##### 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,
    2002                                                 
|  
|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 Companys common stock on June 30,
2002, as reported on the Nasdaq National Market was
approximately $281,681,170.

The number of shares outstanding of Common Stock
as of March 14, 2003 was 17,256,828.

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
    April 30, 2003. |  | Part III, Items 10, 11 and 12



---






---

TABLE OF CONTENTS



|                                                                                                                       |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                                                                
|                                                                                                                       | Item 1. Business                                                                             
|FACTORS THAT COULD AFFECT FUTURE RESULTS                                                                              
|                                                                                                                       | Item 2. Properties                                                                           
|                                                                                                                       | Item 3. Legal Proceedings                                                                    
|                                                                                                                       | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                                                                                               
|                                                                                                                       | Item 5. Market for the Registrants Common Stock and Related Stockholder Matters             
|                                                                                                                       | Item 6. Selected Financial Data                                                              
|                                                                                                                       | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                                                                       | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                          
|                                                                                                                       | Item 8. Financial Statements and Supplementary Data                                          
|                                                                                                                       | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                                                                                              
|                                                                                                                       | Item 10. Directors and Officers of the Registrant                                            
|                                                                                                                       | Item 11. Executive Compensation                                                              
|                                                                                                                       | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                                                                                       | Item 13. Certain Relationships and Related Transactions                                      
|                                                                                                                       | Item 14. Statement of Fees Paid to Independent Auditors                                      
|                                                                                                                       | Item 15. Controls and Procedures                                                             
|PART IV                                                                                                               
|                                                                                                                       | Item 16. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|REPORT OF INDEPENDENT ACCOUNTANTS                                                                                     
|REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                                                              
|CONCORD COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS                                                              
|CONCORD COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS                                                    
|CONCORD COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)                                
|CONCORD COMMUNICATIONS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS                                                     
|CONCORD COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                               
|SIGNATURES                                                                                                            
|CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
|CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
|STATEMENT OF PRINCIPAL EXECUTIVE OFFICER                                                                              
|STATEMENT OF PRINCIPAL FINANCIAL OFFICER                                                                              
|EXHIBIT INDEX                                                                                                         
|Ex-10.34 Management Change in Control  (Batt)                                                                         
|Ex-10.35 Management Change in Control  (Sheahan)                                                                      
|Ex-10.36 Employment Agreement                                                                                         
|Ex-21.01 Subsidiaries of the Company                                                                                  
|Ex-23.01 Consent of PricewaterhouseCoopers LLP                                                                        
|Ex-23.02 Consent of Arthur Andersen LLP                                                                               



---



##### 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

General

We develop, market and support a scalable fault
and performance management software solution, the
eHealthTM Suite family of products. Our
solutions ensure availability of the information technology
(IT) infrastructure by providing an end-to-end view
across the components of this infrastructure: the network, the
systems and the applications.

Technology plays an essential role for many
businesses as they rely on their IT infrastructure to deliver
products and services to their customers. This dependency on
their IT infrastructure requires corporations to closely monitor
their applications, client and server systems and networks to
ensure high availability. The ability to provide fast,
easy-to-access, and high availability IT services has become a
differentiator for many successful businesses. Our
eHealthTM Suite products help these businesses
optimize the performance and availability of IT infrastructure
on which businesses depend for their day-to-day business and
operational success.

Businesses, such as enterprises, managed services
providers and telecommunication carriers, use our
eHealthTM fault and performance management
software to ensure the availability of their IT infrastructures.
Our eHealthTM Suite of products enables our
customers to reduce down time, optimize the usage of current
resources, and limit the need for incremental IT personnel as
their business IT infrastructures expand. Our
eHealthTM Suite software enables managed
service providers and telecommunication carriers to monitor
compliance with service level agreements and to introduce new
services for their customers. Service providers also rely on the
eHealthTM Suite to help ensure the quality of
services such as network and bandwidth services
(carriers), web hosting, data center/ co-location
services, internet service providers (ISPs), managed
service providers (MSPs) and outsourcing services.

Our software monitors the performance of the
infrastructure by collecting high volumes of data from network
devices, client and server systems and applications. This
information is then stored in a relational database where it is
consolidated, normalized and analyzed. IT personnel can retrieve
this information to gain a better understanding of the
performance of the infrastructure via our
eHealthTM E2E Console or via standard
web-based browsers; these personnel can also run standardized or
customized reports.

Our software also enables businesses to test and
monitor availability and responsiveness of critical business
applications. Our software enables businesses to measure and
monitor actual end-user application response time, perform
custom monitoring and measurement of individual business
transactions and understand application availability through
active testing of the application. Our software allows the IT
professional to analyze any degradation in service and see if
the degradation is being caused by the network, the client, the
backend server or the application itself. IT personnel can
perform analysis on numerous combinations of response metrics
and time periods which enable them to detect degrading
performance, service level breaches, and declining availability
of applications. IT personnel can also determine the capacity
being utilized on a specific network or a server which will help
them plan the future capacity of the infrastructure and ensure
that service level agreements are met.

Our target markets include enterprises, managed
service providers and telecommunication carriers. We market to
these potential customers through our own sales force, sales
agents, value-added resellers,

1



---



##### Table of Contents



distributors, network service providers,
telecommunication carriers, and original equipment manufacturers
(OEMs). As of December 31, 2002, we had
approximately 2,900 customers 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.


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,
Marlborough, 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. 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.

The Concord Solution

We provide businesses an out-of-the-box, quick to
deploy, software-only solution. Our eHealthTM
Suite software is a family of automated, scalable, web-based
management solutions for business-critical applications,
systems, and networks.

Our eHealthTM product family
incorporates the following features:

Out-of-the-Box Deployment.Our software can be installed, in
most 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 eHealthTM
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 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 that provide
information and analyses on a wide variety of pre-configured
parameters. Information is provided for use at multiple levels
of management: chief information officers can get a general
overview of capacity, availability and response time 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 eHealthTM
product family provides embedded intelligence, detailed
knowledge, and automated analysis for over 1,000 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; ERP systems
from SAP; 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 eHealthTM Suite software is
composed of the eHealthTM E2E console, a
centralized console and a database that stores, consolidates,
analyzes and reports on information gathered from applications,
systems and networks. Concords software also includes
technology-area solution sets that contain products pertaining

2



---



##### Table of Contents



to applications, systems and networks management;
and a number of cross-technology, suite-wide products that
operate across all technology areas.


eHealthTM
E2E Console This
solution provides IT personnel with a centralized view of
faults, availability and performance across applications,
systems and networks. The eHealthTM
E2E Console combines a customizable graphical user
interface for both end-users and administrators, an efficient
engine for collecting data, an industry standard relational
database, and flexible reporting capabilities. The console
collects vital information from multi-vendor agents residing on
workstations, servers, and network devices; more than
1,000 devices are currently supported by our software,
spanning a range of over 140 different vendors. Once
collected, this data is processed through analysis algorithms,
then stored in a relational database; these algorithms provide
information on which IT personnel can take action. This
information can be retrieved via the console or a standard
Web-based browser on-demand or scheduled reports, such as:
Top-N-Reporting, which helps to identify trouble spots;
At-A-Glance Reporting, which enables users to examine critical
resources; and Trend Reporting, which provides tools to build
custom reports. The MyHealth interface allows users to tailor
their own views of business services, selecting from reports on
a particular component such as the network, or combining reports
across the network, systems, and application components for a
complete end-to-end view of a business service. The
eHealthTM E2E Console also provides an
interface for administration and configuration tasks such as
associating business organizations or processes with underlying
resources and scheduling reports.

eHealthTM
Live HealthTM
This solution provides real time fault management solutions to
identify outages, potential outages and sources of delay across
the IT infrastructure for rapid problem diagnosis. Our
eHealthTM Live HealthTM solution
provides out-of-the-box profiles that detect
brownouts and service delays without configuring
complicated rules. Our Fault Manager module, with its analysis
algorithms, processes traps and creates 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 by
invoking any user-specified action. Upon notification, IT
personnel can associate the alarms to elements managed by
eHealthTM 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 regions. The 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.

eHealthTM 
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.

eHealthTM 
System and Application Management
Solution This solution
provides IT personnel meaningful, compiled information, and
analysis about their business-critical systems and applications.
This solution enables IT personnel to manage the performance and
availability of systems, such as workstations and servers. Our
software collects key performance metrics such as utilization of
CPU, memory and disk space from our eHealth
SystemEDGETM agents and other third party agents
residing on NT or UNIX systems. This solution also helps IT
personnel optimize the performance and availability of
applications, 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. The information
collected from systems and applications is brought back to the
eHealthTM E2E Console, where it is
stored. IT personnel can perform, from the
eHealthTM E2E Console, comprehensive
analyses on various combinations of

3



---



##### Table of Contents



metrics and time periods. The information
collected is also delivered to Concords
eHealthTM Live HealthTM application
for real-time detection of system faults, potential outages, and
delays.


eHealthTM 
Application Performance Management
Solution This solution
enables IT personnel to measure the true end-user client
workstation response, detect performance degradations, maintain
service levels, and manage application performance and
availability. The information is stored in the
eHealthTM database and a comprehensive set of
reports is available within the eHealth
SuiteTM to help IT personnel proactively manage
application performance and availability. Application data
provided using this solution, in conjunction with server and
network data, enables eHealthTM Suite software
to provide comprehensive performance and availability management
across customers applications and their complete
infrastructures. This solution captures application information
from eHealthTM  Application
Response agents that perform observational monitoring as well as
active performance and availability testing. Observational
monitoring collects 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. Active testing can take place at the desktop, server,
or router, providing performance and availability data from
these strategic locations in customers infrastructures
based on executing repeatable, scheduled application tests. From
the eHealthTM E2E Console, IT personnel can perform
comprehensive analyses on numerous combinations of response
metrics and time periods. The information gathered from this
application is also delivered to the
eHealthTM  Live HealthTM
product for real-time detection of degrading performance,
service level breaches, and declining availability.

Distributed
eHealthTM This
solution provides the ability to run and manage supported
eHealthTM applications across multiple
eHealthTM systems in a truly distributed
fashion. Our distributed architecture solution allows
configurations, viewable from a single console, that supports
collection and reporting of up to 1,000,000 data elements.

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. We
recently opened a call center in Australia that will be
servicing our customers in the Asia-Pacific region.

As of December 31, 2002, we employed 46
technical post-sales support personnel, 5 inside sales
representatives and one administrative customer service person.
In addition, we also had 44 professional service and training
personnel who provide services to our customers on a
fee-for-service basis.

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, 2002, we had
28 North America sales teams, each composed of one direct
sales person and one or two technical support people targeting
the following four regions: 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, targeting the following three geographic regions:
Europe, Middle East and Africa (EMEA); Asia/ Pacific; and Latin
America. In addition, we employed 24 inside sales and technical
management individuals who support both the North America and
International sales teams. As of December 31, 2002, we
employed 120 sales personnel.

4



---



##### Table of Contents



As of December 31, 2002, we had
relationships with 61 North American VARs and
78 international distributors. It is the responsibility of
each sales team to manage all sales within its geographic
territory by signing up, training, and managing sales agents,
VARs, distributors, network service providers and outsourcers,
as well as selling directly to customers.

As of December 31, 2002, we had
relationships with over 560 telecommunication carriers and
managed service providers. These service providers offer our
products as part of their service offerings. As of
December 31, 2002, 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, Lucent Technologies, 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, Concord 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, 2002, we employed
49 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.

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 2000, we introduced our
eHealthTM Suite that offers performance,
capacity and availability management across applications,
systems, and networks. The introduction of the
eHealthTM Suite is the result of the
integration of the products of Empire Technologies, Inc. and
FirstSense Software, Inc. which we acquired in 1999 and 2000,
respectively, into our eHealthTM product:
Systems and Application Management from Empire and Application
Response Management, from FirstSense. During 2000, we also
introduced our first fault management application, Live
HealthTM, which detects and reports performance and
availability faults in real time. The
eHealthTM historical database provides the
Live HealthTM application the historical context to
reduce fault notifications and to detect performance brownouts
as well as hard faults. During 2001, we introduced our second
fault management solution, Fault Manager, which combines
embedded intelligence and analysis algorithms to create a low
number of intelligent alarms; this enables IT personnel to focus
on taking corrective action rather than researching potential
issues. During 2001, we also introduced our real-time display
tool, Live StatusTM, which provides individual users
an overview of the business topology of the IT infrastructure.
These two products, Fault Manager and Live StatusTM,
are now integrated in our eHealth Live
HealthTM product. 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, VoIP, VPN, SAN, Wireless, and others
rounded out the end-to-end solution set in that same year. We
are now developing an enhancement to the fault management
capabilities of our eHealthTM Live
HealthTM product. In addition, we are working on
integrating the Oracle database software into our offering; this
will enable us to replace the Ingres database with the Oracle
product. This will enable us to offer one single database
solution to our customers. We currently offer both of these
databases to our customers.

Research and product development expenses were
$21.9 million, $24.0 million and $21.1 million in
2002, 2001 and 2000, respectively, representing 23.3%, 27.2% and
23.1% of total revenues for those 3 years. 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, 2002, our product development organization
consisted of 125 people.

5



---



##### Table of Contents



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
54.6%, 61.8% and 75.9% of total revenues in 2002, 2001 and 2000,
respectively. Concords service revenues consist of fees
for maintenance, training and professional services. Service
revenues accounted for 45.4%, 38.2% and 24.1% of total revenues
in 2002, 2001 and 2000, 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 performance and availability
management market for networks, systems and applications. 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 fault,
performance, and availability solution for applications, systems
and networks, as a single vendor; (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 and
Candle Corporation; (ii) report toolset niche vendors such
as InfoVista; (iii) fault management software vendors such
as Hewlett-Packard Company; (iv) enterprise management
software, framework and platform providers such as BMC Software,
Inc. and Computer Associates, Inc; (v) large, well
established management framework companies such as International
Business Machines Corporation and Lucent Technologies Inc., that
have developed network management platforms;
(vi) developers of network element management solutions
such as Cisco Systems, Inc., 3Com Corporation and Nortel
Networks, Inc.; and (vii) probe vendors such as NetScout
Systems, Inc. and Visual Networks, Inc.

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.

6



---



##### Table of Contents



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, twelve
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.

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, many of our products
are licensed under end user license agreements (also known as
shrinkwrap licenses) that are not signed by licensees. The law
governing the enforceability of shrinkwrap license agreements is
not settled in most jurisdictions. There can be no guarantee
that we would achieve success in enforcing one or more
shrinkwrap license agreements if we sought to do so in a court
of law.

Revenue by Geographic region

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

|                              |  |                         |        |      |  |      |        |  |  |   |        | 
|----------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                              |  |                        
|                              |  | Year Ended December 31,
|                              |  |                        
|                              |  | 2002                    |        | 2001 |  | 2000
|                              |  |                         |        |      |  |     
|                              |  |                        
|                              |  | ($000s)               
|United States                 |  | $                       | 57,812 |      |  | $    | 54,746 |  |  | $ | 62,015 | 
|Europe                        |  |                         | 22,371 |      |  |      | 20,142 |  |  |   | 17,290 | 
|Rest of the World             |  |                         | 13,661 |      |  |      | 13,090 |  |  |   | 12,179 | 
|                              |  |                         |        |      |  |      |        |  |  |   |        | 
|Total  All Foreign Countries |  |                         | 36,032 |      |  |      | 33,232 |  |  |   | 29,469 | 
|                              |  |                         |        |      |  |      |        |  |  |   |        | 
|Total                         |  | $                       | 93,844 |      |  | $    | 87,978 |  |  | $ | 91,484 | 
|                              |  |                         |        |      |  |      |        |  |  |   |        | 

No one country, except the United States,
accounts for greater than 10% of total revenues.

Business Segment Data

Enterprise customers comprised 58%, 55% and 56%
of revenues in 2002, 2001 and 2000, respectively. Managed
service providers and telecommunication carriers comprised 42%,
45% and 44% of revenues in 2002, 2001 and 2000, respectively.
See Note 11 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, 2002, we had a total of
454 employees, all but 47 of whom were based in the United
States. Of the total, 125 were in research and development, 96
were in customer service, 120 were in sales, 49

7



---



##### Table of Contents



were in marketing, 32 were in operations and
information technology and 32 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
Brazil and 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.


8



---



##### Table of Contents






FACTORS THAT COULD AFFECT FUTURE
RESULTS

References in these risk factors to
we, our, the Company, 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 document contains forward-looking
statements. Any statements contained in this document that do
not describe historical facts are forward-looking statements.
Concord makes such forward-looking statements under the
provisions of the safe harbor section of the Private
Securities Litigation Reform Act of 1995. In particular,
statements contained in Managements Discussion and
Analysis of Financial Condition and Results of Operations, which
are not historical facts (including, but not limited to,
statements concerning: the plans and objectives of management;
increases in absolute dollars or decreases as a percentage of
revenues in sales and marketing, research and development,
customer support and service, and general and administrative
expenses; expectations regarding increased competition and
Concords ability to compete successfully; sustenance of
revenue growth both domestically and internationally; the size,
scope and description of Concords target customer market;
future product development, including but not limited to
anticipated expense levels to fund product development,
acquisitions and the integration of acquired companies; and our
expected liquidity and capital resources) constitute
forward-looking statements. 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 below.

Our future operating results are
uncertain.

Prior to 2001, we marketed and sold our products
primarily in the performance management market. In 2001, our
product functionality was expanded to include both fault and
performance management features to penetrate the fault
management market. While sales of our fault and application
response products were approximately 15% and 10%, respectively,
of our license revenues for the fiscal year ended
December 31, 2002, we still have a limited operating
history in this expanded market upon which we can evaluate our
business. As currently developed, our product is an integrated
fault and performance management tool that manages applications,
systems and networks. The integrated fault and performance
market is highly competitive and rapidly evolving. Additionally,
many of our competitors in this new market have a longer
operating history and greater resources. Our limited operating
history, an uncertain economic climate due to worldwide economic
conditions and the possibility of war in Iraq or North Korea,
makes the prediction of future results of operations difficult
or impossible. Our prospects must be considered in light of the
risks, costs, and difficulties frequently encountered by
emerging companies operating in the highly competitive software
industry.

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

As a company, we have expended considerable
resources to the research and development of new technologies
and new or improved product features that have enabled us to
penetrate new markets both in the United States and
internationally. This investment in product development allowed
the company to achieve revenue growth and profitability for the
fiscal year ended December 31, 2002. Despite our results in
2002, we cannot ensure that we can 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, we continue
to work to reduce operating expenses 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;      
|
| |  | develop new distribution channels;             

9



---



##### Table of Contents





| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | broaden our customer support capabilities;                                   
|
| |  | expand our administrative resources in
    anticipation of future growth; and
|
| |  | respond to unforeseeable economic or business
    circumstances.             

To the extent that increases in our expenses
precede or are not followed by increased revenues, our
profitability will be at risk. In addition, in view of the
rapidly evolving nature of our business and markets, the
uncertain economic and geopolitical landscape, and our limited
operating history in our current market, we believe that one
should not rely on period-to-period comparisons of our financial
results as an indication of our future performance.

Our quarterly operating results may
fluctuate.

We are likely to experience significant
fluctuations in our quarterly 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;
|
| |  | our customers spending patterns and
    budgetary resources for our products;                                                                                                 
|
| |  | geopolitical conditions in the world, with
    specific reference to the current situation in Iraq, North
    Korea, and portions of South America;                            
|
| |  | 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;                                                                                                  
|
| |  | 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, such as recording
    expenses for employee stock option grants.                                                                                  

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, as do other software companies with a
longer history of operations. Increases in our revenues will
also depend on our successful implementation of our distribution
strategy as we attempt to expand our channels of distribution.
Due to the buying patterns of certain of our customers and also
to our own sales incentive programs focused on annual sales
goals, revenues in our fourth quarter could be higher than
revenues in our first quarter of the following year. There also
may be other factors, such as seasonality and the timing of
receipt and delivery of orders within a fiscal quarter, that
significantly affect our quarterly results, which are often
difficult to predict.

A significant portion of our product sales occurs
in the final two weeks of each fiscal quarter. Any delay in the
shipment of products near the end of the quarter may result in
decreased revenues for the quarter. Additionally, intense
competition and budgetary constraints placed upon our customers
typically increase during the final two weeks of a fiscal
quarter and may adversely affect our revenues for that quarter.

10



---



##### Table of Contents



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.

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. These markets worldwide have suffered from
a turbulent economy during 2000, 2001, and 2002. We have been
negatively affected by the general weakness in capital spending
within these markets. The volume of sales of our products and
services to telecommunication carriers, service providers, and
enterprise customers may increase slower than we expect or may
decrease.

The market for integrated fault and
performance management software is emerging.

The market for our integrated fault and
performance solution is still 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 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
enterprises to integrate fault and performance management into
their applications, systems, and networks. Moreover, this market
is very competitive and we are in direct competition with larger
companies with substantially greater resources. These larger
companies are able to devote considerable resources to the
development of competitive products and the creation and
maintenance of direct and indirect sales channels. The continued
presence of these larger companies in this market may impact our
ability to retain or increase our market share.

The market for our products is intensely
competitive and rapidly evolving.

The market for our products is intensely
competitive and rapidly evolving. Our current and future
competitors include:



| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | fault management software vendors;                                                                                             
|
| |  | application performance 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;                                                                                                                 

11



---



##### Table of Contents





| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | telecommunications vendors;                                                    
|
| |  | system agent vendors; and                                                      
|
| |  | vendors who 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
eHealthTM product family is critical to our
success.

We currently derive substantial product revenues
from our eHealthTM Suite product family, and
we expect that revenues from these products will continue to
account for substantially all of our product revenues in the
foreseeable future. Broad market acceptance of these products is
critical to our future success. We cannot ensure that market
acceptance of our eHealthTM Suite of products
will increase or even remain at current levels. Factors that may
affect the market acceptance of our integrated solution include:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | the availability and price of competing
    integrated solutions, products and technologies;
|
| |  | 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 fault and
performance management software products increases, we
anticipate that our competitors will introduce additional
competitive products and new competitors 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 the
eHealthTM product family. While we have
approximately $72.8 million in short term investments
(cash, cash equivalents and marketable securities), excluding
restricted cash totaling $839,000 as of December 31, 2002,
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 and potential changes in the IT
infrastructure, fault and performance management software
market, and changes in industry standards, the life cycle of
versions of our eHealthTM products is
difficult to estimate. We cannot ensure that:



| |   |                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we will successfully develop and market
    enhancements to our eHealthTM 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 such enhancements or new products; or                                                          
|
| |  | such enhancements or new products will adequately
    address the requirements of the marketplace and achieve market
    acceptance.                                                                                        

12



---



##### Table of Contents



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.

Continuing public company accounting
improprieties may adversely impact our revenues.

The publics perception of accounting
improprieties by public companies has undermined confidence in
the public markets, adding to economic uncertainty. This
economic uncertainty can affect customer demand for our products
and services, thus affecting our revenue. For example, the
announcement by a large American telecommunications firm near
the end of our second fiscal quarter that it had improperly
accounted for some expenses created uncertainties for some of
our customers last quarter. Specifically, banks holding debt for
this telecommunications company reduced expenditures to mitigate
the exposure created by the telecommunications companys
actions. Our revenues suffered in the final weeks of the quarter
ended June 30, 2002 as many of our customers considerably
decreased, postponed or potentially canceled IT infrastructure
purchases due to this uncertainty. It is likely that similar
announcements by other companies would impact the Companys
future sales.

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

International tensions, exacerbated by the
possibility of war in Iraq and the escalating tensions in North
Korea 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. In addition,
recent terrorist attacks internationally have contributed to
continued international tension and uncertainty, which has
exacerbated an already weakened worldwide economy. 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 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.

13



---



##### Table of Contents



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 solutions obsolete and
unmarketable. While we actively 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
solutions.

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;                                          
|
| |  | 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. Specifically, beginning in the
second half of 2002, we have focused on identifying and
developing our key distribution partners worldwide. We intend to
decrease the total number of distributors selling our products,
but increase the quality and focus of our most valuable
distributors. Our success will depend in large part on our
development of these more focused distribution relationships and
on the performance and success of these third parties,
particularly telecommunication carriers and other network
service providers. We sell our products 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 almost exclusively through indirect
sales via our channel partners. 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 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. 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 offered by other companies, products
    developed internally by these channel partners, their financial
    insolvency or otherwise.

14



---



##### Table of Contents



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

We have experienced reductions in our sales and
operations personnel; our products have become increasingly
complex; and our product distribution channels are being
developed and expanded. The rapid evolution of our markets and
the increasing complexity of our products has 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.

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. Our success depends on our continuing ability to
identify, hire, train, motivate, and retain highly qualified
management, technical, and sales and marketing personnel.
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;                                                       
|
| |  | the burden of complying 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,
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

15



---



##### Table of Contents



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 in 2002. 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.


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, non-disclosure
agreements, and other contractual provisions to establish,
maintain, and protect our proprietary rights. These means afford
only limited protection.

We have nine issued and twelve pending U.S.
patents, and various foreign counterparts as of
December 31, 2002. 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, many of our products
are licensed under end user license agreements (also known as
shrinkwrap licenses) that are not signed by licensees. The law
governing the enforceability of shrinkwrap license agreements is
not settled in most jurisdictions. There can be no guarantee
that we would achieve success in enforcing one or more
shrinkwrap 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.
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.

We have started shipping Oracle® software as
the database on which the eHealthTM Suite of
products runs, which will eventually replace the Ingres®
database on which our eHealthTM Suite of products
currently operates. 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 in conjunction with our eHealthTM 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

16



---



##### Table of Contents



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.


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 network 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. While we do not maintain
product liability insurance, 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 from them related to their prior
service as our independent auditors.

Arthur Andersen LLP served as our independent
auditors until June 10, 2002. On June 15, 2002,
Andersen was found guilty on federal obstruction of justice
charges arising from the governments investigation of
Enron Corporation. Following this indictment, Andersen informed
the SEC that it would cease its operations. On June 10,
2002, we dismissed Andersen and on June 11, 2002, we
retained PricewaterhouseCoopers LLP as our independent auditors
for the fiscal year ended December 31, 2002. SEC rules
require us to present historical audited financial statements in
various SEC filings, such as registration statements, along with
Andersens consent to our inclusion of its audit report in
those filings. Since our former engagement partner and audit
manager have left Andersen and in light of the announced
cessation of Andersens SEC practice, we will not be able
to obtain the consent of Andersen to the inclusion of its audit
report in our relevant current and future filings. The SEC
recently has provided regulatory relief designed to allow
companies that file reports with the SEC to dispense with the
requirement to file a consent of Andersen in certain
circumstances, but purchasers of securities sold under our
registration statements, which were not filed with the consent
of Andersen to the inclusion of its audit report will not be
able to sue Andersen 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 Andersens consent.

Limitations on the Effectiveness of
Controls.

The Companys management, including the CEO
and CFO, 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 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

17



---



##### Table of Contents



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

Concords corporate headquarters and
principal facilities are located in approximately 142,400 square
feet of office space in Marlborough, Massachusetts under
separate lease arrangements that expire in June 2006 and August
2007. These principal facilities accommodate finance,
administration and operations, research and development,
customer support, marketing and sales management. We also lease
sales office space in Atlanta, GA; Dallas, TX; Plymouth, MI;
Seattle, WA; Vienna, VA; Palo Alto, CA; Canada; England; France;
Germany; the Netherlands; Spain; Sweden; Australia; Hong Kong;
Japan; Singapore; Mexico and Brazil. 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 litigation 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, 2002.




PART II




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

Price Range of Common Stock

Concord affected its initial public offering on
October 24, 1997 at a price of $14.00 per share. Since that
date, Concords Common Stock has traded on the Nasdaq
National Market under the symbol CCRD. The following table sets
forth, for the period indicated, the high and low sales prices
for the Common Stock, all as reported by the Nasdaq National
Market.

|             |                |      |       |       |  |   |      |       | 
|------------ | -------------- | ---- | ----- | ----- |  | - | ---- | ----- | 
|Period       |                | High |       | Low  
|             |                |      |       |      
|Fiscal 2001: |                |      |       |       |  |   |      |      
|             | First Quarter  |      | $     | 16.00 |  |   | $    | 6.50  | 
|             | Second Quarter |      |       | 10.10 |  |   |      | 5.13  | 
|             | Third Quarter  |      |       | 10.87 |  |   |      | 7.70  | 
|             | Fourth Quarter |      |       | 23.25 |  |   |      | 8.27  | 
|Fiscal Year  |                | $    | 23.25 |       |  | $ | 5.13 |      
|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 Year  |                | $    | 24.62 |       |  | $ | 4.83 |      

18



---



##### Table of Contents



As of March 14, 2003, Concord had
approximately 5,688 holders of our common stock.

Dividend Policy

We did not declare or pay any cash dividends on
our capital stock during 2002, 2001 or 2000. 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
common stock, par value $0.01 per share (the 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 overallotment 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 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 February 4, 2000, the Company completed a
merger with FirstSense Software, Inc. (FirstSense).
The Company issued an aggregate of 1,940,000 shares of Concord
common stock to the stockholders of FirstSense in the merger in
a private placement transaction pursuant to Section 4(2)
under the Securities Act of 1933, as amended. 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.

19



---



##### Table of Contents








|        |                        
|------- | -----------------------
|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, 2002 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.

|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |        |        | 
|------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ----- | ------ | ------ | ---- | ------- | ------- | ------- | ---- | ----- | ------ | ------ | - | ----- | ------ | ------ | - | ----- | ------ | ------ | 
|                                                                                           |                                                                                                                            |                                      
|                                                                                           |                                                                                                                            | Fiscal Year Ended December 31,       
|                                                                                           |                                                                                                                            |                                      
|                                                                                           |                                                                                                                            | 2002                                  |       | 2001   |        | 2000 |         | 1999    |         | 1998
|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |     
|                                                                                           |                                                                                                                            |                                      
|                                                                                           |                                                                                                                            | (In thousands, except per share data)
|Consolidated Statements of Operations
    Data:                                            |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|Revenues:                                                                                  |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|                                                                                           | License revenues                                                                                                           |                                       | $     | 51,230 |        |      | $       | 54,406  |         |      | $     | 69,464 |        |   | $     | 53,924 |        |   | $     | 35,048 |       
|                                                                                           | Service revenues                                                                                                           |                                       |       | 42,614 |        |      |         | 33,572  |         |      |       | 22,020 |        |   |       | 14,896 |        |   |       | 6,921  |       
|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|                                                                                           |                                                                                                                            | Total revenues                        |       |        | 93,844 |      |         |         | 87,978  |      |       |        | 91,484 |   |       |        | 68,820 |   |       |        | 41,969 | 
|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|Cost of Revenues:                                                                          |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|                                                                                           | Cost of license revenues                                                                                                   |                                       |       | 1,850  |        |      |         | 2,272   |         |      |       | 1,997  |        |   |       | 2,300  |        |   |       | 1,666  |       
|                                                                                           | Cost of service revenues                                                                                                   |                                       |       | 15,120 |        |      |         | 15,544  |         |      |       | 11,104 |        |   |       | 6,202  |        |   |       | 3,218  |       
|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|                                                                                           |                                                                                                                            | Total cost of revenues                |       |        | 16,970 |      |         |         | 17,816  |      |       |        | 13,101 |   |       |        | 8,502  |   |       |        | 4,884  | 
|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|                                                                                           |                                                                                                                            | Gross profit                          |       |        | 76,874 |      |         |         | 70,162  |      |       |        | 78,383 |   |       |        | 60,318 |   |       |        | 37,085 | 
|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|Operating Expenses:                                                                        |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|                                                                                           | Research and development (excluding stock-based
    compensation of $106, $315, $522, $2,549 and $1,001,
    respectively) |                                       |       | 21,867 |        |      |         | 23,969  |         |      |       | 21,102 |        |   |       | 14,432 |        |   |       | 9,880  |       
|                                                                                           | Sales and marketing                                                                                                        |                                       |       | 47,383 |        |      |         | 51,041  |         |      |       | 42,996 |        |   |       | 29,442 |        |   |       | 19,885 |       
|                                                                                           | General and administrative (excluding stock-based
    compensation of $0, $5, $290, $490 and $125, respectively)           |                                       |       | 7,665  |        |      |         | 8,700   |         |      |       | 8,113  |        |   |       | 5,337  |        |   |       | 3,595  |       
|                                                                                           | Asset impairment charge                                                                                                    |                                       |       |       |        |      |         |        |         |      |       | 2,337  |        |   |       |       |        |   |       |       |       
|                                                                                           | Stock-based compensation                                                                                                   |                                       |       | 106    |        |      |         | 320     |         |      |       | 812    |        |   |       | 3,039  |        |   |       | 1,126  |       
|                                                                                           | Acquisition-related charges                                                                                                |                                       |       |       |        |      |         |        |         |      |       | 4,300  |        |   |       | 551    |        |   |       |       |       
|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|                                                                                           |                                                                                                                            | Total operating expenses              |       |        | 77,021 |      |         |         | 84,030  |      |       |        | 79,660 |   |       |        | 52,801 |   |       |        | 34,486 | 
|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|                                                                                           | Operating (loss) income                                                                                                    |                                       |       | (147   | )      |      |         | (13,868 | )       |      |       | (1,277 | )      |   |       | 7,517  |        |   |       | 2,599  |       
|Other income, net                                                                          |                                                                                                                            |                                       | 2,916 |        |        |      | 3,161   |         |         |      | 3,066 |        |        |   | 2,964 |        |        |   | 2,515 |       
|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|                                                                                           |                                                                                                                            | Income (loss) before income taxes     |       |        | 2,769  |      |         |         | (10,707 | )    |       |        | 1,789  |   |       |        | 10,481 |   |       |        | 5,114  | 
|Provision (benefit) for income taxes                                                       |                                                                                                                            |                                       | 568   |        |        |      | 447     |         |         |      | 447   |        |        |   | 4,286 |        |        |   | (986  | )     
|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|Income (loss) before extraordinary items                                                   |                                                                                                                            |                                       | 2,201 |        |        |      | (11,154 | )       |         |      | 1,342 |        |        |   | 6,195 |        |        |   | 6,100 |       
|Extraordinary loss on early extinguishment of
    debt, net of tax benefit of $72,000      |                                                                                                                            |                                       |      |        |        |      |        |         |         |      | (216  | )      |        |   |      |        |        |   |      |       
|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|Net income (loss)                                                                          |                                                                                                                            |                                       | 2,201 |        |        |      | (11,154 | )       |         |      | 1,126 |        |        |   | 6,195 |        |        |   | 6,100 |       
|Accretion of redeemable preferred stock                                                    |                                                                                                                            |                                       |      |        |        |      |        |         |         |      |      |        |        |   | 125   |        |        |   | 120   |       
|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|Net income (loss) available to common shareholders                                         |                                                                                                                            | $                                     | 2,201 |        |        | $    | (11,154 | )       |         | $    | 1,126 |        |        |   | 6,070 |        |        |   | 5,980 |       
|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|Pro forma provision for income taxes on
    Subchapter S-Corporation income (unaudited)(1) |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   | 146   |        |        |   | 41    |       
|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       
|Pro forma net income (unaudited)(1)                                                        |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        | $ | 5,924 |        |        | $ | 5,939 |       
|                                                                                           |                                                                                                                            |                                       |       |        |        |      |         |         |         |      |       |        |        |   |       |        |        |   |       |       

20



---



##### Table of Contents



|                                                                     |                                  |                                       |   |        |  |      |   |        |   |      |   |        |  |  |   |        |  |  |   |        | 
|-------------------------------------------------------------------- | -------------------------------- | ------------------------------------- | - | ------ |  | ---- | - | ------ | - | ---- | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                                     |                                  |                                      
|                                                                     |                                  | Fiscal Year Ended December 31,       
|                                                                     |                                  |                                      
|                                                                     |                                  | 2002                                  |   | 2001   |  | 2000 |   | 1999   |   | 1998
|                                                                     |                                  |                                       |   |        |  |      |   |        |   |     
|                                                                     |                                  |                                      
|                                                                     |                                  | (In thousands, except per share data)
|Net income (loss) per common and potential common
    share:         |                                  |                                       |   |        |  |      |   |        |   |      |   |        |  |  |   |        |  |  |   |       
|                                                                     | Basic                            |                                       | $ | 0.13   |  |      | $ | (0.67  | ) |      | $ | 0.07   |  |  | $ | 0.42   |  |  | $ | 0.44   | 
|                                                                     | Diluted                          |                                       | $ | 0.12   |  |      | $ | (0.67  | ) |      | $ | 0.07   |  |  | $ | 0.36   |  |  | $ | 0.37   | 
|                                                                     | Pro forma diluted (unaudited)(1) |                                       |   |        |  |      |   |        |   |      |   |        |  |  | $ | 0.35   |  |  | $ | 0.37   | 
|Weighted average common and potential common
    shares outstanding: |                                  |                                       |   |        |  |      |   |        |   |      |   |        |  |  |   |        |  |  |   |       
|                                                                     | Basic                            |                                       |   | 17,057 |  |      |   | 16,683 |   |      |   | 16,144 |  |  |   | 14,395 |  |  |   | 13,570 | 
|                                                                     | Diluted                          |                                       |   | 17,627 |  |      |   | 16,683 |   |      |   | 16,746 |  |  |   | 16,722 |  |  |   | 16,200 | 
|                                                                     | Pro forma diluted (unaudited)(1) |                                       |   |        |  |      |   |        |   |      |   |        |  |  |   | 16,722 |  |  |   | 16,200 | 



---



|    |                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

|                                                 |  |                |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |        | 
|------------------------------------------------ |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------ |  |  | - | ------ | 
|                                                 |  |               
|                                                 |  | December 31,  
|                                                 |  |               
|                                                 |  | 2002           |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                                 |  |                |         |      |  |      |         |      |  |     
|                                                 |  |               
|                                                 |  | (In thousands)
|Consolidated Balance Sheet Data:                 |  |                |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |        | 
|Cash, cash equivalents and marketable securities |  | $              | 73,670  |      |  | $    | 68,344  |      |  | $    | 63,251  |  |  | $ | 63,569 |  |  | $ | 56,619 | 
|Working capital                                  |  |                | 56,975  |      |  |      | 48,965  |      |  |      | 54,131  |  |  |   | 55,213 |  |  |   | 47,913 | 
|Total assets                                     |  |                | 105,930 |      |  |      | 102,480 |      |  |      | 102,276 |  |  |   | 89,787 |  |  |   | 67,981 | 
|Long-term debt, net of current portion           |  |                |        |      |  |      |        |      |  |      |        |  |  |   | 2,064  |  |  |   | 242    | 
|Redeemable convertible preferred stock           |  |                |        |      |  |      |        |      |  |      |        |  |  |   | 11,723 |  |  |   | 11,598 | 
|Total stockholders equity                       |  | $              | 68,936  |      |  | $    | 63,507  |      |  | $    | 70,746  |  |  | $ | 52,476 |  |  | $ | 41,213 | 

21



---



##### Table of Contents








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

Overview

Concord develops, markets and supports a scalable
fault and performance management software solution, its
eHealthTM Suite family of products.
Concords solutions ensure the high availability of the
information technology (IT) infrastructure by
providing an end-to-end view across the components of this
infrastructure: the network, the systems and the applications.

The information provided by Concord or statements
made by our employees may contain forward-looking statements. In
particular, some statements contained in this Form 10-K for
the fiscal year ended December 31, 2002 are not historical
statements including, but not limited to, statements concerning
the plan and objectives of management; increases in revenues
(domestically and internationally); increases in absolute
dollars or decreases as a percentage of revenues in sales and
marketing, research and development and general and
administrative expenses (domestically and internationally),
Concords ability to use deferred tax assets,
Concords success in competing in international markets,
Concords expected future profitability and Concords
expected liquidity and capital resources. This document contains
forward-looking statements. Any statements contained herein that
do not describe historical facts are forward-looking statements.
The Company 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. The facts that could cause actual
results to differ materially from current expectations include
the following: risks of intellectual property rights and
litigation, risks in technology development and
commercialization, risks in product development and market
acceptance of and demand for the Companys products, risks
of downturns in economic conditions generally, and in the
software, networking and telecommunications industries
specifically, risks associated with competition and competitive
pricing pressures, risks associated with international sales,
risks associated with a limited family of products and other
risks detailed in this Form 10-K under the heading
Factors that Could Affect Future Results and
elsewhere in the Companys filings with the Securities and
Exchange Commission.

On February 4, 2000, the Company completed
its acquisition of all of the capital stock of FirstSense
Software, Inc., a Delaware corporation (FirstSense).
The Company accounted for the transaction as a pooling of
interests in accordance with Accounting Principles Board
(APB) Opinion No. 16, Business
Combinations. As required by APB Opinion No. 16, the
Company restated all of its financial statements to reflect the
combined results of both entities for all periods presented. All
transactions between the two companies have been eliminated in
the combined results. FirstSense is a provider of applications
performance and service level management software designed for
distributed applications, including packaged, custom and
e-business applications.

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. See our audited consolidated
financial statements and notes thereto which begin on
page 35 of this Annual Report on Form 10-K and which
contain accounting policies and other disclosures required by
generally accepted accounting principles.

22



---



##### Table of Contents



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. Under SOP 97-2, 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 and maintenance 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 and
maintenance and customer support services 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, and maintenance and customer
support services.

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. All revenues generated from our worldwide
operations are approved at our corporate headquarters, located
in the United States. Our arrangements do not generally include
clauses involving acceptance of our products by our customers.
However, 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.

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 to the
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 identifying the end-user
while 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,
we account for the fee as not being fixed or determinable. In
these cases, we recognize revenue when the fee is due.

23



---



##### Table of Contents



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.

For arrangements with multiple obligations (for
example, undelivered maintenance and support), 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 values 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 values of services, such as training or
consulting, by referencing the prices at which we have
separately sold comparable services to our customers.



|    |                    
|--- | -------------------
|(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.



|    |                            
|--- | ---------------------------
|(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.

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. We have recorded a
valuation allowance of approximately $10.0 million as of
December 31, 2002, due to uncertainties related to our
ability to utilize some of our deferred tax assets, primarily
consisting of the utilization of certain net operating loss
carryforwards from prior years. We are unsure whether we will
have sufficient future taxable income to allow us to use these
net operating losses and tax credit carryforwards before they
expire. The valuation allowance 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.
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.

Pro Forma Financial Results

We prepare and release quarterly unaudited
financial statements prepared in accordance with generally
accepted accounting principles (GAAP). We also
disclose and discuss certain pro forma financial information in
the related earnings release and investor conference call. This
pro forma financial information excludes certain non-cash and
special charges, consisting primarily of non-cash compensation
charges and transaction costs associated with acquisitions. This
proforma calculation also substitutes current period GAAP tax
provisions with a pro forma tax rate. We have
significant deferred tax assets and have not recorded a

24



---



##### Table of Contents



federal tax provision in 2001 or 2002. The tax
provision in 2001 and 2002 relates to state and foreign taxes
only. Management uses the pro forma information to evaluate the
results of our ongoing operations. Similarly, we believe the
disclosure of the pro forma financial information helps
investors evaluate the results of our ongoing operations.
However, we present both GAAP and Proforma EPS results and urge
investors to carefully review the GAAP financial information
included as part of our Quarterly Reports on Form 10-Q, our
Annual Reports on Form 10-K, and our quarterly earnings
releases.


Results of Operations

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

|                                                                           |                             |                                   |                |      |       |      |       |      |       |       |      |      |       |      |  
|-------------------------------------------------------------------------- | --------------------------- | --------------------------------- | -------------- | ---- | ----- | ---- | ----- | ---- | ----- | ----- | ---- | ---- | ----- | ---- | -
|                                                                           |                             |                                  
|                                                                           |                             | Year Ended December 31,          
|                                                                           |                             |                                  
|                                                                           |                             | 2002                              |                | 2001 |       | 2000
|                                                                           |                             |                                   |                |      |       |     
|Revenues:                                                                  |                             |                                   |                |      |       |      |       |      |       |       |      |     
|                                                                           | License revenues            |                                   |                | 54.6 | %     |      |       | 61.8 | %     |       |      | 75.9 | %    
|                                                                           | Service revenues            |                                   |                | 45.4 |       |      |       | 38.2 |       |       |      | 24.1 |      
|                                                                           |                             |                                   |                |      |       |      |       |      |       |       |      |     
|                                                                           |                             | Total revenues                    |                |      | 100.0 |      |       |      | 100.0 |       |      |      | 100.0 |     
|                                                                           |                             |                                   |                |      |       |      |       |      |       |       |      |     
|Cost of Revenues:                                                          |                             |                                   |                |      |       |      |       |      |       |       |      |     
|                                                                           | Cost of license revenues    |                                   |                | 2.0  |       |      |       | 2.6  |       |       |      | 2.2  |      
|                                                                           | Cost of service revenues    |                                   |                | 16.1 |       |      |       | 17.7 |       |       |      | 12.1 |      
|                                                                           |                             |                                   |                |      |       |      |       |      |       |       |      |     
|                                                                           |                             | Total cost of revenues            |                |      | 18.1  |      |       |      | 20.3  |       |      |      | 14.3  |     
|                                                                           |                             |                                   |                |      |       |      |       |      |       |       |      |     
|                                                                           |                             |                                   | Gross profit   |      |       | 81.9 |       |      |       | 79.7  |      |      |       | 85.7 |  
|                                                                           |                             |                                   |                |      |       |      |       |      |       |       |      |     
|Operating Expenses:                                                        |                             |                                   |                |      |       |      |       |      |       |       |      |     
|                                                                           | Research and development    |                                   |                | 23.3 |       |      |       | 27.2 |       |       |      | 23.1 |      
|                                                                           | Sales and marketing         |                                   |                | 50.5 |       |      |       | 58.0 |       |       |      | 47.0 |      
|                                                                           | General and administrative  |                                   |                | 8.2  |       |      |       | 9.9  |       |       |      | 8.9  |      
|                                                                           | Asset impairment charge     |                                   |                |     |       |      |       |     |       |       |      | 2.5  |      
|                                                                           | Stock-based compensation    |                                   |                | 0.1  |       |      |       | 0.4  |       |       |      | 0.9  |      
|                                                                           | Acquisition-related charges |                                   |                |     |       |      |       |     |       |       |      | 4.7  |      
|                                                                           |                             |                                   |                |      |       |      |       |      |       |       |      |     
|                                                                           |                             | Total operating expenses          |                |      | 82.1  |      |       |      | 95.5  |       |      |      | 87.1  |     
|                                                                           |                             |                                   |                |      |       |      |       |      |       |       |      |     
|                                                                           |                             |                                   | Operating loss |      |       | (0.2 | )     |      |       | (15.8 | )    |      |       | (1.4 | )
|Total other income, net                                                    |                             |                                   | 3.1            |      |       |      | 3.6   |      |       |       | 3.4  |     
|                                                                           |                             |                                   |                |      |       |      |       |      |       |       |      |     
|                                                                           |                             | Income (loss) before income taxes |                |      | 2.9   |      |       |      | (12.2 | )     |      |      | 2.0   |     
|Provision for income taxes                                                 |                             |                                   | 0.6            |      |       |      | 0.5   |      |       |       | 0.5  |     
|                                                                           |                             |                                   |                |      |       |      |       |      |       |       |      |     
|Income (loss) before extraordinary items                                   |                             |                                   | 2.3            |      |       |      | (12.7 | )    |       |       | 1.5  |     
|Extraordinary loss on early extinguishment of
    debt, net of tax benefit |                             |                                   | 0.0            |      |       |      | 0.0   |      |       |       | (0.2 | )   
|                                                                           |                             |                                   |                |      |       |      |       |      |       |       |      |     
|Net income (loss)                                                          |                             |                                   | 2.3            | %    |       |      | (12.7 | )%   |       |       | 1.3  | %   
|                                                                           |                             |                                   |                |      |       |      |       |      |       |       |      |     

Total Revenues

Total revenues were $93.8 million,
$88.0 million and $91.5 million in 2002, 2001 and
2000, respectively, representing an increase of 6.7% from 2001
to 2002 and a decrease of 3.8% from 2000 to 2001.

License Revenues

Concords license revenues are derived from
the licensing of software products. License revenues were
$51.2 million, $54.4 million and $69.5 million in
2002, 2001 and 2000, respectively, representing a decrease of
5.8% from 2001 to 2002 and a decrease of 21.7% from 2000 to
2001. License revenues accounted for 54.6%, 61.8% and 75.9% of
total revenues in 2002, 2001 and 2000, respectively. The
continuing decrease in license revenues in absolute dollars from
2001 to 2002 and from 2000 to 2001 was due, in large part, to
decreases in, or postponements or cancellations of IT
infrastructure purchases by some of our customers due to
worldwide economic uncertainty. In addition to the continuing
worldwide slowdown in the economy, political uncertainty

25



---



##### Table of Contents



resulting in financial instability in Brazil,
reduced spending by some telecommunication carriers on their
infrastructures and the announcement of accounting improprieties
by a few major U.S. based firms have also negatively affected IT
spending by our customers and potential customers. The
continuing decrease in license revenues as a percent of total
revenues from 2001 to 2002 and from 2000 to 2001 was the result
of a significant increase in service revenues, consisting mainly
of maintenance revenues. There were no material price increases
for products during 2002, 2001 or 2000. Inflation did not have a
significant impact on our revenues or income during 2002, 2001
or 2000.


Service Revenues

Concords service revenues consist of fees
for maintenance, training and professional services. Service
revenues were $42.6 million, $33.6 million and
$22.0 million in 2002, 2001 and 2000, respectively,
representing increases of 26.9% from 2001 to 2002 and 52.5% from
2000 to 2001. Service revenues accounted for 45.4%, 38.2% and
24.1% of total revenues in 2002, 2001 and 2000, respectively.
The increase in service revenues was mainly due to a significant
increase in maintenance revenues which are generated from new
and renewed maintenance contracts. 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 2001 to 2002 and from 2000 to
2001.

International Revenues

Concords international revenues were
$36.0 million, $33.2 million and $29.5 million in
2002, 2001 and 2000, respectively, representing 38.4%, 37.8% and
32.2% of total revenues, respectively. Our international
revenues were primarily generated from customers located in
Europe. Revenues from customers located in Europe accounted for
23.8%, 22.9% and 18.9% of total revenues in 2002, 2001 and 2000,
respectively. 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 believe that continued growth and
profitability will require further expansion of our sales,
marketing and customer service functions in 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. Concords
MSP/ TC revenues were $39.6 million, $39.2 million and
$40.2 million in 2002, 2001 and 2000, respectively,
representing approximately 42%, 45% and 44% of total revenues,
respectively. 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 general slowdown of the economy in the United States and
abroad, the overcapacity in the telecommunications
infrastructure market and the bankruptcies of some major U.S.
carriers have all contributed to the lower spending by this
segment. Additionally, the decrease in MSP/ TC revenues as a
percent of total revenues was the result of an increase in
enterprise revenues, including both new and existing customers.

Concords enterprise revenues were
$54.2 million, $48.8 million and $51.3 million in
2002, 2001 and 2000, respectively, representing approximately
58%, 55% and 56% of total revenues, respectively. The increase
in enterprise revenues in 2002, both in absolute dollars and as
a percentage of total revenues, was due to an increase in orders
from new customers and repeat sales to existing customers.

26



---



##### Table of Contents



Cost of License Revenues

Cost of license revenues includes expenses
associated with royalty fees, production, fulfillment and
product documentation. Cost of licenses was $1.9 million,
$2.3 million and $2.0 million in 2002, 2001 and 2000,
respectively, representing 2.0%, 2.6% and 2.2% of total revenues
in 2002, 2001 and 2000, respectively. The decrease from 2001 to
2002 was due, in part, to lower fulfillment costs. In 2002,
these costs were lower due to a decreased number of product
updates sent to customers and improved efficiencies in the
distribution process of these upgrades. The increase from 2000
to 2001 was due, in part, to higher fulfillment costs

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.
Cost of service was $15.1 million, $15.5 million and
$11.1 million in 2002, 2001 and 2000, respectively,
representing 16.1%, 17.7% and 12.1% of total revenues in 2002,
2001 and 2000, respectively. The decrease in the cost of service
revenues was driven by lower use of outside consultants to
deliver the training and professional services. The increase
from 2000 to 2001 was an increase in customer support spending
associated with service revenues to be more responsive to
growing customer needs.

Gross Profit

Total gross profit includes gross profit from
license revenues and gross profit from service revenues. Total
gross profit was $76.9 million, $70.2 million and
$78.4 million in 2002, 2001 and 2000, respectively,
representing 81.9%, 79.7% and 85.7% of total revenues in 2002,
2001 and 2000, respectively. The increase in total gross profit
and gross profit percentage from 2001 to 2002 was attributable
to an increase of total revenues combined with a decrease of the
cost of service and cost of license revenues. The decrease in
total gross profit and gross profit percentage from 2000 to 2001
was primarily the result of a shift in the revenue mix from
license revenues to service revenues as well as the increase of
cost of service. 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. Research and development expenses were
$21.9 million, $24.0 million and $21.1 million in
2002, 2001 and 2000, respectively, representing a decrease of
8.8% from 2001 to 2002 and an increase of 13.6% from 2000 to
2001. Research and development expenses accounted for 23.3%,
27.2% and 23.1% of total revenues in 2002, 2001 and 2000,
respectively. The decrease in research and development expenses
from 2001 to 2002 was primarily due to lower use of outside
consultants, lower employee benefits expenses due to an increase
in employee share of the cost of health insurance, and a
decrease in other employee related costs driven by lower
headcount. The increase in research and development expenses
from 2000 to 2001 was primarily due to higher compensation
expenses associated with software developers and development
support personnel, as well as associated benefits and facilities
costs. Headcount in research and development was 125, 132 and
128 people in 2002, 2001 and 2000, respectively. 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; however, 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 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
either on an absolute basis or as a percentage of total revenues.

27



---



##### Table of Contents



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. Sales and marketing expenses were
$47.4 million, $51.0 million and $43.0 million in
2002, 2001 and 2000, respectively, representing a decrease of
7.2% from 2001 to 2002 and an increase of 18.7% from 2000 to
2001. Sales and marketing expenses accounted for 50.5%, 58.0%
and 47.0% of total revenues in 2002, 2001 and 2000,
respectively. The decrease in absolute dollars and as a
percentage of total revenues from 2001 to 2002 was primarily the
result of lower spending on marketing programs, lower employee
benefits expenses due to an increase in employee share of the
cost of health insurance, a decrease of headcount and lower
commissions and bonus payments to our sales force resulting from
lower license revenues. Our sales force is compensated on the
initial sales of license and services. The increase from 2000 to
2001 was the result of increased headcount needed to build the
direct sales force along with strong channel partners to
penetrate the market. Additionally, the costs to market a
multi-product, multi-market solution set are higher than the
single-product, single-market solution sold in prior years.
Headcount in sales and marketing was 169, 182 and 163 people in
2002, 2001 and 2000, respectively. We anticipate that we will
continue to commit substantial resources to sales and marketing
in the future and that sales and marketing expenses may increase
in absolute dollars in future periods; however, we intend to
decrease our sales and marketing expenses as a percentage of
total revenues. Our ability to decrease these expenses as a
percentage of revenues will 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 either on an absolute basis or 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. General and administrative expenses were
$7.7 million, $8.7 million and $8.1 million in
2002, 2001 and 2000, respectively, representing a decrease of
11.9% from 2001 to 2002 and an increase of 7.2% from 2000 to
2001. General and administrative expenses accounted for 8.2%,
9.9% and 8.9% of total revenues in 2002, 2001 and 2000,
respectively. From 2001 to 2002, the decrease in absolute
dollars is attributable primarily to lower outside legal fees,
reduced consulting costs and lower bad debt expenses due to
decreased write-offs. From 2000 to 2001, the increase in
absolute dollars is due mainly to increased administrative fees
such as legal fees and accounting costs necessary to support the
growth of our international operations. Headcount in general and
administrative was 32, 33 and 44 people in 2002, 2001 and 2000,
respectively. We expect to decrease these expenses as a
percentage of revenue; 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
general and administrative expenses either on an absolute basis
or as a percentage of total revenues.

Asset Impairment Charge

Concord acquired a $3 million interest in
Broadband Investment Group (Broadband) in
September 2000 in exchange for our products and services.
In November 2000, Broadband publicly announced that it was
ceasing operations and liquidating its remaining assets
following its inability to raise additional capital due to
unfavorable market conditions. As a result, Concord recorded a
charge of approximately $2.3 million to write off its
investment in Broadband. The remainder of the carrying value of
our Broadband investment was reversed against the related
deferred revenue for services not yet rendered.

Stock-based Compensation

Stock-based compensation relates to the issuance
of stock options with exercise prices below the deemed fair
value of the Companys common stock at the date of grant.
Deferred stock-based compensation resulted solely from the
issuance of stock options to employees of FirstSense, Inc.
(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. Stock-based
compensation was approximately $106,000, $320,000 and $812,000
in 2002, 2001 and 2000, respectively. The Company recorded

28



---



##### Table of Contents



forfeitures of deferred stock-based compensation
of approximately $76,000 and $949,000 related to the forfeiture
of unvested employee stock options and restricted stock in 2002
and 2001, respectively.


Acquisition-Related Charges

Acquisition-related charges incurred in 2000
included accounting, legal and investment banking fees
associated with the acquisition of FirstSense. These
acquisition-related charges were approximately $4.3 million
in 2000 and they accounted for 4.7% of total revenues in 2000.

Other Income

Other income consists of interest earned on funds
available for investment, net of foreign currency exchange gains
and losses and miscellaneous foreign taxes. The Company had net
other income of $2.9 million, $3.2 million and
$3.1 million, respectively, in 2002, 2001 and 2000.

Provision for Income Taxes

In 2002 and 2001, the Company recorded a total
income tax provision of $568,000 and $447,000, respectively,
which was primarily related to foreign taxes resulting from the
profitability of certain of the Companys foreign
operations. See discussions in Liquidity and Capital Resources
for a discussion of our deferred tax assets.

Extraordinary Loss on Early Extinguishment of
Debt

The Company recognized an extraordinary loss of
$216,000 (net of the related tax benefit of $72,000) in 2000
related to the early extinguishment of certain debt that the
Company assumed as a part of the First-Sense acquisition.

Liquidity and Capital Resources

As of December 31, 2002, the Company had
cash, cash equivalents and marketable securities of
approximately $72.8 million, excluding restricted cash
totaling approximately $839,000. This represents an increase of
$4.5 million from $68.3 million as of
December 31, 2001. The Company had working capital of
$57.0 million and $49.0 million as of
December 31, 2002 and 2001, respectively. The increase in
working capital was primarily attributable to an increase in
cash, cash equivalents and marketable securities due to income
from continuing operations during 2002.

Net cash provided by operating activities was
$5.7 million, $5.7 million and $8.7 million in
2002, 2001 and 2000, respectively. Accounts receivable increased
approximately $880,000 during 2002 primarily due to slower
collections particularly with international customers. Our
annual days of sales outstanding (DSO) remained
relatively constant at 68 days at December 31, 2002
compared to 67 days at December 31, 2001. 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 and collection ability. Deferred revenue increased
approximately $1.2 million during 2002 mainly due to an
increase in new and renewed maintenance contracts.

Investing activities have consisted of the
acquisition of property and equipment, most notably computer and
networking equipment to support the corporate infrastructure,
and also investments in marketable securities. The Company
manages its market risk on its investment securities by
selecting investment grade securities with the highest credit
ratings of relatively short duration that trade in highly liquid
markets.

Financing activities consisted primarily of the
issuance of common stock from the exercise of options during
2002, 2001 and 2000 and from the repayments in 2000 of
borrowings on a subordinated debt financing by FirstSense.

29



---



##### Table of Contents



As of December 31, 2002, the Company has
future payments under facility and certain equipment lease
agreements expiring through July 2007 of $3.7 million,
$6.6 million and $2.5 million in one year, two to
three years, and thereafter, respectively. In addition, the
Company is obligated to make minimum royalty payments in 2003
and 2004 under a software license agreement. The minimum
payments are noncancelable and nonrefundable. This obligation is
secured by a letter of credit arrangement with the royalty
provider.

The following is a summary of our contractual
commitments associated with our lease and royalties obligations
as of December 31, 2002:

|                                                |  |                         |       |      |  |      |       |      |  |      |       |       |  |   |       |  |  |   |     |  |  |   |        | 
|----------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ----- |  | - | ----- |  |  | - | --- |  |  | - | ------ | 
|                                                |  |                        
|                                                |  | Year ended December 31,
|                                                |  |                        
|                                                |  | 2003                    |       | 2004 |  | 2005 |       | 2006 |  | 2007 |       | Total
|                                                |  |                         |       |      |  |      |       |      |  |      |       |      
|                                                |  |                        
|                                                |  | (Dollars in thousands) 
|Facility and certain equipment lease agreements |  | $                       | 3,739 |      |  | $    | 3,354 |      |  | $    | 3,234 |       |  | $ | 1,960 |  |  | $ | 563 |  |  | $ | 12,850 | 
|Minimum royalties payments                      |  |                         | 645   |      |  |      | 194   |      |  |      |       |       |  |   |       |  |  |   |     |  |  |   | 839    | 
|                                                |  |                         |       |      |  |      |       |      |  |      |       |       |  |   |       |  |  |   |     |  |  |   |        | 
|Total commitments                               |  | $                       | 4,384 |      |  | $    | 3,548 |      |  | $    | 3,234 |       |  | $ | 1,960 |  |  | $ | 563 |  |  | $ | 13,689 | 
|                                                |  |                         |       |      |  |      |       |      |  |      |       |       |  |   |       |  |  |   |     |  |  |   |        | 

As of December 31, 2002, the Company had
available for federal income tax purposes net operating loss
carryforwards of approximately $18,453,000, which expire at
various dates through 2021. In addition, as of December 31,
2002, the Company had federal research and development tax
credit carryforwards of approximately $3,274,000, which expire
at various dates through 2022. Under current tax law, the
utilization of net operating loss 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. The Company has significantly reserved
for these deferred tax assets by recording a valuation allowance
of $10,012,000 at December 31, 2002. The resulting net
deferred tax asset is based on the Companys estimate of
future taxable income it expects to generate; all other tax
assets have been fully reserved. The factors that weighed most
heavily on managements decision to record this amount of a
valuation allowance were the Companys history of prior
profitability, current profitability, current economic
conditions and forecasted profitability over the next several
years. In addition, the Company is subject to rapid
technological change, competition from substantially larger
competitors, a limited family of products and other related
risks, as more thoroughly described in the Factors That
Could Affect Future Results section of the Companys
Form 10-K for the year ended December 31, 2002. As a
result, the Company found the evidence described above to be the
most reliable objective evidence available in determining that a
valuation allowance against its tax assets would be necessary.
Significant management judgment is required in determining the
valuation allowance recorded against the net deferred tax
assets. Management is unsure whether the Company will have
sufficient future taxable income to allow it to use all net
operating losses and tax credit carryforwards before they
expire. 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.

Pursuant to the Tax Reform Act of 1986, the
utilization of NOL 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, 2002, the Company has
recorded a deferred tax asset of approximately $4,175,000
reflecting the benefit of deductions from the exercise of stock
options. When and if the Company realizes the asset, the benefit
from this $4,175,000 will be recorded as a credit to additional
paid-in capital when realized.

As of December 31, 2002, Concords
principal sources of liquidity included cash, cash equivalents
and marketable securities. The Company believes that its current
cash, cash equivalents and marketable securities

30



---



##### Table of Contents



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.





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.

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, 2002, we 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 |         | December 31, 2002
|         |      |          |  |          |      |          |  |               |         |                  
|         | Euro |          |  |          | Sell |          |  |               | 1/10/03 |                   |  | 486,000 |  |  | 1.0063 |  |  | $ | 510,000 | 

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.

31



---



##### Table of Contents






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
beginning on page 35 of Item 16.




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.




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 April 30, 2003 is incorporated herein by
reference.

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

|                |  |                                                                                                   
|--------------- |  | --------------------------------------------------------------------------------------------------
|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                            
|Ellen Kokos     |  | Executive Vice President, Marketing                                                               
|Daniel Sheahan  |  | Executive Vice President, Worldwide Sales
    and Professional Services                           

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

John A. Blaeser, 61,
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, 42,
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, 40,
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.

32



---



##### Table of Contents



Ferdinand Engel, 54,
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.

Ellen Kokos, 50, has
been Concords Executive Vice President, Marketing since
February 2001. Prior to joining Concord, Ms. Kokos was Vice
President at Epicon, Inc. from November 1998 until September
2000. From July 1996 until September 1997, Ms. Kokos was
Vice President, Marketing at Agile Networks, a subsidiary of
Lucent Technologies. In 1995, Ms. Kokos was Corporate Vice
President, Marketing at Chipcom prior to its acquisition by
3COM, Inc. Ms. Kokos also held executive positions at
Digital Equipment Corporation, Novell, Inc. and Sun
Microsystems, Inc.

Daniel Sheahan, 41,
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.




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
April 30, 2003 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
April 30, 2003 is incorporated herein by reference.




Item 13.     Certain
Relationships and Related Transactions

Not applicable.




Item 14.     Statement
of Fees Paid to Independent Auditors

The response to this Item will be contained in
the Proxy Statement for the 2003 Annual Meeting of Stockholders
under the caption Statement of Fees Paid to Independent
Auditors, and is incorporated herein.




Item 15.     Controls
and Procedures

(a) Evaluation
of Disclosure Controls and Procedures.

Within the 90 days prior to the filing date,
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 identify, process, and
report information required to be included in the Companys
periodic SEC filings within the required time period.

(b) Changes
in Internal Controls.

There were no significant changes in the
Companys internal controls or to our knowledge, in other
factors that could significantly affect our disclosure controls
and procedures subsequent to the Evaluation Date.

33



---



##### Table of Contents






PART IV




Item 16.     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 Accountants                   |                                                                            |        | 35 |   
|Consolidated Balance Sheets:                         |                                                                            |        |    |   
|                                                     | December 31, 2002 and December 31, 2001                                    |        |    | 37 | 
|Consolidated Statements of Operations:               |                                                                            |        |    |   
|                                                     | Years ended December 31, 2002,
    December 31, 2001 and December 31, 2000 |        |    | 38 | 
|Consolidated Statements of Stockholders
    Equity: |                                                                            |        |    |   
|                                                     | Years ended December 31, 2002,
    December 31, 2001 and December 31, 2000 |        |    | 39 | 
|Consolidated Statements of Cash Flows:               |                                                                            |        |    |   
|                                                     | Years ended December 31, 2002,
    December 31, 2001 and December 31, 2000 |        |    | 40 | 
|Notes to the Consolidated Financial Statements       |                                                                            |        | 41 |   

2.     Consolidated
Financial Statement Schedules

Schedule II  Valuation and
Qualifying Accounts Included in Note 10 of Notes to the
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 Index to Exhibits. The Exhibits listed in the
accompanying Index to Exhibits are filed or incorporated by
reference as part of this report.

(c) Reports on Form 8-K:

None.

34



---



##### Table of Contents






REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders

of Concord Communications, Inc.:


In our opinion, the accompanying consolidated
balance sheet as of December 31, 2002 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, 2002 and the results
of their operations and their cash flows for the year 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 audit. We conducted our audit 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
audit provides a reasonable basis for our opinion. The financial
statements of Concord Communications, Inc. as of
December 31, 2001 and for each of the two years in the
period ended December 31, 2001 were audited by other
independent accountants who have ceased operations. Those
independent accountants expressed an unqualified opinion on
those financial statements in their report dated
January 16, 2002.



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

Boston, Massachusetts

January 15, 2003


35



---



##### 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. See Exhibit 23.02 for further
discussion. The consolidated balance sheet as of
December 31, 2000 and the consolidated statements of
operations, stockholders equity and cash flows for the
year ended December 31, 1999 referred to in this report
have not been included in the accompanying 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


36



---



##### Table of Contents






CONCORD COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share
data)


|                                         |                                                                                               |                                                                                                               |        |              |         |  |        |         |         | 
|---------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ------ | ------------ | ------- |  | ------ | ------- | ------- | 
|                                         |                                                                                               | December 31,                                                                                                  |        | December 31,
|                                         |                                                                                               | 2002                                                                                                          |        | 2001        
|                                         |                                                                                               |                                                                                                               |        |             
|ASSETS                                   |                                                                                               |                                                                                                               |        |              |         |  |        |        
|Current Assets:                          |                                                                                               |                                                                                                               |        |              |         |  |        |        
|                                         | Cash and cash equivalents                                                                     |                                                                                                               | $      | 10,362       |         |  | $      | 9,011   |        
|                                         | Marketable securities                                                                         |                                                                                                               |        | 62,469       |         |  |        | 59,333  |        
|                                         | Restricted cash                                                                               |                                                                                                               |        | 839          |         |  |        |        |        
|                                         | Accounts receivable, net of allowance of $1,480
    and $1,410 in 2002 and 2001, respectively |                                                                                                               |        | 17,417       |         |  |        | 16,537  |        
|                                         | Prepaid expenses and other current assets                                                     |                                                                                                               |        | 2,882        |         |  |        | 3,058   |        
|                                         |                                                                                               |                                                                                                               |        |              |         |  |        |        
|                                         |                                                                                               | Total current assets                                                                                          |        |              | 93,969  |  |        |         | 87,939  | 
|                                         |                                                                                               |                                                                                                               |        |              |         |  |        |        
|Equipment and improvements, at cost:     |                                                                                               |                                                                                                               |        |              |         |  |        |        
|                                         | Equipment                                                                                     |                                                                                                               |        | 22,987       |         |  |        | 19,637  |        
|                                         | Leasehold improvements                                                                        |                                                                                                               |        | 6,111        |         |  |        | 5,957   |        
|                                         |                                                                                               |                                                                                                               |        |              |         |  |        |        
|                                         |                                                                                               |                                                                                                               | 29,098 |              |         |  | 25,594 |        
|                                         | Less  accumulated depreciation and
    amortization                                          |                                                                                                               |        | 20,853       |         |  |        | 14,799  |        
|                                         |                                                                                               |                                                                                                               |        |              |         |  |        |        
|                                         |                                                                                               |                                                                                                               | 8,245  |              |         |  | 10,795 |        
|                                         |                                                                                               |                                                                                                               |        |              |         |  |        |        
|Deferred tax asset                       |                                                                                               |                                                                                                               | 3,500  |              |         |  | 3,500  |        
|Other long-term assets                   |                                                                                               |                                                                                                               | 216    |              |         |  | 246    |        
|                                         |                                                                                               |                                                                                                               |        |              |         |  |        |        
|                                         |                                                                                               |                                                                                                               | 3,716  |              |         |  | 3,746  |        
|                                         |                                                                                               |                                                                                                               |        |              |         |  |        |        
|                                         |                                                                                               | Total assets                                                                                                  |        | $            | 105,930 |  |        | $       | 102,480 | 
|                                         |                                                                                               |                                                                                                               |        |              |         |  |        |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY |                                                                                               |                                                                                                               |        |              |         |  |        |        
|Current Liabilities:                     |                                                                                               |                                                                                                               |        |              |         |  |        |        
|                                         | Accounts payable                                                                              |                                                                                                               | $      | 3,584        |         |  | $      | 3,553   |        
|                                         | Accrued expenses                                                                              |                                                                                                               |        | 10,062       |         |  |        | 13,279  |        
|                                         | Deferred revenue                                                                              |                                                                                                               |        | 23,348       |         |  |        | 22,141  |        
|                                         |                                                                                               |                                                                                                               |        |              |         |  |        |        
|                                         |                                                                                               | Total current liabilities                                                                                     |        |              | 36,994  |  |        |         | 38,973  | 
|                                         |                                                                                               |                                                                                                               |        |              |         |  |        |        
|Commitments and Contingencies (Note 7)   |                                                                                               |                                                                                                               |        |              |         |  |        |        
|Stockholders Equity:                    |                                                                                               |                                                                                                               |        |              |         |  |        |        
|                                         | Common stock, $0.01 par value:                                                                |                                                                                                               |        |              |         |  |        |         |        
|                                         |                                                                                               | Authorized  50,000,000 shares                                                                                |        |              |         |  |        |         |         | 
|                                         |                                                                                               | Issued and outstanding  17,246,005 and
    16,901,193 shares at December 31, 2002 and 2001,
    respectively |        |              | 172     |  |        |         | 169     | 
|                                         | Additional paid-in capital                                                                    |                                                                                                               |        | 98,893       |         |  |        | 96,365  |        
|                                         | Deferred compensation                                                                         |                                                                                                               |        | (60          | )       |  |        | (241    | )      
|                                         | Accumulated other comprehensive income                                                        |                                                                                                               |        | 2,408        |         |  |        | 1,892   |        
|                                         | Accumulated deficit                                                                           |                                                                                                               |        | (32,477      | )       |  |        | (34,678 | )      
|                                         |                                                                                               |                                                                                                               |        |              |         |  |        |        
|                                         |                                                                                               | Total stockholders equity                                                                                    |        |              | 68,936  |  |        |         | 63,507  | 
|                                         |                                                                                               |                                                                                                               |        |              |         |  |        |        
|                                         |                                                                                               | Total liabilities and stockholders equity                                                                    |        | $            | 105,930 |  |        | $       | 102,480 | 
|                                         |                                                                                               |                                                                                                               |        |              |         |  |        |        

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

37



---



##### Table of Contents






CONCORD COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except share and per share
data)


|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |            |        |        |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | --------------------------------- | -------------- | ---------- | ------ | ------ | ------- | ---------- | ------- | ------- | ----- | ---------- | ------ | ------ | -
|                                                                                  |                                                                                                        |                                  
|                                                                                  |                                                                                                        | Year Ended December 31,          
|                                                                                  |                                                                                                        |                                  
|                                                                                  |                                                                                                        | 2002                              |                | 2001       |        | 2000  
|                                                                                  |                                                                                                        |                                   |                |            |        |       
|Revenues:                                                                         |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|                                                                                  | License revenues                                                                                       |                                   | $              | 51,230     |        |        | $       | 54,406     |         |         | $     | 69,464     |       
|                                                                                  | Service revenues                                                                                       |                                   |                | 42,614     |        |        |         | 33,572     |         |         |       | 22,020     |       
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|                                                                                  |                                                                                                        | Total revenues                    |                |            | 93,844 |        |         |            | 87,978  |         |       |            | 91,484 |       
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|Cost of Revenues:                                                                 |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|                                                                                  | Cost of license revenues                                                                               |                                   |                | 1,850      |        |        |         | 2,272      |         |         |       | 1,997      |       
|                                                                                  | Cost of service revenues                                                                               |                                   |                | 15,120     |        |        |         | 15,544     |         |         |       | 11,104     |       
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|                                                                                  |                                                                                                        | Total cost of revenues            |                |            | 16,970 |        |         |            | 17,816  |         |       |            | 13,101 |       
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|                                                                                  |                                                                                                        |                                   | Gross profit   |            |        | 76,874 |         |            |         | 70,162  |       |            |        | 78,383 |  
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|Operating Expenses:                                                               |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|                                                                                  | Research and development (excluding stock-based
    compensation of $106, $315 and $522, respectively) |                                   |                | 21,867     |        |        |         | 23,969     |         |         |       | 21,102     |       
|                                                                                  | Sales and marketing                                                                                    |                                   |                | 47,383     |        |        |         | 51,041     |         |         |       | 42,996     |       
|                                                                                  | General and administrative (excluding stock-based
    compensation of $0, $5 and $290, respectively)   |                                   |                | 7,665      |        |        |         | 8,700      |         |         |       | 8,113      |       
|                                                                                  | Asset impairment charge                                                                                |                                   |                |           |        |        |         |           |         |         |       | 2,337      |       
|                                                                                  | Stock-based compensation                                                                               |                                   |                | 106        |        |        |         | 320        |         |         |       | 812        |       
|                                                                                  | Acquisition-related charges                                                                            |                                   |                |           |        |        |         |           |         |         |       | 4,300      |       
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|                                                                                  |                                                                                                        | Total operating expenses          |                |            | 77,021 |        |         |            | 84,030  |         |       |            | 79,660 |       
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|                                                                                  |                                                                                                        |                                   | Operating loss |            |        | (147   | )       |            |         | (13,868 | )     |            |        | (1,277 | )
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|Other Income (Expense):                                                           |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|                                                                                  | Interest income                                                                                        |                                   |                | 3,127      |        |        |         | 3,361      |         |         |       | 3,066      |       
|                                                                                  | Other expense                                                                                          |                                   |                | (211       | )      |        |         | (200       | )       |         |       |           |       
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|                                                                                  |                                                                                                        | Total other income, net           |                |            | 2,916  |        |         |            | 3,161   |         |       |            | 3,066  |       
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|                                                                                  |                                                                                                        | Income (loss) before income taxes |                |            | 2,769  |        |         |            | (10,707 | )       |       |            | 1,789  |       
|Provision for income taxes                                                        |                                                                                                        |                                   | 568            |            |        |        | 447     |            |         |         | 447   |           
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|Income (loss) before extraordinary item                                           |                                                                                                        |                                   | 2,201          |            |        |        | (11,154 | )          |         |         | 1,342 |           
|Extraordinary loss on early extinguishment of
    debt, net of tax benefit of $72 |                                                                                                        |                                   |               |            |        |        |        |            |         |         | (216  | )         
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|Net income (loss)                                                                 |                                                                                                        | $                                 | 2,201          |            |        | $      | (11,154 | )          |         | $       | 1,126 |           
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|Net income (loss) per common and potential common
    share:                      |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|                                                                                  | Basic                                                                                                  |                                   | $              | 0.13       |        |        | $       | (0.67      | )       |         | $     | 0.07       |       
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|                                                                                  | Diluted                                                                                                |                                   | $              | 0.12       |        |        | $       | (0.67      | )       |         | $     | 0.07       |       
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|Weighted average common and potential common
    shares outstanding:              |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|                                                                                  | Basic                                                                                                  |                                   |                | 17,057,188 |        |        |         | 16,682,634 |         |         |       | 16,143,867 |       
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           
|                                                                                  | Diluted                                                                                                |                                   |                | 17,627,122 |        |        |         | 16,682,634 |         |         |       | 16,745,742 |       
|                                                                                  |                                                                                                        |                                   |                |            |        |        |         |            |         |         |       |           

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

38



---



##### Table of Contents






CONCORD COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

(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, 1999                                                                                  |                      |              | 14,809,533 |       |  | $          | 148 |              |  | $             | 81,922 |             |  | $     | (3,558 | )             |  | $ | (1,386 | ) |  | $ | (24,650 | ) |  | $ | 52,476  |   |  |   |         |       
|Shares issued in connection with employee stock
    plans                                                   |                      |              | 474,762    |       |  |            | 5   |              |  |               | 2,193  |             |  |       |       |               |  |   |       |   |  |   |        |   |  |   | 2,198   |   |  |   |         |       
|Conversion of redeemable preferred stock                                                                    |                      |              | 1,252,616  |       |  |            | 13  |              |  |               | 11,710 |             |  |       |       |               |  |   |       |   |  |   |        |   |  |   | 11,723  |   |  |   |         |       
|Exercise of warrants                                                                                        |                      |              | 18,033     |       |  |            |    |              |  |               | 420    |             |  |       |       |               |  |   |       |   |  |   |        |   |  |   | 420     |   |  |   |         |       
|Tax benefit associated with employee stock options                                                          |                      |              |           |       |  |            |    |              |  |               | 469    |             |  |       |       |               |  |   |       |   |  |   |        |   |  |   | 469     |   |  |   |         |       
|Reversal of deferred compensation related to
    forfeitures of unvested stock options and restricted stock |                      |              |           |       |  |            |    |              |  |               | (1,236 | )           |  |       | 1,236  |               |  |   |       |   |  |   |        |   |  |   |        |   |  |   |         |       
|Amortization of deferred compensation related to
    grants of stock options                                |                      |              |           |       |  |            |    |              |  |               |       |             |  |       | 812    |               |  |   |       |   |  |   |        |   |  |   | 812     |   |  |   |         |       
|Unrealized gains on available-for-sale securities                                                           |                      |              |           |       |  |            |    |              |  |               |       |             |  |       |       |               |  |   | 1,521  |   |  |   |        |   |  |   | 1,521   |   |  | $ | 1,521   |       
|Net income                                                                                                  |                      |              |           |       |  |            |    |              |  |               |       |             |  |       |       |               |  |   |       |   |  |   | 1,126   |   |  |   | 1,126   |   |  |   | 1,126   |       
|                                                                                                            |                      |              |            |       |  |            |     |              |  |               |        |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |       
|                                                                                                            | Comprehensive income |              |            |       |  |            |     |              |  |               |        |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   | $       | 2,647  |  
|                                                                                                            |                      |              |            |       |  |            |     |              |  |               |        |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |       
|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 loss on available-for-sale securities                                                            |                      |              |           |       |  |            |    |              |  |               |       |             |  |       |       |               |  |   | 516    |   |  |   |        |   |  |   | 516     |   |  | $ | 516     |       
|Net income                                                                                                  |                      |              |            |       |  |            |     |              |  |               |        |             |  |       |        |               |  |   |        |   |  |   | 2,201   |   |  |   | 2,201   |   |  |   | 2,201   |       
|                                                                                                            |                      |              |            |       |  |            |     |              |  |               |        |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |       
|                                                                                                            | Comprehensive income |              |            |       |  |            |     |              |  |               |        |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |        |  
|BALANCE, DECEMBER 31, 2002                                                                                  |                      |              | 17,246,005 |       |  | $          | 172 |              |  | $             | 98,893 |             |  | $     | (60    | )             |  | $ | 2,408  |   |  | $ | (32,477 | ) |  | $ | 68,936  |   |  | $ | 2,717   |       
|                                                                                                            |                      |              |            |       |  |            |     |              |  |               |        |             |  |       |        |               |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |       

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

39



---



##### Table of Contents






CONCORD COMMUNICATIONS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)


|                                                                                             |                                            |                                                         |         |       |        |      |         |       |        |   |         |       |        |  
|-------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------------------------- | ------- | ----- | ------ | ---- | ------- | ----- | ------ | - | ------- | ----- | ------ | -
|                                                                                             |                                            |                                                        
|                                                                                             |                                            | Year Ended December 31,                                
|                                                                                             |                                            |                                                        
|                                                                                             |                                            | 2002                                                    |         | 2001  |        | 2000
|                                                                                             |                                            |                                                         |         |       |        |     
|Cash Flows from Operating Activities:                                                        |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|Net income (loss)                                                                            |                                            | $                                                       | 2,201   |       |        | $    | (11,154 | )     |        | $ | 1,126   |      
|Adjustments to reconcile net income
    (loss) to net cash provided by operating activities: |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|                                                                                             | Depreciation and amortization              |                                                         |         | 6,077 |        |      |         | 6,290 |        |   |         | 5,104 |       
|                                                                                             | (Gain) loss on sale of fixed assets        |                                                         |         | (7    | )      |      |         | 24    |        |   |         |      |       
|                                                                                             | Stock-based compensation                   |                                                         |         | 106   |        |      |         | 320   |        |   |         | 812   |       
|                                                                                             | Deferred tax benefit                       |                                                         |         |      |        |      |         |      |        |   |         | (500  | )     
|                                                                                             | Changes in current assets and liabilities: |                                                         |         |       |        |      |         |       |        |   |         |       |       
|                                                                                             |                                            | Accounts receivable                                     |         |       | (880   | )    |         |       | 3,463  |   |         |       | (6,023 | )
|                                                                                             |                                            | Prepaid expenses and other current assets               |         |       | 176    |      |         |       | (648   | ) |         |       | (1,218 | )
|                                                                                             |                                            | Accounts payable                                        |         |       | 31     |      |         |       | 436    |   |         |       | 997    |  
|                                                                                             |                                            | Accrued expenses                                        |         |       | (3,217 | )    |         |       | 2,350  |   |         |       | 685    |  
|                                                                                             |                                            | Deferred revenue                                        |         |       | 1,207  |      |         |       | 4,657  |   |         |       | 7,223  |  
|                                                                                             |                                            | Tax benefit associated with exercise of options         |         |       |       |      |         |       |       |   |         |       | 469    |  
|                                                                                             |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|                                                                                             |                                            | Net cash provided by operating activities               |         |       | 5,694  |      |         |       | 5,738  |   |         |       | 8,675  |  
|                                                                                             |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|Cash Flows from Investing Activities:                                                        |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|Purchases of equipment and improvements, net                                                 |                                            |                                                         | (3,520  | )     |        |      | (4,083  | )     |        |   | (10,080 | )    
|Change in other assets                                                                       |                                            |                                                         | 30      |       |        |      | (157    | )     |        |   | (90     | )    
|Investments in marketable securities                                                         |                                            |                                                         | (20,363 | )     |        |      | (16,492 | )     |        |   | (12,816 | )    
|Proceeds from sales of marketable securities                                                 |                                            |                                                         | 17,742  |       |        |      | 11,442  |       |        |   | 14,751  |      
|Deposit of restricted cash                                                                   |                                            |                                                         | (839    | )     |        |      |        |       |        |   |        |      
|                                                                                             |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|                                                                                             |                                            | Net cash used in investing activities                   |         |       | (6,950 | )    |         |       | (9,290 | ) |         |       | (8,235 | )
|                                                                                             |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|Cash Flows from Financing Activities:                                                        |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|Repayments of bank borrowings                                                                |                                            |                                                         |        |       |        |      |        |       |        |   | (2,962  | )    
|Proceeds from issuance of common stock                                                       |                                            |                                                         | 2,607   |       |        |      | 1,838   |       |        |   | 2,198   |      
|Proceeds from exercise of warrants                                                           |                                            |                                                         |        |       |        |      |        |       |        |   | 420     |      
|                                                                                             |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|                                                                                             |                                            | Net cash provided by (used in) financing
    activities |         |       | 2,607  |      |         |       | 1,838  |   |         |       | (344   | )
|                                                                                             |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|Net increase (decrease) in cash and cash
    equivalents                                     |                                            |                                                         | 1,351   |       |        |      | (1,714  | )     |        |   | 96      |      
|Cash and cash equivalents, beginning of year                                                 |                                            |                                                         | 9,011   |       |        |      | 10,725  |       |        |   | 10,629  |      
|                                                                                             |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|Cash and cash equivalents, end of year                                                       |                                            | $                                                       | 10,362  |       |        | $    | 9,011   |       |        | $ | 10,725  |      
|                                                                                             |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|Supplemental Disclosure of Cash Flow Information:                                            |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|Cash paid for interest                                                                       |                                            | $                                                       |        |       |        | $    |        |       |        | $ | 20      |      
|                                                                                             |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|Cash paid for income taxes                                                                   |                                            | $                                                       | 476     |       |        | $    | 281     |       |        | $ | 819     |      
|                                                                                             |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|Supplemental Disclosure of Noncash Financing and
    Investing Transactions:                 |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|Reversal of deferred compensation related to
    forfeitures of stock options                |                                            | $                                                       | (76     | )     |        | $    | (948    | )     |        | $ | (1,236  | )    
|                                                                                             |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|Retirements of fully depreciated equipment and
    improvements                              |                                            | $                                                       |        |       |        | $    | 631     |       |        | $ |        |      
|                                                                                             |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|Conversions of redeemable convertible preferred
    stock to common stock                    |                                            | $                                                       |        |       |        | $    |        |       |        | $ | 11,723  |      
|                                                                                             |                                            |                                                         |         |       |        |      |         |       |        |   |         |      
|Unrealized gain on available-for-sale securities                                             |                                            | $                                                       | 516     |       |        | $    | 1,757   |       |        | $ | 1,521   |      
|                                                                                             |                                            |                                                         |         |       |        |      |         |       |        |   |         |      

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

40



---



##### 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 next-generation fault,
availability and performance information technology
infrastructure management solutions to primarily enterprises,
managed service providers and telecommunications 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 $3,560,000 and $4,401,000 at December 31,
2002 and 2001, respectively, and consisted primarily of money
market funds.



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

Restricted cash totaling $839,000 at
December 31, 2002 consists of money market funds held in
the Companys name and custodied with a major financial
institution. Such funds are being used as collateral under a
letter of credit arrangement with a Company supplier.

(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. Under SOP 97-2, 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 and maintenance 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
and maintenance and customer support services based on the price
charged when these elements are sold separately. Accordingly,
software license revenues are recognized under the

41



---



##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

residual method in arrangements in which software
is licensed with professional services, training, and
maintenance and customer support services.

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.

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, 2002 and 2001, deferred revenue includes
$17,861,000 and $17,106,000 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
life of the lease.



|    |                                                                
|--- | ---------------------------------------------------------------
|(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. 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 2002, 2001 or 2000. One customer, a reseller in
Europe, accounted for 11.0% of the Companys accounts
receivable at December 31, 2002. One customer, a reseller
in South America, accounted for 13.4% of accounts receivable at
December 31, 2001; a total of 7.2% of the receivables from
this customer was included in the Companys deferred
revenue at December 31, 2001. As of December 31, 2002,
this customer represented approximately 3.4% of accounts
receivable.

42



---



##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                  
|--- | -------------------------------------------------
|(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 $126,000, $91,000 and $81,000 were recognized in fiscal
years 2002, 2001 and 2000, 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, 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 |         | December 31, 2002
|         |      |          |  |          |      |          |  |               |         |                  
|         | Euro |          |  |          | Sell |          |  |               | 1/10/03 |                   |  |  | 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, 2002
or 2001.



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

The Company accounts for employee stock-based
compensation arrangements under the provisions of Accounting
Principles Board (APB) Opinion No. 25 and
related interpretations. Statement of Financial Accounting
Standards (SFAS) No. 123 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 earnings (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)

43



---



##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and earnings (loss) per share as if SFAS
No. 123 had been applied in measuring compensation expense
for all periods presented.

The following table illustrates the effect on net
income (loss) and related net income (loss) per share, had
compensation cost for employee stock-based compensation plans
been determined based upon the fair value method prescribed
under SFAS No. 123:

|                                     |                                                                                                                                             |                                       |         |         |   |      |         |         |   |   |         |         |  
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                     |                                                                                                                                             |                                      
|                                     |                                                                                                                                             | Year Ended December 31,              
|                                     |                                                                                                                                             |                                      
|                                     |                                                                                                                                             | 2002                                  |         | 2001    |   | 2000
|                                     |                                                                                                                                             |                                       |         |         |   |     
|                                     |                                                                                                                                             |                                      
|                                     |                                                                                                                                             | (In thousands, except per share data)
|Net income (loss):                   |                                                                                                                                             |                                       |         |         |   |      |         |         |   |   |         |        
|                                     | As reported                                                                                                                                 |                                       | $       | 2,201   |   |      | $       | (11,154 | ) |   | $       | 1,126   |  
|Add:                                 |                                                                                                                                             |                                       |         |         |   |      |         |         |   |   |         |        
|                                     | Stock-based employee compensation expense
    included in reported net income (loss), net of related taxes                                  |                                       |         | 106     |   |      |         | 320     |   |   |         | 812     |  
|Less:                                |                                                                                                                                             |                                       |         |         |   |      |         |         |   |   |         |        
|                                     | Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    related tax effects |                                       |         | (13,718 | ) |      |         | (14,959 | ) |   |         | (15,782 | )
|                                     |                                                                                                                                             |                                       |         |         |   |      |         |         |   |   |         |        
|Pro forma net loss                   |                                                                                                                                             | $                                     | (11,411 | )       |   | $    | (25,793 | )       |   | $ | (13,844 | )      
|                                     |                                                                                                                                             |                                       |         |         |   |      |         |         |   |   |         |        
|Basic net income (loss) per share:   |                                                                                                                                             |                                       |         |         |   |      |         |         |   |   |         |        
|                                     | As reported                                                                                                                                 |                                       | $       | 0.13    |   |      | $       | (0.67   | ) |   | $       | 0.07    |  
|                                     | Pro forma                                                                                                                                   |                                       | $       | (0.67   | ) |      | $       | (1.55   | ) |   | $       | (0.86   | )
|Diluted net income (loss) per share: |                                                                                                                                             |                                       |         |         |   |      |         |         |   |   |         |        
|                                     | As reported                                                                                                                                 |                                       | $       | 0.12    |   |      | $       | (0.67   | ) |   | $       | 0.07    |  
|                                     | Pro forma                                                                                                                                   |                                       | $       | (0.67   | ) |      | $       | (1.55   | ) |   | $       | (0.86   | )



|    |                            
|--- | ---------------------------
|(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, 2002 and 2000, dilutive potential common
shares consisted of outstanding options and convertible
preferred stock. 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.

44



---



##### 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          
|                                                                                             |  |                                 
|                                                                                             |  | 2002                             |            | 2001 |  | 2000
|                                                                                             |  |                                  |            |      |  |     
|                                                                                             |  |                                 
|                                                                                             |  | (Dollars in thousands           
|                                                                                             |  | except share and per share data)
|Basic                                                                                        |  |                                  |            |      |  |      |            |   |  |   |            |  
|Income from continuing operations before
    extraordinary item                              |  | $                                | 2,201      |      |  | $    | (11,154    | ) |  | $ | 1,342      |  
|Extraordinary loss on early extinguishment of
    debt, net of tax benefit of $72            |  |                                  |           |      |  |      |           |   |  |   | (216       | )
|                                                                                             |  |                                  |            |      |  |      |            |   |  |   |            |  
|Net income (loss) applicable to common
    stockholders                                      |  | $                                | 2,201      |      |  | $    | (11,154    | ) |  | $ | 1,126      |  
|                                                                                             |  |                                  |            |      |  |      |            |   |  |   |            |  
|Weighted average common shares outstanding                                                   |  |                                  | 17,057,188 |      |  |      | 16,682,634 |   |  |   | 16,143,867 |  
|                                                                                             |  |                                  |            |      |  |      |            |   |  |   |            |  
|Basic earnings (loss) per share                                                              |  |                                  |            |      |  |      |            |   |  |   |            |  
|Continuing operations before extraordinary item                                              |  | $                                | 0.13       |      |  | $    | (0.67      | ) |  | $ | 0.08       |  
|Extraordinary loss on early extinguishment of
    debt, net of tax benefit of $72            |  |                                  |           |      |  |      |           |   |  |   | (0.01      | )
|                                                                                             |  |                                  |            |      |  |      |            |   |  |   |            |  
|                                                                                             |  | $                                | 0.13       |      |  | $    | (0.67      | ) |  | $ | 0.07       |  
|                                                                                             |  |                                  |            |      |  |      |            |   |  |   |            |  
|Diluted                                                                                      |  |                                  |            |      |  |      |            |   |  |   |            |  
|Income from continuing operations before
    extraordinary item                              |  | $                                | 2,201      |      |  | $    | (11,154    | ) |  | $ | 1,342      |  
|Extraordinary loss on early extinguishment of
    debt, net of tax benefit of $72            |  |                                  |           |      |  |      |           |   |  |   | (216       | )
|                                                                                             |  |                                  |            |      |  |      |            |   |  |   |            |  
|Net income (loss) applicable to common
    stockholders                                      |  | $                                | 2,201      |      |  | $    | (11,154    | ) |  | $ | 1,126      |  
|                                                                                             |  |                                  |            |      |  |      |            |   |  |   |            |  
|Weighted average common shares outstanding                                                   |  |                                  | 17,057,188 |      |  |      | 16,682,634 |   |  |   | 16,143,867 |  
|Potential common shares pursuant to stock options                                            |  |                                  | 569,934    |      |  |      |           |   |  |   | 498,301    |  
|Potential common shares pursuant to conversion of
    redeemable convertible preferred stock |  |                                  |            |      |  |      |           |   |  |   | 103,574    |  
|                                                                                             |  |                                  |            |      |  |      |            |   |  |   |            |  
|Diluted weighted average shares                                                              |  |                                  | 17,627,122 |      |  |      | 16,682,634 |   |  |   | 16,745,742 |  
|                                                                                             |  |                                  |            |      |  |      |            |   |  |   |            |  
|Diluted earnings (loss) per
    share                                                        |  |                                  |            |      |  |      |            |   |  |   |            |  
|Continuing operations before extraordinary item                                              |  | $                                | 0.12       |      |  | $    | (0.67      | ) |  | $ | 0.08       |  
|Extraordinary loss on early extinguishment of
    debt, net of tax benefit of $72            |  |                                  |           |      |  |      |           |   |  |   | (0.01      | )
|                                                                                             |  |                                  |            |      |  |      |            |   |  |   |            |  
|                                                                                             |  | $                                | 0.12       |      |  | $    | (0.67      | ) |  | $ | 0.07       |  
|                                                                                             |  |                                  |            |      |  |      |            |   |  |   |            |  

Diluted weighted average shares outstanding does
not include 3,622,519, 4,154,700 and 1,880,310 potential common
shares for the years ended December 31, 2002, 2001 and 2000,
respectively, as their effect would have been antidilutive.



|    |                            
|--- | ---------------------------
|(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.

45



---



##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

In November 2001, the Emerging Issues Task Force
issued EITF 01-14 relating to the accounting for
reimbursements received for out-of-pocket expenses. In
accordance with EITF 01-14, reimbursements received for
out-of-pocket expenses incurred should be characterized as
revenues in the statement of operations. The Company has
historically accounted for reimbursements received for
out-of-pocket expenses incurred as a reduction to cost of
service revenues in the statement of operations to offset the
costs incurred. The Company adopted EITF 01-14 on
January 1, 2002, and comparative financial statements for
prior periods have been reclassified to comply with the guidance
in EITF 01-14. During the years ended December 31,
2002 and 2001, reimbursed out-of-pocket expenses totaled
$109,000 and $91,000, respectively. The Company had no
reimbursed out-of-pocket expenses in 2000. There was no impact
on the gross profit as a percentage of total revenues or gross
margin for the years ended December 31, 2002, 2001 and 2000.

In April 2002, the Financial Accounting Standards
Board (FASB) issued FASB Statement No. 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections. Among other things, this statement rescinds
FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that
Statement, FASB Statement No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. The provisions
of this statement related to the rescission of FASB Statement
No. 4 are applicable in fiscal years beginning after
May 15, 2002. The provisions of this statement related to
the rescission of FASB Statement No. 4 will require the
Company to present gains and losses from the extinguishment of
debt as part of operating expenses rather than as extraordinary
items. Under the standard, gains and losses on early
extinguishment of debt, currently classified by the Company as
extraordinary items, will no longer be treated as such but
instead will be reported as other income or expense. Prior
periods will be reclassified to conform to this presentation.

In July 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting
for Exit or Disposal Activities
(SFAS 146). SFAS 146 requires the
recognition of a liability for costs associated with an exit
plan or disposal activity when incurred and nullifies Emerging
Issues Task Force (EITF) Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring), which allowed recognition at the date of
an entitys commitment to an exit plan. The provisions of
this statement are effective for exit or disposal activities
that may be initiated by the Company after December 31,
2002. The Company does not anticipate the adoption of SFAS 146
will have a material effect on its financial position or results
of operations.

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
(FIN 45). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including
loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the
company must recognize an initial liability for the fair value,
or market value, of the obligations it assumes under that
guarantee and must disclose that information in its interim and
annual financial statements. The disclosure requirements of
FIN 45 are effective for all fiscal years ending after
December 15, 2002. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after
December 31, 2002. The Company is complying with the
disclosure requirements of FIN 45 and is evaluating the
effect the other requirements may have on its financial
statements. See Note 7(c) of Notes to Consolidated
Financial Statements for information regarding indemnifications.

On December 31, 2002, the FASB issued
Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure  an Amendment of
FAS 123 (FAS 148). FAS 148
provides additional transition guidance for those entities that
elect to voluntarily adopt the accounting provisions of
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(FAS 123). The standard is intended to
encourage the adoption of the provisions of FAS 123
relating to the fair value-based method of accounting for
employee stock options. The

46



---



##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company currently applies the disclosure-only
provisions of FAS 123. Under the provisions of
FAS 148, companies that choose to adopt the accounting
provisions of FAS 123 will be permitted to select from
three transition methods: the prospective method, the modified
prospective method and the retroactive restatement method. The
prospective method, however, may no longer be applied for
adoptions of the accounting provisions of FAS 123 for
periods beginning after December 15, 2003. FAS 148
requires certain new disclosures that are incremental to those
required by FAS 123, which must also be made in interim
financial statements. The transition and annual disclosure
provisions of FAS 148 are effective for fiscal years ending
after December 31, 2002. The new interim disclosure
provisions are effective for the first interim period beginning
after December 15, 2002. The Company will continue to
account for its employee stock-based compensation arrangements
under the provisions of APB No. 25 and will disclose the
pro forma net income (loss) and earnings per share that would
have resulted form the use of the fair value method under
FAS 123.

(2) 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.

The amortized cost, unrealized gains and fair
value of marketable securities available-for-sale as of
December 31, 2002 with maturity dates from January 1,
2003 through January 30, 2008, are as follows:

|                                         |  |           |        |            |  |       |       |  |  |   |        | 
|---------------------------------------- |  | --------- | ------ | ---------- |  | ----- | ----- |  |  | - | ------ | 
|                                         |  | Amortized |        | Unrealized |  | Fair 
|                                         |  | Cost      |        | Gains      |  | Value
|                                         |  |           |        |            |  |      
|                                         |  |          
|                                         |  | ($000s) 
|US government and municipal obligations  |  | $         | 25,133 |            |  | $     | 914   |  |  | $ | 26,047 | 
|Foreign government obligations           |  |           | 1,012  |            |  |       | 70    |  |  |   | 1,082  | 
|Corporate bonds and notes                |  |           | 38,315 |            |  |       | 1,424 |  |  |   | 39,739 | 
|                                         |  |           |        |            |  |       |       |  |  |   |        | 
|                                         |  |           | 64,460 |            |  |       | 2,408 |  |  |   | 66,868 | 
|Less: cash equivalents                   |  |           | 3,560  |            |  |       |      |  |  |   | 3,560  | 
|Less: restricted cash                    |  |           | 839    |            |  |       |      |  |  |   | 839    | 
|                                         |  |           |        |            |  |       |       |  |  |   |        | 
|Available for sale marketable securities |  | $         | 60,061 |            |  | $     | 2,408 |  |  | $ | 62,469 | 
|                                         |  |           |        |            |  |       |       |  |  |   |        | 

The amortized cost, unrealized gains and fair
value of marketable securities available-for-sale as of
December 31, 2001 with maturity dates from January 1,
2002 through August 1, 2006, are as follows:

|                                         |  |           |        |            |  |       |       |  |  |   |        | 
|---------------------------------------- |  | --------- | ------ | ---------- |  | ----- | ----- |  |  | - | ------ | 
|                                         |  | Amortized |        | Unrealized |  | Fair 
|                                         |  | Cost      |        | Gains      |  | Value
|                                         |  |           |        |            |  |      
|                                         |  |          
|                                         |  | ($000s) 
|US government and municipal obligations  |  | $         | 29,068 |            |  | $     | 1,121 |  |  | $ | 30,189 | 
|Foreign government obligations           |  |           | 1,020  |            |  |       | 72    |  |  |   | 1,092  | 
|Corporate bonds and notes                |  |           | 31,674 |            |  |       | 699   |  |  |   | 32,373 | 
|                                         |  |           |        |            |  |       |       |  |  |   |        | 
|                                         |  |           | 61,762 |            |  |       | 1,892 |  |  |   | 63,654 | 
|Less: cash equivalents                   |  |           | 4,321  |            |  |       |      |  |  |   | 4,321  | 
|                                         |  |           |        |            |  |       |       |  |  |   |        | 
|Available for sale marketable securities |  | $         | 57,441 |            |  | $     | 1,892 |  |  | $ | 59,333 | 
|                                         |  |           |        |            |  |       |       |  |  |   |        | 

(3) Acquisition

On February 4, 2000, the Company completed
the acquisition of FirstSense Software, Inc.
(FirstSense). Under the terms of the agreement, the
shareholders and option holders received an aggregate of
1,940,000 Company shares to effect the business combination. The
transaction has been accounted for as a

47



---



##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

pooling of interests. Accordingly, all
prior-period financial statements presented have been restated
as required by Accounting Principles Board (APB)
Opinion No. 16, Accounting for Business
Combinations. All intercompany transactions have been
eliminated as a result of the business combination.

As part of the transaction, the Company incurred
direct, acquisition-related charges of approximately
$4.3 million, primarily consisting of investment banking
fees of $3.6 million and legal and accounting fees of
$700,000. All of such costs were expensed in fiscal 2000 upon
the completion of the FirstSense acquisition.

(4) Line of Credit, Term Loan and
Subordinated Debenture

Prior to the Companys acquisition of
FirstSense, FirstSense had a subordinated debt agreement with
another lender in July 1999. Under the terms of this agreement,
FirstSense borrowed $3,000,000 in 1999. FirstSense also granted
the lender a warrant to purchase its Series B Preferred
Stock. FirstSense allocated $357,486 to the value of the
warrant, based on the relative fair value of the subordinated
note and warrant at the date of issuance. FirstSense was
amortizing the resulting original issuance discount over the
life of the subordinated note. As of December 31, 1999, the
unamortized original issue discount was $297,984. Immediately
following the acquisition, the Company repaid all amounts due
under this agreement; upon the early extinguishment of this
debt, the Company recorded an extraordinary loss of
approximately $216,000, net of related tax benefit of
approximately $72,000 in fiscal 2000.

Pursuant to the terms of the related warrant
agreement, certain of the warrants terms did not become
fixed until the Companys acquisition of FirstSense. The
Company applied the applicable provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, and determined
that no further value should be attributed to the warrant.
Concurrent with the closing of the acquisition, the warrant
holder exercised the warrant.

(5) 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, 2002, no shares
were issued under the ESPP Plan. During the years ended
December 31, 2001 and 2000, 232,441 and 80,788, shares,
respectively, were issued under the ESPP Plan. As of
December 31, 2002, 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) subject to shareholder approval, 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 average 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 year ended December 31, 2002,
180,697 shares were issued under the NEESPP Plan. No shares were
issued under this plan during the year ended December 31,
2001. As of December 31, 2002, 319,303 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.

48



---



##### 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, 2002,
451,565 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 four 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 2002, increasing the number of shares of common
stock available for future grants thereunder by 200,000 for a
total of 330,000. At December 31, 2002, 182,500 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 thereunder by 500,000 for a total of
2,000,000. As of December 31, 2002, 532,056 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
Opinion No. 25, Accounting for Stock Issued to
Employees, 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 weighted average fair value per share of
options granted during 2002, 2001 and 2000 was $10.71, $7.64 and
$11.86, respectively. The weighted average assumptions are as
follows:

|                        |  |                        |         |      |  |      |         |   |  |  |         |  
|----------------------- |  | ---------------------- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                        |  |                       
|                        |  | Year Ended December 31
|                        |  |                       
|                        |  | 2002                   |         | 2001 |  | 2000
|                        |  |                        |         |      |  |     
|Risk-free interest rate |  |                        | 4       | %    |  |      | 6       | % |  |  | 6       | %
|Expected dividend yield |  |                        | 0       | %    |  |      | 0       | % |  |  | 0       | %
|Expected lives          |  |                        | 7 years |      |  |      | 7 years |   |  |  | 7 years |  
|Expected volatility     |  |                        | 91      | %    |  |      | 89      | % |  |  | 190     | %

49



---



##### 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, 2002:

|               |               |                     |  |                     |           |                |  |             |      |                |  |   |       |  |  |  |           |  |  |   |       | 
|-------------- | ------------- | ------------------- |  | ------------------- | --------- | -------------- |  | ----------- | ---- | -------------- |  | - | ----- |  |  |  | --------- |  |  | - | ----- | 
|               |               |                     |  |                    
|               |               | Options Outstanding |  | Options Exercisable
|               |               |                     |  |                    
|               |               |                     |  | Weighted            |           |                |  |            
|               |               |                     |  | Average             |           | Weighted       |  |             |      | Weighted      
|               |               | Number of           |  | Remaining           |           | Average        |  | Number of   |      | Average       
|Range of       |               | Shares              |  | Contractual Life    |           | Exercise Price |  | Shares      |      | Exercise Price
|Exercise Price |               | Outstanding         |  | (in years)          |           | per Share      |  | Outstanding |      | per Share     
|               |               |                     |  |                     |           |                |  |             |      |               
|$              | 0.10 - 5.82   |                     |  |                     | 99,542    |                |  |             | 4.13 |                |  | $ | 3.99  |  |  |  | 56,556    |  |  | $ | 2.89  | 
|               | 5.85 - 6.69   |                     |  |                     | 551,711   |                |  |             | 4.36 |                |  |   | 6.61  |  |  |  | 246,395   |  |  |   | 6.63  | 
|               | 6.81 - 8.72   |                     |  |                     | 210,226   |                |  |             | 5.93 |                |  |   | 7.65  |  |  |  | 45,137    |  |  |   | 7.74  | 
|               | 8.75 - 9.01   |                     |  |                     | 592,600   |                |  |             | 5.95 |                |  |   | 9.00  |  |  |  | 7,496     |  |  |   | 8.82  | 
|               | 9.09 - 9.34   |                     |  |                     | 191,000   |                |  |             | 6.53 |                |  |   | 9.33  |  |  |  | 59,686    |  |  |   | 9.33  | 
|               | 9.35 - 13.05  |                     |  |                     | 594,260   |                |  |             | 4.66 |                |  |   | 12.79 |  |  |  | 151,893   |  |  |   | 12.74 | 
|               | 13.19 - 34.88 |                     |  |                     | 973,472   |                |  |             | 4.54 |                |  |   | 21.82 |  |  |  | 587,479   |  |  |   | 22.62 | 
|               | 35.50 - 62.03 |                     |  |                     | 979,642   |                |  |             | 4.49 |                |  |   | 43.71 |  |  |  | 829,771   |  |  |   | 44.21 | 
|               |               |                     |  |                     |           |                |  |             |      |                |  |   |       |  |  |  |           |  |  |   |       | 
|               |               |                     |  |                     | 4,192,453 |                |  |             |      |                |  | $ | 20.14 |  |  |  | 1,984,413 |  |  | $ | 27.55 | 
|               |               |                     |  |                     |           |                |  |             |      |                |  |   |       |  |  |  |           |  |  |   |       | 

The following table summarizes the activity under
the stock option plans for the three-year period ended
December 31, 2002:

|                                 |            |           |           |           |   |           |            |            |  |   |       |       | 
|-------------------------------- | ---------- | --------- | --------- | --------- | - | --------- | ---------- | ---------- |  | - | ----- | ----- | 
|                                 |            |           |           |           |   | Weighted 
|                                 |            |           |           |           |   | Average  
|                                 |            | Number of |           | Price per |   | Price    
|                                 |            | Shares    |           | Share     |   | per Share
|                                 |            |           |           |           |   |          
|Outstanding at December 31, 1999 |            |           | 3,102,184 |           |   | $         | 0.10-64.25 |            |  | $ | 29.78 |      
|                                 | Granted    |           |           | 1,751,065 |   |           |            | 4.99-53.81 |  |   |       | 17.50 | 
|                                 | Exercised  |           |           | (394,635  | ) |           |            | 0.10-36.38 |  |   |       | 3.53  | 
|                                 | Terminated |           |           | (878,616  | ) |           |            | 0.10-62.81 |  |   |       | 33.07 | 
|                                 |            |           |           |           |   |           |            |            |  |   |       |      
|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 |      
|                                 |            |           |           |           |   |           |            |            |  |   |       |      
|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 |      
|                                 |            |           |           |           |   |           |            |            |  |   |       |      
|Exercisable at December 31, 2000 |            |           | 970,982   |           |   | $         | 0.10-64.25 |            |  | $ | 30.51 |      
|                                 |            |           |           |           |   |           |            |            |  |   |       |      

Prior to the Companys acquisition of
FirstSense, FirstSense recorded deferred compensation of
$150,000 and $3,417,000 in 2000 and 1999, respectively,
representing the 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 $106,000, $320,000 and $812,000 of deferred
compensation during the years ended December 31, 2002, 2001
and 2000, respectively.

50



---



##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The amortization of deferred compensation is
recorded as an operating expense. Additionally, the Company
reversed $76,000 and $948,000 of deferred compensation in 2002
and 2001 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.

(6) 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:

|                                              |  |              |         |              |  |   |         |  
|--------------------------------------------- |  | ------------ | ------- | ------------ |  | - | ------- | -
|                                              |  | December 31, |         | December 31,
|                                              |  | 2002         |         | 2001        
|                                              |  |              |         |             
|                                              |  |             
|                                              |  | ($000s)    
|Net operating loss carryforwards              |  | $            | 6,274   |              |  | $ | 11,326  |  
|Research and development                      |  |              | 3,274   |              |  |   | 2,782   |  
|Accruals not yet deductible for tax purposes  |  |              | 1,507   |              |  |   | 2,401   |  
|Depreciation                                  |  |              | 1,733   |              |  |   | 964     |  
|Deferred revenue                              |  |              | 1,266   |              |  |   | 2,883   |  
|Capitalized research and development expenses |  |              | 382     |              |  |   | 1,499   |  
|Other                                         |  |              | 39      |              |  |   | 39      |  
|Marketable securities                         |  |              | (963    | )            |  |   |        |  
|Valuation allowance                           |  |              | (10,012 | )            |  |   | (18,394 | )
|                                              |  |              |         |              |  |   |         |  
|                                              |  | $            | 3,500   |              |  | $ | 3,500   |  
|                                              |  |              |         |              |  |   |         |  

As of December 31, 2002, the Company had
available for federal income tax purposes net operating loss
carryforwards of approximately $18,453,000, which expire at
various dates through 2021. In addition, as of December 31,
2002, the Company had federal research and development tax
credit carryforwards of approximately $3,274,000, which expire
at various dates through 2022. Under current tax law, the
utilization of net operating loss 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. The Company has significantly reserved
for these deferred tax assets by recording a valuation allowance
of $10,012,000 at December 31, 2002. The resulting net
deferred tax asset is based on the Companys estimate of
future taxable income it expects to generate; all other tax
assets have been fully reserved. The factors that weighed most
heavily on managements decision to record this amount of a
valuation allowance were the Companys history of prior
profitability, current profitability, current economic
conditions and forecasted profitability over the next several
years. In addition, the Company is subject to rapid
technological change, competition from substantially larger
competitors, a limited family of products and other related
risks, as more thoroughly described in the Factors That
Could Affect Future Results section of the Companys
Form 10-K for the year ended December 31, 2002. As a
result, the Company found the evidence described above to be the
most reliable objective evidence available in

51



---



##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

determining that a valuation allowance against
its tax assets would be necessary. 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.
Management is unsure whether the Company will have sufficient
future taxable income to allow it to use all net operating
losses and tax credit carryforwards before they expire. 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, 2002, the Company has
recorded a deferred tax asset of approximately $4,175,000
reflecting the benefit of deductions from the exercise of stock
options. When and if the Company realizes this asset, the
benefit from this $4,175,000 will be recorded as a credit to
additional paid-in capital when realized.

The components of the Companys tax
provision (benefit) are as follows:

|                           |         |                         |     |      |     |      |     |     |     |   |     |      |      |  
|-------------------------- | ------- | ----------------------- | --- | ---- | --- | ---- | --- | --- | --- | - | --- | ---- | ---- | -
|                           |         |                        
|                           |         | Year Ended December 31,
|                           |         |                        
|                           |         | 2002                    |     | 2001 |     | 2000
|                           |         |                         |     |      |     |     
|                           |         |                        
|                           |         | ($000s)               
|Current                    |         |                         |     |      |     |      |     |     |     |   |     |     
|                           | Federal |                         | $   |     |     |      | $   |    |     |   | $   | 730  |     
|                           | State   |                         |     | 116  |     |      |     | 45  |     |   |     | 145  |     
|                           | Foreign |                         |     | 452  |     |      |     | 402 |     |   |     |     |     
|                           |         |                         |     |      |     |      |     |     |     |   |     |     
|                           |         | Total current           |     |      | 568 |      |     |     | 447 |   |     |      | 875  |  
|                           |         |                         |     |      |     |      |     |     |     |   |     |     
|Deferred                   |         |                         |     |      |     |      |     |     |     |   |     |     
|                           | Federal |                         |     |     |     |      |     |    |     |   |     | (375 | )   
|                           | State   |                         |     |     |     |      |     |    |     |   |     | (125 | )   
|                           |         |                         |     |      |     |      |     |     |     |   |     |     
|                           |         | Total deferred          |     |      |    |      |     |     |    |   |     |      | (500 | )
|                           |         |                         |     |      |     |      |     |     |     |   |     |     
|                           |         |                         |     |      |     |      |     |     |     |   |     |     
|Total income tax provision |         | $                       | 568 |      |     | $    | 447 |     |     | $ | 375 |     
|                           |         |                         |     |      |     |      |     |     |     |   |     |     

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

|                                                        |  |                         |       |      |  |      |       |   |  |  |       |  
|------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                                        |  |                        
|                                                        |  | Year Ended December 31,
|                                                        |  |                        
|                                                        |  | 2002                    |       | 2001 |  | 2000
|                                                        |  |                         |       |      |  |     
|Statutory rate                                          |  |                         | 34.0  |      |  |      | (34.0 | ) |  |  | 34.0  |  
|State tax rate, net of federal benefit                  |  |                         | 2.8   |      |  |      | (6.1  | ) |  |  | 4.7   |  
|Foreign earnings taxed at different rates               |  |                         | 3.9   |      |  |      | 3.1   |   |  |  |      |  
|Research and development tax credits                    |  |                         |      |      |  |      |      |   |  |  | (76.3 | )
|Benefit associated with the Extraterritorial
    Income |  |                         |      |      |  |      | (4.7  | ) |  |  | (18.7 | )
|Non-deductible meals and entertainment                  |  |                         | 2.9   |      |  |      | 2.1   |   |  |  | 8.7   |  
|Non-deductible transaction costs                        |  |                         |      |      |  |      |      |   |  |  | 81.1  |  
|Change in valuation allowance                           |  |                         | (24.6 | )    |  |      | 43.7  |   |  |  | (15.7 | )
|Other                                                   |  |                         | 1.5   |      |  |      |      |   |  |  | 7.2   |  
|                                                        |  |                         |       |      |  |      |       |   |  |  |       |  
|                                                        |  |                         | 20.5  |      |  |      | 4.1   |   |  |  | 25.0  |  
|                                                        |  |                         |       |      |  |      |       |   |  |  |       |  

52



---



##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                              
|--- | -----------------------------
|(7) | Commitments and Contingencies



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

The Company leases its facilities and certain
equipment under operating lease agreements expiring through July
2007. 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, 2002 are as
follows:

|     |  |          |        | 
|---- |  | -------- | ------ | 
|     |  | Amount  
|     |  |         
|     |  | ($000s)
|2003 |  | $        | 3,739  | 
|2004 |  |          | 3,354  | 
|2005 |  |          | 3,234  | 
|2006 |  |          | 1,960  | 
|2007 |  |          | 563    | 
|     |  |          |        | 
|     |  | $        | 12,850 | 
|     |  |          |        | 

Rent expense was $4.5 million,
$4.4 million and $2.8 million for the years ended
December 31, 2002, 2001 and 2000, 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, 2002 and 2001, this deferred rent liability
was $1,254,000 and $1,288,000, 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
are 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 $682,000, $440,000 and $300,000 for the years
ended December 31, 2002, 2001 and 2000, respectively.



| |                     
| | --------------------
| | (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s 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 that limits our exposure and enables us to
recover a portion of any future amounts paid. As a result of our
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 the life
of the product. 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

53



---



##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 our product or services warranties. As
a result, the Company believes the estimated fair value on these
agreements 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 any time after execution of the agreement.
The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements
is sometimes capped at a dollar figure, but is often unlimited.
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.



| |                      
| | ---------------------
| | (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.

(8) Accrued Expenses

Accrued expenses consist of the following:

|                            |  |              |        |              |  |   |        | 
|--------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | 
|                            |  | December 31, |        | December 31,
|                            |  | 2002         |        | 2001        
|                            |  |              |        |             
|                            |  |             
|                            |  | ($000s)    
|Payroll and payroll-related |  | $            | 4,920  |              |  | $ | 5,519  | 
|Deferred rent               |  |              | 1,254  |              |  |   | 1,288  | 
|Sales and marketing         |  |              | 736    |              |  |   | 2,079  | 
|Taxes payable               |  |              | 468    |              |  |   | 691    | 
|Travel expenses             |  |              | 575    |              |  |   | 661    | 
|Other                       |  |              | 2,109  |              |  |   | 3,041  | 
|                            |  |              |        |              |  |   |        | 
|                            |  | $            | 10,062 |              |  | $ | 13,279 | 
|                            |  |              |        |              |  |   |        | 

(9) Employee Benefit Plan

The Company maintains an employee benefit 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 15% of pretax
compensation. The Company made a discretionary matching
contribution up to a maximum of 2% of employee salaries for a
total of $695,000 in 2001, which was primarily contributed
during 2001. The Company accrued a $200,000 discretionary
contribution to the plan in 2000, which was paid in 2001. No
matching contributions were made to the Plan during 2002.

54



---



##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(10) Valuation and Qualifying
Accounts

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

|     |  |            |       |            |  |           |     |             |  |   |      |   |  |   |       | 
|---- |  | ---------- | ----- | ---------- |  | --------- | --- | ----------- |  | - | ---- | - |  | - | ----- | 
|     |  | Balance at |       |            |  |           |     |            
|     |  | Beginning  |       | Charges to |  |           |     | Balance at 
|     |  | of Year    |       | Expense    |  | Writeoffs |     | End of Year
|     |  |            |       |            |  |           |     |            
|     |  |           
|     |  | ($000s)  
|2000 |  | $          | 971   |            |  | $         | 756 |             |  | $ | (201 | ) |  | $ | 1,526 | 
|2001 |  | $          | 1,526 |            |  | $         | 711 |             |  | $ | (827 | ) |  | $ | 1,410 | 
|2002 |  | $          | 1,410 |            |  | $         | 355 |             |  | $ | (285 | ) |  | $ | 1,480 | 

(11) 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
President and Chief Executive Officer, the Executive Vice
President of Business Services and Chief Financial Officer, the
Executive Vice President of Engineering and Chief Technology
Officer, the Executive Vice President of Worldwide Sales, and
the Executive Vice President of Marketing. The Company records
revenue by geographic region based on the location of each of
the Companys sales offices.

The following table presents the revenue by major
geographical regions:

|                  |  |                         |        |      |  |      |        |  |  |   |        | 
|----------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                  |  |                        
|                  |  | Year Ended December 31,
|                  |  |                        
|                  |  | 2002                    |        | 2001 |  | 2000
|                  |  |                         |        |      |  |     
|                  |  |                        
|                  |  | ($000s)               
|United States     |  | $                       | 57,812 |      |  | $    | 54,746 |  |  | $ | 62,015 | 
|Europe            |  |                         | 22,371 |      |  |      | 20,142 |  |  |   | 17,290 | 
|Rest of the World |  |                         | 13,661 |      |  |      | 13,090 |  |  |   | 12,179 | 
|                  |  |                         |        |      |  |      |        |  |  |   |        | 
|Total             |  | $                       | 93,844 |      |  | $    | 87,978 |  |  | $ | 91,484 | 
|                  |  |                         |        |      |  |      |        |  |  |   |        | 

No one country, except the United States,
accounted for greater than 10% of total revenues in the years
ended December 31, 2002, 2001 or 2000. 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. Therefore, it is
not practical to show profit or loss by operating segments.
Also, the Executive Management Committee does not assign assets
to these segments. Consequently, it is not practical to show
assets by operating segments.

55



---



##### Table of Contents



CONCORD COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table presents the revenue by
reportable segment:

|           |  |                         |        |      |  |      |        |  |  |   |        | 
|---------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|           |  |                        
|           |  | Year Ended December 31,
|           |  |                        
|           |  | 2002                    |        | 2001 |  | 2000
|           |  |                         |        |      |  |     
|           |  |                        
|           |  | ($000s)               
|MSP/ TC    |  | $                       | 39,636 |      |  | $    | 39,182 |  |  | $ | 40,219 | 
|Enterprise |  |                         | 54,208 |      |  |      | 48,796 |  |  |   | 51,265 | 
|           |  |                         |        |      |  |      |        |  |  |   |        | 
|Total      |  | $                       | 93,844 |      |  | $    | 87,978 |  |  | $ | 91,484 | 
|           |  |                         |        |      |  |      |        |  |  |   |        | 

(12) Asset Impairment Charge

The Company acquired a $3 million equity
interest in Broadband Investment Group (Broadband)
in September 2000 in exchange for the Companys products
and services. In November 2000, Broadband publicly announced
that it was ceasing operations and liquidating its remaining
assets following its inability to raise additional capital due
to unfavorable market conditions. As a result, the Company
recorded a charge for approximately $2.3 million in 2000 to
write off its investment in Broadband. The remainder of the
carrying value of the Companys investment in Broadband was
reversed against related deferred revenue for services not yet
rendered.

(13) Supplemental Financial Disclosure
(Unaudited)

|                                                                 |                    |                                          |        |       |  |       |        |       |  |   |        |      |  |   |        |      | 
|---------------------------------------------------------------- | ------------------ | ---------------------------------------- | ------ | ----- |  | ----- | ------ | ----- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                 |                    | 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 |     

|                                                                        |                           |                                          |        |       |   |       |        |       |   |   |        |       |   |   |        |   | 
|----------------------------------------------------------------------- | ------------------------- | ---------------------------------------- | ------ | ----- | - | ----- | ------ | ----- | - | - | ------ | ----- | - | - | ------ | - | 
|                                                                        |                           | Q1-01                                    |        | Q2-01 |   | Q3-01 |        | Q4-01
|                                                                        |                           |                                          |        |       |   |       |        |      
|                                                                        |                           |                                         
|                                                                        |                           | (In thousands, except per share amounts)
|Revenue                                                                 |                           | $                                        | 20,431 |       |   | $     | 21,614 |       |   | $ | 21,840 |       |   | $ | 24,093 |  
|Gross profit                                                            |                           |                                          | 15,470 |       |   |       | 17,218 |       |   |   | 17,737 |       |   |   | 19,737 |  
|Net (loss) income                                                       |                           |                                          | (5,365 | )     |   |       | (3,446 | )     |   |   | (2,371 | )     |   |   | 28     |  
|Per common and potential common share:                                  |                           |                                          |        |       |   |       |        |       |   |   |        |       |   |   |        |  
|                                                                        | Basic net (loss) income   |                                          | $      | (0.32 | ) |       | $      | (0.21 | ) |   | $      | (0.14 | ) |   | $      |  | 
|                                                                        | Diluted net (loss) income |                                          | $      | (0.32 | ) |       | $      | (0.21 | ) |   | $      | (0.14 | ) |   | $      |  | 
|Shares used in computing basic net (loss) income
    per common share   |                           |                                          | 16,561 |       |   |       | 16,672 |       |   |   | 16,700 |       |   |   | 16,798 |  
|Shares used in computing diluted net (loss)
    income per common share |                           |                                          | 16,561 |       |   |       | 16,672 |       |   |   | 16,700 |       |   |   | 17,579 |  

56



---



##### Table of Contents



CONCORD COMMUNICATIONS, INC.

FORM 10-K, December 31,
2002




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 19th day of March 2003.



| |                             
| | ----------------------------
| | 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 19, 2003
|                                                  
|/s/ MELISSA H. CRUZMelissa H. Cruz                 |  | Executive Vice President, Business Services,
    Chief Financial Officer and Treasurer, (Principal Financial and
    Accounting Officer) |  | March 19, 2003
|                                                  
|/s/ FREDERICK W.W. BOLANDERFrederick W.W. Bolander |  | Director                                                                                                                                 |  | March 19, 2003
|                                                  
|/s/ RICHARD M. BURNES, JRRichard M. Burnes, Jr.    |  | Director                                                                                                                                 |  | March 19, 2003
|                                                  
|/s/ DEEPAK KAMRADeepak Kamra                       |  | Director                                                                                                                                 |  | March 19, 2003
|                                                  
|/s/ ROBERT M. WADSWORTHRobert M. Wadsworth         |  | Director                                                                                                                                 |  | March 19, 2003
|                                                  
|/s/ JACK M. COOPERJack M. Cooper                   |  | Director                                                                                                                                 |  | March 19, 2003

57



---



##### Table of Contents






CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Concord
Communications, Inc. (the Company) on Form 10-K
for the fiscal year ended December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the
Report), I, John A. Blaeser, President and Chief
Executive Officer of the Company, certify, pursuant to
18 U.S.C. § 1350, as adopted pursuant to
§ 906 of the Sarbanes-Oxley Act of 2002, that, to the
best of my knowledge:



| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)     The Report fully
    complies with the requirements of Section 13(a) or 15(d) of
    the Securities Exchange Act of 1934; and                                   
|
| | (2)     The information
    contained in the Report fairly presents, in all material
    respects, the financial condition and results of operations of
    the Company.



| |                                          
| | -----------------------------------------
| | /s/ JOHN A. BLAESER                      
| |                                          
| | John A. Blaeser                          
| | President and Chief Executive
    Officer

March 19, 2003

58



---



##### Table of Contents






CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Concord
Communications, Inc. (the Company) on Form 10-K
for the fiscal year ended December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the
Report), I, Melissa H. Cruz, Executive Vice
President, Business Services and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. § 1350,
as adopted pursuant to § 906 of the Sarbanes-Oxley Act
of 2002, that, to the best of my knowledge:



| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)     The Report fully
    complies with the requirements of Section 13(a) or 15(d) of
    the Securities Exchange Act of 1934; and                                   
|
| | (2)     The information
    contained in the Report fairly presents, in all material
    respects, the financial condition and results of operations of
    the Company.



| |                                                    
| | ---------------------------------------------------
| | /s/ MELISSA H. CRUZ                                
| |                                                    
| | Melissa H. Cruz                                    
| | Executive Vice President, Business Services
    and
| | Chief Financial Officer                            

March 19, 2003

59



---



##### Table of Contents






STATEMENT OF PRINCIPAL EXECUTIVE
OFFICER

I, John A. Blaeser, certify that:

1.     I have reviewed
this annual report on Form 10-K of Concord Communications,
Inc.;

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

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

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



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) Presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5.     The
registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of the
registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6.     The
registrants other certifying officers and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ JOHN A. BLAESER                      
| |                                          
| | John A. Blaeser                          
| | President and Chief Executive
    Officer

March 19, 2003

60



---



##### Table of Contents






STATEMENT OF PRINCIPAL FINANCIAL
OFFICER

I, Melissa H. Cruz, certify that:

1.     I have reviewed
this annual report on Form 10-K of Concord Communications,
Inc.;

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

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

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



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) Presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5.     The
registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of the
registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6.     The
registrants other certifying officers and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.



| |                                                    
| | ---------------------------------------------------
| | /s/ MELISSA H. CRUZ                                
| |                                                    
| | Melissa H. Cruz                                    
| | Executive Vice President, Business Services
    and
| | Chief Financial Officer                            

March 19, 2003

61



---



##### Table of Contents






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  
|        | 10.01 |             |  | Working Capital Loan Agreement between the
    Company and Silicon Valley Bank dated April 3, 1997                                            |  | Exhibit No. 10.01 to Registration
    Statement on Form S-1 (No. 333-33227)
|        | 10.02 |             |  | Revolving Promissory Note made by the Company in
    favor of Silicon Valley Bank                                                             |  | Exhibit No. 10.02 to Registration
    Statement on Form S-1 (No. 333-33227)
|        | 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)
|        | 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)



---



##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                           |  |                                                                            
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------
|Exhibit |       |             |  |                                                                                                                                                                                                                          
|No.     |       | Description |  | SEC Document Reference                                                                                                                                                                                                   
|        |       |             |  |                                                                                                                                                                                                                          
|        | 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)
|        | 10.18 |             |  | Management Change in Control Agreement between
    the Company and Gary E. Haroian dated as of July 23,
    1997                                                                                                          |  | Exhibit No. 10.17 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                
|        | 10.20 |             |  | Management Change in Control Agreement between
    the Company and Daniel D. Phillips, Jr. dated as of
    July 23, 1997                                                                                                  |  | Exhibit No. 10.18 to Registration
    Statement on Form S-1 (No. 333-33227)
|        | 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)
|        | 10.23 |             |  | Letter Agreement between the Company and Silicon
    Valley Bank dated March 25, 1996 together with the Loan
    Modification Agreement dated November 14, 1996                                                           |  | Exhibit No. 10.21 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)
|        | 10.25 |             |  | Agreement and Plan of Reorganization dated as of
    October 19, 1999 by and among Concord Communications, Inc.,
    E Acquisition Corp., Empire Technologies, Inc. and the
    stockholders of Empire Technologies, Inc. |  | Exhibit No. 2.1 on Form 8-K filed
    on November 12, 1999                 
|        | 10.26 |             |  | Agreement and Plan of Reorganization dated as of
    January 20, 2000 by and among Concord Communications, Inc.,
    F Acquisition Corp., and FirstSense Software, Inc.                                                   |  | Exhibit No. 2.1 on Form 8-K filed
    on February 10, 2000                 
|        | 10.27 |             |  | Registration Rights Agreement dated as of
    February 4, 2000 by and among Concord Communications, Inc.
    and Timothy Barrows, as Securityholder Agent                                                                 |  | Exhibit No. 99.1 on Form 8-K filed
    on February 10, 2000                
|        | 10.28 |             |  | 2000 Non-Executive Employee Equity Incentive Plan                                                                                                                                                                         |  | Exhibit 10.28 on Form 10-K, for the period
    ended December 31, 2000     
|        | 10.29 |             |  | Management Change in Control Agreement between
    the Company and Ellen Kokos dated as of February 2, 2001                                                                                                               |  | Exhibit No. 10.29 on Form 10-Q
    filed on May 9, 2001                    
|        | 10.30 |             |  | Management Change in Control Agreement between
    the Company and John F. Hamilton dated as of April 16,
    2001                                                                                                        |  | Exhibit No. 10.30 on Form 10-Q
    filed July 31, 2001                     
|        | 10.31 |             |  | 2001 Non-Executive Employee Stock Purchase Plan                                                                                                                                                                           |  | Exhibit No. 10.31 on Form 10-Q
    filed on November 5, 2001               



---



##### Table of Contents



|        |       |             |  |                                                                                                                 |  |                                                             
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------
|Exhibit |       |             |  |                                                                                                                
|No.     |       | Description |  | SEC Document Reference                                                                                         
|        |       |             |  |                                                                                                                
|        | 10.32 |             |  | Management Agreement between the Company and John
    Hamilton dated May 6, 2002                                |  | Exhibit No. 10.31 on Form 10-Q
    filed on August 13, 2002 
|        | 10.33 |             |  | Management Agreement between the Company and
    Kevin Conklin dated September 9, 2002                          |  | 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 to Current Report on
    Form 10-K        
|*       | 10.35 |             |  | Management Change in Control Agreement between
    the Company and Daniel Sheahan dated as of November 18, 2002 |  | Exhibit No. 10.35 to Current Report on
    Form 10-K        
|*       | 10.36 |             |  | Employment Agreement dated August 10, 2001                                                                      |  | Exhibit No. 10.36 to Current Report on
    Form 10-K        
|*       | 21.01 |             |  | Subsidiaries of the Company                                                                                     |  |                                                             
|*       | 23.01 |             |  | Consent of Pricewaterhouse Coopers LLP                                                                          |  |                                                             
|*       | 23.02 |             |  | Consent of Arthur Andersen LLP                                                                                  |  |                                                             



---



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