter of 2002,
continued throughout 2003. We generated $10.4 million in
operating cash during the year and finished 2003 with
$161.9 million of cash, cash equivalents and marketable
securities after the issuance of $86.25 million of
Convertible Senior Notes.

We sell our products worldwide through a direct
sales force, channel partners and other resellers. We have sales
offices in 17 countries, including the United States and we have
customers in 62 countries.

Last year, we grew our business by improving our
core technology, solidifying our existing customer base, and
investing in sales and customer support. First, we improved our
core technology  the eHealth®
Suite  by extending our management capabilities to
VoIP, and strengthening our wireless solution. Second, we
significantly expanded our presence in the installed base; most
of our license revenue came from existing customers returning to
buy new eHealth® capabilities. Third, we expanded
sales management and customer support staff  allowing
us to improve the level of service provided to potential and
current customers.

In 2003, we took steps to augment our product
portfolio by licensing technology from Tavve Software Company
(Tavve) and by acquiring and beginning to integrate
netViz.

On July 11, 2003, we entered into a license
agreement with Tavve whereby we licensed components of
Tavves technology. We licensed Tavves root cause
analysis and discovery of layer 2 and 3 network topology to
build upon our current position in optimizing application
availability and performance across networks and systems. The
transaction, valued at $1.2 million, included
$0.2 million of prepaid maintenance and $1.0 million
of in-process research and development. (see Note 4 of the
Notes to Consolidated Financial Statements).

On July 17, 2003, we completed the
acquisition of privately-held netViz. netVizs software
enables users to visualize business processes and allows them to
map relationships within the supporting technology
infrastructure through data-driven icons. Consideration for the
acquisition totaled $10.3 million, including transaction
costs of $0.3 million. (see Note 2 of the Notes to
Consolidated Financial Statements).

On December 8, 2003, we raised gross
proceeds of $86.25 million in a convertible debt offering
which significantly increased our cash reserves. We intend to
use the net proceeds of the offering for working capital and
general corporate purposes and potentially for future
acquisitions of complementary businesses and technologies. (see
Note 5 of the Notes to Consolidated Financial Statements).

In the coming year, we expect to further
integrate our acquired technologies of Tavve and netViz,
strengthen sales of new and enhanced product offerings and
increase profitability through revenue growth. Accomplishing our
first goal  integrating acquired
technologies  will provide customers the ability to
map their IT to business needs, measure the business service in
terms of end users experience and manage the entire IT
infrastructure  systems, applications and network.

Our second goal is to strengthen sales of new and
enhanced products. To accomplish this, we are enhancing our
application partner program, planning several new product
releases and developing an overlay application management BSM
sales team focused on the application-centric portion of our
business.

Our third goal is to increase profitability by
continuing to closely manage our expenses, while focusing on
increasing revenue growth.

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Critical Accounting Policies, Significant
Estimates and Judgments

The accompanying discussion and analysis of our
financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles in the
United States (US GAAP). The preparation of
consolidated financial statements requires us to make estimates
and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. These estimates form the
basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other
sources. We base our estimates and judgments on historical
experience and on various other assumptions that we believe are
reasonable under the circumstances. However, future events are
subject to change and the best estimates and judgments routinely
require adjustment. US GAAP requires us to make estimates and
judgments in several areas. If actual results differ
significantly from managements estimates and projections,
there could be a material effect on our financial statements.
See our audited consolidated financial statements and notes
thereto of this Annual Report on Form 10-K and which
contain accounting policies and other disclosures required by US
GAAP.

We believe that the policies, significant
estimates and judgments discussed below are the most critical to
our financial statements and the understanding of our financial
condition and results of operations because their application
places the most significant demands on managements
judgment.



|    |                    
|--- | -------------------
|(a) | Revenue Recognition

Our revenues consist of software license revenues
and service revenues. Software license revenues are recognized
in accordance with the American Institute of Certified Public
Accountants Statement of Position (SOP) 97-2,
Software Revenue Recognition, as modified by
SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition with respect to Certain Transactions.
Software license revenues are recognized when persuasive
evidence of an arrangement exists and delivery of the software
has occurred, provided that the license fee is fixed or
determinable, collection is considered reasonably assured and no
customer acceptance clauses exist. If an arrangement includes an
acceptance provision, revenue recognition occurs upon the
earlier of a receipt of a written customer acceptance or
expiration of the acceptance period. If the fee is determined
not to be fixed or determinable, revenue is recognized when the
fees become due. If collection is not considered reasonably
assured, revenue is recognized upon the receipt of cash.
Revenues under multiple-element arrangements, which typically
include software products, services, maintenance and sometimes
undelivered specified software upgrades sold together, are
allocated to each element using the residual method in
accordance with SOP 98-9. Under the residual method, the
fair value of the undelivered elements is deferred and
subsequently recognized when these elements are delivered; the
remainder of the arrangement consideration is allocated to the
software. We have established sufficient vendor specific
objective evidence for professional services, training,
maintenance, customer support services and specified software
upgrades based on the price charged when these elements are sold
separately. Accordingly, software license revenues are
recognized under the residual method in arrangements in which
software is licensed with professional services, training,
maintenance, customer support services and specified software
upgrades.

Service revenues include professional services,
training and maintenance and customer support fees. Professional
services are not essential to the functionality of the other
elements in an arrangement and are accounted for separately.
Service revenues are recognized as the services are performed,
provided evidence of an arrangement exists, fees are fixed or
determinable, and collection is considered reasonably assured.

We license our software to end-users, resellers
and OEMs. Revenue recognition is centralized at our
corporate headquarters, located in the United States. Our
arrangements with customers do not generally include provisions
involving acceptance of our products by our customers. However,
if a customer arrangement includes an acceptance provision,
revenue recognition occurs upon the earlier of receipt of a
written customer acceptance or expiration of the acceptance
period. With respect to revenues from our channel partners and
other resellers, we recognize revenue upon delivery of our
software to the channel partner or reseller. We do not offer any
right of return, price protection or similar rights to our
channel partners and other resellers.

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For all sales, in the absence of a signed license
agreement, we use either a purchase order or purchase order
equivalent as evidence of an arrangement. If a signed license
agreement is obtained, we use either the license agreement or
the license agreement and a purchase order as evidence of an
arrangement. Sales to resellers are usually evidenced by a
master agreement governing the relationship together with
purchase orders on a transaction-by-transaction basis. Sales to
OEMs are usually evidenced by a master agreement governing
the relationship together with a shipping report on a
transaction-by-transaction basis.

Delivery generally occurs when product is
delivered to a common carrier and the delivery terms are FOB
Concord. In the case of arrangements with resellers or OEMs,
revenue is recognized upon delivery to the reseller or OEM. Most
of these arrangements involve a sell-through by the reseller or
OEM to an end user. For a reseller, evidence usually comes in
the form of a purchase order typically identifying the end-user.
For an OEM, evidence of sell-through usually comes in the form
of a shipping report, which usually identifies the ship
to location.

At the time of the transaction, we assess whether
the fee associated with our revenue transaction is fixed or
determinable and whether or not collection is reasonably
assured. We assess whether the fee is fixed or determinable
based on the payment terms associated with the transaction. If a
significant portion of a fee is due after our normal payment
terms, which are usually 30 to 60 days from invoice date,
depending upon the region, we account for the fee as not being
fixed or determinable. In these cases, we recognize revenue when
the fees become due.

We assess collection based on a number of
factors, including past transaction history with the customer
and the credit-worthiness of the customer. We do not request
collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and
recognize revenue upon receipt of cash. Concords channel
partners and other resellers are responsible to the Company upon
delivery.

For arrangements with multiple elements (for
example, undelivered maintenance and support or undelivered
specified software upgrades), we allocate revenue to each
component of the arrangement using the residual value method
based on the fair value of the undelivered elements. This means
that we defer revenue from the fee arrangement equivalent to the
fair value of the undelivered elements. We determine fair values
for ongoing maintenance and support obligations using our
internal pricing policies for maintenance and by referencing the
prices at which we have sold separate maintenance contract
renewals to our customers. We determine fair value of services,
such as training or consulting, by referencing the prices at
which we have separately sold comparable services to our
customers. For specified undelivered software upgrades, we
determine fair value of these upgrades by referencing the prices
at which we sell upgrades separately to our customers.

The majority of our sales transactions are
completed using standard terms and conditions; however, there
are agreements that contain non-standard terms and conditions.
As a result, significant contract interpretation is sometimes
required to determine the appropriate accounting, including
whether the deliverables specified in a multiple obligations
arrangement should be treated as separate units of accounting
for revenue recognition purposes, and if so, how the price
should be allocated among the deliverable elements and when to
recognize the revenue for each element. Changes in the
allocation of the sales price between deliverable elements might
impact the timing of revenue recognition, but would not change
the total revenue recognized for the transaction.



|    |                    
|--- | -------------------
|(b) | Accounts Receivable

We perform ongoing credit evaluations of our
customers and adjust credit limits based upon payment history
and the customers current credit worthiness, as determined
by our review of their current credit information. We
continuously monitor collections and payments from our customers
and maintain a provision for estimated credit losses based on
our historical experience and any specific customer collection
issues that we have identified. While such credit losses have
historically been within our expectations and appropriate
reserves have been established, we cannot guarantee that we will
continue to experience the same credit loss rates that we have
experienced in the past. Thus, if the financial condition of our
customers were to deteriorate, our actual losses may exceed our
estimates, and additional allowances would be required.

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|    |                            
|--- | ---------------------------
|(c) | Accounting for Income Taxes

As part of the process of preparing our
consolidated financial statements, we are required to estimate
our income taxes in each of the jurisdictions in which we
operate. To do this, we estimate our actual current tax
liabilities, while also assessing temporary differences
resulting from differing treatment of items, such as deferred
revenue and expense accruals, for tax and accounting purposes.
These differences result in deferred tax assets and liabilities,
which are included within our consolidated balance sheet. We
must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income. To the extent we
believe that recovery is not likely, we must establish a
valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must
include an expense within the tax provision in the statement of
operations. To the extent we reverse any portion of the
valuation allowance, we must recognize a benefit within the tax
provision in the statement of operations or to additional
paid-in capital for the benefit of deductions for stock option
exercises.

Significant management judgment is required in
determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded
against our net deferred tax assets. The Company has reserved
for its deferred tax assets by recording a valuation allowance.
The resulting net deferred tax asset of $9.6 million at
December 31, 2003 is based on the Companys estimate
of future taxable income it expects to generate; all other tax
assets have been reserved. The remaining valuation allowance of
$1.8 million is based on our estimates of taxable income by
jurisdiction in which we operate and the period over which our
deferred tax assets will be recoverable. This amount relates to
stock option deductions and will be credited to additional
paid-in capital when released. If we continue to be sufficiently
profitable in 2004, the reserve will be released in 2004. In the
event that actual results differ from these estimates or we
adjust these estimates in future periods, we may need to
establish an additional valuation allowance. Establishing new or
additional valuation allowances could materially adversely
impact our financial position and results of operations.



|    |                                                                                 
|--- | --------------------------------------------------------------------------------
|(d) | Accounting for Acquisitions and Acquired
    In-process Research and Development

We have completed our acquisition of netViz,
which was accounted for under the purchase method of accounting,
which has resulted in recording significant goodwill and other
intangible asset balances. The purchase price has been allocated
to the assets acquired and liabilities assumed at their
estimated fair values on the date of acquisition, as determined
by management and, with respect to the identifiable intangible
assets, an appraisal. Our accounting for the netViz acquisition
involves significant judgments and estimates regarding
primarily, but not limited to: the fair value of acquired
intangible assets, which are based on projections of future
revenues and cash flows, assumptions regarding discount factors,
royalty rates, tax rates, amortization methodologies and related
useful lives, as well as the fair value of other acquired assets
and assumed liabilities, including potential contingencies and
deferred income taxes. The completed technology (software),
reseller relationships, maintenance relationships and trade
name/trademarks will be amortized at the greater of (a) the
ratio that current revenues bear to the total of current and
anticipated future revenues or (b) the straight-line method
over their respective remaining useful lives. The contractor
agreements will be amortized using the straight-line method over
their useful lives. The values of the completed technology,
reseller relationships, maintenance relationships, contractor
agreements and trade name/trademarks were determined using the
income approach. The income approach requires a projection of
revenues and expenses specifically attributed to the intangible
assets. The discounted cash flow (DCF) method is
then applied to the potential income streams after making
necessary adjustments with respect to such factors as the
wasting nature of the identifiable intangible assets and the
allowance of a fair return on the net tangible assets and other
intangible assets employed. There are several variations on the
income approach, including the relief-from-royalty method, the
avoided cost method and the lost profits method.

The relief-from-royalty method was used to value
the trade name/trademarks. The relief-from-royalty method is
used to estimate the cost savings that accrue to the owner of
the intangible assets that would otherwise have to pay royalties
or licensee fees on revenues earned through the use of the
asset. The royalty rate used in the analysis is based on an
analysis of empirical, market-derived royalty rates for
guideline intangible assets. Typically, revenue is projected
over the expected remaining useful life of the intangible asset.
The market-derived royalty rate is then applied to estimate the
royalty savings. The key assumptions used in

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valuing the trade name/trademarks are as follows:
royalty rate 1%, discount rate 21%, tax rate 40% and estimated
average economic life of 3 years.


The avoided cost method was used to value the
reseller relationships and contractor agreements. The avoided
cost method considers the concept of avoided cost as an
indicator of value. The avoided cost method is appropriate for
estimating the fair value of an asset where reliable data for
sales of comparable property are not available and where the
property does not directly produce an income stream. The key
assumptions used in valuing the reseller relationships are as
follows: tax rate 40% and estimated average economic life of
5 years. The key assumptions used in valuing the contractor
agreements are as follows: tax rate 40% and estimated average
economic life of 4 years.

The completed technology (software) was
valued using the income approach without variation. The key
assumptions used in valuing the completed technology are as
follows: discount rate 21%, tax rate 40% and estimated life of
4 years. The key assumptions used in valuing the
maintenance relationship are as follows: discount rate 21%, tax
rate 40% and estimated average economic life of 5 years.

Deferred income taxes and any valuation
allowances are based in part on future estimated profitability
of the Company. As a direct result of the netViz acquisition,
the Company has estimated that future profitability will
increase and therefore released $0.75 million of the
valuation allowance.

We have also completed our accounting of the
license agreement with Tavve whereby Concord licensed components
of Tavves technology. Our accounting for the Tavve license
as in-process research & development involved significant
judgments and estimates regarding primarily, but not limited to:
assessing if the acquired technology has reached technological
feasibility and if the acquired technology has no alternative
future use.

Technological feasibility is established when
either of two sets of criteria is met:



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) the detail program design has been
    completed, documented, and traced to product specifications and
    its high-risk development issues have been resolved; or
|
| | b) a working model of the product has been
    finished and determined to be complete and consistent with the
    product design.                                    

Upon acquiring the licensed components of
Tavves technology, Concord did not have a completed
product design at the time of the purchase as it had not
completed, documented, and traced the detail program design to
product specifications. Concord also did not have the high-risk
development issues resolved.

A working model is defined as an operative
version of the computer software product that is completed in
the same software language as the product to be ultimately
marketed, performs all the major functions planned for the
product, and is ready for initial customer testing (usually
identified as beta testing). Upon acquiring the licensed
components of Tavves technology, Concord did not have a
working model as defined.

In addition, the purchased source code has no
alternative future use, i.e., Concord will not use the source
code for any other purpose than described above.

The detail program design for the integration of
Tavves technology into Concord eHealth® Suite
of products has not been completed; thus, the exact costs and
efforts required for completion of this integration has not been
determined. Based on managements initial estimates, an
integrated product based on Tavves technology will be
introduced in the next 12 to 18 months. However, as with
any major software development project, actual introduction may
vary. Failure to successfully market and sell our integrated
product may adversely impact our business.



|    |                                                                        
|--- | -----------------------------------------------------------------------
|(e) | Valuation of Long-Lived Tangible and
    Intangible Assets and Goodwill

We have significant long-lived tangible and
intangible assets and goodwill, which are susceptible to
valuation adjustments as a result of changes in various factors
or conditions. The long-lived tangible assets are fixed assets,
which are depreciated over their estimated useful lives. The
long-lived intangible assets are completed technology
(software), reseller relationships, maintenance relationships,
contractor agreements,

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and trade name / trademarks which are amortized
over their estimated useful lives following the greater of the
pattern in which the expected benefits will be consumed or
otherwise used up or on a straight-line basis. Goodwill is not
amortized.


At each quarter-end, the carrying value of the
completed technology (software) is compared to its net
realizable value (NRV). NRV is the estimated future
gross revenues from products that incorporate the software
reduced by the estimated future costs of disposal. If NRV is
less than the carrying value, the excess is written-off and the
then current NRV becomes the new carrying value of the software.
We assess the potential impairment of other identifiable
intangible assets and fixed assets whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Factors we consider important, which could trigger
an impairment of such assets, include the following:



| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | Significant underperformance relative to
    historical or projected future operating results;                  
|
| |  | Significant changes in the manner of or use of
    the acquired assets or the strategy for our overall business;
|
| |  | Significant negative industry or economic trends;                                                               
|
| |  | Significant decline in our stock price for a
    sustained period; and                                          
|
| |  | A decline in our market capitalization below net
    book value.                                                

Future adverse changes in these or other
unforeseeable factors could result in an impairment charge that
would impact future results of operations and financial position
in the reporting period identified.

Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, or
SFAS 142 requires goodwill to be tested for impairment
using a two-step process. The first step compares the fair value
of the reporting unit with the units carrying value,
including goodwill. When the carrying value of the reporting
unit is greater than fair value, the units goodwill may be
impaired, and the second step must be completed to measure the
amount of the goodwill impairment charge, if any. In the second
step, the implied fair value of the reporting units
goodwill is compared with the carrying amount of the units
goodwill. If the carrying amount is greater than the implied
fair value, the carrying value of the goodwill must be written
down to its implied fair value. We operate in one reporting unit
and, therefore, will conduct future goodwill impairment test on
an enterprise-wide level. Goodwill is required to be tested for
impairment at least annually, or more frequently when events and
circumstances occur indicating that the recorded goodwill might
be impaired. We plan to perform the annual assessment at
June 30 of each fiscal year. Factors we consider important,
which could trigger an impairment of goodwill, include the
following:



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | Significant underperformance relative to
    historical or projected future operating results;
|
| |  | Significant negative industry or economic trends;                                             
|
| |  | Significant decline in our stock price for a
    sustained period; and                        
|
| |  | A decline in our market capitalization below net
    book value.                              

Future adverse changes in these or other
unforeseeable factors could result in an impairment charge that
would impact future results of operations and financial position
in the reporting period identified.

Significant judgments and estimates are involved
in determining the useful lives of our intangible assets,
determining what reporting units exist and assessing when events
or circumstances would require an interim impairment analysis of
goodwill or other long-lived assets to be performed. Changes in
events or circumstances, including but not limited to
technological advances or competition which could result in
shorter useful lives, additional reporting units which may
require alternative methods of estimating fair value, or
economic or market conditions which may affect previous
assumptions and estimates, could have a significant impact on
our results of operations or financial position through
accelerated amortization expense or impairment charges.

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Results of Operations

The following table sets forth, for the periods
indicated, certain financial data as percentages of
Concords total revenues.

|                                          |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |      |       |       |  
|----------------------------------------- | ----------------------------------------------------------------- | --------------------------------- | ----------------------- | ---- | ----- | ---- | --- | ---- | ----- | ---- | ----- | ---- | ----- | ----- | -
|                                          |                                                                   |                                  
|                                          |                                                                   | Year Ended December 31,          
|                                          |                                                                   |                                  
|                                          |                                                                   | 2003                              |                         | 2002 |       | 2001
|                                          |                                                                   |                                   |                         |      |       |     
|Revenues:                                 |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     
|                                          | License revenues                                                  |                                   |                         | 52.1 | %     |      |     | 54.6 | %     |      |       | 61.8 | %    
|                                          | Service revenues                                                  |                                   |                         | 47.9 |       |      |     | 45.4 |       |      |       | 38.2 |      
|                                          |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     
|                                          |                                                                   | Total revenues                    |                         |      | 100.0 |      |     |      | 100.0 |      |       |      | 100.0 |      
|                                          |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     
|Cost of Revenues:                         |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     
|                                          | Cost of license revenues                                          |                                   |                         | 3.0  |       |      |     | 2.0  |       |      |       | 2.6  |      
|                                          | Cost of service revenues                                          |                                   |                         | 15.5 |       |      |     | 16.1 |       |      |       | 17.7 |      
|                                          |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     
|                                          |                                                                   | Total cost of revenues            |                         |      | 18.5  |      |     |      | 18.1  |      |       |      | 20.3  |      
|                                          |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     
|                                          |                                                                   |                                   | Gross profit            |      |       | 81.5 |     |      |       | 81.9 |       |      |       | 79.7  |  
|                                          |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     
|Operating Expenses:                       |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     
|                                          | Research and development (excluding stock-based
    compensation) |                                   |                         | 21.9 |       |      |     | 23.3 |       |      |       | 27.2 |      
|                                          | Sales and marketing                                               |                                   |                         | 46.5 |       |      |     | 50.5 |       |      |       | 58.0 |      
|                                          | General and administrative                                        |                                   |                         | 8.7  |       |      |     | 8.2  |       |      |       | 9.9  |      
|                                          | Stock-based compensation                                          |                                   |                         | 0.0  |       |      |     | 0.1  |       |      |       | 0.4  |      
|                                          | Acquisition-related charges                                       |                                   |                         | 0.0  |       |      |     |     |       |      |       |     |      
|                                          | In-process research and development                               |                                   |                         | 1.0  |       |      |     |     |       |      |       |     |      
|                                          |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     
|                                          |                                                                   | Total operating expenses          |                         |      | 78.1  |      |     |      | 82.1  |      |       |      | 95.5  |      
|                                          |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     
|                                          |                                                                   |                                   | Operating income (loss) |      |       | 3.4  |     |      |       | (0.2 | )     |      |       | (15.8 | )
|                                          |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     
|Other Income (Expense):                   |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     
|                                          | Interest income                                                   |                                   |                         | 2.7  |       |      |     | 3.3  |       |      |       | 3.8  |      
|                                          | Interest expense                                                  |                                   |                         | (0.2 | )     |      |     | 0.0  |       |      |       | 0.0  |      
|                                          | Other expense                                                     |                                   |                         | (0.4 | )     |      |     | (0.2 | )     |      |       | (0.2 | )    
|                                          |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     
|                                          |                                                                   | Total other income, net           |                         |      | 2.1   |      |     |      | 3.1   |      |       |      | 3.6   |      
|                                          |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     
|                                          |                                                                   | Income (loss) before income taxes |                         |      | 5.5   |      |     |      | 2.9   |      |       |      | (12.2 | )    
|(Benefit from) provision for income taxes |                                                                   |                                   | (1.9                    | )    |       |      | 0.6 |      |       |      | 0.5   |     
|                                          |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     
|Net income                                |                                                                   |                                   | 7.4                     | %    |       |      | 2.3 | %    |       |      | (12.7 | )%  
|                                          |                                                                   |                                   |                         |      |       |      |     |      |       |      |       |     

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Total Revenues

Concords total revenues are generated from
license revenue and service revenue. License revenues are
derived from the licensing of software products. Service
revenues consist of fees for maintenance, training and
professional services.

|                          |  |                         |         |         |  |      |      |         |  |      |        |   |  |  |      |    |  |   |        |  
|------------------------- |  | ----------------------- | ------- | ------- |  | ---- | ---- | ------- |  | ---- | ------ | - |  |  | ---- | -- |  | - | ------ | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  |                         |         | Percent |  |      |      | Percent |  |     
|                          |  | 2003                    |         | Change  |  | 2002 |      | Change  |  | 2001
|                          |  |                         |         |         |  |      |      |         |  |     
|                          |  |                        
|                          |  | (Dollars in thousands) 
|License Revenues          |  | $                       | 54,267  |         |  |      | 5.9  | %       |  | $    | 51,230 |   |  |  | (5.8 | )% |  | $ | 54,406 |  
|Service Revenues          |  |                         | 49,796  |         |  |      | 16.9 | %       |  |      | 42,614 |   |  |  | 26.9 | %  |  |   | 33,572 |  
|                          |  |                         |         |         |  |      |      |         |  |      |        |   |  |  |      |    |  |   |        |  
|Total Revenues            |  | $                       | 104,063 |         |  |      | 10.9 | %       |  | $    | 93,844 |   |  |  | 6.7  | %  |  | $ | 87,978 |  
|                          |  |                         |         |         |  |      |      |         |  |      |        |   |  |  |      |    |  |   |        |  
|Percent of Total Revenues |  |                         |         |         |  |      |      |         |  |      |        |   |  |  |      |    |  |   |        |  
|License Revenues          |  |                         | 52.1    | %       |  |      |      |         |  |      | 54.6   | % |  |  |      |    |  |   | 61.8   | %
|Service Revenues          |  |                         | 47.9    | %       |  |      |      |         |  |      | 45.4   | % |  |  |      |    |  |   | 38.2   | %

License Revenues

Concords license revenues are derived from
the licensing of software products.

|                          |  |                         |        |         |  |      |     |         |  |      |        |   |  |  |      |    |  |   |        |  
|------------------------- |  | ----------------------- | ------ | ------- |  | ---- | --- | ------- |  | ---- | ------ | - |  |  | ---- | -- |  | - | ------ | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  |                         |        | Percent |  |      |     | Percent |  |     
|                          |  | 2003                    |        | Change  |  | 2002 |     | Change  |  | 2001
|                          |  |                         |        |         |  |      |     |         |  |     
|                          |  |                        
|                          |  | (Dollars in thousands) 
|License Revenues          |  | $                       | 54,267 |         |  |      | 5.9 | %       |  | $    | 51,230 |   |  |  | (5.8 | )% |  | $ | 54,406 |  
|Percent of Total Revenues |  |                         |        |         |  |      |     |         |  |      |        |   |  |  |      |    |  |   |        |  
|License Revenues          |  |                         | 52.1   | %       |  |      |     |         |  |      | 54.6   | % |  |  |      |    |  |   | 61.8   | %

Fiscal 2003 compared to fiscal
2002:The increase in license revenues
in absolute dollars from 2002 to 2003 was due to an increase in
sales to European service providers and to the licenses revenue
generated by netViz, a company acquired in 2003. The increase in
sales to European service providers was driven by the increased
demand for outsourced services by European enterprises, which in
turn, are using these services to reduce their operational
costs. NetViz contributed over $1.0 million in the license
revenue in 2003 while increased sales to European service
providers comprise the majority of the balance of the increase.

Fiscal 2002 compared to fiscal
2001:The decrease in license revenues
in absolute dollars from 2001 to 2002 was due in large part to
decreases, postponements or cancellations of IT infrastructure
purchases by some of our customers due to worldwide economic
uncertainty during that period.

The continuing decrease of license revenues as a
percent of total revenues from 2002 to 2003 and from 2001 to
2002 was the result of a significant increase in service
revenues during the same periods, consisting primarily of
maintenance revenue increases.

License revenues are partially dependent on our
ability to sell to new customer accounts. License revenues can
also be dependent on the number of transactions over $100,000
that we are able to close during the period.

|                                |  |                         |     |         |  |      |       |         |  |      |     |   |  |  |       |    |  |  |     |  
|------------------------------- |  | ----------------------- | --- | ------- |  | ---- | ----- | ------- |  | ---- | --- | - |  |  | ----- | -- |  |  | --- | -
|                                |  |                        
|                                |  | Year Ended December 31,
|                                |  |                        
|                                |  |                         |     | Percent |  |      |       | Percent |  |     
|                                |  | 2003                    |     | Change  |  | 2002 |       | Change  |  | 2001
|                                |  |                         |     |         |  |      |       |         |  |     
|New Customers                   |  |                         | 147 |         |  |      | (45.6 | )%      |  |      | 270 |   |  |  | (35.6 | )% |  |  | 419 |  
|Transactions greater than $100K |  |                         | 165 |         |  |      | 1.9   | %       |  |      | 162 |   |  |  | (10.0 | )% |  |  | 180 |  
|Percent of Total Revenues       |  |                         |     |         |  |      |       |         |  |      |     |   |  |  |       |    |  |  |     |  
|New Customers                   |  |                         | 18  | %       |  |      |       |         |  |      | 21  | % |  |  |       |    |  |  | 30  | %

33



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Fiscal 2003 compared to fiscal
2002:The decrease in the number of
sales to new customer accounts from 2002 to 2003, is due
primarily, to an increase in repeat sales to our customer base
driven by the release of new functionality that continues to
appeal to our existing customer base. The slight increase in the
number of transactions greater than $100,000 is due primarily to
the investment in the solution selling training of our sales
force; this training provides a business-focused approach to the
sales process. We expect that this training, coordinated with
other internal efforts, will result in an increase of the number
of transactions greater than $100,000; however, there can be no
assurance that we will be successful in meeting this estimate.

Fiscal 2002 compared to fiscal
2001:The decrease in the number of
sales to new customer accounts from 2001 to 2002, is due
primarily, to an increase in repeat sales to our customer base
driven by the release of new functionality that continues to
appeal to our existing customer base The reduction in the number
of transactions greater than $100,000 from 2001 to 2002 was due
primarily to the continued economic slowdown, particularly in
the telecommunications industry.

There were no material price increases for
products during 2003, 2002 or 2001. Inflation did not have a
significant impact on our revenues or income during 2003, 2002
or 2001.

Service Revenues

Concords service revenues consist of fees
for maintenance, training and professional services.

|                          |  |                         |        |         |  |      |      |         |  |      |        |   |  |  |      |   |  |   |        |  
|------------------------- |  | ----------------------- | ------ | ------- |  | ---- | ---- | ------- |  | ---- | ------ | - |  |  | ---- | - |  | - | ------ | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  |                         |        | Percent |  |      |      | Percent |  |     
|                          |  | 2003                    |        | Change  |  | 2002 |      | Change  |  | 2001
|                          |  |                         |        |         |  |      |      |         |  |     
|                          |  |                        
|                          |  | (Dollars in thousands) 
|Service Revenues          |  | $                       | 49,796 |         |  |      | 16.9 | %       |  | $    | 42,614 |   |  |  | 26.9 | % |  | $ | 33,572 |  
|Percent of Total Revenues |  |                         |        |         |  |      |      |         |  |      |        |   |  |  |      |   |  |   |        |  
|Service Revenues          |  |                         | 47.9   | %       |  |      |      |         |  |      | 45.4   | % |  |  |      |   |  |   | 38.2   | %

Fiscal 2003 compared to fiscal
2002:The increase in service
revenues, from 2002 to 2003, was due to a significant increase
in maintenance revenues, which are generated from new and
renewed maintenance contracts, and the maintenance generated by
netViz. NetViz contributed over $0.6 million in service
revenue in 2003 while increased services revenues from new and
renewed maintenance contracts primarily comprised the balance of
the increase in service revenues.

Fiscal 2002 compared to fiscal
2001:The increase in service revenues
was primarily due to a significant increase in maintenance
revenues, driven by an increased customer base.

Maintenance revenues represent fees earned by
granting our customers rights to technical support, software
product upgrades and maintenance patches during the support
period, which is usually one year. The majority of our license
customers purchase maintenance upon the initial licensing of our
software. In addition, the majority of these customers renew
their maintenance agreements annually. An increase in the number
of the Companys customers and the resulting demand for
these services further helped drive the increase in service
revenues from 2002 to 2003 and from 2001 to 2002.

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Direct and Indirect Revenues

Concord markets its products in the United States
primarily through a direct sales force. Internationally, Concord
markets primarily through indirect channels, which include
channel partners and other resellers.

|                          |  |                         |         |         |  |      |      |         |  |      |        |   |  |  |     |   |  |   |        |  
|------------------------- |  | ----------------------- | ------- | ------- |  | ---- | ---- | ------- |  | ---- | ------ | - |  |  | --- | - |  | - | ------ | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  |                         |         | Percent |  |      |      | Percent |  |     
|                          |  | 2003                    |         | Change  |  | 2002 |      | Change  |  | 2001
|                          |  |                         |         |         |  |      |      |         |  |     
|                          |  |                        
|                          |  | (Dollars in thousands) 
|Direct                    |  | $                       | 64,162  |         |  |      | (5.5 | )%      |  | $    | 67,925 |   |  |  | 9.4 | % |  | $ | 62,099 |  
|Indirect                  |  |                         | 39,901  |         |  |      | 53.9 | %       |  |      | 25,919 |   |  |  | 0.2 | % |  |   | 25,879 |  
|                          |  |                         |         |         |  |      |      |         |  |      |        |   |  |  |     |   |  |   |        |  
|Total Revenues            |  | $                       | 104,063 |         |  |      | 10.9 | %       |  | $    | 93,844 |   |  |  | 6.7 | % |  | $ | 87,978 |  
|                          |  |                         |         |         |  |      |      |         |  |      |        |   |  |  |     |   |  |   |        |  
|Percent of Total Revenues |  |                         |         |         |  |      |      |         |  |      |        |   |  |  |     |   |  |   |        |  
|Direct                    |  |                         | 61.7    | %       |  |      |      |         |  |      | 72.4   | % |  |  |     |   |  |   | 70.6   | %
|Indirect                  |  |                         | 38.3    | %       |  |      |      |         |  |      | 27.6   | % |  |  |     |   |  |   | 29.4   | %

Fiscal 2003 compared to fiscal
2002:The increase of indirect sales
is primarily driven by increased sales in Europe, which are
usually done through resellers. In 2003, we introduced the
Concord Authorized Reseller (CAR) program, which provides, for a
fixed annual fee, product, services and sales training to our
VARs and distributors. This training had a positive impact, in
2003, on the ability of the indirect channel to better penetrate
international markets, such as Europe.

Fiscal 2002 compared to fiscal
2001:The increase of direct sales, in
absolute dollars and as a percentage of revenue, is primarily
due to increased sales to American based customers. The slow
growth of indirect sales is driven by the economic uncertainty
in many countries during that period.

International Revenues

Concord has thirteen international subsidiaries
and two international branch offices. Concord has customers in
62 countries.

|                            |  |                         |        |         |  |      |      |         |  |      |        |   |  |  |      |   |  |   |        |  
|--------------------------- |  | ----------------------- | ------ | ------- |  | ---- | ---- | ------- |  | ---- | ------ | - |  |  | ---- | - |  | - | ------ | -
|                            |  |                        
|                            |  | Year Ended December 31,
|                            |  |                        
|                            |  |                         |        | Percent |  |      |      | Percent |  |     
|                            |  | 2003                    |        | Change  |  | 2002 |      | Change  |  | 2001
|                            |  |                         |        |         |  |      |      |         |  |     
|                            |  |                        
|                            |  | (Dollars in thousands) 
|United Kingdom              |  | $                       | 10,412 |         |  |      | 81.7 | %       |  | $    | 5,731  |   |  |  | 3.3  | % |  | $ | 5,546  |  
|Europe (excluding the U.K.) |  |                         | 19,907 |         |  |      | 19.6 | %       |  |      | 16,640 |   |  |  | 14.0 | % |  |   | 14,596 |  
|Rest of the World           |  |                         | 14,419 |         |  |      | 5.5  | %       |  |      | 13,661 |   |  |  | 4.4  | % |  |   | 13,090 |  
|                            |  |                         |        |         |  |      |      |         |  |      |        |   |  |  |      |   |  |   |        |  
|Total                       |  | $                       | 44,738 |         |  |      | 24.2 | %       |  | $    | 36,032 |   |  |  | 8.4  | % |  | $ | 33,232 |  
|                            |  |                         |        |         |  |      |      |         |  |      |        |   |  |  |      |   |  |   |        |  
|Percent of Total Revenues   |  |                         |        |         |  |      |      |         |  |      |        |   |  |  |      |   |  |   |        |  
|United Kingdom              |  |                         | 10.0   | %       |  |      |      |         |  |      | 6.1    | % |  |  |      |   |  |   | 6.3    | %
|Europe (excluding the U.K.) |  |                         | 19.1   | %       |  |      |      |         |  |      | 17.7   | % |  |  |      |   |  |   | 16.6   | %
|Rest of the World           |  |                         | 13.9   | %       |  |      |      |         |  |      | 14.6   | % |  |  |      |   |  |   | 14.9   | %

Fiscal 2003 compared to fiscal
2002:The increase in international
revenues as a percentage of total revenues is driven primarily
by strong demand by European service providers.

Fiscal 2002 compared to fiscal
2001:The increase is driven primarily
by increased demand by European based enterprise customers.

The continued increase in international revenues
as a percentage of total revenues is primarily the result of
Concords expansion of its operations outside the United
States, which has included both the hiring of additional
personnel as well as the establishment of additional reseller
relationships.

We expect revenue from international customers
will be 40% to 50% of total revenues however, there can be no
assurance that we will be successful in meeting this estimate.
We believe that continued growth and profitability will require
further expansion of our sales, marketing and customer service
functions in

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international markets. We expect to commit
additional time and development resources to customizing our
products and services for selected international markets.


Segment Revenues

Concords reportable segments are determined
by customer type: managed service providers/ telecommunications
carriers (MSP/ TC) and enterprise.

|                          |            |                         |   |         |         |      |  |         |      |      |   |        |        |  |  |      |     |   |   |        |        | 
|------------------------- | ---------- | ----------------------- | - | ------- | ------- | ---- |  | ------- | ---- | ---- | - | ------ | ------ |  |  | ---- | --- | - | - | ------ | ------ | 
|                          |            |                        
|                          |            | Year Ended December 31,
|                          |            |                        
|                          |            |                         |   | Percent |         |      |  | Percent |      |     
|                          |            | 2003                    |   | Change  |         | 2002 |  | Change  |      | 2001
|                          |            |                         |   |         |         |      |  |         |      |     
|                          |            |                        
|                          |            | (Dollars in thousands) 
|Segment Revenues          |            |                         |   |         |         |      |  |         |      |      |   |        |        |  |  |      |     |   |   |       
|                          | MSP/ TC    |                         | $ | 46,872  |         |      |  | 18.3    | %    |      | $ | 39,636 |        |  |  | 1.2  | %   |   | $ | 39,182 |       
|                          | Enterprise |                         |   | 57,191  |         |      |  | 5.5     | %    |      |   | 54,208 |        |  |  | 11.1 | %   |   |   | 48,796 |       
|                          |            |                         |   |         |         |      |  |         |      |      |   |        |        |  |  |      |     |   |   |       
|                          |            | Total Revenues          |   | $       | 104,063 |      |  |         | 10.9 | %    |   | $      | 93,844 |  |  |      | 6.7 | % |   | $      | 87,978 | 
|                          |            |                         |   |         |         |      |  |         |      |      |   |        |        |  |  |      |     |   |   |       
|Percent of Total Revenues |            |                         |   |         |         |      |  |         |      |      |   |        |        |  |  |      |     |   |   |       
|                          | MSP/TC     |                         |   | 45.0    | %       |      |  |         |      |      |   | 42.2   | %      |  |  |      |     |   |   | 44.5   | %     
|                          | Enterprise |                         |   | 55.0    | %       |      |  |         |      |      |   | 57.8   | %      |  |  |      |     |   |   | 55.5   | %     

Fiscal 2003 compared to fiscal
2002:The increase in MSP/ TC revenue,
in absolute dollars and as a percentage of total revenues, from
2002 to 2003 was driven primarily by increased sales to European
based MSP/ TC customers. The increase in enterprise revenues in
absolute dollars was due to an increase in demand for our
products from new customers and repeat sales to existing
customers.

Fiscal 2002 compared to fiscal
2001:The decrease in MSP/ TC revenues
as a percentage of total revenues in 2002 was attributable to
reduced spending by major telecommunications firms on IT
infrastructure projects. The increase in enterprise revenues in
absolute dollars was due to an increase in demand for our
products from new customers and repeat sales to existing
customers. The growth of enterprise revenues, as a percentage of
revenues, is due to the strong increase of enterprise revenue in
2002.

We expect that MSP/ TC revenue will be 40% to 50%
of total revenues; however, there can be no assurance that we
will be successful in meeting this estimate.

Cost of Revenues

Cost of revenues includes cost of license
revenues and cost of service revenues.

|                          |  |                         |        |         |  |      |      |         |  |      |        |   |  |  |       |    |  |   |        |  
|------------------------- |  | ----------------------- | ------ | ------- |  | ---- | ---- | ------- |  | ---- | ------ | - |  |  | ----- | -- |  | - | ------ | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  |                         |        | Percent |  |      |      | Percent |  |     
|                          |  | 2003                    |        | Change  |  | 2002 |      | Change  |  | 2001
|                          |  |                         |        |         |  |      |      |         |  |     
|                          |  |                        
|                          |  | (Dollars in thousands) 
|Cost of License Revenues  |  | $                       | 3,117  |         |  |      | 68.5 | %       |  | $    | 1,850  |   |  |  | (18.6 | )% |  | $ | 2,272  |  
|Cost of Service Revenues  |  |                         | 16,127 |         |  |      | 6.7  | %       |  |      | 15,120 |   |  |  | (2.7  | )% |  |   | 15,544 |  
|                          |  |                         |        |         |  |      |      |         |  |      |        |   |  |  |       |    |  |   |        |  
|Total Cost of Revenues    |  | $                       | 19,244 |         |  |      | 13.4 | %       |  | $    | 16,970 |   |  |  | (4.7  | )% |  | $ | 17,816 |  
|                          |  |                         |        |         |  |      |      |         |  |      |        |   |  |  |       |    |  |   |        |  
|Percent of Total Revenues |  |                         |        |         |  |      |      |         |  |      |        |   |  |  |       |    |  |   |        |  
|Cost of License Revenues  |  |                         | 3.0    | %       |  |      |      |         |  |      | 2.0    | % |  |  |       |    |  |   | 2.6    | %
|Cost of Service Revenues  |  |                         | 15.5   | %       |  |      |      |         |  |      | 16.1   | % |  |  |       |    |  |   | 17.7   | %

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Cost of License Revenues

Cost of license revenues includes expenses
associated with royalty fees, production, fulfillment of orders,
product documentation and amortization expense associated with
the completed technology intangible asset. Royalty costs are
composed of third party software costs.

|                          |  |                         |       |         |  |      |      |         |  |      |       |   |  |  |       |    |  |   |       |  
|------------------------- |  | ----------------------- | ----- | ------- |  | ---- | ---- | ------- |  | ---- | ----- | - |  |  | ----- | -- |  | - | ----- | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  |                         |       | Percent |  |      |      | Percent |  |     
|                          |  | 2003                    |       | Change  |  | 2002 |      | Change  |  | 2001
|                          |  |                         |       |         |  |      |      |         |  |     
|                          |  |                        
|                          |  | (Dollars in thousands) 
|Cost of License Revenues  |  | $                       | 3,117 |         |  |      | 68.5 | %       |  | $    | 1,850 |   |  |  | (18.6 | )% |  | $ | 2,272 |  
|Percent of Total Revenues |  |                         |       |         |  |      |      |         |  |      |       |   |  |  |       |    |  |   |       |  
|Cost of License Revenues  |  |                         | 3.0   | %       |  |      |      |         |  |      | 2.0   | % |  |  |       |    |  |   | 2.6   | %

Fiscal 2003 compared to fiscal
2002:The increase of cost of license
revenues, in absolute dollars, is driven by amortization expense
and higher royalty costs. The factors contributed approximately
21% and 56%, respectively, of the increase in cost of license
revenues. The amortization expense is related to the acquisition
of netViz and represents the amortization associated with
completed technology intangible asset, which has an estimated
useful life of 4 years.

Fiscal 2002 compared to fiscal
2001:The decrease of cost of license
revenues, in absolute dollars, was due primarily, to lower
fulfillment costs. In 2002, these costs were lower due to
improved efficiencies in the distribution process of our
software.

Revenues and Expenses Recognized in Connection
With Third Party Software.

Royalty costs are composed of third party
software costs. The Company bundles third party software in some
of its products when it determines that bundling such software
is cost-effective or increases the effectiveness of
Concords products. In some instances, the Company has
determined that it can be cost prohibitive to develop such
software applications, especially if such applications are
already available in the marketplace. In addition, bundling
third party software allows Concord, in certain instances, to
accelerate the delivery of increased functionality within a
short timeframe. Revenues generated by Concord products that
included third party software and the associated royalty costs
were:

|                          |  |                         |        |         |  |      |       |         |  |      |       |   |  |  |      |   |  |   |       |  
|------------------------- |  | ----------------------- | ------ | ------- |  | ---- | ----- | ------- |  | ---- | ----- | - |  |  | ---- | - |  | - | ----- | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  |                         |        | Percent |  |      |       | Percent |  |     
|                          |  | 2003                    |        | Change  |  | 2002 |       | Change  |  | 2001
|                          |  |                         |        |         |  |      |       |         |  |     
|                          |  |                        
|                          |  | (Dollars in thousands) 
|Revenues                  |  | $                       | 12,281 |         |  |      | 271.8 | %       |  | $    | 3,303 |   |  |  | 24.5 | % |  | $ | 2,654 |  
|Expenses                  |  |                         | 1,396  |         |  |      | 104.7 | %       |  | $    | 682   |   |  |  | 55.0 | % |  |   | 440   |  
|Percent of Total Revenues |  |                         |        |         |  |      |       |         |  |      |       |   |  |  |      |   |  |   |       |  
|Revenues                  |  |                         | 11.8   | %       |  |      |       |         |  |      | 3.5   | % |  |  |      |   |  |   | 3.0   | %
|Expenses                  |  |                         | 1.3    | %       |  |      |       |         |  |      | 0.7   | % |  |  |      |   |  |   | 0.5   | %

Fiscal 2003 compared to fiscal
2002:The increase in royalty costs is
mostly driven by the cost of distribution of the Oracle database
and the related maintenance costs. In 2002, we integrated the
Oracle database software into our product offering; this enabled
us to replace the Ingres database with the Oracle product and to
offer one single database solution to our customers. Third party
maintenance charges are usually based on the number of sold
units. As the Companys installed base has grown, the
number of its products under maintenance, which includes third
party software, has also increased.

Fiscal 2002 compared to fiscal
2001:The increase in royalty costs is
mostly driven by the increased installed base.

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Cost of Service Revenues

Cost of service revenues includes the personnel
costs associated with providing customer support in connection
with maintenance, training and professional service contracts.

|                          |  |                         |        |         |  |      |     |         |  |      |        |   |  |  |      |    |  |  |        |  
|------------------------- |  | ----------------------- | ------ | ------- |  | ---- | --- | ------- |  | ---- | ------ | - |  |  | ---- | -- |  |  | ------ | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  |                         |        | Percent |  |      |     | Percent |  |     
|                          |  | 2003                    |        | Change  |  | 2002 |     | Change  |  | 2001
|                          |  |                         |        |         |  |      |     |         |  |     
|                          |  |                        
|                          |  | (Dollars in thousands) 
|Cost of Service Revenues  |  |                         | 16,127 |         |  |      | 6.7 | %       |  |      | 15,120 |   |  |  | (2.7 | )% |  |  | 15,544 |  
|Percent of Total Revenues |  |                         |        |         |  |      |     |         |  |      |        |   |  |  |      |    |  |  |        |  
|Cost of Service Revenues  |  |                         | 15.5   | %       |  |      |     |         |  |      | 16.1   | % |  |  |      |    |  |  | 17.7   | %

Fiscal 2003 compared to fiscal
2002:The increase in absolute dollars
is attributable to the costs associated with the opening, in the
first quarter of 2003, of a technical support call center in
Australia, which is servicing our customers in the Asia-Pacific
region.

Fiscal 2002 compared to fiscal
2001:The decrease in the cost of
service revenues was driven by lower use of outside consultants
to deliver the training and professional services.

The decrease of the cost of service revenues as a
percentage of revenue from 2002 to 2003 and 2001 to 2002 is
mainly attributable to investments made in systems, which have
improved the productivity of the service organization.

Gross Profit

Total gross profit includes gross profit from
license revenues and gross profit from service revenues.

|                          |  |                         |        |         |  |      |      |         |  |      |        |   |  |  |     |   |  |   |        |  
|------------------------- |  | ----------------------- | ------ | ------- |  | ---- | ---- | ------- |  | ---- | ------ | - |  |  | --- | - |  | - | ------ | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  |                         |        | Percent |  |      |      | Percent |  |     
|                          |  | 2003                    |        | Change  |  | 2002 |      | Change  |  | 2001
|                          |  |                         |        |         |  |      |      |         |  |     
|                          |  |                        
|                          |  | (Dollars in thousands) 
|Gross Profit              |  | $                       | 84,819 |         |  |      | 10.3 | %       |  | $    | 76,874 |   |  |  | 9.6 | % |  | $ | 70,162 |  
|Percent of Total Revenues |  |                         |        |         |  |      |      |         |  |      |        |   |  |  |     |   |  |   |        |  
|Gross Profit              |  |                         | 81.5   | %       |  |      |      |         |  |      | 81.9   | % |  |  |     |   |  |   | 79.7   | %

Fiscal 2003 compared to fiscal
2002:The increase in total gross
profit is driven by the increase of total revenues. The decrease
of the gross profit percentage is driven by the increase in
royalty costs.

Fiscal 2002 compared to fiscal
2001:The increase in total gross
profit and gross profit percentage was attributable to an
increase of total revenues.

We expect to increase our gross profit in
absolute dollars; however, this will depend upon our revenue
growth, among other factors. Accordingly, there can be no
assurance that we will be successful in increasing our gross
profit on an absolute basis of total revenues.

Research and Development Expenses

Research and development expenses consist
primarily of personnel costs associated with software
development.

|                          |  |                         |        |         |  |      |     |         |  |      |        |   |  |  |      |    |  |   |        |  
|------------------------- |  | ----------------------- | ------ | ------- |  | ---- | --- | ------- |  | ---- | ------ | - |  |  | ---- | -- |  | - | ------ | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  |                         |        | Percent |  |      |     | Percent |  |     
|                          |  | 2003                    |        | Change  |  | 2002 |     | Change  |  | 2001
|                          |  |                         |        |         |  |      |     |         |  |     
|                          |  |                        
|                          |  | (Dollars in thousands) 
|Research and Development  |  | $                       | 22,767 |         |  |      | 4.1 | %       |  | $    | 21,867 |   |  |  | (8.8 | )% |  | $ | 23,969 |  
|Percent of Total Revenues |  |                         |        |         |  |      |     |         |  |      |        |   |  |  |      |    |  |   |        |  
|Research and Development  |  |                         | 21.9   | %       |  |      |     |         |  |      | 23.3   | % |  |  |      |    |  |   | 27.2   | %

Fiscal 2003 compared to fiscal
2002:The increase is due to the
acquisition of netViz, which resulted in higher headcount,
increased consulting fees and amortization expenses. Each of
these factors contributed 73%,

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14% and 13% to the increase. Research and
development expenses would have remained similar to 2002 when
excluding the impact of the netViz acquisition.


Fiscal 2002 compared to fiscal
2001:The decrease in research and
development expenses was primarily due to a decrease in salary
and related benefits due to lower headcount. The decrease of
these expenses was the result of cost control measures taking in
order to reduce our operating expenses and increase
profitability.

We intend to decrease our research and
development expenses as a percentage of total revenues. Our
ability to decrease these expenses as a percentage of total
revenues will depend upon our revenue growth, among other
factors. Accordingly, there can be no assurance that we will be
successful in decreasing our research and development expenses
as a percentage of total revenues.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of
salaries, commissions to sales personnel and agents, travel,
tradeshow participation, public relations, advertising and other
promotional expenses.

|                          |  |                         |        |         |  |      |     |         |  |      |        |   |  |  |      |    |  |   |        |  
|------------------------- |  | ----------------------- | ------ | ------- |  | ---- | --- | ------- |  | ---- | ------ | - |  |  | ---- | -- |  | - | ------ | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  |                         |        | Percent |  |      |     | Percent |  |     
|                          |  | 2003                    |        | Change  |  | 2002 |     | Change  |  | 2001
|                          |  |                         |        |         |  |      |     |         |  |     
|                          |  |                        
|                          |  | (Dollars in thousands) 
|Sales and Marketing       |  | $                       | 48,352 |         |  |      | 2.0 | %       |  | $    | 47,383 |   |  |  | (7.2 | )% |  | $ | 51,041 |  
|Percent of Total Revenues |  |                         |        |         |  |      |     |         |  |      |        |   |  |  |      |    |  |   |        |  
|Sales and Marketing       |  |                         | 46.5   | %       |  |      |     |         |  |      | 50.5   | % |  |  |      |    |  |   | 58.0   | %

Fiscal 2003 compared to fiscal
2002:The increase in absolute dollars
is due to the acquisition of netViz, increased sales expenses,
which were partially offset by lower marketing expenses. The
integration and investments made in the sales and marketing
functions of netViz account for about $0.4 million of the
increase. Sales expenses increased by approximately
$3.7 million due to additional headcount and higher sales
commissions and bonus payments to our sales force resulting from
higher license revenues. Our sales force is compensated on the
initial sales of license and services. Each factor contributed
approximately 32% and 58%, respectively, to the increase.
Marketing expenses decreased by approximately by
$3.2 million due to lower marketing program spending and
lower headcount. Each factor contributed about 36% and 31%,
respectively, to the decrease.

Fiscal 2002 compared to fiscal
2001:The decrease of sales and
marketing expenses, in absolute dollars, is due to lower sales
expenses, which were partially offset by higher marketing
expenses. Sales expenses decreased by approximately
$4.9 million, or 13%, due to lower commissions and bonus
payments to our sales force resulting from lower license
revenues, lower employee related expenses and lower travel
costs. Each factor contributed approximately 31%, 27% and 20%,
respectively, to the decrease. Marketing expenses increased by
approximately $1.3 million or 9%, primarily due to higher
headcount.

We expect to decrease these expenses as a
percentage of total revenues; however, this will ultimately
depend upon our revenue growth, among other factors.
Accordingly, there can be no assurance that we will be
successful in decreasing our sales and marketing expenses as a
percentage of total revenues.

General and Administrative Expenses

General and administrative expenses consist
primarily of salaries for financial, accounting, legal, investor
relations, human resources, administrative and management
personnel.

|                           |  |                         |       |         |  |      |      |         |  |      |       |   |  |  |       |    |  |   |       |  
|-------------------------- |  | ----------------------- | ----- | ------- |  | ---- | ---- | ------- |  | ---- | ----- | - |  |  | ----- | -- |  | - | ----- | -
|                           |  |                        
|                           |  | Year Ended December 31,
|                           |  |                        
|                           |  |                         |       | Percent |  |      |      | Percent |  |     
|                           |  | 2003                    |       | Change  |  | 2002 |      | Change  |  | 2001
|                           |  |                         |       |         |  |      |      |         |  |     
|                           |  |                        
|                           |  | (Dollars in thousands) 
|General and Administrative |  | $                       | 9,035 |         |  |      | 17.9 | %       |  | $    | 7,665 |   |  |  | (11.9 | )% |  | $ | 8,700 |  
|Percent of Total Revenues  |  |                         |       |         |  |      |      |         |  |      |       |   |  |  |       |    |  |   |       |  
|General and Administrative |  |                         | 8.7   | %       |  |      |      |         |  |      | 8.2   | % |  |  |       |    |  |   | 9.9   | %

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Fiscal 2003 compared to fiscal
2002:The increase in absolute dollars
from 2002 to 2003 was due to the integration of netViz, higher
salary and bonus expenses, increased administrative fees, which
include legal and auditing fees, and increase in the use of
consultants in preparation for new rules governing
publicly-traded companies in the United States. Lower bad debt
expenses offset these increases, in part. Each factor
contributed approximately 10%, 48%, 34%, 14%, and (39%),
respectively, to the variance.

Fiscal 2002 compared to fiscal
2001:The decrease in absolute dollars
is attributable primarily to lower bad debt expenses due to
decreased write-offs and lower outside legal fees. Each factor
contributed approximately 37% and 14%, respectively, of the
decrease. The remaining decrease of general and administrative
expenses was the result of cost control measures taking in order
to reduce our operating expenses and increase profitability.

We expect to decrease these expenses as a
percentage of total revenues; however, this will ultimately
depend upon our revenue growth, among other factors.
Accordingly, there can be no assurance that we will be
successful in decreasing our expenses as a percentage of total
revenues.

Stock-based Compensation

Stock-based compensation relates to the issuance
of stock options with exercise prices below the deemed fair
value of the Common Stock at the date of grant. Deferred
stock-based compensation resulted solely from the issuance of
stock options to employees of FirstSense in connection with the
Companys acquisition of FirstSense on February 4,
2000 and is amortized through charges to operations over the
vesting period of the options, which is generally four years.

|                          |  |                         |     |         |  |      |       |         |  |      |     |   |  |  |       |    |  |   |     |  
|------------------------- |  | ----------------------- | --- | ------- |  | ---- | ----- | ------- |  | ---- | --- | - |  |  | ----- | -- |  | - | --- | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  |                         |     | Percent |  |      |       | Percent |  |     
|                          |  | 2003                    |     | Change  |  | 2002 |       | Change  |  | 2001
|                          |  |                         |     |         |  |      |       |         |  |     
|                          |  |                        
|                          |  | (Dollars in thousands) 
|Stock-based compensation  |  | $                       | 60  |         |  |      | (43.4 | )%      |  | $    | 106 |   |  |  | (66.9 | )% |  | $ | 320 |  
|Percent of Total Revenues |  |                         |     |         |  |      |       |         |  |      |     |   |  |  |       |    |  |   |     |  
|Stock-based compensation  |  |                         | 0.0 | %       |  |      |       |         |  |      | 0.1 | % |  |  |       |    |  |   | 0.4 | %

Stock-based compensation decreased from 2001 to
2002 and from 2002 to 2003 following the forfeiture of unvested
employee stock options and restricted stock during that period.
There will be no future compensation expense charges relating to
First Sense acquisition.

Acquisition-Related Charges

Acquisition-related charges are expenses
associated with the acquisition of netViz; these include mostly
legal and audit fees.

|                            |  |                         |     |         |  |      |  |         |  |      |     |   |  |  |  |  |  |   |     |  
|--------------------------- |  | ----------------------- | --- | ------- |  | ---- |  | ------- |  | ---- | --- | - |  |  |  |  |  | - | --- | -
|                            |  |                        
|                            |  | Year Ended December 31,
|                            |  |                        
|                            |  |                         |     | Percent |  |      |  | Percent |  |     
|                            |  | 2003                    |     | Change  |  | 2002 |  | Change  |  | 2001
|                            |  |                         |     |         |  |      |  |         |  |     
|                            |  |                        
|                            |  | (Dollars in thousands) 
|Acquisition-related charges |  | $                       | 40  |         |  |      |  |         |  | $    |    |   |  |  |  |  |  | $ |    |  
|Percent of Total Revenues   |  |                         |     |         |  |      |  |         |  |      |     |   |  |  |  |  |  |   |     |  
|Acquisition-related charges |  |                         | 0.0 | %       |  |      |  |         |  |      | 0.0 | % |  |  |  |  |  |   | 0.0 | %

There were no acquisition related charges
incurred in 2001 or 2002.

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In-Process Research & Development
Expenses

In process research & development expenses
relate to our licensing of components of Tavves
technology. Concord has licensed Tavves root cause
analysis and discovery of layer 2 and 3 network topology to
build upon our current position in optimizing application
availability and performance across networks and systems.

|                                  |  |                         |     |         |  |      |  |         |  |      |     |   |  |  |  |  |  |   |     |  
|--------------------------------- |  | ----------------------- | --- | ------- |  | ---- |  | ------- |  | ---- | --- | - |  |  |  |  |  | - | --- | -
|                                  |  |                        
|                                  |  | Year Ended December 31,
|                                  |  |                        
|                                  |  |                         |     | Percent |  |      |  | Percent |  |     
|                                  |  | 2003                    |     | Change  |  | 2002 |  | Change  |  | 2001
|                                  |  |                         |     |         |  |      |  |         |  |     
|                                  |  |                        
|                                  |  | (Dollars in thousands) 
|In-process research & development |  | $                       | 994 |         |  |      |  |         |  | $    |    |   |  |  |  |  |  | $ |    |  
|Percent of Total Revenues         |  |                         |     |         |  |      |  |         |  |      |     |   |  |  |  |  |  |   |     |  
|In-process research & development |  |                         | 1.0 | %       |  |      |  |         |  |      | 0.0 | % |  |  |  |  |  |   | 0.0 | %

There were no in process research &
development expenses incurred in 2001 or 2002.

Other Income

Other income consists of interest earned on funds
available for investment, interest expenses payable on the
Convertibles Senior Notes issued in December 2003, foreign
currency exchange gains and losses and miscellaneous foreign
taxes.

|                          |  |                         |       |         |  |      |        |         |  |      |       |   |  |  |      |    |  |   |       |  
|------------------------- |  | ----------------------- | ----- | ------- |  | ---- | ------ | ------- |  | ---- | ----- | - |  |  | ---- | -- |  | - | ----- | -
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  |                         |       | Percent |  |      |        | Percent |  |     
|                          |  | 2003                    |       | Change  |  | 2002 |        | Change  |  | 2001
|                          |  |                         |       |         |  |      |        |         |  |     
|                          |  |                        
|                          |  | (Dollars in thousands) 
|Interest Income           |  | $                       | 2,808 |         |  |      | (10.2  | )%      |  | $    | 3,127 |   |  |  | (7.0 | )% |  | $ | 3,361 |  
|Interest Expense          |  |                         | (244  | )       |  |      | 1335.3 | %       |  |      | (17   | ) |  |  |      |    |  | $ |      |  
|Other                     |  |                         | (480  | )       |  |      | 147.4  | %       |  |      | (194  | ) |  |  | (3.0 | )% |  |   | (200  | )
|                          |  |                         |       |         |  |      |        |         |  |      |       |   |  |  |      |    |  |   |       |  
|Total Other Income, net   |  | $                       | 2,084 |         |  |      | (28.5  | )%      |  | $    | 2,916 |   |  |  | (7.8 | )% |  | $ | 3,161 |  
|                          |  |                         |       |         |  |      |        |         |  |      |       |   |  |  |      |    |  |   |       |  
|Percent of Total Revenues |  |                         |       |         |  |      |        |         |  |      |       |   |  |  |      |    |  |   |       |  
|Other Income              |  |                         | 2.1   | %       |  |      |        |         |  |      | 3.1   | % |  |  |      |    |  |   | 3.6   | %

Fiscal 2003 compared to fiscal
2002:The decrease of interest income
is due to lower yield on our investment portfolio, which is
driven by lower interest rates. Concord incurred interest
expenses of $0.2 million following the issuance of
$86.25 million in Convertible Senior Notes in December of
2003. The increase in other expenses is due to larger foreign
currency transaction and translation losses attributable to a
weaker US dollar.

Fiscal 2002 compared to fiscal
2001:The decrease of interest income
is due to lower yield on our investment portfolio, which is
driven by lower interest rates. The Company had no debt in 2001
and 2002 and therefore, did not have any material interest
expenses.

Provision for Income Taxes

The provision for income taxes relates to
federal, state and foreign taxes resulting from the
profitability of certain of our foreign operations and the
release of a portion of our deferred tax asset valuation reserve.

|                                          |  |                         |        |         |  |      |        |         |  |      |     |   |  |  |      |   |  |   |     |  
|----------------------------------------- |  | ----------------------- | ------ | ------- |  | ---- | ------ | ------- |  | ---- | --- | - |  |  | ---- | - |  | - | --- | -
|                                          |  |                        
|                                          |  | Year Ended December 31,
|                                          |  |                        
|                                          |  |                         |        | Percent |  |      |        | Percent |  |     
|                                          |  | 2003                    |        | Change  |  | 2002 |        | Change  |  | 2001
|                                          |  |                         |        |         |  |      |        |         |  |     
|                                          |  |                        
|                                          |  | (Dollars in thousands) 
|(Benefit from) provision for income taxes |  | $                       | (2,015 | )       |  |      | (454.8 | )%      |  | $    | 568 |   |  |  | 27.1 | % |  | $ | 447 |  
|Percent of Total Revenues                 |  |                         |        |         |  |      |        |         |  |      |     |   |  |  |      |   |  |   |     |  
|(Benefit from) provision for income taxes |  |                         | (1.9   | )%      |  |      |        |         |  |      | 0.6 | % |  |  |      |   |  |   | 0.5 | %

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We recorded an income tax benefit of
$2.6 million in connection with the reversal of our
non-cash deferred tax valuation allowance; this was offset by
approximately $0.6 million in foreign taxes. The increase
of the provision from 2001 to 2002 is due to an increase
international presence, which resulted in higher profitability
of certain of our foreign operations.

Liquidity and Capital Resources

|                                                                              |  |                        |         |        |  |              |       |        |  |              |        |  |  |  |      |   |  |   |        | 
|----------------------------------------------------------------------------- |  | ---------------------- | ------- | ------ |  | ------------ | ----- | ------ |  | ------------ | ------ |  |  |  | ---- | - |  | - | ------ | 
|                                                                              |  | December 31,           |         |        |  | December 31, |       |        |  | December 31,
|                                                                              |  | 2003                   |         | Change |  | 2002         |       | Change |  | 2001        
|                                                                              |  |                        |         |        |  |              |       |        |  |             
|                                                                              |  |                       
|                                                                              |  | (Dollars in thousands)
|Working Capital                                                               |  | $                      | 149,433 |        |  |              | 158.6 | %      |  | $            | 57,792 |  |  |  | 18.0 | % |  | $ | 48,966 | 
|Cash, cash equivalents and marketable securities
    (net of restricted cash) |  | $                      | 161,891 |        |  |              | 122.3 | %      |  | $            | 72,831 |  |  |  | 6.6  | % |  | $ | 68,344 | 

|                                      |  |                         |         |        |  |      |        |        |  |      |        |   |  |  |       |    |  |   |        |  
|------------------------------------- |  | ----------------------- | ------- | ------ |  | ---- | ------ | ------ |  | ---- | ------ | - |  |  | ----- | -- |  | - | ------ | -
|                                      |  |                        
|                                      |  | Year Ended December 31,
|                                      |  |                        
|                                      |  | 2003                    |         | Change |  | 2002 |        | Change |  | 2001
|                                      |  |                         |         |        |  |      |        |        |  |     
|                                      |  |                        
|                                      |  | (Dollars in thousands) 
|Cash provided by operating activities |  | $                       | 10,387  |        |  |      | 81.5   | %      |  | $    | 5,724  |   |  |  | 2.6   | %  |  | $ | 5,581  |  
|Cash used for investing activities    |  | $                       | (38,574 | )      |  |      | 452.6  | %      |  | $    | (6,980 | ) |  |  | (23.6 | )% |  | $ | (9,133 | )
|Cash provided by financing activities |  | $                       | 87,261  |        |  |      | 3247.2 | %      |  | $    | 2,607  |   |  |  | 41.8  | %  |  | $ | 1,838  |  

Working capital

The increase in working capital is primarily due
to the issuance of $86.25 million of convertible senior notes,
for which we received $82.7 million, net of commissions and
fees. The rest of the increase is due, in part, to an increase
of $6.0 million of cash, cash equivalents and marketable
securities, which was the cash generated through our normal
operations.

Cash, cash equivalents and marketable
securities (net of restricted cash)

Cash, cash equivalents and marketable securities
consist of highly liquid investments in time deposits held at
major banks, commercial paper, United States government agency
discount notes, money market mutual funds and other money market
securities with original maturities of 90 days or less. The
increase of cash, cash equivalents and marketable securities is
primarily due to the issuance of convertible senior notes; this
accounts for $82.7 million of the increase. The rest of
change is due to the increase in net income and changes in
various working capital components.

Cash provided by operating
activities

Cash flows from operating activities increased
primarily due to the increase in net income and deferred
revenue, partially offset by an increase in accounts receivable.
Average daily sales outstanding (DSO) for the quarter increased
to 72 days at December 31, 2003 compared to
66 days at December 31, 2002. DSO is calculated by
dividing the period end accounts receivable by the quarterly
revenue. DSO measures both the age, in terms of days, of our
accounts receivable and the average time it takes to turn the
receivable into cash. There are a number of factors affecting
DSO, including our payment terms, collection ability and the
timing of sales made during a quarter. Deferred revenue
increased $3.1 million mainly due to an increase in new and
renewed maintenance contracts to our larger customer base.

Cash used for investing activities

Investing activities have consisted of the
investments in marketable securities, acquisition of property
and equipment, most notably computer and networking equipment to
support the corporate infrastructure, and business acquisition.
The Company manages its market risk on its investment securities
by selecting investment grade securities with the highest credit
ratings and relatively short duration that trade in highly
liquid markets. The decrease from 2002 to 2003 is mainly due to
the timing of the purchases and maturities of investments and
the acquisition of netViz. Each factors contributed 80% and 13%
to the change, respectively.

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Cash provided by financing
activities

Financing activities consisted primarily of the
issuance of Common Stock and debt. On December 8, 2003,
Concord received $82.7 million, net of fees and
commissions, following the issuance of $86.25 million of
Convertible Senior Notes. In addition, the Company issued
approximately $4.5 million in Common Stock from the
exercise of employee stock options.

Contractual obligations

The following table is a summary of our
contractual obligations:

|                                           |                   |                         |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |        |        |  |   |        |         | 
|------------------------------------------ | ----------------- | ----------------------- | ----- | ----- |  | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- |  | - | ------ | ------ |  | - | ------ | ------- | 
|                                           |                   |                        
|                                           |                   | Year Ended December 31,
|                                           |                   |                        
|                                           |                   | 2004                    |       | 2005  |  | 2006 |       | 2007  |  | 2008 |       | Total
|                                           |                   |                         |       |       |  |      |       |       |  |      |       |      
|                                           |                   |                        
|                                           |                   | (In thousands)         
|Facility and certain equipment leases      |                   | $                       | 4,283 |       |  | $    | 3,658 |       |  | $    | 2,176 |       |  | $ | 785   |       |  | $ | 153    |        |  | $ | 11,055 |        
|Minimum royalties payments                 |                   |                         | 694   |       |  |      |      |       |  |      |      |       |  |   |      |       |  |   |       |        |  |   | 694    |        
|Technology purchase                        |                   |                         | 100   |       |  |      |      |       |  |      |      |       |  |   |      |       |  |   |       |        |  |   | 100    |        
|Convertible notes                          |                   |                         |      |       |  |      |      |       |  |      |      |       |  |   |      |       |  |   | 86,250 |        |  |   | 86,250 |        
|Interest payments on the Convertible Notes |                   |                         | 2,588 |       |  |      | 2,588 |       |  |      | 2,588 |       |  |   | 2,588 |       |  |   | 2,588  |        |  |   | 12,940 |        
|                                           |                   |                         |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |        |        |  |   |        |        
|                                           | Total commitments |                         | $     | 7,665 |  |      | $     | 6,246 |  |      | $     | 4,764 |  |   | $     | 3,373 |  |   | $      | 88,991 |  |   | $      | 111,039 | 
|                                           |                   |                         |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |        |        |  |   |        |        

The Company leases its facilities and certain
equipment under operating lease agreements extending through
August 2007. The Companys remaining lease commitments for
all leased facilities and equipment with an initial or remaining
term of at least one-year total $11.1 million.

The Company has entered into several software
license agreements that provide the Company with exclusive
worldwide licenses to distribute or utilize certain patented
computer software. The Company bundles third-party software in
some of its products when it determines that bundling such
software is cost-effective or increases the effectiveness of
Concords products. The minimum royalties payment is
$0.7 million.

The Company has agreed to license additional
technology from Tavve, which technology will be delivered in the
first half of 2004. The value of this additional purchase is
$0.1 million. No additional purchases from Tavve are
contemplated at this time.

On December 8, 2003, the Company raised
$82.7 million, net of fees and commissions, following the
issuance of convertibles senior notes with a principal of
$86.25 million. The Convertible Senior Notes mature in 2023
and bear interest of 3.0%, payable semi-annually in June and
December of each year. Concord intends to use the net proceeds
of the offering for working capital and general corporate
purposes and potentially for future acquisitions of
complementary businesses and technologies. Holders of the
Convertible Senior Notes may elect to convert some or all of the
outstanding Convertible Senior Notes upon certain events,
including a change in control or if during a conversion period,
the closing price of our stock exceeds $32.24, which is 120% of
the conversion price ($26.87) for 20 trading days in a period of
30 trading days, which starts on the first business day of a
quarter. If the threshold is met, then holders may convert their
Convertible Senior Notes into our Common Stock at any time
during the succeeding 90 days, beginning on the 30th
trading day of the quarter. We may redeem some or all of the
Convertible Senior Notes at any time on or after
December 15, 2008. Holders have the right to require the
Company to purchase all or a portion of their notes for cash on
December 15, 2008, December 15, 2013 and
December 15, 2018.

As of December 31, 2003, the Companys
stock had not exceeded 120% of the conversion price on any
trading day since December 8, 2003 and no other events had
occurred which would make the Convertible Senior Notes
convertible. Holders may convert the notes into shares of our
common stock at an initial conversion rate of
37.2148 shares of common stock per $1,000 principal amount
of notes (representing a conversion price of approximately
$26.87 per share which converts into 3,209,776 shares of common
stock), subject to adjustment. We may redeem some or all of the
convertible senior notes on or after December 15, 2008.

As of December 31, 2003, the Company had
available for U.S. federal income tax purposes net operating
loss carryforwards of approximately $17.3 million, which
expire at various dates through 2021. In addition, as of
December 31, 2003, the Company had U.S. federal research
and development tax credit carryforwards of approximately
$3.0 million, which expire at various dates through 2023.
Under current tax law, the utilization

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of net operating loss and research and
development tax credit carryforwards may be subject to annual
limitations in the event of certain changes in ownership.


As required by SFAS No. 109, management of
the Company has evaluated the positive and negative evidence
bearing upon the realizability of the Companys deferred
tax assets. The Company has reserved for its deferred tax assets
by recording a valuation allowance. The resulting net deferred
tax asset of $9.6 million is based on the Companys
estimate of future taxable income it expects to generate. The
reversal of the deferred tax assets valuation allowance is based
upon managements expectation that the Company will
generate sufficient taxable income in future periods to allow it
to realize its deferred tax assets resulting from the tax
benefits associated with its net operating loss carryforwards
and its research and development tax credit carryforwards, as
well as certain other tax benefits related to book and tax
income timing. In the event that actual results differ from
these estimates or the Company adjusts these estimates in future
periods, the Company may need to establish an additional
valuation allowance. Establishing new or additional valuation
allowances could materially adversely impact the Companys
financial position and results of operations.

As of December 31, 2003, the Company has
recorded a deferred tax asset of approximately $4.5 million
reflecting the benefit of deductions from the exercise of stock
options. The Company realized approximately $2.7 million of
this benefit as a credit to additional paid in capital during
2003. The remaining valuation allowance of $1.8 million
relates to stock option deductions and will be credited to
additional paid-in capital when released. If we continue to be
sufficiently profitable in 2004, the reserve will be released in
2004.

Pursuant to the Tax Reform Act of 1986, the
utilization of net operating loss carryforwards for tax purposes
may be subject to an annual limitation if a cumulative change of
ownership of more than 50% occurs over a three-year period.

As of December 31, 2003, Concords
principal sources of liquidity included cash, cash equivalents
and marketable securities. The Company believes that its current
cash, cash equivalents, marketable securities and cash provided
by future operations will be sufficient to meet its working
capital and anticipated capital expenditure requirements for at
least the next 12 months. Although operating activities may
provide cash in certain periods, to the extent Concord
experiences growth in the future, its operating and investing
activities may require additional cash. Consequently, any such
future growth may require Concord to obtain additional equity or
debt financing.

Recent Accounting Pronouncements

In April 2003, the Financial Accounting Standards
Board (FASB) released SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS 149 clarifies under what
circumstances a contract with an initial net investment meets
the characteristics of a derivative, amends the definition of an
underlying contract, and clarifies when a derivative contains a
financing component in order to increase the comparability of
accounting practices under SFAS No. 133. The statement is
effective for contracts entered into or modified after
June 30, 2003, and for hedging relationships designated
after June 30, 2003. Concord adopted this standard on
July 1, 2003 and its adoption did not have any impact on
the Companys financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify
a financial instrument that is within its scope as a liability
(or an asset in some circumstances). Many of those instruments
were previously classified as equity. The Statement is effective
for financial instruments entered into or modified after
May 31, 2003. Concord adopted this standard on June 1,
2003 and its adoption did not have any impact on the
Companys financial position or results of operations.

In January 2003, the FASB issued Interpretation
(FIN) No. 46, Consolidation of Variable
Interest Entities, and in December 2003, issued a revision
to that interpretation (FIN 46R). FIN 46R
replaces FIN 46 and addresses consolidation by business
enterprises of variable interest entities that possess certain

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characteristics. A variable interest entity
(VIE) is defined as (a) an ownership,
contractual or monetary interest in an entity where the ability
to influence financial decisions is not proportional to the
investment interest, or (b) an entity lacking the invested
capital sufficient to fund future activities without the support
of a third party. FIN 46R establishes standards for
determining under what circumstances VIEs should be consolidated
with their primary beneficiary, including those to which the
usual condition for consolidation does not apply. FIN 46R
is effective for all new variable interest entities created or
acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the
provisions of FIN 46R must be applied for the first interim
or annual period beginning after December 15, 2003. The
adoption of this standard is not expected to have a material
impact on the Companys financial position or results of
operations as the Company currently does not have variable
interest entities.


In November 2002, the Emerging Issues Task Force
(EITF) of the FASB reached a consensus on
Issue 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. EITF 00-21 requires that for
revenue arrangements with multiple deliverables, those
deliverables be divided into separate units of accounting if the
deliverables meet certain criteria as defined by
EITF 00-21. Arrangement consideration is to be allocated
among the separate units of accounting based on their relative
fair values and revenue recognition decisions should be
considered separately for each separate unit of accounting.
EITF 00-21 is effective for all arrangements entered into
in fiscal periods beginning after June 15, 2003, with early
adoption permitted. The Companys multiple element
arrangements fall within the scope of SOP 97-2 and,
therefore, EITF 00-21 is not applicable to the Company.

In August 2003, the EITF reached a consensus on
Issue 03-05, Applicability of AICPA Statement of
Position 97-2 to Non-Software Deliverables in an Arrangement
Containing More-Than-Incidental Software. EITF 03-05
addresses the applicability of SOP 97-2 to non-software
deliverables in an arrangement containing more-than-incidental
software. In an arrangement that includes software that is more
than incidental to the products or services as a whole, software
and software-related elements are included within the scope of
SOP 97-2. Software-related elements include software
products and services, as well as any non-software deliverables
for which software deliverable is essential to its
functionality. The adoption of EITF 03-05 did not have a
material impact on the Companys consolidated financial
results. The Company will classify all software-related services
and products as software license on its consolidated statement
of operations.

On December 23, 2003, the FASB issued SFAS
No. 132 (Revised 2003), Employers Disclosures
about Pensions and Other Postretirement Benefits. This
statement increases the existing GAAP disclosure requirements by
requiring more details about pension plan assets, benefit
obligations, cash flows, benefit costs and related information.
Companies will be required to segregate plan assets by category,
such as debt, equity and real estate, and to provide certain
expected rates of return and other informational disclosures.
SFAS 132(R) also requires companies to disclose various elements
of pension and postretirement benefit costs in interim-period
financial statements for quarters beginning after
December 15, 2003. The new standard provides that companies
with foreign plans may defer certain disclosures associated with
those plans until fiscal years ending after June 15, 2004.
The adoption of this standard is not expected to have a material
impact on the Companys financial position or results of
operations.




Item 7A.     Quantitative
and Qualitative Disclosures about Market Risk



| |                                      
| | -------------------------------------
| | (a) Market and Interest Rate
    Risk

Most of Concords current export sales are
denominated in United States dollars. To the extent that a
majority of our international sales continue to be denominated
in United States dollars, an increase in the value of the United
States dollar relative to other currencies could make our
products and services more expensive and, therefore, potentially
less competitive in international markets. Substantially all of
our business outside the United States is conducted in U.S.
dollar-denominated transactions, whereas our operating expenses
in our international branches are denominated in local currency.
We believe that the operating expenses of our foreign operations
are immaterial, and therefore any associated market risk is
unlikely to have a material adverse effect on our business,
results of operations or financial condition.

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All of the Companys investments are in
investment grade securities with high credit ratings of
relatively short duration that trade in highly liquid markets
and are carried at fair value on the Companys books.
Accordingly, the Company has no quantitative information
concerning the market risk of participating in such investments.
Due to the short-term nature of our investments, we believe we
have minimal market risk. The Companys investment
portfolio of cash equivalents and marketable securities is
subject to interest rate fluctuations, but the Company believes
this risk is immaterial due to the short-term nature of these
investments.

(b) Foreign
Currency Exchange Rate Risk

We use forward contracts to reduce our exposure
to foreign currency risk due to fluctuations in exchange rates
underlying the value of accounts receivable denominated in
foreign currencies held until such receivables are collected. A
forward contract obligates us to exchange predetermined amounts
of specified foreign currencies at specified exchange rates on
specified dates. These forward contracts, to qualify as hedges
of existing assets, are denominated in the same currency in
which the underlying foreign currency receivables are
denominated and bear a contract value and maturity date that
approximate the value and expected settlement date,
respectively, of the underlying transactions. For contracts that
are designated and effective as hedges, unrealized gains and
losses on open contracts at the end of each accounting period,
resulting from changes in the fair value of these contracts, are
recognized in earnings in the same period as gains and losses on
the underlying foreign denominated receivables are recognized
and generally offset.

We do not enter into or hold derivatives for
trading or speculative purposes, and we only enter into
contracts with highly rated financial institutions. At
December 31, 2003, we had no forward contracts outstanding.

We plan to continue to utilize forward contracts
and other instruments in the future to reduce our exposure to
exchange rate fluctuations from accounts receivable denominated
in foreign currencies, and we may not be able to do this
successfully. Accordingly, we may experience economic loss and a
negative impact on earnings and equity as a result of foreign
currency exchange rate fluctuations. Also, as we continue to
expand our operations outside of the United States, our exposure
to fluctuations in currency exchange rates could increase.




Item 8.     Financial
Statements and Supplementary Data

Concords financial statements together with
the related notes and the reports of
PricewaterhouseCoopers LLP and Arthur Andersen LLP,
independent accountants, are set forth in Item 15.




Item 9.     Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure

Information regarding the change in the
Companys principal accountants was provided in the
Companys Current Report on Form 8-K filed
June 14, 2002. The letter from Arthur Andersen LLP stating
the firms agreement with the information provided in the
report was filed as an exhibit to the Form 8-K report.




Item 9A.     Controls
and Procedures

(a) Evaluation of Disclosure Controls and
Procedures.As of the end of the
period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of
the Companys management, including the Companys
President and Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures, as defined in
Exchange Act Rule 15d-14(c). Based upon that evaluation,
the Companys President and Chief Executive Officer and
Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective in enabling the
Company to record, process, summarize, and report information
required to be included in the Companys periodic SEC
filings within the required time period.

(b) Changes in Internal Controls over
Financial Reporting.There were no
changes in the Companys internal controls over financial
reporting (as defined in Rule 13a-15(f) under the Exchange
Act) during the

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##### Table of Contents



fourth quarter that has materially affected, or
would be reasonably likely to materially affect the
Companys internal controls over financial reporting.




PART III




Item 10.     Directors
and Officers of the Registrant

The information under the captions Election
of Directors and Section 16(a) Beneficial
Ownership Reporting Compliance as set forth in
Concords Proxy Statement for its annual stockholders
meeting to be held May 5, 2004 is incorporated herein by
reference.

Set forth below is certain information relating
to each executive officers business experience:

|                |  |                                                                                                   
|--------------- |  | --------------------------------------------------------------------------------------------------
|Name            |  | Position                                                                                          
|                |  |                                                                                                   
|John A. Blaeser |  | President, Chief Executive Officer and Chairman
    of the Board                                  
|Douglas A. Batt |  | Executive Vice President, General Counsel and
    Clerk                                           
|Melissa H. Cruz |  | Executive Vice President, Business Services Chief
    Financial Officer, Asst. Clerk and Treasurer
|Ferdinand Engel |  | Executive Vice President, Engineering and Chief
    Technology Officer                            
|Daniel Sheahan  |  | Executive Vice President, Worldwide Sales and
    Professional Services                           

Our executive officers and their ages as of
December 31, 2003 are as follows:

John A. Blaeser, 62,
has been Concords President, Chief Executive Officer and
Chairman of the Board, since January 1996 and a director of
Concord since 1985. Prior to joining Concord as Chief Executive
Officer and President, from 1991 until 1996, Mr. Blaeser
was Managing General Partner of EG&G Venture Management, a
venture capital firm. Mr. Blaeser currently serves as a
director for Network Engines, Inc.

Douglas A. Batt, 43,
has been Concords Executive Vice President and General
Counsel since November 2002, and Vice President and General
Counsel from July 2000 until November 2002. Prior to
joining Concord, Mr. Batt was Technology Counsel at Reebok
International Ltd. from October 1997 until July 2000
and from September 1991 until October 1997,
Mr. Batt was an attorney with the law firm of Goodwin
Procter LLP in Boston.

Melissa H. Cruz, 41,
has been Concords Executive Vice President, Business
Services and Chief Financial Officer since April 2000, Vice
President Finance from January 2000 until April 2000,
Director of Finance from August 1998 until
January 2000 and Manager, Financial Planning from
August 1997 until August 1998. Prior to joining
Concord, Ms. Cruz was Director of Finance at SeaChange
International, Inc. from November 1996 to
August 1997, International Controller at Bay
Networks, Inc. from November 1993 to July 1996
and from December 1984 to November 1993, Ms. Cruz
held a variety of financial management roles at Digital
Equipment Corporation.

Ferdinand Engel, 55,
has been Concords Executive Vice President of Engineering
and Chief Technology Officer since April 2000, Senior Vice
President of Engineering of Concord from September 1999 until
April 2000 and Vice President of Engineering of Concord from
1989 until September 1999. Prior to joining Concord,
Mr. Engel was Vice President of Engineering for Technology
Concepts at Bell Atlantic Corp.

Daniel Sheahan, 42,
has been Concords Executive Vice President, Worldwide
Sales and Professional Services since November 2002, Vice
President of Worldwide Sales from June 2001 until
November 2002, and Managing Director of Concords Asia
Pacific Region from November 1999 until June 2001. Prior to
joining Concord, Mr. Sheahan was a senior member of
Compuwares Asia Pacific management team holding several
positions during his five years with the company including
managing Compuwares regional professional services
organization and leading its Strategic Solutions group.

47



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##### Table of Contents



Our Code of Business Conduct and Ethics
(Code) applies to all of our directors, officers and
employees. It is publicly available on our website at
www.concord.com/aboutus/invest/corpgovern.shtml.
Amendments to the Code and waivers of any provision thereof
which require disclosure under applicable SEC and Nasdaq rules
will be disclosed on our website.



Item 11.     Executive
Compensation

The information under the caption Executive
Compensation as set forth in the Companys Proxy
Statement for its annual stockholders meeting to be held
May 5, 2004 is incorporated herein by reference.



Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information under the caption
Securities Ownership of Certain Beneficial Owners and
Management as set forth in Concords Proxy Statement
for its Annual Stockholders Meeting to be held May 5,
2004 is incorporated herein by reference.



Item 13.     Certain
Relationships and Related Transactions

None.



Item 14.     Principal
Accountant Fees and Services

The response to this Item will be contained in
the Proxy Statement for the annual stockholders meeting to be
held on May 5, 2004 under the caption Statement of
Fees Paid to Independent Auditors, and is incorporated
herein.



PART IV




Item 15.     Exhibits,
Financial Statement Schedules and Reports on
Form 8-K

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

1.     Consolidated
Financial Statements:

|                                                     |                                              |        |    |    | 
|---------------------------------------------------- | -------------------------------------------- | ------ | -- | -- | 
|                                                     |                                              | Page  
|                                                     |                                              | Number
|                                                     |                                              |       
|Reports of Independent Auditors                      |                                              |        | 48 |   
|Consolidated Balance Sheets:                         |                                              |        |    |   
|                                                     | December 31, 2003 and 2002                   |        |    | 50 | 
|Consolidated Statements of Operations:               |                                              |        |    |   
|                                                     | Years ended December 31, 2003, 2002 and 2001 |        |    | 51 | 
|Consolidated Statements of Stockholders
    Equity: |                                              |        |    |   
|                                                     | Years ended December 31, 2003, 2002 and 2001 |        |    | 52 | 
|Consolidated Statements of Cash Flows:               |                                              |        |    |   
|                                                     | Years ended December 31, 2003, 2002 and 2001 |        |    | 53 | 
|Notes to Consolidated Financial Statements           |                                              |        | 54 |   

2.     Consolidated
Financial Statement Schedules

Schedule II  Valuation and
Qualifying Accounts Included in Note 12 of Notes to
Consolidated Financial Statements

All other financial statement schedules are
omitted because they are not applicable or the required
information is included in the consolidated financial statements
and notes thereto.

(b) Exhibits:

See Exhibit Index. The Exhibits listed in the
accompanying Exhibit Index are filed or incorporated by
reference as part of this report.

(c) Reports on Form 8-K:

Current Reports on Form 8-K were filed on
November 10, 2003, December 2, 2003, December 3,
2003, and December 9, 2003.

48



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##### Table of Contents






REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders

of Concord Communications, Inc.:


In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of
operations, of stockholders equity and of cash flows
present fairly, in all material respects, the financial position
of Concord Communications, Inc. and its subsidiaries at
December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. The
consolidated financial statements of Concord Communications,
Inc. for the year ended December 31, 2001 were audited by
other independent auditors who have ceased operations. Those
independent auditors expressed an unqualified opinion on those
consolidated financial statements in their report dated
January 16, 2002.



| |                               
| | ------------------------------
| | /s/ PRICEWATERHOUSECOOPERS LLP
| | PRICEWATERHOUSECOOPERS LLP    

Boston, Massachusetts

January 19, 2004


49



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##### Table of Contents



This is a copy of the audit report previously
issued by Arthur Andersen LLP in connection with Concord
Communications, Inc.s filing on Form 10-K for the
year ended December 31, 2001. This audit report has not
been reissued by Arthur Andersen LLP in connection with
this filing on Form 10-K. The consolidated balance sheets
as of December 31, 2001 and 2000 and the consolidated
statements of operations, stockholders equity and cash
flows for each of the two years in the period ended
December 31, 2000 referred to in this report have not been
included in the accompanying consolidated financial
statements.




REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To the Board of Directors of

Concord Communications, Inc.:


We have audited the accompanying consolidated
balance sheets of Concord Communications, Inc. (a
Massachusetts corporation) as of December 31, 2001 and
December 31, 2000, and the related consolidated statements
of operations, stockholders equity and cash flows for each
of the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
did not audit the financial statements of FirstSense
Software, Inc., a company acquired during 2000 in a
transaction accounted for as a pooling of interests, as
discussed in Note 3, or for any periods prior to its
acquisition. Such statements are included in the consolidated
financial statements of Concord Communications, Inc. and reflect
total revenues of 2% for the year ended December 31, 1999,
of the related consolidated totals. These statements were
audited by other auditors whose report has been furnished to us
and our opinion, insofar as it relates to amounts included for
FirstSense Software, Inc., is based solely on the report of the
other auditors.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
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 and
the report of the other auditors provide a reasonable basis for
our opinion.

In our opinion, based on our audits and the
report of the other auditors, the financial statements referred
to above present fairly, in all material respects, the financial
position of Concord Communications, Inc. as of December 31,
2001 and December 31, 2000, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with
accounting principles generally accepted in United States.



| |                        
| | -----------------------
| | /s/ ARTHUR ANDERSEN LLP
| | ARTHUR ANDERSEN LLP    

Boston, Massachusetts

January 16, 2002


50



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##### Table of Contents



CONCORD COMMUNICATIONS, INC.




CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |         |         | 
|-------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ------ | ------------ | ------- |  | ------ | ------- | ------- | 
|                                                               |                                                                                                            | December 31,                                                                                                  |        | December 31,
|                                                               |                                                                                                            | 2003                                                                                                          |        | 2002        
|                                                               |                                                                                                            |                                                                                                               |        |             
|ASSETS                                                         |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|Current Assets:                                                |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|                                                               | Cash and cash equivalents                                                                                  |                                                                                                               | $      | 69,436       |         |  | $      | 10,362  |        
|                                                               | Marketable securities                                                                                      |                                                                                                               |        | 92,455       |         |  |        | 62,469  |        
|                                                               | Restricted cash                                                                                            |                                                                                                               |        | 194          |         |  |        | 839     |        
|                                                               | Accounts receivable, net of allowance of $1,050
    and $1,480 at December 31, 2003 and 2002, respectively |                                                                                                               |        | 22,194       |         |  |        | 17,417  |        
|                                                               | Deferred tax assets                                                                                        |                                                                                                               |        | 4,638        |         |  |        | 817     |        
|                                                               | Prepaid expenses and other current assets                                                                  |                                                                                                               |        | 4,851        |         |  |        | 2,882   |        
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|                                                               |                                                                                                            | Total current assets                                                                                          |        |              | 193,768 |  |        |         | 94,786  | 
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|Equipment and improvements:                                    |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|                                                               | Equipment                                                                                                  |                                                                                                               |        | 19,433       |         |  |        | 22,987  |        
|                                                               | Leasehold improvements                                                                                     |                                                                                                               |        | 6,225        |         |  |        | 6,111   |        
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|                                                               |                                                                                                            |                                                                                                               | 25,658 |              |         |  | 29,098 |        
|                                                               | Less  accumulated depreciation and
    amortization                                                       |                                                                                                               |        | 18,961       |         |  |        | 20,853  |        
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|                                                               |                                                                                                            |                                                                                                               | 6,697  |              |         |  | 8,245  |        
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|Goodwill                                                       |                                                                                                            |                                                                                                               | 6,225  |              |         |  |       |        
|Other intangible assets, net                                   |                                                                                                            |                                                                                                               | 3,004  |              |         |  |       |        
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|                                                               |                                                                                                            |                                                                                                               | 9,229  |              |         |  |       |        
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|Deferred tax assets                                            |                                                                                                            |                                                                                                               | 4,962  |              |         |  | 2,683  |        
|Unamortized debt issuance costs and other
    long-term assets |                                                                                                            |                                                                                                               | 3,770  |              |         |  | 216    |        
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|                                                               |                                                                                                            |                                                                                                               | 8,732  |              |         |  | 2,899  |        
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|                                                               |                                                                                                            | Total assets                                                                                                  |        | $            | 218,426 |  |        | $       | 105,930 | 
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                       |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|Current Liabilities:                                           |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|                                                               | Accounts payable                                                                                           |                                                                                                               | $      | 5,218        |         |  | $      | 3,584   |        
|                                                               | Accrued expenses                                                                                           |                                                                                                               |        | 12,627       |         |  |        | 10,062  |        
|                                                               | Deferred revenue                                                                                           |                                                                                                               |        | 26,490       |         |  |        | 23,348  |        
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|                                                               |                                                                                                            | Total current liabilities                                                                                     |        |              | 44,335  |  |        |         | 36,994  | 
|                                                               | Convertible senior notes                                                                                   |                                                                                                               |        | 86,250       |         |  |        |        |        
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|                                                               |                                                                                                            | Total liabilities                                                                                             |        |              | 130,585 |  |        |         | 36,994  | 
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|Commitments and Contingencies (Note 9)                         |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|Stockholders Equity:                                          |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|                                                               | Preferred stock, $0.01 par value:                                                                          |                                                                                                               |        |              |         |  |        |         |        
|                                                               |                                                                                                            | Authorized  1,000,000 shares                                                                                 |        |              |         |  |        |         |         | 
|                                                               |                                                                                                            | Issued and outstanding  none                                                                                 |        |              |        |  |        |         |        | 
|                                                               | Common stock, $0.01 par value:                                                                             |                                                                                                               |        |              |         |  |        |         |        
|                                                               |                                                                                                            | Authorized  50,000,000 shares                                                                                |        |              |         |  |        |         |         | 
|                                                               |                                                                                                            | Issued and outstanding  18,121,211 and
    17,246,005 shares at December 31, 2003 and 2002,
    respectively |        |              | 181     |  |        |         | 172     | 
|                                                               | Additional paid-in capital                                                                                 |                                                                                                               |        | 111,651      |         |  |        | 98,893  |        
|                                                               | Deferred compensation                                                                                      |                                                                                                               |        |             |         |  |        | (60     | )      
|                                                               | Accumulated other comprehensive income                                                                     |                                                                                                               |        | 816          |         |  |        | 2,408   |        
|                                                               | Accumulated deficit                                                                                        |                                                                                                               |        | (24,807      | )       |  |        | (32,477 | )      
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|                                                               |                                                                                                            | Total stockholders equity                                                                                    |        |              | 87,841  |  |        |         | 68,936  | 
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        
|                                                               |                                                                                                            | Total liabilities and stockholders equity                                                                    |        | $            | 218,426 |  |        | $       | 105,930 | 
|                                                               |                                                                                                            |                                                                                                               |        |              |         |  |        |        

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

51



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##### Table of Contents



CONCORD COMMUNICATIONS, INC.




CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except share and per share
data)


|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |            |         |         |  
|-------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | --------------------------------- | ----------------------- | ---------- | ------- | ------ | ----- | ---------- | ------ | ------ | ------- | ---------- | ------- | ------- | -
|                                                                     |                                                                                                       |                                  
|                                                                     |                                                                                                       | Year Ended December 31,          
|                                                                     |                                                                                                       |                                  
|                                                                     |                                                                                                       | 2003                              |                         | 2002       |         | 2001  
|                                                                     |                                                                                                       |                                   |                         |            |         |       
|Revenues:                                                            |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|                                                                     | License revenues                                                                                      |                                   | $                       | 54,267     |         |        | $     | 51,230     |        |        | $       | 54,406     |        
|                                                                     | Service revenues                                                                                      |                                   |                         | 49,796     |         |        |       | 42,614     |        |        |         | 33,572     |        
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|                                                                     |                                                                                                       | Total revenues                    |                         |            | 104,063 |        |       |            | 93,844 |        |         |            | 87,978  |        
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|Cost of Revenues:                                                    |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|                                                                     | Cost of license revenues                                                                              |                                   |                         | 3,117      |         |        |       | 1,850      |        |        |         | 2,272      |        
|                                                                     | Cost of service revenues                                                                              |                                   |                         | 16,127     |         |        |       | 15,120     |        |        |         | 15,544     |        
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|                                                                     |                                                                                                       | Total cost of revenues            |                         |            | 19,244  |        |       |            | 16,970 |        |         |            | 17,816  |        
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|                                                                     |                                                                                                       |                                   | Gross profit            |            |         | 84,819 |       |            |        | 76,874 |         |            |         | 70,162  |  
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|Operating Expenses:                                                  |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|                                                                     | Research and development (excluding stock-based
    compensation of $60, $106 and $315, respectively) |                                   |                         | 22,767     |         |        |       | 21,867     |        |        |         | 23,969     |        
|                                                                     | Sales and marketing                                                                                   |                                   |                         | 48,352     |         |        |       | 47,383     |        |        |         | 51,041     |        
|                                                                     | General and administrative (excluding stock-based
    compensation of $0, $0 and $5, respectively)    |                                   |                         | 9,035      |         |        |       | 7,665      |        |        |         | 8,700      |        
|                                                                     | Stock-based compensation                                                                              |                                   |                         | 60         |         |        |       | 106        |        |        |         | 320        |        
|                                                                     | Acquisition-related charges                                                                           |                                   |                         | 40         |         |        |       |           |        |        |         |           |        
|                                                                     | Acquired in-process research and development                                                          |                                   |                         | 994        |         |        |       |           |        |        |         |           |        
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|                                                                     |                                                                                                       | Total operating expenses          |                         |            | 81,248  |        |       |            | 77,021 |        |         |            | 84,030  |        
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|                                                                     |                                                                                                       |                                   | Operating income (loss) |            |         | 3,571  |       |            |        | (147   | )       |            |         | (13,868 | )
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|Other Income (Expense):                                              |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|                                                                     | Interest income                                                                                       |                                   |                         | 2,808      |         |        |       | 3,127      |        |        |         | 3,361      |        
|                                                                     | Interest expense                                                                                      |                                   |                         | (244       | )       |        |       | (17        | )      |        |         |           |        
|                                                                     | Other expense                                                                                         |                                   |                         | (480       | )       |        |       | (194       | )      |        |         | (200       | )      
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|                                                                     |                                                                                                       | Total other income, net           |                         |            | 2,084   |        |       |            | 2,916  |        |         |            | 3,161   |        
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|                                                                     |                                                                                                       | Income (loss) before income taxes |                         |            | 5,655   |        |       |            | 2,769  |        |         |            | (10,707 | )      
|(Benefit from) provision for income taxes                            |                                                                                                       |                                   | (2,015                  | )          |         |        | 568   |            |        |        | 447     |           
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|Net income (loss)                                                    |                                                                                                       | $                                 | 7,670                   |            |         | $      | 2,201 |            |        | $      | (11,154 | )         
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|Net income (loss) per common and potential
    common share:         |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|                                                                     | Basic                                                                                                 |                                   | $                       | 0.44       |         |        | $     | 0.13       |        |        | $       | (0.67      | )      
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|                                                                     | Diluted                                                                                               |                                   | $                       | 0.42       |         |        | $     | 0.12       |        |        | $       | (0.67      | )      
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|Weighted average common and potential common
    shares outstanding: |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|                                                                     | Basic                                                                                                 |                                   |                         | 17,533,509 |         |        |       | 17,057,188 |        |        |         | 16,682,634 |        
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           
|                                                                     | Diluted                                                                                               |                                   |                         | 18,207,541 |         |        |       | 17,627,122 |        |        |         | 16,682,634 |        
|                                                                     |                                                                                                       |                                   |                         |            |         |        |       |            |        |        |         |           

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

52



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##### Table of Contents



CONCORD COMMUNICATIONS, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


(In thousands, except share data)


|                                                                                                            |                      |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |        |  
|----------------------------------------------------------------------------------------------------------- | -------------------- | ------------ | ---------- | ----- |  | ---------- | --- | ------------ |  | ------------- | ------- | ----------- |  | ----- | ------ | ------------- |  | - | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | ------ | -
|                                                                                                            |                      |              |            |       |  |            |     |              |  |               |         |             |  |      
|                                                                                                            |                      | Common Stock |            |       |  |            |     |              |  |               |         |             |  |      
|                                                                                                            |                      |              |            |       |  |            |     | Accumulated  |  |               |         |             |  |      
|                                                                                                            |                      |              |            | $0.01 |  | Additional |     |              |  | Other         |         |             |  |       |        |              
|                                                                                                            |                      | Number       |            | Par   |  | Paid-in    |     | Deferred     |  | Comprehensive |         | Accumulated |  |       |        | Comprehensive
|                                                                                                            |                      | of Shares    |            | Value |  | Capital    |     | Compensation |  | Income (Loss) |         | Deficit     |  | Total |        | Income (Loss)
|                                                                                                            |                      |              |            |       |  |            |     |              |  |               |         |             |  |       |        |              
|BALANCE, DECEMBER 31, 2000                                                                                  |                      |              | 16,554,944 |       |  | $          | 166 |              |  | $             | 95,478  |             |  | $     | (1,510 | )             |  | $ | 135    |   |  | $ | (23,524 | ) |  | $ | 70,745  |   |  |   |         |       
|Shares issued in connection with employee stock
    plans                                                   |                      |              | 346,249    |       |  |            | 3   |              |  |               | 1,835   |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   | 1,838   |   |  |   |         |       
|Reversal of deferred compensation related to
    forfeitures of unvested stock options and restricted stock |                      |              |            |       |  |            |     |              |  |               | (948    | )           |  |       | 948    |               |  |   |        |   |  |   |         |   |  |   |        |   |  |   |         |       
|Amortization of deferred compensation related to
    grants of stock options                                |                      |              |            |       |  |            |     |              |  |               |         |             |  |       | 320    |               |  |   |        |   |  |   |         |   |  |   | 320     |   |  |   |         |       
|Unrealized gains on available-for-sale securities                                                           |                      |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   | 1,757  |   |  |   |         |   |  |   | 1,757   |   |  | $ | 1,757   |       
|Net loss                                                                                                    |                      |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   |        |   |  |   | (11,154 | ) |  |   | (11,154 | ) |  |   | (11,154 | )     
|                                                                                                            |                      |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |       
|                                                                                                            | Comprehensive loss   |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   | $       | (9,397 | )
|                                                                                                            |                      |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |       
|BALANCE, DECEMBER 31, 2001                                                                                  |                      |              | 16,901,193 |       |  |            | 169 |              |  |               | 96,365  |             |  |       | (242   | )             |  |   | 1,892  |   |  |   | (34,678 | ) |  |   | 63,506  |   |  |   |         |       
|Shares issued in connection with employee stock
    plans                                                   |                      |              | 344,812    |       |  |            | 3   |              |  |               | 2,604   |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   | 2,607   |   |  |   |         |       
|Reversal of deferred compensation related to
    forfeitures of unvested stock options and restricted stock |                      |              |            |       |  |            |     |              |  |               | (76     | )           |  |       | 76     |               |  |   |        |   |  |   |         |   |  |   |        |   |  |   |         |       
|Amortization of deferred compensation related to
    grants of stock options                                |                      |              |            |       |  |            |     |              |  |               |         |             |  |       | 106    |               |  |   |        |   |  |   |         |   |  |   | 106     |   |  |   |         |       
|Unrealized gains on available-for-sale securities                                                           |                      |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   | 516    |   |  |   |         |   |  |   | 516     |   |  | $ | 516     |       
|Net income                                                                                                  |                      |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   |        |   |  |   | 2,201   |   |  |   | 2,201   |   |  |   | 2,201   |       
|                                                                                                            |                      |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |       
|                                                                                                            | Comprehensive income |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   | $       | 2,717  |  
|                                                                                                            |                      |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |       
|BALANCE, DECEMBER 31, 2002                                                                                  |                      |              | 17,246,005 |       |  |            | 172 |              |  |               | 98,893  |             |  |       | (60    | )             |  |   | 2,408  |   |  |   | (32,477 | ) |  |   | 68,936  |   |  |   |         |       
|Shares issued in connection with employee stock
    plans                                                   |                      |              | 534,210    |       |  |            | 5   |              |  |               | 4,525   |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   | 4,530   |   |  |   |         |       
|Tax benefit from exercise of stock options                                                                  |                      |              |            |       |  |            |     |              |  |               | 2,726   |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   | 2,726   |   |  |   |         |       
|Shares issued in connection with netViz
    acquisition                                                     |                      |              | 340,996    |       |  |            | 4   |              |  |               | 4,964   |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   | 4,968   |   |  |   |         |       
|Amortization of deferred compensation related to
    grants of stock options                                |                      |              |            |       |  |            |     |              |  |               |         |             |  |       | 60     |               |  |   |        |   |  |   |         |   |  |   | 60      |   |  |   |         |       
|Unrealized losses on available-for-sale securities                                                          |                      |              |            |       |  |            |     |              |  |               | 543     |             |  |       |        |               |  |   | (1,592 | ) |  |   |         |   |  |   | (1,049  | ) |  | $ | (1,049  | )     
|Net income                                                                                                  |                      |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   |        |   |  |   | 7,670   |   |  |   | 7,670   |   |  |   | 7,670   |       
|                                                                                                            |                      |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |       
|                                                                                                            | Comprehensive income |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   | $       | 6,621  |  
|                                                                                                            |                      |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |       
|BALANCE, DECEMBER 31, 2003                                                                                  |                      |              | 18,121,211 |       |  | $          | 181 |              |  | $             | 111,651 |             |  | $     |       |               |  | $ | 816    |   |  | $ | (24,807 | ) |  | $ | 87,841  |   |  |   |         |       
|                                                                                                            |                      |              |            |       |  |            |     |              |  |               |         |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |       

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

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CONCORD COMMUNICATIONS, INC.



CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


|                                                                                             |                                                                   |                                           |         |        |         |      |         |       |        |   |         |       |        |  
|-------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------- | ------- | ------ | ------- | ---- | ------- | ----- | ------ | - | ------- | ----- | ------ | -
|                                                                                             |                                                                   |                                          
|                                                                                             |                                                                   | Year Ended December 31,                  
|                                                                                             |                                                                   |                                          
|                                                                                             |                                                                   | 2003                                      |         | 2002   |         | 2001
|                                                                                             |                                                                   |                                           |         |        |         |     
|Cash Flows from Operating Activities:                                                        |                                                                   |                                           |         |        |         |      |         |       |        |   |         |      
|Net income (loss)                                                                            |                                                                   | $                                         | 7,670   |        |         | $    | 2,201   |       |        | $ | (11,154 | )    
|Adjustments to reconcile net income
    (loss) to net cash provided by operating activities: |                                                                   |                                           |         |        |         |      |         |       |        |   |         |      
|                                                                                             | Depreciation and amortization                                     |                                           |         | 5,223  |         |      |         | 6,077 |        |   |         | 6,290 |       
|                                                                                             | (Loss) gain on disposal or sale of equipment and
    improvements |                                           |         | (14    | )       |      |         | (7    | )      |   |         | 24    |       
|                                                                                             | Stock-based compensation                                          |                                           |         | 60     |         |      |         | 106   |        |   |         | 320   |       
|                                                                                             | Amortization of debt issuance costs                               |                                           |         | 59     |         |      |         |      |        |   |         |      |       
|                                                                                             | Deferred tax benefit                                              |                                           |         | (2,624 | )       |      |         |      |        |   |         |      |       
|                                                                                             | Changes in assets and liabilities:                                |                                           |         |        |         |      |         |       |        |   |         |       |       
|                                                                                             |                                                                   | Accounts receivable                       |         |        | (4,473  | )    |         |       | (880   | ) |         |       | 3,463  |  
|                                                                                             |                                                                   | Prepaid expenses and other current assets |         |        | (1,892  | )    |         |       | 176    |   |         |       | (648   | )
|                                                                                             |                                                                   | Accounts payable                          |         |        | 1,591   |      |         |       | 31     |   |         |       | 436    |  
|                                                                                             |                                                                   | Accrued expenses                          |         |        | 2,292   |      |         |       | (3,217 | ) |         |       | 2,350  |  
|                                                                                             |                                                                   | Deferred revenue                          |         |        | 2,551   |      |         |       | 1,207  |   |         |       | 4,657  |  
|                                                                                             |                                                                   | Other assets                              |         |        | (56     | )    |         |       | 30     |   |         |       | (157   | )
|                                                                                             |                                                                   |                                           |         |        |         |      |         |       |        |   |         |      
|                                                                                             |                                                                   | Net cash provided by operating activities |         |        | 10,387  |      |         |       | 5,724  |   |         |       | 5,581  |  
|                                                                                             |                                                                   |                                           |         |        |         |      |         |       |        |   |         |      
|Cash Flows from Investing Activities:                                                        |                                                                   |                                           |         |        |         |      |         |       |        |   |         |      
|Purchases of equipment and improvements                                                      |                                                                   |                                           | (3,203  | )      |         |      | (3,520  | )     |        |   | (4,083  | )    
|Investments in marketable securities                                                         |                                                                   |                                           | (58,895 | )      |         |      | (20,363 | )     |        |   | (16,492 | )    
|Proceeds from sales of marketable securities                                                 |                                                                   |                                           | 27,860  |        |         |      | 17,742  |       |        |   | 11,442  |      
|Deposit of restricted cash                                                                   |                                                                   |                                           |        |        |         |      | (839    | )     |        |   |        |      
|Release of restricted cash                                                                   |                                                                   |                                           | 645     |        |         |      |        |       |        |   |        |      
|Acquisition of business  net of cash
    acquired                                           |                                                                   |                                           | (4,981  | )      |         |      |        |       |        |   |        |      
|                                                                                             |                                                                   |                                           |         |        |         |      |         |       |        |   |         |      
|                                                                                             |                                                                   | Net cash used for investing activities    |         |        | (38,574 | )    |         |       | (6,980 | ) |         |       | (9,133 | )
|                                                                                             |                                                                   |                                           |         |        |         |      |         |       |        |   |         |      
|Cash Flows from Financing Activities:                                                        |                                                                   |                                           |         |        |         |      |         |       |        |   |         |      
|Proceeds from convertible senior notes                                                       |                                                                   |                                           | 86,250  |        |         |      |        |       |        |   |        |      
|Debt issuance costs                                                                          |                                                                   |                                           | (3,519  | )      |         |      |        |       |        |   |        |      
|Proceeds from issuance of common stock                                                       |                                                                   |                                           | 4,530   |        |         |      | 2,607   |       |        |   | 1,838   |      
|                                                                                             |                                                                   |                                           |         |        |         |      |         |       |        |   |         |      
|                                                                                             |                                                                   | Net cash provided by financing activities |         |        | 87,261  |      |         |       | 2,607  |   |         |       | 1,838  |  
|                                                                                             |                                                                   |                                           |         |        |         |      |         |       |        |   |         |      
|Net increase (decrease) in cash and cash
    equivalents                                     |                                                                   |                                           | 59,074  |        |         |      | 1,351   |       |        |   | (1,714  | )    
|Cash and cash equivalents, beginning of year                                                 |                                                                   |                                           | 10,362  |        |         |      | 9,011   |       |        |   | 10,725  |      
|                                                                                             |                                                                   |                                           |         |        |         |      |         |       |        |   |         |      
|Cash and cash equivalents, end of year                                                       |                                                                   | $                                         | 69,436  |        |         | $    | 10,362  |       |        | $ | 9,011   |      
|                                                                                             |                                                                   |                                           |         |        |         |      |         |       |        |   |         |      
|Supplemental Disclosure of Cash Flow Information:                                            |                                                                   |                                           |         |        |         |      |         |       |        |   |         |      
|Cash paid for income taxes                                                                   |                                                                   | $                                         | 513     |        |         | $    | 476     |       |        | $ | 281     |      
|Supplemental Disclosure of Noncash Financing and
    Investing Transactions:                 |                                                                   |                                           |         |        |         |      |         |       |        |   |         |      
|Reversal of deferred compensation related to
    forfeitures of stock options                |                                                                   | $                                         |        |        |         | $    | (76     | )     |        | $ | (948    | )    
|Retirements of fully depreciated equipment and
    improvements                              |                                                                   | $                                         | 4,615   |        |         | $    |        |       |        | $ | 631     |      
|Unrealized gain/(loss) on available-for-sale
    securities                                  |                                                                   | $                                         | (1,592  | )      |         | $    | 516     |       |        | $ | 1,757   |      
|Common stock issued to acquire business                                                      |                                                                   | $                                         | 4,968   |        |         | $    |        |       |        | $ |        |      

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

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##### Table of Contents



CONCORD COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(1) Organization and Significant
Accounting Policies

Concord Communications, Inc. (the
Company or Concord) is primarily engaged
in the development and sale of Business Service Management (BSM)
to enterprise customers, managed service providers and
telecommunication carriers principally located in the United
States, Europe, the Middle East, Africa, Latin America and Asia
Pacific.

The Company is subject to the risks associated
with emerging, technology-oriented companies. Primary among
these risks are competition from substitute products and the
ability to successfully develop and market the Companys
current and future products.



|    |                            
|--- | ---------------------------
|(a) | Principles of Consolidation

The accompanying consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.



|    |                                                     
|--- | ----------------------------------------------------
|(b) | Cash, Cash Equivalents and Marketable
    Securities

The Company follows the provisions of Statement
of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The Company has classified its investment
securities as available-for-sale and recorded them at fair
value, with the unrealized gains and losses reported as a
separate component of stockholders equity. The Company
considers highly liquid investments, purchased with an original
maturity of 90 days or less, to be cash equivalents. Cash
equivalents were $57.1 million and $3.6 million at
December 31, 2003 and 2002, respectively, and consisted
primarily of money market funds.



|    |                
|--- | ---------------
|(c) | Restricted Cash

Restricted cash totaling $0.2 million and
$0.8 million at December 31, 2003 and 2002,
respectively, consists of money market funds held in the
Companys name and held with a major financial institution.
Such funds are being used as collateral under a letter of credit
arrangement with a Company supplier and will expire in May 2004.



|    |                    
|--- | -------------------
|(d) | Revenue Recognition

The Companys revenues consist of software
license revenues and service revenues. Software license revenues
are recognized in accordance with the American Institute of
Certified Public Accountants Statement of Position
(SOP) 97-2, Software Revenue
Recognition, as modified by SOP 98-9, Modification
of SOP 97-2, Software Revenue Recognition With Respect to
Certain Transactions. Software license revenues are
recognized when persuasive evidence of an arrangement exists and
delivery of the software has occurred, provided that the license
fee is fixed or determinable, collection is considered
reasonably assured and no customer acceptance clauses exist. If
an arrangement includes an acceptance provision, revenue
recognition occurs upon the earlier of receipt of a written
customer acceptance or expiration of the acceptance period. If
the fee is determined not to be fixed or determinable, revenue
is recognized when the fees become due. If collection is not
considered reasonably assured, revenue is recognized when
collection becomes reasonably assured, typically upon the
receipt of cash. Revenues under multiple-element arrangements,
which typically include software products, services, maintenance
and sometimes undelivered specified software upgrades sold
together, are allocated to each element using the residual
method in accordance with SOP 98-9. Under the residual method,
the fair value of the undelivered elements is deferred and
subsequently recognized when these elements are delivered; the
remainder of the arrangement consideration is allocated to the
software. The Company has established sufficient vendor specific
objective evidence for professional services, training,

55



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##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

maintenance, customer support services and
specified software upgrades based on the price charged when
these elements are sold separately. Accordingly, software
license revenues are recognized under the residual method in
arrangements in which software is licensed with professional
services, training, maintenance, customer support services and
specified software upgrades.

Service revenues include professional services,
training, maintenance and customer support fees. Professional
services are not essential to the functionality of the other
elements in an arrangement and are accounted for separately.
Service revenues are recognized as the services are performed,
provided evidence of an arrangement exists, fees are fixed or
determinable, and collection is considered reasonably assured.

Maintenance revenues, a component of service
revenues, are derived from customer support agreements generally
entered into in connection with initial license sales and
subsequent renewals. Maintenance and customer support fees
include the right to unspecified upgrades on a
when-and-if-available basis and ongoing technical support.
Maintenance revenues are recognized ratably over the term of the
maintenance period. Payments for maintenance fees are generally
made in advance and are included in deferred revenue. As of
December 31, 2003 and 2002, deferred revenue includes
$20.8 million and $17.9 million of deferred
maintenance revenues.



|    |                           
|--- | --------------------------
|(e) | Equipment and Improvements

Equipment and improvements are recorded at cost.
Depreciation is provided for on a straight-line basis over the
useful lives of the assets, which are estimated to be three
years for all assets other than leasehold improvements, which
are amortized over the shorter of the life of the asset or the
term of the lease. Upon retirement or sale, the related cost and
accumulated depreciation or amortization is removed from the
accounts and any resulting gain or loss is included in the
results of operations. Depreciation expense of
$4.8 million, $6.1 million and $6.3 million was
incurred in fiscal years 2003, 2002 and 2001, respectively.



|    |                                                                
|--- | ---------------------------------------------------------------
|(f) | Use of Estimates in the Preparation of
    Financial Statements

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



|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|(g) | Financial Instruments, Concentration of
    Credit Risk and Significant Customers

The Company has estimated the fair value of
financial instruments using available market information and
appropriate valuation methodologies. The carrying values of
cash, cash equivalents, restricted cash, marketable securities,
accounts receivable, accounts payable and accrued expenses
approximate fair market value due to the short-term nature of
these financial instruments. Given the recent date of the
issuance of the Convertible Senior Notes and the unchanged
interest rate environment, the Convertible Senior Notes
fair value approximates their carrying value. Financial
instruments that potentially subject the Company to
concentrations of credit risk are principally cash, cash
equivalents, restricted cash, marketable securities and accounts
receivable. The Company has no significant off-balance-sheet or
concentration of credit risk exposure such as foreign exchange
contracts or option contracts. The Company maintains its cash,
cash equivalents, restricted cash and marketable securities with
established financial institutions. Concentration of credit risk
with respect to accounts receivable is limited to certain
customers to whom the Company makes substantial sales. To reduce
its credit risk, the Company routinely assesses the financial
strength of its customers. The Company maintains an allowance
for potential credit losses but historically has not experienced
any significant losses related to individual customers or groups
of customers in any particular industry or geographic area. No
individual customer or reseller accounted for more than 10% of
revenues in

56



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##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2003, 2002 or 2001. No individual customer
accounted for more than 10% of the Companys accounts
receivable at December 31, 2003. One customer, a reseller
in Europe, accounted for 11.0% of the Companys accounts
receivable at December 31, 2002.



|    |                                                  
|--- | -------------------------------------------------
|(h) | Foreign Currency Translation and
    Transactions

The Company translates the assets and liabilities
of its foreign subsidiaries and branches at the exchange rates
in effect at fiscal year-end in accordance with SFAS
No. 52, Foreign Currency Translation. Revenues and
expenses are translated using average exchange rates in effect
during each period. Because the Companys subsidiaries and
branches are considered extensions of domestic operations,
translation gains and losses are included in the Companys
consolidated statements of operations and are classified as
other income (expense). Transaction and translation losses
totaling $0.44 million, $0.13 million and
$0.09 million were recognized in fiscal years 2003, 2002
and 2001, respectively.



|    |                                     
|--- | ------------------------------------
|(i) | Derivative Financial
    Instruments

The Company uses forward contracts to reduce its
exposure to foreign currency risk and variability in operating
results due to fluctuations in exchange rates underlying the
value of accounts receivable denominated in foreign currencies
until such receivables are collected. A forward contract
obligates the Company to exchange predetermined amounts of
specified foreign currencies at specified exchange rates on
specified dates. These foreign currency forward exchange
contracts are denominated in the same currency in which the
underlying foreign currency receivables are denominated and bear
a contract value and maturity date that approximate the value
and expected settlement date, respectively, of the underlying
transactions. For contracts that are designated and effective as
hedges, unrealized gains and losses on open contracts at the end
of each accounting period, resulting from changes in the fair
value of these contracts, are recognized in earnings in the same
period as gains and losses on the underlying foreign denominated
receivables are recognized and generally offset. Gains and
losses on forward contracts and foreign denominated receivables
are included in other income (expense), net. The Company does
not enter into or hold derivatives for trading or speculative
purposes and only enters into contracts with highly rated
financial institutions.

At December 31, 2003, the Company had no
forward contracts outstanding.

At December 31, 2002, the Company had one
forward contract outstanding, which is presented in the table
below. The notional exchange rate is quoted using market
conventions where the currency is expressed in currency units
per U.S. dollar.

|         |      |          |  |          |      |          |  |               |           |              |  |  |         |  |  |  |        |  |  |   |         | 
|-------- | ---- | -------- |  | -------- | ---- | -------- |  | ------------- | --------- | ------------ |  |  | ------- |  |  |  | ------ |  |  | - | ------- | 
|         |      |          |  |          |      |          |  |               |           | Fair Market 
|         |      |          |  | Maturity |      | Notional |  | Notional      |           | Value as of 
|Currency |      | Position |  | Date     |      | Amount   |  | Exchange Rate |           | Dec 31, 2002
|         |      |          |  |          |      |          |  |               |           |             
|         | Euro |          |  |          | Sell |          |  |               | 1/10/2003 |              |  |  | 486,000 |  |  |  | 1.0063 |  |  | $ | 510,000 | 



|    |                           
|--- | --------------------------
|(j) | Software Development Costs

SFAS No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased or Otherwise Marketed,
requires the capitalization of certain computer software
development costs incurred after technological feasibility is
established. The Company believes that once technological
feasibility of a software product has been established, the
additional development costs incurred to bring the product to a
commercially acceptable level are not significant. There were no
capitalized software development costs at December 31, 2003
or 2002.

57



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##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                         
|--- | ------------------------
|(k) | Stock-Based Compensation

The Company accounts for employee stock-based
compensation arrangements under the provisions of Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations. SFAS No. 123, Accounting for
Stock-Based Compensation, permits the use of either a
fair-value based method or the intrinsic value method under APB
No. 25 to account for employee stock-based compensation
arrangements. Companies that elect to use the intrinsic value
method provided in APB No. 25 are required to disclose the
pro forma net income (loss) and net income (loss) per share that
would have resulted form the use of the fair value method. The
Company has provided, below, the pro forma disclosures of the
effect on net income (loss) and net income (loss) per share
as if SFAS No. 123, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure, an Amendment to FASB Statement
No. 123, had been applied in measuring compensation
expense for all periods presented.

|                                     |                                                                                                                                             |                                       |        |        |   |      |         |         |   |   |         |         |  
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------ | ------ | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                     |                                                                                                                                             |                                      
|                                     |                                                                                                                                             | Year Ended December 31,              
|                                     |                                                                                                                                             |                                      
|                                     |                                                                                                                                             | 2003                                  |        | 2002   |   | 2001
|                                     |                                                                                                                                             |                                       |        |        |   |     
|                                     |                                                                                                                                             |                                      
|                                     |                                                                                                                                             | (In thousands, except per share data)
|Net income (loss):                   |                                                                                                                                             |                                       |        |        |   |      |         |         |   |   |         |        
|                                     | As reported                                                                                                                                 |                                       | $      | 7,670  |   |      | $       | 2,201   |   |   | $       | (11,154 | )
|Add:                                 |                                                                                                                                             |                                       |        |        |   |      |         |         |   |   |         |        
|                                     | Stock-based employee compensation expense
    included in reported net income (loss), net of related taxes                                  |                                       |        | 60     |   |      |         | 106     |   |   |         | 320     |  
|Less:                                |                                                                                                                                             |                                       |        |        |   |      |         |         |   |   |         |        
|                                     | Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    related tax effects |                                       |        | (9,533 | ) |      |         | (15,553 | ) |   |         | (14,959 | )
|                                     |                                                                                                                                             |                                       |        |        |   |      |         |         |   |   |         |        
|Pro forma loss                       |                                                                                                                                             | $                                     | (1,803 | )      |   | $    | (13,246 | )       |   | $ | (25,793 | )      
|                                     |                                                                                                                                             |                                       |        |        |   |      |         |         |   |   |         |        
|Basic net income (loss) per share:   |                                                                                                                                             |                                       |        |        |   |      |         |         |   |   |         |        
|                                     | As reported                                                                                                                                 |                                       | $      | 0.44   |   |      | $       | 0.13    |   |   | $       | (0.67   | )
|                                     | Pro forma                                                                                                                                   |                                       | $      | (0.10  | ) |      | $       | (0.78   | ) |   | $       | (1.55   | )
|Diluted net income (loss) per share: |                                                                                                                                             |                                       |        |        |   |      |         |         |   |   |         |        
|                                     | As reported                                                                                                                                 |                                       | $      | 0.42   |   |      | $       | 0.12    |   |   | $       | (0.67   | )
|                                     | Pro forma                                                                                                                                   |                                       | $      | (0.10  | ) |      | $       | (0.78   | ) |   | $       | (1.55   | )



|    |                            
|--- | ---------------------------
|(l) | Net Income (Loss) per Share

The Company computes earnings per share following
the provisions of SFAS No. 128, Earnings Per Share.
Basic net income (loss) per share is computed using the
weighted-average number of common shares outstanding for a
period. Diluted net income (loss) per share is computed using
the weighted-average number of common and dilutive potential
common shares outstanding for the period. For the years ended
December 31, 2003 and 2002, dilutive potential common
shares consisted of outstanding options. For the year ended
December 31, 2001, diluted net loss per share is the same
as basic net loss per share as the effects of potential common
stock are antidilutive as a result of the Companys
reported loss. The dilutive effect of outstanding stock options
is computed using the treasury stock method. The dilutive effect
of convertible preferred stock is computed using the
as-if-converted method.

58



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##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Calculations of the basic and diluted net income
(loss) per common share and potential common shares are as
follows:

|                                                  |  |                                                |            |      |  |      |            |  |  |   |            |  
|------------------------------------------------- |  | ---------------------------------------------- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | -
|                                                  |  |                                               
|                                                  |  | Year Ended December, 31                       
|                                                  |  |                                               
|                                                  |  | 2003                                           |            | 2002 |  | 2001
|                                                  |  |                                                |            |      |  |     
|                                                  |  |                                               
|                                                  |  | (In thousands except share and per share data)
|Basic:                                            |  |                                                |            |      |  |      |            |  |  |   |            |  
|Net income applicable to common stockholders      |  | $                                              | 7,670      |      |  | $    | 2,201      |  |  | $ | (11,154    | )
|                                                  |  |                                                |            |      |  |      |            |  |  |   |            |  
|Weighted average common shares outstanding        |  |                                                | 17,533,509 |      |  |      | 17,057,188 |  |  |   | 16,682,634 |  
|                                                  |  |                                                |            |      |  |      |            |  |  |   |            |  
|Basic net income (loss) per share                 |  | $                                              | 0.44       |      |  | $    | 0.13       |  |  | $ | (0.67      | )
|                                                  |  |                                                |            |      |  |      |            |  |  |   |            |  
|Diluted:                                          |  |                                                |            |      |  |      |            |  |  |   |            |  
|Net income applicable to common stockholders      |  | $                                              | 7,670      |      |  | $    | 2,201      |  |  | $ | (11,154    | )
|                                                  |  |                                                |            |      |  |      |            |  |  |   |            |  
|Weighted average common shares outstanding        |  |                                                | 17,533,509 |      |  |      | 17,057,188 |  |  |   | 16,682,634 |  
|Potential common shares pursuant to stock options |  |                                                | 674,032    |      |  |      | 569,934    |  |  |   |           |  
|                                                  |  |                                                |            |      |  |      |            |  |  |   |            |  
|Diluted weighted average shares                   |  |                                                | 18,207,541 |      |  |      | 17,627,122 |  |  |   | 16,682,634 |  
|                                                  |  |                                                |            |      |  |      |            |  |  |   |            |  
|Diluted net income (loss) per share               |  | $                                              | 0.42       |      |  | $    | 0.12       |  |  | $ | (0.67      | )
|                                                  |  |                                                |            |      |  |      |            |  |  |   |            |  

Diluted weighted average shares outstanding does
not include 1,931,133, 2,113,271 and 4,154,700 potential common
shares for the years ended December 31, 2003, 2002 and
2001, respectively, as their effect would have been
anti-dilutive.

For the period ended December 31, 2003,
common stock reserved for issuance upon conversion of the 2003
Convertible Senior Notes for approximately 3,209,776 shares were
not included in diluted earnings per share because the
conversion criteria had not been met. When the Convertible
Senior Notes conversion criteria is met and prior to converting
those notes, 3,209,776 shares will be included in the
diluted weighted average common shares and equivalents for the
net income per share calculation, excluding interest expense for
the period.



|    |                            
|--- | ---------------------------
|(m) | Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the
change in net assets of the Company during a period from
transactions generated from non-owner sources. It includes all
changes in equity during a period except those resulting from
investments by owners and distributions to owners. The only
components of comprehensive income (loss) reported by the
Company are net income (loss) and unrealized gains (losses) on
available-for-sale securities.



|    |                                     
|--- | ------------------------------------
|(n) | Recent Accounting
    Pronouncements

In April 2003, the Financial Accounting Standards
Board (FASB) released SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS 149 clarifies under what
circumstances a contract with an initial net investment meets
the characteristics of a derivative, amends the definition of an
underlying contract, and clarifies when a derivative contains a
financing component in order to increase the comparability of
accounting practices under SFAS No. 133. The statement is
effective for contracts entered into or modified after
June 30, 2003, and for hedging relationships designated
after June 30, 2003. Concord adopted this standard on
July 1, 2003 and its adoption did not have any impact on
the Companys financial position or results of operations.

59



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##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify
a financial instrument that is within its scope as a liability
(or an asset in some circumstances). Many of those instruments
were previously classified as equity. The Statement is effective
for financial instruments entered into or modified after
May 31, 2003. Concord adopted this standard on June 1,
2003 and its adoption did not have any impact on the
Companys financial position or results of operations.

In January 2003, the FASB issued Interpretation
(FIN) No. 46, Consolidation of Variable
Interest Entities,and in December 2003, issued a revision
to that interpretation (FIN 46R). FIN 46R
replaces FIN 46 and addresses consolidation by business
enterprises of variable interest entities that possess certain
characteristics. A variable interest entity (VIE) is
defined as (a) an ownership, contractual or monetary
interest in an entity where the ability to influence financial
decisions is not proportional to the investment interest, or
(b) an entity lacking the invested capital sufficient to
fund future activities without the support of a third party. FIN
46R establishes standards for determining under what
circumstances VIEs should be consolidated with their primary
beneficiary, including those to which the usual condition for
consolidation does not apply. FIN 46R is effective for all
new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of
FIN 46R must be applied for the first interim or annual
period beginning after December 15, 2003. The adoption of
this standard is not expected to have a material impact on the
Companys financial position or results of operations as
the Company currently does not have variable interest entities.

In November 2002, the Emerging Issues Task Force
(EITF) of the FASB reached a consensus on Issue
00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. EITF 00-21 requires that for revenue
arrangements with multiple deliverables, those deliverables be
divided into separate units of accounting if the deliverables
meet certain criteria as defined by EITF 00-21. Arrangement
consideration is to be allocated among the separate units of
accounting based on their relative fair values and revenue
recognition decisions should be considered separately for each
separate unit of accounting. EITF 00-21 is effective for
all arrangements entered into in fiscal periods beginning after
June 15, 2003, with early adoption permitted. The
Companys multiple element arrangements fall within the
scope of SOP 97-2 and, therefore, EITF 00-21 is not
applicable to the Company.

In August 2003, the EITF reached a consensus on
Issue 03-05, Applicability of AICPA Statement of
Position 97-2 to Non-Software Deliverables in an
Arrangement Containing More-Than-Incidental Software.
EITF 03-05 addresses the applicability of SOP 97-2 to
non-software deliverables in an arrangement containing
more-than-incidental software. In an arrangement that includes
software that is more than incidental to the products or
services as a whole, software and software-related elements are
included within the scope of SOP 97-2. Software-related
elements include software products and services, as well as any
non-software deliverables for which software deliverable is
essential to its functionality. The adoption of EITF 03-05
did not have a material impact on the Companys
consolidated financial results. The Company will classify all
software-related services and products as software license on
its consolidated statement of operations.

On December 23, 2003, the FASB issued SFAS
No. 132 (Revised 2003), Employers Disclosures
about Pensions and Other Postretirement Benefits. This
standard increases the existing GAAP disclosure requirements by
requiring more details about pension plan assets, benefit
obligations, cash flows, benefit costs and related information.
Companies will be required to segregate plan assets by category,
such as debt, equity and real estate, and to provide certain
expected rates of return and other informational disclosures.
SFAS 132(R) also requires companies to disclose various elements
of pension and postretirement benefit costs in interim-period
financial statements for quarters beginning after
December 15, 2003. The new standard provides that companies
with foreign plans may defer certain disclosures associated with
those plans until fiscal years ending

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CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

after June 15, 2004. The adoption of this
standard is not expected to have a material impact on the
Companys financial position or results of operations.



|    |                 
|--- | ----------------
|(o) | Reclassification

Certain amounts in the 2002 consolidated
financial statements have been reclassified to conform with the
2003 presentation.

(2) Acquisition of Netviz
Corporation

On July 17, 2003, the Company completed the
acquisition of netViz Corporation (netViz).
netVizs software enables users to visualize business
processes and allows them to map relationships within the
supporting technology infrastructure through data-driven icons.
The integration of netVizs technologies with
Concords eHealth® Suite will provide a new,
more automated means of application service optimization. This
integration will enable enterprises and service providers to
employ data-driven icons to visualize and take action on the
critical relationships between business processes, application
services, and network and system infrastructures. Furthermore,
this will allow customers to measure the performance and
availability of application services, map the dependencies
between business processes, and manage the complete application
service. Integrating netViz technologies will further increase
the eHealth® Suites value proposition by
capturing the business context of information and delivering IT
knowledge.

The results of operations of the acquired
business have been included in the financial statements of the
Company since the date of acquisition.

Consideration for the acquisition totaled
$10.3 million, including transaction costs of
$0.3 million. The consideration consisted of
$5.0 million in cash paid at closing and the issuance of
340,996 shares of Common Stock, valued at approximately
$5.0 million.

The acquisition was accounted for using the
purchase method of accounting. The purchase price has been
allocated to the assets acquired and liabilities assumed at
their estimated fair values on the date of acquisition, as
determined by management and, with respect to the identifiable
intangible assets, an appraisal. The excess of the purchase
price over the amounts allocated to the assets acquired and
liabilities assumed was recorded as goodwill. The following
represents the purchase price allocation of the acquisition:

|                                         |                                   |                              |        |       |        | 
|---------------------------------------- | --------------------------------- | ---------------------------- | ------ | ----- | ------ | 
|                                         |                                   | (In thousands)              
|Total consideration:                     |                                   |                              |        |      
|                                         | Cash                              |                              | $      | 5,000 |       
|                                         | Stock                             |                              |        | 5,000 |       
|                                         | Transaction costs                 |                              |        | 342   |       
|                                         |                                   |                              |        |      
|                                         |                                   | Total purchase consideration |        | $     | 10,342 | 
|                                         |                                   |                              |        |      
|Allocation of the purchase consideration |                                   |                              |        |      
|                                         | Current assets                    |                              | $      | 813   |       
|                                         | Equipment and improvements        |                              |        | 51    |       
|                                         | Deferred tax asset                |                              |        | 750   |       
|                                         | Identifiable intangible assets    |                              |        | 3,410 |       
|                                         | Goodwill                          |                              |        | 6,225 |       
|                                         |                                   |                              |        |      
|                                         |                                   | Total assets acquired        |        |       | 11,249 | 
|                                         | Fair value of liabilities assumed |                              |        | (907  | )     
|                                         |                                   |                              |        |      
|                                         |                                   | $                            | 10,342 |      
|                                         |                                   |                              |        |      

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##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The deferred income taxes and any valuation
allowances therein are based in part on future estimated
profitability of the Company. As a direct result of the netViz
acquisition, the Company has estimated that future profitability
will increase and therefore released $0.75 million of the
valuation allowance in the three months ended September 30,
2003.

The following are the identifiable intangible
assets acquired and the respective estimated periods over which
the assets will be amortized:

|                                |                                       |                |       |              |  |  |   |   | 
|------------------------------- | ------------------------------------- | -------------- | ----- | ------------ |  |  | - | - | 
|                                |                                       |                |       | Amortization
|                                |                                       | Amount         |       | Period      
|                                |                                       |                |       |             
|                                |                                       | (In thousands) |       | (In years)  
|Completed technology (software) |                                       | $              | 2,130 |              |  |  | 4 |  
|Reseller relationships          |                                       |                | 570   |              |  |  | 5 |  
|Maintenance relationships       |                                       |                | 340   |              |  |  | 5 |  
|Contractor agreements           |                                       |                | 300   |              |  |  | 4 |  
|Trade name/trademark            |                                       |                | 70    |              |  |  | 3 |  
|                                |                                       |                |       |              |  |  |   |  
|                                | Total                                 |                | $     | 3,410        |  |  |   |   | 
|                                |                                       |                |       |              |  |  |   |  
|                                | Weighted average amortization period: |                |       |              |  |  |   | 4 | 

The completed technology (software), reseller
relationships, maintenance relationships and trade name/
trademark will be amortized at the greater of (a) the ratio
that current revenues bear to the total of current and
anticipated future revenues or (b) the straight-line method
over their respective remaining useful lives. The contractor
agreements will be amortized using the straight-line method over
their useful lives. The values of the completed technology
(software), reseller relationships, maintenance relationships,
contractor agreements and trade name/ trademark were determined
using the income approach. The income approach requires a
projection of revenues and expenses specifically attributed to
the intangible assets. The discounted cash flow
(DCF) method is then applied to the potential income
streams after making necessary adjustments with respect to such
factors as the wasting nature of the identifiable intangible
assets and the allowance of a fair return on the net tangible
assets and other intangible assets employed. There are several
variations on the income approach, including the
relief-from-royalty method, the avoided cost method and the lost
profits method.

The relief-from-royalty method was used to value
the trade name/ trademark. The relief-from-royalty method is
used to estimate the cost savings that accrue to the owner of
the intangible assets that would otherwise have to pay royalties
or licensee fees on revenues earned through the use of the
asset. The royalty rate used in the analysis is based on an
analysis of empirical, market-derived royalty rates for
guideline intangible assets. Typically, revenue is projected
over the expected remaining useful life of the intangible asset.
The market-derived royalty rate is then applied to estimate the
royalty savings. The key assumptions used in valuing the trade
name/ trademark are as follows: royalty rate 1%, discount rate
21%, tax rate 40% and estimated average economic life of
3 years.

The avoided cost method was used to value the
reseller relationships and contractor agreements. The avoided
cost method considers the concept of avoided cost as an
indicator of value. The avoided cost method is appropriate for
estimating the fair value of an asset where reliable data for
sales of comparable property are not available and where the
property does not directly produce an income stream. The key
assumptions used in valuing the reseller relationships are as
follows: tax rate 40% and estimated average economic life of
5 years. The key assumptions used in valuing the contractor
agreements are as follows: tax rate 40% and estimated average
economic life of 4 years.

The completed technology (software) and
maintenance relationships were valued using the income approach
without variation. The key assumptions used in valuing the
completed technology (software) are as

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##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

follows: discount rate 21%, tax rate 40% and
estimated life of 4 years. The key assumptions used in
valuing the maintenance relationships are as follows: discount
rate 21%, tax rate 40% and estimated average economic life of
5 years.



| |                              
| | -----------------------------
| | Pro Forma Results (Unaudited)

The following table reflects unaudited pro forma
results of operations of the Company assuming that the netViz
acquisition had occurred on January 1, 2002 (in thousands,
except per share data):

|                             |  |                         |         |      |  |   |        | 
|---------------------------- |  | ----------------------- | ------- | ---- |  | - | ------ | 
|                             |  |                        
|                             |  | Year Ended December 31,
|                             |  |                        
|                             |  | 2003                    |         | 2002
|                             |  |                         |         |     
|Revenues                     |  | $                       | 106,067 |      |  | $ | 97,947 | 
|Net income                   |  | $                       | 7,420   |      |  | $ | 2,215  | 
|Net income per diluted share |  | $                       | 0.41    |      |  | $ | 0.13   | 

The unaudited pro forma results of operations are
not necessarily indicative of the actual results that would have
occurred had the transaction actually taken place at the
beginning of these periods.

(3) Goodwill and Other Intangible
Assets

The changes in the carrying amount of goodwill,
by reportable segment, for the year ended December 31, 2003 are
as follows (in thousands):

|                                |  |        |       |            |  |       |       |  |  |   |       | 
|------------------------------- |  | ------ | ----- | ---------- |  | ----- | ----- |  |  | - | ----- | 
|                                |  | MSP/TC |       | Enterprise |  | Total
|                                |  |        |       |            |  |      
|Balance as of January 1, 2003   |  | $      |      |            |  | $     |      |  |  | $ |      | 
|Goodwill acquired during year   |  |        | 2,800 |            |  |       | 3,425 |  |  |   | 6,225 | 
|Impairment losses               |  |        |      |            |  |       |      |  |  |   |      | 
|                                |  |        |       |            |  |       |       |  |  |   |       | 
|Balance as of December 31, 2003 |  | $      | 2,800 |            |  | $     | 3,425 |  |  | $ | 6,225 | 
|                                |  |        |       |            |  |       |       |  |  |   |       | 

All of the Companys goodwill resulted from
the acquisition of netViz (see Note 2.) The goodwill is
tested for impairment on June 30th of each year and
whenever changes in circumstances indicate goodwill could be
impaired.

Other intangible assets as of December 31,
2003 consist of the following (in thousands):

|                                |  |      |       |              |  |     |      |   |  |   |       | 
|------------------------------- |  | ---- | ----- | ------------ |  | --- | ---- | - |  | - | ----- | 
|                                |  |      |       | Accumulated  |  |    
|                                |  | Cost |       | Amortization |  | Net
|                                |  |      |       |              |  |    
|Completed technology (software) |  | $    | 2,130 |              |  | $   | (266 | ) |  | $ | 1,864 | 
|Reseller relationships          |  |      | 570   |              |  |     | (57  | ) |  |   | 513   | 
|Maintenance relationships       |  |      | 340   |              |  |     | (34  | ) |  |   | 306   | 
|Contractor agreements           |  |      | 300   |              |  |     | (37  | ) |  |   | 263   | 
|Trade name/trademark            |  |      | 70    |              |  |     | (12  | ) |  |   | 58    | 
|                                |  |      |       |              |  |     |      |   |  |   |       | 
|Total                           |  | $    | 3,410 |              |  | $   | (406 | ) |  | $ | 3,004 | 
|                                |  |      |       |              |  |     |      |   |  |   |       | 

There were no intangible assets as of
December 31, 2002.

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##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Aggregate amortization expense was
$0.4 million for year ended December 31, 2003. Of this
amount, $0.3 million was included in cost of revenues, and
$0.1 million was included in operating expenses. Estimated
amortization expense for the five succeeding fiscal years as of
December 31, 2003 is as follows (in thousands):

|            |  |          |       |           |  |       |       |  |  |   |       | 
|----------- |  | -------- | ----- | --------- |  | ----- | ----- |  |  | - | ----- | 
|            |  | Cost of  |       | Operating |  |      
|Year Ending |  | Revenues |       | Expenses  |  | Total
|            |  |          |       |           |  |      
|2004        |  | $        | 532   |           |  | $     | 280   |  |  | $ | 812   | 
|2005        |  |          | 532   |           |  |       | 280   |  |  |   | 812   | 
|2006        |  |          | 532   |           |  |       | 269   |  |  |   | 801   | 
|2007        |  |          | 268   |           |  |       | 219   |  |  |   | 487   | 
|2008        |  |          |      |           |  |       | 92    |  |  |   | 92    | 
|            |  |          |       |           |  |       |       |  |  |   |       | 
|Total       |  | $        | 1,864 |           |  | $     | 1,140 |  |  | $ | 3,004 | 
|            |  |          |       |           |  |       |       |  |  |   |       | 

(4) Acquired In-Process Research and
Development

On July 11, 2003, Concord entered into a
license agreement with Tavve Software Company
(Tavve) whereby Concord licensed components of
Tavves technology. Concord has licensed Tavves root
cause analysis and discovery of layer 2 and 3 network topology
to build upon Concords current position in optimizing
application availability and performance across networks and
systems. The transaction, valued at $1.2 million, included
$0.2 million of prepaid maintenance and $1.0 million
of in-process research and development. This was accounted for
as in-process-research-and-development as an integrated product
has not reached technological feasibility and has no alternative
future use. Accordingly, the $1.0 million was expensed in
2003.

Technological feasibility is established when
either of two sets of criteria is met:



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) the detail program design has been
    completed, documented, and traced to product specifications and
    its high-risk development issues have been resolved; or
|
| | b) a working model of the product has been
    finished and determined to be complete and consistent with the
    product design.                                    

Upon acquiring the licensed components of
Tavves technology, Concord did not have a completed
product design at the time of the purchase as it had not
completed, documented, and traced the detail program design to
product specifications. Concord did not have the high-risk
development issues resolved.

A working model is defined as an operative
version of the computer software product that is completed in
the same software language as the product to be ultimately
marketed, performs all the major functions planned for the
product, and is ready for initial customer testing (usually
identified as beta testing). Upon acquiring the licensed
components of Tavves technology, Concord did not have a
working model as defined.

In addition, the purchased source code has no
alternative future use, i.e., Concord will not use the source
code for any other purpose than described above.

The detail program design for the integration of
Tavves technology into Concord eHealth® Suite
of products has not been completed as of December 31, 2003;
thus, the exact costs and efforts required for completion of
this integration has not been determined. Based on
managements initial estimates, an integrated product based
on Tavves technology will be introduced in the next 12 to
18 months. However, as with any major software development
project, actual introduction may vary. Failure to successfully
market and sell the integrated product may adversely impact the
Companys business.

64



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##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(5) Convertible Senior Notes

In December 2003, Concord issued
$86.25 million in 3.0% convertible senior notes due 2023.
The Convertible Senior Notes mature on July 1, 2023 (the
Convertible Senior Notes) and bear interest at a
rate of 3.00% per annum, payable semiannually on June 15
and December 15 of each year. The Convertible Senior Notes
will rank equally to existing and future unsecured senior
indebtedness. The Convertible Senior Notes are contingently
convertible into shares of the Companys common stock at
the occurrence of specific events, including a change in control
or if during a conversion period, the closing price of Concord
stock exceeds $32.24, which is 120% of the conversion price
($26.87) for 20 trading days in a period of 30 trading days,
which starts on the first business day of a quarter. If the
threshold is met, then holders may convert their Convertible
Senior Notes into the Companys Common Stock at any time
during the succeeding 90 days, beginning on the 30th trading day
of the quarter. The Company may redeem some or all of the
Convertible Senior Notes at any time on or after
December 15, 2008. Holders have the right to require the
Company to purchase all or a portion of their notes for cash on
December 15, 2008, December 15, 2013 and
December 15, 2018.

As of December 31, 2003, the Companys
Common Stock had not exceeded 120% of the conversion price on
any trading day since December 8, 2003 and no other events
had occurred which would make the Convertible Senior Notes
convertible. The Convertible Senior Notes will be convertible
into shares of Common Stock at an initial conversion price of
$26.87 per share. Holders may convert the Convertible Senior
Notes into shares of Common Stock at an initial conversion rate
of 37.2148 shares of Common Stock per $1,000 principal amount of
Convertible Senior Notes which converts into 3,209,776 shares of
common stock subject to adjustment.

Concord may redeem some or all of the Convertible
Senior Notes at any time on or after December 15, 2008.
Holders of the Convertible Senior Notes will have the right to
require Concord to repurchase some or all of the outstanding
notes on December 15, 2008, 2013, and 2018 and upon certain
events, including a change in control. Accrued interest to the
redemption date will be paid by Concord in any such redemption.
Total interest expense under this debt for 2003 was
$0.17 million.

Under the terms of the Convertible Senior Notes,
Concord is required to comply with certain restrictive
covenants, which require that the Company maintain solvency and
liquidity. The Company was in compliance with all covenants as
of December 31, 2003.

In connection with the issuance of the
Convertible Senior Notes, the Company incurred
$3.52 million of issuance costs, which primarily consisted
of investment banker fees, legal, and other professional fees.
These costs are being amortized to interest expense over the
five year period to the first date holders of the Convertible
Senior Notes may require Concord to repurchase the outstanding
Convertible Senior Notes. Amortization expense related to the
issuance costs was $0.06 million for 2003. At
December 31, 2003, net debt issuance costs associated with
the Convertible Senior Notes were $3.46 million.

(6) Marketable Securities

It is the Companys intent to maintain a
liquid investment portfolio to support current operations and to
take advantage of investment opportunities; therefore, all
marketable securities are considered to be available-for-sale
and are classified as current assets.

65



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##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The unrealized gains and fair value of marketable
securities available-for-sale as of December 31, 2003 with
maturity dates from January 15, 2004 through
December 1, 2008, are as follows (in thousands):

|                                        |  |                     |        |                   |  |       |     |            |  |       |        |            |  |   |       |  |  |   |        |  |  |   |       | 
|--------------------------------------- |  | ------------------- | ------ | ----------------- |  | ----- | --- | ---------- |  | ----- | ------ | ---------- |  | - | ----- |  |  | - | ------ |  |  | - | ----- | 
|                                        |  |                     |        |                   |  |      
|                                        |  | Less Than 12 Months |        | 12 Months or More |  | Total
|                                        |  |                     |        |                   |  |      
|                                        |  | Fair                |        | Unrealized        |  | Fair  |     | Unrealized |  | Fair  |        | Unrealized
|Description of Securities               |  | Value               |        | Gains             |  | Value |     | Gains      |  | Value |        | Gains     
|                                        |  |                     |        |                   |  |       |     |            |  |       |        |           
|US government and municipal obligations |  | $                   | 16,512 |                   |  | $     | 67  |            |  | $     | 8,251  |            |  | $ | 267   |  |  | $ | 24,763 |  |  | $ | 334   | 
|Foreign government obligations          |  |                     | 1,032  |                   |  |       | 27  |            |  |       |       |            |  |   |      |  |  |   | 1,032  |  |  |   | 27    | 
|Corporate bonds and notes               |  |                     | 16,523 |                   |  |       | 123 |            |  |       | 50,137 |            |  |   | 876   |  |  |   | 66,660 |  |  |   | 999   | 
|                                        |  |                     |        |                   |  |       |     |            |  |       |        |            |  |   |       |  |  |   |        |  |  |   |       | 
|Total                                   |  | $                   | 34,067 |                   |  | $     | 217 |            |  | $     | 58,388 |            |  | $ | 1,143 |  |  | $ | 92,455 |  |  | $ | 1,360 | 
|                                        |  |                     |        |                   |  |       |     |            |  |       |        |            |  |   |       |  |  |   |        |  |  |   |       | 

The unrealized gains and fair value of marketable
securities available-for-sale as of December 31, 2002 with
maturity dates from January 1, 2003 through
December 1, 2008, are as follows (in thousands):

|                                        |  |                     |        |                   |  |       |     |            |  |       |        |            |  |   |       |  |  |   |        |  |  |   |       | 
|--------------------------------------- |  | ------------------- | ------ | ----------------- |  | ----- | --- | ---------- |  | ----- | ------ | ---------- |  | - | ----- |  |  | - | ------ |  |  | - | ----- | 
|                                        |  |                     |        |                   |  |      
|                                        |  | Less Than 12 Months |        | 12 Months or More |  | Total
|                                        |  |                     |        |                   |  |      
|                                        |  | Fair                |        | Unrealized        |  | Fair  |     | Unrealized |  | Fair  |        | Unrealized
|Description of Securities               |  | Value               |        | Gains             |  | Value |     | Gains      |  | Value |        | Gains     
|                                        |  |                     |        |                   |  |       |     |            |  |       |        |           
|US government and municipal obligations |  | $                   | 10,043 |                   |  | $     | 195 |            |  | $     | 11,605 |            |  | $ | 719   |  |  | $ | 21,648 |  |  | $ | 914   | 
|Foreign government obligations          |  |                     |       |                   |  |       |    |            |  |       | 1,082  |            |  |   | 70    |  |  |   | 1,082  |  |  |   | 70    | 
|Corporate bonds and notes               |  |                     | 12,910 |                   |  |       | 64  |            |  |       | 26,829 |            |  |   | 1,360 |  |  |   | 39,739 |  |  |   | 1,424 | 
|                                        |  |                     |        |                   |  |       |     |            |  |       |        |            |  |   |       |  |  |   |        |  |  |   |       | 
|Total                                   |  | $                   | 22,953 |                   |  | $     | 259 |            |  | $     | 39,516 |            |  | $ | 2,149 |  |  | $ | 62,469 |  |  | $ | 2,408 | 
|                                        |  |                     |        |                   |  |       |     |            |  |       |        |            |  |   |       |  |  |   |        |  |  |   |       | 

(7) Stock Option Plans



| |                                      
| | -------------------------------------
| | (a) Employee Stock Purchase
    Plans

In July 1997, the Board of Directors adopted the
1997 Employee Stock Purchase Plan (ESPP Plan). The
Company has reserved 375,000 of its shares of common stock for
issuance under the ESPP Plan. Eligible employees may purchase
shares at 85% of the lower of the average market price at the
beginning or ending date of each ESPP Plan payment period, as
defined. During the year ended December 31, 2003 and 2002,
no shares were issued under the ESPP Plan. During the year ended
December 31, 2001, 232,441 shares were issued under the
ESPP Plan. As of December 31, 2003, no shares were
available for future issuance under the ESPP Plan.

In October 2001, the Board of Directors adopted
the 2001 Non-Executive Employee Stock Purchase Plan
(NEESPP Plan), which was subsequently approved by
the shareholders of the Company in April 2002. The Company has
reserved 500,000 of its shares for issuance under the NEESPP
Plan. Eligible employees may purchase shares at 85% of the lower
of the closing market price at the beginning or ending date of
each NEESPP Plan payment period, as defined. Officers and
directors are not eligible employees under the NEESPP Plan.
During the years ended December 31, 2003 and 2002, 208,331
and 180,697 shares, respectively, were issued under the NEESPP
Plan. As of December 31, 2003, 110,972 shares were
available for future issuance under the NEESPP Plan.



| |                       
| | ----------------------
| | (b) Stock Option Plans

The Companys 1995 Stock Option Plan
(1995 Plan) has been terminated; however, the 1995
Plan continues to govern all options, awards and other grants
issued and outstanding under the 1995 Plan. The 1995 Plan
provided for the granting of both incentive stock options and
nonqualified stock options.

66



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##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In July 1997, the Board of Directors adopted the
1997 Stock Plan (1997 Plan), as amended, which
permits granting of incentive and non-qualified stock options as
well as other stock rights to employees, officers, or
consultants of the Company and its subsidiaries at prices
determined by the Board of Directors prior to the Companys
IPO and at market value at the date of grant subsequent to the
IPO. The 1997 Plan also permits direct purchases of stock by
individuals at prices determined by the Board of Directors.
Options become exercisable as determined by the Board of
Directors and expire up to 5 to 10 years from the date of
grant. The number of shares of common stock subject to issuance
under the 1997 Plan is 3,250,000. At December 31, 2003,
374,767 shares were available for future grant under the 1997
Plan.

In July 1997, the Board of Directors adopted the
1997 Non-employee Director Stock Option Plan (1997
Director Plan), as amended, which was subsequently
approved by the shareholders of the Company. The 1997 Director
Plan provides for the granting of nonqualified stock options to
members of the Board of Directors who are not employees or
officers of the Company. Options generally vest over
4 years and expire up to 10 years from the date of
grant. The number of shares of common stock originally subject
to issuance under the 1997 Director Plan was 130,000. In
February 2002, the Board of Directors adopted an amendment to
the 1997 Director Plan, which was subsequently approved by the
shareholders of the Company in April 2003, increasing the number
of shares of common stock available for future grants there
under by 200,000 for a total of 330,000. At December 31,
2003, 178,750 shares of common stock were available for future
grant under the 1997 Director Plan.

In November 2000, the Board of Directors adopted
the 2000 Non-Executive Employee Equity Incentive Plan
(2000 Equity Incentive Plan). The 2000 Equity
Incentive Plan provides for the granting of nonqualified stock
options, stock bonuses, stock appreciation rights and other
stock based awards to employees of Concord who are not officers
or directors of the Company. To date, only stock options have
been awarded under this plan. Options become exercisable as
determined by the Board of Directors and expire up to
10 years from the date of grant. The number of shares of
common stock originally reserved for issuance under the 2000
Equity Incentive Plan was 1,500,000. In January 2002, the Board
of Directors adopted an amendment to the 2000 Equity Incentive
Plan increasing the number of shares of common stock reserved
for issuance there under by 500,000 for a total of 2,000,000. As
of December 31, 2003, 167,438 shares were available for
future grant under the 2000 Equity Incentive Plan.

In accordance with SFAS No. 123, the Company
accounts for stock-based compensation for employees under APB
No. 25, using the intrinsic value method and has elected
the disclosure-only alternative under SFAS No. 123 for
options granted using the Black-Scholes option pricing model
prescribed by SFAS No. 123.

The assumptions are as follows:

|                        |  |                         |         |      |  |      |         |   |  |  |         |  
|----------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                        |  |                        
|                        |  | Year Ended December 31,
|                        |  |                        
|                        |  | 2003                    |         | 2002 |  | 2001
|                        |  |                         |         |      |  |     
|Risk-free interest rate |  |                         | 3.65    | %    |  |      | 3.90    | % |  |  | 6.00    | %
|Expected dividend yield |  |                         | 0       | %    |  |      | 0       | % |  |  | 0       | %
|Expected lives          |  |                         | 5 years |      |  |      | 7 years |   |  |  | 7 years |  
|Expected volatility     |  |                         | 96      | %    |  |      | 91      | % |  |  | 89      | %

67



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##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information about
options outstanding and exercisable at December 31, 2003:

|                |               |                     |  |                     |           |                |  |             |      |                |  |   |       |  |  |  |           |  |  |   |       | 
|--------------- | ------------- | ------------------- |  | ------------------- | --------- | -------------- |  | ----------- | ---- | -------------- |  | - | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |               |                     |  |                    
|                |               | Options Outstanding |  | Options Exercisable
|                |               |                     |  |                    
|                |               |                     |  | Weighted            |           | Weighted       |  |             |      | Weighted      
|                |               | Number of           |  | Average             |           | Average        |  | Number of   |      | Average       
|Range of        |               | Shares              |  | Remaining           |           | Exercise Price |  | Shares      |      | Exercise Price
|Exercise Prices |               | Outstanding         |  | Contractual Life    |           | per Share      |  | Exercisable |      | per Share     
|                |               |                     |  |                     |           |                |  |             |      |               
|$               | 0.10 - 6.69   |                     |  |                     | 456,379   |                |  |             | 3.52 |                |  | $ | 6.25  |  |  |  | 289,346   |  |  | $ | 6.14  | 
|                | 6.81 - 8.69   |                     |  |                     | 208,783   |                |  |             | 5.00 |                |  |   | 7.76  |  |  |  | 75,392    |  |  |   | 7.74  | 
|                | 8.72 - 9.01   |                     |  |                     | 540,684   |                |  |             | 4.93 |                |  |   | 9.00  |  |  |  | 142,503   |  |  |   | 9.00  | 
|                | 9.09 - 9.34   |                     |  |                     | 174,688   |                |  |             | 5.37 |                |  |   | 9.32  |  |  |  | 84,937    |  |  |   | 9.34  | 
|                | 9.35 - 13.05  |                     |  |                     | 510,195   |                |  |             | 3.97 |                |  |   | 12.81 |  |  |  | 201,408   |  |  |   | 12.95 | 
|                | 13.19 - 16.79 |                     |  |                     | 748,792   |                |  |             | 5.86 |                |  |   | 15.31 |  |  |  | 23,535    |  |  |   | 13.97 | 
|                | 17.06 - 23.50 |                     |  |                     | 547,643   |                |  |             | 3.33 |                |  |   | 20.75 |  |  |  | 421,341   |  |  |   | 20.88 | 
|                | 23.69 - 36.91 |                     |  |                     | 657,125   |                |  |             | 3.80 |                |  |   | 33.31 |  |  |  | 629,192   |  |  |   | 33.59 | 
|                | 37.25 - 52.63 |                     |  |                     | 452,146   |                |  |             | 3.27 |                |  |   | 49.92 |  |  |  | 445,293   |  |  |   | 50.05 | 
|                | 53.00 - 62.03 |                     |  |                     | 14,500    |                |  |             | 3.56 |                |  |   | 58.24 |  |  |  | 14,500    |  |  |   | 58.24 | 
|                |               |                     |  |                     |           |                |  |             |      |                |  |   |       |  |  |  |           |  |  |   |       | 
|                |               |                     |  |                     | 4,310,935 |                |  |             |      |                |  | $ | 19.86 |  |  |  | 2,327,447 |  |  | $ | 25.97 | 
|                |               |                     |  |                     |           |                |  |             |      |                |  |   |       |  |  |  |           |  |  |   |       | 

The following table summarizes the activity under
the stock option plans for the three-year period ended
December 31, 2003:

|                                 |            |           |           |           |   |           |            |            |  |   |       |       | 
|-------------------------------- | ---------- | --------- | --------- | --------- | - | --------- | ---------- | ---------- |  | - | ----- | ----- | 
|                                 |            |           |           |           |   | Weighted 
|                                 |            |           |           |           |   | Average  
|                                 |            | Number of |           | Price per |   | Price    
|                                 |            | Shares    |           | Share     |   | per Share
|                                 |            |           |           |           |   |          
|Outstanding at December 31, 2000 |            |           | 3,579,998 |           |   | $         | 0.10-64.25 |            |  | $ | 25.92 |      
|                                 | Granted    |           |           | 1,263,761 |   |           |            | 5.38-18.49 |  |   |       | 11.37 | 
|                                 | Exercised  |           |           | (113,808  | ) |           |            | 0.10-17.38 |  |   |       | 4.03  | 
|                                 | Terminated |           |           | (575,251  | ) |           |            | 0.67-64.25 |  |   |       | 25.42 | 
|                                 |            |           |           |           |   |           |            |            |  |   |       |      
|Outstanding at December 31, 2001 |            |           | 4,154,700 |           |   |           | 0.10-64.25 |            |  |   | 22.15 |      
|                                 | Granted    |           |           | 935,350   |   |           |            | 5.05-23.80 |  |   |       | 10.71 | 
|                                 | Exercised  |           |           | (161,412  | ) |           |            | 0.10-21.75 |  |   |       | 6.82  | 
|                                 | Terminated |           |           | (736,185  | ) |           |            | 0.10-64.25 |  |   |       | 22.39 | 
|                                 |            |           |           |           |   |           |            |            |  |   |       |      
|Outstanding at December 31, 2002 |            |           | 4,192,453 |           |   |           | 0.10-62.03 |            |  |   | 20.14 |      
|                                 | Granted    |           |           | 939,875   |   |           |            | 6.66-21.06 |  |   |       | 14.78 | 
|                                 | Exercised  |           |           | (326,684  | ) |           |            | 0.10-18.95 |  |   |       | 8.85  | 
|                                 | Terminated |           |           | (494,709  | ) |           |            | 5.08-62.03 |  |   |       | 19.77 | 
|                                 |            |           |           |           |   |           |            |            |  |   |       |      
|Outstanding at December 31, 2003 |            |           | 4,310,935 |           |   | $         | 0.10-62.03 |            |  | $ | 19.86 |      
|                                 |            |           |           |           |   |           |            |            |  |   |       |      
|Exercisable at December 31, 2003 |            |           | 2,327,447 |           |   | $         | 0.10-62.03 |            |  | $ | 25.97 |      
|Exercisable at December 31, 2002 |            |           | 1,984,413 |           |   | $         | 0.10-62.03 |            |  | $ | 27.55 |      
|Exercisable at December 31, 2001 |            |           | 1,537,184 |           |   | $         | 0.10-64.25 |            |  | $ | 29.30 |      

The weighted average price per share of options
granted during 2003, 2002 and 2001 was $14.78, $10.71 and
$11.37, respectively. Prior to the Companys acquisition of
FirstSense in 2000, FirstSense recorded deferred compensation of
$0.15 million and $3.42 million in 2000 and 1999,
respectively, representing the

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CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

difference between the exercise price of stock
options granted and the estimated fair market value of the
underlying common stock at the date of grant. The difference was
recorded as deferred compensation and is being amortized over
the vesting period of applicable options, typically four years.
Including amounts applicable to prior Company grants, the
Company amortized $0.06 million, $0.11 million and
$0.32 million of deferred compensation during the years
ended December 31, 2003, 2002 and 2001, respectively.

The amortization of deferred compensation is
recorded as an operating expense. Additionally, the Company
reversed $0, $0.8 million and $0.95 million, of
deferred compensation in 2003, 2002 and 2001, respectively, due
to the forfeiture of unvested stock options upon the termination
of certain employees.

The exercise price of all other options
outstanding represents the fair market value per share of common
stock as of the date of grant.

(8) Income Taxes

The Company accounts for income taxes in
accordance with SFAS No. 109, Accounting for Income
Taxes. This standard requires, among other things,
recognition of future tax effects, measured by enacted tax
rates, attributable to deductible temporary differences between
the financial statement and income tax bases of assets and
liabilities.

The approximate income tax effects of these
temporary differences, net operating loss and tax credit
carryforwards are as follows (in thousands):

|                                               |  |                     |        |      |  |   |         |  
|---------------------------------------------- |  | ------------------- | ------ | ---- |  | - | ------- | -
|                                               |  |                    
|                                               |  | Year Ended December
|                                               |  | 31,                
|                                               |  |                    
|                                               |  | 2003                |        | 2002
|                                               |  |                     |        |     
|Net operating loss carryforwards               |  | $                   | 5,870  |      |  | $ | 6,274   |  
|Research and development and other tax credits |  |                     | 3,020  |      |  |   | 3,274   |  
|Accruals not yet deductible for tax purposes   |  |                     | 1,824  |      |  |   | 1,507   |  
|Depreciation                                   |  |                     | 882    |      |  |   | 1,733   |  
|Deferred revenue                               |  |                     | 1,064  |      |  |   | 1,266   |  
|Capitalized research and development expenses  |  |                     | 195    |      |  |   | 382     |  
|Other                                          |  |                     | 42     |      |  |   | 39      |  
|Marketable securities                          |  |                     | (544   | )    |  |   | (963    | )
|NetViz Intangibles                             |  |                     | (974   | )    |  |   |        |  
|Valuation reserve                              |  |                     | (1,779 | )    |  |   | (10,012 | )
|                                               |  |                     |        |      |  |   |         |  
|                                               |  | $                   | 9,600  |      |  | $ | 3,500   |  
|                                               |  |                     |        |      |  |   |         |  

As of December 31, 2003, the Company had
available for federal income tax purposes net operating loss
carryforwards of approximately $17.3 million, which expire
at various dates through 2021. In addition, as of
December 31, 2003, the Company had federal research and
development tax credit carryforwards of approximately
$3.0 million, which expire at various dates through 2023.
Under current tax law, the utilization of net operating loss and
research and development tax credit carryforwards may be subject
to annual limitations in the event of certain changes in
ownership.

As required by SFAS No. 109, management
of the Company has evaluated the positive and negative evidence
bearing upon the realizability of the Companys deferred
tax assets, which consist principally of net operating loss and
tax credit carryforwards. For the year ended December 31,
2003, management evaluated the deferred tax asset valuation
allowance and determined $1.8 million was needed based on the
Companys recent profitability and expected future
profitability. As a result, the Company recognized an income tax
benefit of $2.6 million. The tax benefit was partially
offset by an income tax expense of $0.6 million. As of

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CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

December 31, 2002, the Company significantly
reserved for the deferred tax assets by recording a valuation
allowance of approximately $10.0 million.

The Companys net deferred tax asset is
based on the Companys estimate of future taxable income it
expects to generate. The factors that weighed most heavily on
managements decision to record a $1.8 million
valuation allowance were the Companys history of prior
profitability, current profitability, current economic
conditions and forecasted profitability over the next several
years. Significant management judgment is required in
determining the provision for income taxes, the deferred tax
assets and liabilities and any valuation allowance recorded
against the net deferred tax assets. The valuation allowance is
based on managements estimates of taxable income by
jurisdiction in which the Company operates and the period over
which the deferred tax assets will be recoverable. In the event
that actual results differ from these estimates or the Company
adjusts these estimates in future periods, the Company may need
to establish an additional valuation allowance. Establishing new
or additional valuation allowances could materially adversely
impact the Companys financial position and results of
operations.

As of December 31, 2003, the Company has
recorded a deferred tax asset of approximately $4.5 million
reflecting the benefit of deductions from the exercise of stock
options. During the year ended December 31, 2003, the
Company recognized approximately $2.7 million of this
benefit as a credit to additional paid in capital. The remaining
asset of approximately $1.3 million is reserved and will be
recorded as a credit to additional paid-in capital when the
reserve is released. If the Company continues to be sufficiently
profitable in 2004, the reserve will be released in 2004.

As of December 31, 2002, the Company
recorded a deferred tax asset of approximately $4.2 million
reflecting the benefit of deductions from the exercise of stock
options. The components of the Companys tax provision
(benefit) are as follows (in thousands):

|                                     |         |                         |        |        |        |      |     |     |     |   |     |     |     | 
|------------------------------------ | ------- | ----------------------- | ------ | ------ | ------ | ---- | --- | --- | --- | - | --- | --- | --- | 
|                                     |         |                        
|                                     |         | Year Ended December 31,
|                                     |         |                        
|                                     |         | 2003                    |        | 2002   |        | 2001
|                                     |         |                         |        |        |        |     
|Current:                             |         |                         |        |        |        |      |     |     |     |   |     |    
|                                     | Federal |                         | $      | 50     |        |      | $   |    |     |   | $   |    |    
|                                     | State   |                         |        | 100    |        |      |     | 116 |     |   |     | 45  |    
|                                     | Foreign |                         |        | 459    |        |      |     | 452 |     |   |     | 402 |    
|                                     |         |                         |        |        |        |      |     |     |     |   |     |    
|                                     |         | Total current           |        |        | 609    |      |     |     | 568 |   |     |     | 447 | 
|                                     |         |                         |        |        |        |      |     |     |     |   |     |    
|Deferred:                            |         |                         |        |        |        |      |     |     |     |   |     |    
|                                     | Federal |                         |        | (2,524 | )      |      |     |    |     |   |     |    |    
|                                     | State   |                         |        | (100   | )      |      |     |    |     |   |     |    |    
|                                     | Foreign |                         |        |       |        |      |     |    |     |   |     |    |    
|                                     |         |                         |        |        |        |      |     |     |     |   |     |    
|                                     |         | Total deferred          |        |        | (2,624 | )    |     |     |    |   |     |     |    | 
|                                     |         |                         |        |        |        |      |     |     |     |   |     |    
|Total income tax (benefit) provision |         | $                       | (2,015 | )      |        | $    | 568 |     |     | $ | 447 |    
|                                     |         |                         |        |        |        |      |     |     |     |   |     |    

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CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A reconciliation of the statutory federal tax
rate to the Companys effective tax rate is as follows:

|                                                                  |  |                         |       |      |  |      |       |   |  |  |       |   
|----------------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | --
|                                                                  |  |                        
|                                                                  |  | Year Ended December 31,
|                                                                  |  |                        
|                                                                  |  | 2003                    |       | 2002 |  | 2001
|                                                                  |  |                         |       |      |  |     
|Statutory rate                                                    |  |                         | 34.0  | %    |  |      | 34.0  | % |  |  | (34.0 | )%
|State tax rate, net of federal benefit                            |  |                         | 1.2   |      |  |      | 2.8   |   |  |  | (6.1  | ) 
|Foreign earnings taxed at different rates                         |  |                         | (1.1  | )    |  |      | 3.9   |   |  |  | 3.1   |   
|Research and development tax credits                              |  |                         | (3.5  | )    |  |      |      |   |  |  |      |   
|Benefit associated with the extraterritorial
    income exclusion |  |                         |      |      |  |      |      |   |  |  | (4.7  | ) 
|Non-deductible meals and entertainment                            |  |                         | 1.6   |      |  |      | 2.9   |   |  |  | 2.1   |   
|Non-deductible transaction costs                                  |  |                         |      |      |  |      |      |   |  |  |      |   
|Change in valuation allowance                                     |  |                         | (68.6 | )    |  |      | (24.6 | ) |  |  | 43.7  |   
|Other                                                             |  |                         | 0.8   |      |  |      | 1.5   |   |  |  |      |   
|                                                                  |  |                         |       |      |  |      |       |   |  |  |       |   
|                                                                  |  |                         | (35.6 | )%   |  |      | 20.5  | % |  |  | 4.1   | % 
|                                                                  |  |                         |       |      |  |      |       |   |  |  |       |   

(9) Commitments and
Contingencies



| |           
| | ----------
| | (a) Leases

The Company leases its facilities and certain
equipment under operating lease agreements expiring through
October, 2008. The Companys remaining lease commitments
for all leased facilities and equipment with an initial or
remaining term of at least one year as of December 31, 2003
are as follows (in thousands):

|      |  |   |        | 
|----- |  | - | ------ | 
|2004  |  | $ | 4,283  | 
|2005  |  |   | 3,658  | 
|2006  |  |   | 2,176  | 
|2007  |  |   | 785    | 
|2008  |  |   | 153    | 
|      |  |   |        | 
|Total |  | $ | 11,055 | 
|      |  |   |        | 

Rent expense was $4.7 million,
$4.5 million and $4.4 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Certain
operating leases are subject to cost escalations with the lease
expense being recorded on a straight-line basis and the
difference being reflected as an accrued liability. As of
December 31, 2003 and 2002, this deferred rent liability
was $1.03 million and $1.25 million, respectively.

(b) Royalties

The Company has entered into several software
license agreements that provide the Company with exclusive
worldwide licenses to distribute or utilize certain patented
computer software. The Company is required to pay royalties on
all related sales. Under one software license agreement, as
amended, the Company was obligated to make minimum quarterly
royalty payments from 2000 through 2002. The minimum payments
were noncancelable and nonrefundable, but any minimum payments
in excess of amounts due for actual license sales in any quarter
may be used as a credit against future royalty fees in excess of
the specified minimum payments. Under another software license
agreement, the Company is obligated to make certain minimum
royalty payments from 2002 through 2004. This obligation is
secured by a letter of credit arrangement with the royalty
provider. Royalty expense under royalty agreements was
approximately $1.40 million, $0.68 million and
$0.44 million for the years ended December 31, 2003,
2002 and 2001, respectively.

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CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(c) Indemnifications

As permitted under Massachusetts law, the Company
has agreements whereby it indemnifies its officers and directors
for certain events or occurrences while the officer or director
is, or was serving, at the Companys request in such
capacity. The term of the indemnification period is for the
officer or directors lifetime. The maximum potential
amount of future payments the Company could be required to make
under these indemnification agreements is unlimited; however,
the Company has a Director and Officer insurance policy pursuant
to which the company may recover all or a portion of amounts it
pays to directors or officers under their indemnification
agreements. As a result of its insurance policy coverage, the
Company believes the estimated fair value of these
indemnification agreements is minimal.

The Company warrants that its software products
will perform in all material respects in accordance with its
standard published specifications in effect at the time of
delivery of the licensed products to the customer for a period
of 90 days. Additionally, the Company warrants that its
maintenance services will be performed consistent with its
maintenance policy in effect at the time those services are
delivered. The Company believes its maintenance policy is
consistent with generally accepted industry standards. If
necessary, the Company would provide for the estimated cost of
product and service warranties based on specific warranty claims
and claim history; however, the Company has never incurred
significant expense under product or services warranties. As a
result, the Company believes the estimated liability of these
warranties is minimal.

The Company enters into standard indemnification
agreements in the ordinary course of its business. Pursuant to
these agreements, the Company indemnifies, holds harmless, and
agrees to reimburse the indemnified party for losses suffered or
incurred by the indemnified party, generally its business
partners or customers, in connection with any patent, copyright,
trademark, trade secret or other intellectual property
infringement claim by any third party with respect to our
products. The term of these indemnification agreements is
generally perpetual. The maximum potential amount of future
payments the Company could be required to make under these
indemnification agreements is often capped at a dollar figure.
The Company has never incurred costs to defend lawsuits or
settle claims related to these indemnification agreements. As a
result, the Company believes the estimated fair value of these
agreements is minimal.

When, as part of an acquisition, Concord acquires
all of the stock or all or a portion of the assets and/or
liabilities of a company, it may assume liability for certain
events or occurrences that took place prior to the date of
acquisition. The maximum potential amount of future payments it
could be required to make for such obligations is undeterminable
at this time. Concord has no liabilities recorded for these
exposures as of December 31, 2003.

(d) Legal
Proceedings

From time to time, the Company may be exposed to
litigation relating to its products and operations. The Company
is not engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material adverse
effect on the Companys financial conditions or results of
operations.

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CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(10) Accrued Expenses

Accrued expenses consist of the following (in
thousands):

|                            |  |              |        |              |  |   |        | 
|--------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | 
|                            |  | December 31, |        | December 31,
|                            |  | 2003         |        | 2002        
|                            |  |              |        |             
|Payroll and payroll-related |  | $            | 5,293  |              |  | $ | 4,920  | 
|Customer deposits           |  |              | 1,901  |              |  |   | 180    | 
|Deferred rent               |  |              | 1,025  |              |  |   | 1,254  | 
|Administrative services     |  |              | 638    |              |  |   | 469    | 
|Royalties                   |  |              | 423    |              |  |   | 418    | 
|Sales and marketing         |  |              | 321    |              |  |   | 736    | 
|Taxes                       |  |              | 943    |              |  |   | 468    | 
|Travel-related              |  |              | 566    |              |  |   | 575    | 
|Other                       |  |              | 1,517  |              |  |   | 1,042  | 
|                            |  |              |        |              |  |   |        | 
|                            |  | $            | 12,627 |              |  | $ | 10,062 | 
|                            |  |              |        |              |  |   |        | 

(11) Employee Benefit Plan

The Company maintains an employee benefit plan
(the Plan)under Section 401(k) of the Internal
Revenue Code covering all eligible employees, as defined. The
Plan allows for employees to defer a portion of their salary up
to IRS maximums of pretax compensation. The Company made a
discretionary matching contribution up to a maximum of 2% of
employee salaries for a total of $0.7 million in 2001,
which was primarily contributed during 2001. No matching
contributions were made to the Plan during 2003 and 2002.

(12) Valuation and Qualifying
Accounts

The following table sets forth activity in the
Companys accounts receivable reserve account (in
thousands):

|     |  |            |       |            |  |           |      |             |  |   |      |   |  |   |       | 
|---- |  | ---------- | ----- | ---------- |  | --------- | ---- | ----------- |  | - | ---- | - |  | - | ----- | 
|     |  | Balance at |       |            |  |           |      |            
|     |  | Beginning  |       | Charges to |  |           |      | Balance at 
|     |  | of Year    |       | Expense    |  | Writeoffs |      | End of Year
|     |  |            |       |            |  |           |      |            
|2001 |  | $          | 1,526 |            |  | $         | 711  |             |  | $ | (827 | ) |  | $ | 1,410 | 
|2002 |  | $          | 1,410 |            |  | $         | 355  |             |  | $ | (285 | ) |  | $ | 1,480 | 
|2003 |  | $          | 1,480 |            |  | $         | (222 | )           |  | $ | (208 | ) |  | $ | 1,050 | 

(13) Segment Reporting and Geographic
Information

The Company follows the provisions of
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131
establishes standards for reporting information regarding
operating segments in annual financial statements and requires
selected information for those segments to be presented in
interim financial reports issued to stockholders.
SFAS No. 131 also establishes standards for related
disclosures about products and services and geographic areas.
Operating segments are identified as components of an enterprise
about which separate discrete financial information is available
for evaluation by the chief operating decision maker, or
decision-making group, in making decisions on how to allocate
resources and assess performance. The Companys chief
decision-making group, as defined under SFAS No. 131,
is the executive management committee, which is comprised of the
executive officers of the Company. The Company records revenue
by geographic region based on the location of each of the
Companys sales offices.

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CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table presents the revenue by major
geographical regions (in thousands):

|                            |  |                         |         |      |  |      |        |  |  |   |        | 
|--------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------ |  |  | - | ------ | 
|                            |  |                        
|                            |  | Year Ended December, 31
|                            |  |                        
|                            |  | 2003                    |         | 2002 |  | 2001
|                            |  |                         |         |      |  |     
|United States               |  | $                       | 59,325  |      |  | $    | 57,812 |  |  | $ | 54,746 | 
|United Kingdom              |  |                         | 10,412  |      |  |      | 5,731  |  |  |   | 5,546  | 
|Europe (excluding the U.K.) |  |                         | 19,907  |      |  |      | 16,640 |  |  |   | 14,596 | 
|Rest of the World           |  |                         | 14,419  |      |  |      | 13,661 |  |  |   | 13,090 | 
|                            |  |                         |         |      |  |      |        |  |  |   |        | 
|Total                       |  | $                       | 104,063 |      |  | $    | 93,844 |  |  | $ | 87,978 | 
|                            |  |                         |         |      |  |      |        |  |  |   |        | 

No one country, except the United States and the
United Kingdom, accounted for greater than 10% of total revenues
in the year ended December 31, 2003. No one country, except
the United States, accounted for greater than 10% of total
revenues in the years ended December 2002 and 2001.
Substantially all of the Companys assets are located in
the United States.

The Companys reportable segments are
determined by customer type: managed service
providers/telecommunication carriers (MSP/TC) and
enterprise. The accounting policies of the segments are the same
as those described in Note 1. The executive management
committee evaluates segment performance based on revenue.
Accordingly, all expenses are considered corporate level
activities and are not allocated to segments. Also, the
executive management committee does not assign assets to these
segments.

The Company currently does not provide revenues
by product or product family, as it is impractical due to the
nature of its single suite of products. Some components of the
suite cannot be categorized into a specified and defined product
family while others could be included in more than one product
family. In addition, categorization and classification of our
components into product families is changing in nature; changes
in packaging, licensing and product categorization occur on a
frequent basis.

The following table presents the approximate
revenue by reportable segment (in thousands):

|           |  |                         |         |      |  |      |        |  |  |   |        | 
|---------- |  | ----------------------- | ------- | ---- |  | ---- | ------ |  |  | - | ------ | 
|           |  |                        
|           |  | Year Ended December, 31
|           |  |                        
|           |  | 2003                    |         | 2002 |  | 2001
|           |  |                         |         |      |  |     
|MSP/ TC    |  | $                       | 46,872  |      |  | $    | 39,636 |  |  | $ | 39,182 | 
|Enterprise |  |                         | 57,191  |      |  |      | 54,208 |  |  |   | 48,796 | 
|           |  |                         |         |      |  |      |        |  |  |   |        | 
|Total      |  | $                       | 104,063 |      |  | $    | 93,844 |  |  | $ | 87,978 | 
|           |  |                         |         |      |  |      |        |  |  |   |        | 

(14) Supplemental Quarterly Financial
Disclosure (Unaudited)

|                                                                 |                    |                                          |        |       |  |       |        |       |  |   |        |      |  |   |        |      | 
|---------------------------------------------------------------- | ------------------ | ---------------------------------------- | ------ | ----- |  | ----- | ------ | ----- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                 |                    | Q1-03                                    |        | Q2-03 |  | Q3-03 |        | Q4-03
|                                                                 |                    |                                          |        |       |  |       |        |      
|                                                                 |                    |                                         
|                                                                 |                    | (In thousands, except per share amounts)
|Revenue                                                          |                    | $                                        | 24,117 |       |  | $     | 25,615 |       |  | $ | 26,560 |      |  | $ | 27,771 |     
|Gross profit                                                     |                    |                                          | 19,486 |       |  |       | 20,887 |       |  |   | 21,649 |      |  |   | 22,797 |     
|Net income                                                       |                    |                                          | 836    |       |  |       | 1,197  |       |  |   | 481    |      |  |   | 5,156  |     
|Per common and potential common share:                           |                    |                                          |        |       |  |       |        |       |  |   |        |      |  |   |        |     
|                                                                 | Basic net income   |                                          | $      | 0.05  |  |       | $      | 0.07  |  |   | $      | 0.03 |  |   | $      | 0.29 | 
|                                                                 | Diluted net income |                                          | $      | 0.05  |  |       | $      | 0.07  |  |   | $      | 0.03 |  |   | $      | 0.27 | 
|Shares used in computing basic net income per
    common share   |                    |                                          | 17,254 |       |  |       | 17,372 |       |  |   | 17,500 |      |  |   | 18,000 |     
|Shares used in computing diluted net income per
    common share |                    |                                          | 17,449 |       |  |       | 18,022 |       |  |   | 18,238 |      |  |   | 19,081 |     

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CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                 |                    |                                          |        |       |  |       |        |       |  |   |        |      |  |   |        |      | 
|---------------------------------------------------------------- | ------------------ | ---------------------------------------- | ------ | ----- |  | ----- | ------ | ----- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                 |                    | Q1-02                                    |        | Q2-02 |  | Q3-02 |        | Q4-02
|                                                                 |                    |                                          |        |       |  |       |        |      
|                                                                 |                    |                                         
|                                                                 |                    | (In thousands, except per share amounts)
|Revenue                                                          |                    | $                                        | 24,237 |       |  | $     | 22,951 |       |  | $ | 23,054 |      |  | $ | 23,601 |     
|Gross profit                                                     |                    |                                          | 19,852 |       |  |       | 18,836 |       |  |   | 18,803 |      |  |   | 19,383 |     
|Net income                                                       |                    |                                          | 489    |       |  |       | 395    |       |  |   | 564    |      |  |   | 753    |     
|Per common and potential common share:                           |                    |                                          |        |       |  |       |        |       |  |   |        |      |  |   |        |     
|                                                                 | Basic net income   |                                          | $      | 0.03  |  |       | $      | 0.02  |  |   | $      | 0.03 |  |   | $      | 0.04 | 
|                                                                 | Diluted net income |                                          | $      | 0.03  |  |       | $      | 0.02  |  |   | $      | 0.03 |  |   | $      | 0.04 | 
|Shares used in computing basic net income per
    common share   |                    |                                          | 16,931 |       |  |       | 17,017 |       |  |   | 17,104 |      |  |   | 17,176 |     
|Shares used in computing diluted net income per
    common share |                    |                                          | 18,026 |       |  |       | 17,861 |       |  |   | 17,276 |      |  |   | 17,351 |     

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CONCORD COMMUNICATIONS, INC.

FORM 10-K, December 31, 2003




SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized this 15th day of March 2004.



| |                             
| | ----------------------------
| | CONCORD COMMUNICATIONS, INC.
|
| | /s/ MELISSA H. CRUZ         
| |                             
| | Name: Melissa H. Cruz       

| |        |                                                                                                                                                 
| | ------ | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Title: | Executive Vice President, Business Services 
     Chief Financial Officer and Treasurer 
     (Principal Financial and 
     Accounting Officer)

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/ JOHN A. BLAESERJohn A. Blaeser                 |  | President, Chief Executive Officer and Chairman
    of the Board (Principal Executive Officer)                                           |  | March 15, 2004
|                                                  
|/s/ MELISSA H. CRUZMelissa H. Cruz                 |  | Executive Vice President, Business Services,
    Chief Financial Officer and Treasurer, (Principal Financial and
    Accounting Officer) |  | March 15, 2004
|                                                  
|/s/ FREDERICK W.W. BOLANDERFrederick W.W. Bolander |  | Director                                                                                                                                 |  | March 15, 2004
|                                                  
|/s/ RICHARD M. BURNES, JRRichard M. Burnes, Jr     |  | Director                                                                                                                                 |  | March 15, 2004
|                                                  
|/s/ ROBERT M. WADSWORTHRobert M. Wadsworth         |  | Director                                                                                                                                 |  | March 15, 2004
|                                                  
|/s/ JACK M. COOPERJack M. Cooper                   |  | Director                                                                                                                                 |  | March 15, 2004

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EXHIBIT INDEX

The following designated exhibits are either
filed herewith or, where information is provided under the SEC
Document Reference heading corresponding to such exhibit,
incorporated by reference to such filing

|        |        |             |  |                                                                                                                                               |  |                                                                            
|------- | ------ | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------
|Exhibit |        |             |  |                                                                                                                                              
|No.     |        | Description |  | SEC Document Reference                                                                                                                       
|        |        |             |  |                                                                                                                                              
|        | 3.01   |             |  | Restated Articles of Organization of the Company                                                                                              |  | Exhibit No. 3.01 on Form 10-K, for
    the period ended December 31, 1997  
|        | 3.02   |             |  | Restated By-laws of the Company                                                                                                               |  | Exhibit No. 3.02 on Form 10-K, for
    the period ended December 31, 1998  
|        | 4.01   |             |  | Indenture by and between the Company and
    Wilmington Trust Company, as Trustee dated as of
    December 8, 2003.                           |  | Exhibit No. 4.3 to Registration
    Statement on Form S-3 (No. 333-112091) 
|        | 4.02   |             |  | Registration Rights Agreement by and between the
    Company and Bear, Stearns & Co. Inc. dated as of
    December 8, 2003.                   |  | Exhibit No. 4.4 to Registration
    Statement on Form S-3 (No. 333-112091) 
|        | 10.03  |             |  | Equipment Line of Credit Letter Agreement between
    the Company and Fleet Bank dated as of June 9, 1997                                     |  | Exhibit No. 10.03 to Registration
    Statement on Form S-1 (No. 333-33227)
|        | 10.04 |             |  | 1995 Stock Plan of the Company                                                                                                                |  | Exhibit No. 10.04 to Registration
    Statement on Form S-1 (No. 333-33227)
|        | 10.05 |             |  | 1997 Stock Plan of the Company                                                                                                                |  | Exhibit No. 10.01 on Form 10-Q,
    for the period ended June 30, 1998     
|        | 10.06 |             |  | 1997 Stock Plan of the Company, as amended on
    March 12, 1998, March 1, 1999, May 15, 1999 and
    March 8, 2000                           |  | Exhibit No. 10.06 on Form 10-K,
    for the period ended December 31, 2000 
|        | 10.07 |             |  | 1997 Employee Stock Purchase Plan of the Company                                                                                              |  | Exhibit No. 10.06 to Registration
    Statement on Form S-1 (No. 333-33227)
|        | 10.08 |             |  | 1997 Non-Employee Director Stock Option Plan as
    amended on March 8, 2000 and April 25, 2001                                               |  |                                                                            
|        | 10.09 |             |  | The Profit Sharing/401(K) Plan of the Company                                                                                                 |  | Exhibit No. 10.08 to Registration
    Statement on Form S-1 (No. 333-33227)
|        | 10.10  |             |  | Lease Agreement between the Company and John
    Hancock Mutual Life Insurance Company dated March 17, 1994,
    as amended on March 25, 1997 |  | Exhibit No. 10.09 to Registration
    Statement on Form S-1 (No. 333-33227)
|        | 10.11  |             |  | First Amendment to Lease Agreement between the
    Company and John Hancock Mutual Life Insurance Company dated
    March 25, 1997            |  | Exhibit No. 10.10 to Registration
    Statement on Form S-1 (No. 333-33227)
|        | 10.12  |             |  | Form of Indemnification Agreement for directors
    and officers of the Company                                                               |  | Exhibit No. 10.11 to Registration
    Statement on Form S-1 (No. 333-33227)
|        | 10.13  |             |  | Restated Common Stock Registration Rights
    Agreement between the Company and certain investors dated
    August 7, 1986                    |  | Exhibit No. 10.12 to Registration
    Statement on Form S-1 (No. 333-33227)
|        | 10.14  |             |  | Amended and Restated Registration Rights
    Agreement between the Company and certain investors dated
    December 28, 1995                  |  | Exhibit No. 10.13 to Registration
    Statement on Form S-1 (No. 333-33227)



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##### Table of Contents



|        |        |             |  |                                                                                                                             |  |                                                                             
|------- | ------ | ----------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------
|Exhibit |        |             |  |                                                                                                                            
|No.     |        | Description |  | SEC Document Reference                                                                                                     
|        |        |             |  |                                                                                                                            
|        | 10.15 |             |  | Management Change in Control Agreement between
    the Company and John A. Blaeser dated as of August 7, 1997               |  | Exhibit No. 10.14 to Registration
    Statement on Form S-1 (No. 333-33227) 
|        | 10.16  |             |  | Management Change in Control Agreement between
    the Company and Kevin J. Conklin dated as of July 23, 1997               |  | Exhibit No. 10.15 to Registration
    Statement on Form S-1 (No. 333-33227) 
|        | 10.17 |             |  | Management Change in Control Agreement between
    the Company and Ferdinand Engel dated as of July 23, 1997                |  | Exhibit No. 10.16 to Registration
    Statement on Form S-1 (No. 333-33227) 
|        | 10.19 |             |  | Management Change in Control Agreement between
    the Company and Melissa H. Cruz dated as of June 12, 2000                |  | Exhibit No. 10.18 on Form 10-Q
    filed on August 14, 2000                 
|        | 10.21 |             |  | Stock Option Agreement dated January 1, 1996
    between the Company and John A. Blaeser                                    |  | Exhibit No. 10.19 to Registration
    Statement on Form S-1 (No. 333-33227) 
|        | 10.22 |             |  | Stock Option Agreement dated January 1, 1996
    between the Company and John A. Blaeser                                    |  | Exhibit No. 10.20 to Registration
    Statement on Form S-1 (No. 333-33227) 
|        | 10.24  |             |  | Form of Shrink-Wrap License                                                                                                 |  | Exhibit No. 10.22 to Registration
    Statement on Form S-1 (No. 333-33227) 
|        | 10.28 |             |  | 2000 Non-Executive Employee Equity Incentive Plan                                                                           |  | Exhibit 10.28 on Form 10-K, for the period
    ended December 31, 2000      
|        | 10.31 |             |  | 2001 Non-Executive Employee Stock Purchase Plan                                                                             |  | Exhibit No. 10.31 on Form 10-Q
    filed on November 5, 2001                
|        | 10.34 |             |  | Management Change in Control Agreement between
    the Company and Douglas Batt dated as of November 18, 2002               |  | Exhibit No. 10.34 on Form 10-K
    filed on March 19, 2003                  
|        | 10.35 |             |  | Management Change in Control Agreement between
    the Company and Daniel Sheahan dated as of November 18, 2002             |  | Exhibit No. 10.35 on Form 10-K
    filed on March 19, 2003                  
|        | 10.36  |             |  | Employment Agreement between the Company and
    Daniel Sheahan dated August 10, 2001                                       |  | Exhibit No. 10.36 on Form 10-K
    filed on March 19, 2003                  
|        | 10.37  |             |  | Registration Rights Agreement by and between the
    Company and Vo Ngoc Tran dated as of July 17, 2003.                    |  | Exhibit No. 4.1 to Registration
    Statement on Form S-3 (No. 333-108068)  
|        | 10.38  |             |  | Registration Rights Agreement by and between the
    Company and Bear, Stearns & Co. Inc. dated as of
    December 8, 2003. |  | Exhibit No. 4.5 to Registration
    Statement on Form S-3 (No. 333-112091)  
|        | *10.39 |             |  | Management Agreement between the Company and
    Ellen (Kokos) Rogers dated October 22, 2003                                |  | Exhibit No. 10.37 to Current Report on
    Form 10-K.                       
|        | 12.01  |             |  | Statement regarding Computation of Ratio of
    Earnings to Fixed Charges                                                   |  | Exhibit No. 12.01 to Registration
    Statement on Form S-3 (No. 333-112091)
|        | *21.01 |             |  | Subsidiaries of the Company                                                                                                 |  |                                                                             
|        | *23.01 |             |  | Consent of Pricewaterhouse Coopers LLP                                                                                      |  |                                                                             
|        | *31.1  |             |  | Certification of John A. Blaeser pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                              |  | Exhibit No. 31.1 on Form 10-K for
    the period ended December 31, 2003    



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##### Table of Contents



|        |      |             |  |                                                                                                |  |                                                                         
|------- | ---- | ----------- |  | ---------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------
|Exhibit |      |             |  |                                                                                               
|No.     |      | Description |  | SEC Document Reference                                                                        
|        |      |             |  |                                                                                               
|*       | 31.2 |             |  | Certification of Melissa H. Cruz pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002 |  | Exhibit No. 31.2 on Form 10-K for
    the period ended December 31, 2003
|*       | 32.1 |             |  | Certification of John A. Blaeser pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 |  | Exhibit No. 32.1 on Form 10-K for
    the period ended December 31, 2003
|*       | 32.2 |             |  | Certification of Melissa H. Cruz pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 |  | Exhibit No. 32.2 on Form 10-K for
    the period ended December 31, 2003



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|  |               
|- | --------------
|* | filed herewith



|  |                                                                         
|- | ------------------------------------------------------------------------
| | Indicates a management contract or compensatory
    plan or arrangement.