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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

| |  | EXCHANGE ACT OF 1934
| |  | --------------------



For Quarterly Period Ended December 31, 2002



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|- |  | -------------------------------------------------------------------

| |  | EXCHANGE ACT OF 1934
| |  | --------------------



Commission File Number: 0-28900



ROGUE WAVE SOFTWARE, INC.

(Exact name of registrant as specified in its charter)



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



(303)
473-9118

(Registrants telephone number, including area code)



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



Inidcate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  YES ̈NO  x



Indicate the
number of shares outstanding of each of the registrants classes of Common Stock, as of the latest practicable date.



|Class                          |  | Outstanding at January 20, 2003
|------------------------------ |  | -------------------------------
|Common Stock, $0.001 par value |  | 10,152,052                     



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ROGUE WAVE SOFTWARE, INC.

FORM 10-Q



INDEX



|                             |  |                                                                                                                                    |  | Page No.
|---------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | --------
|PART IFINANCIAL INFORMATION |  |                                                                                                                                   
|                            
|Item 1.                      |  | Condensed Consolidated Financial Statements:                                                                                       |  |         
|                            
|                             |  | Condensed Consolidated Balance Sheets at December 31, 2002 and September 30, 2002                                                  |  | 3       
|                            
|                             |  | Condensed Consolidated Statements of Operations and Other Comprehensive Loss for the Three Months Ended December 31, 2002 and 2001 |  | 4       
|                            
|                             |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2002 and 2001                              |  | 5       
|                            
|                             |  | Notes to Condensed Consolidated Financial Statements                                                                               |  | 6       
|                            
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                              |  | 12      
|                            
|                             |  | Risk Factors                                                                                                                       |  | 20      
|                            
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                                                         |  | 25      
|                            
|Item 4.                      |  | Controls and Procedures                                                                                                            |  | 25      
|                            
|PART IIOTHER INFORMATION    |  |                                                                                                                                   
|                            
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                                                                   |  | 26      
|                            
|Signatures                   |  | 27                                                                                                                                
|                            
|Certifications               |  | 28                                                                                                                                



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PART IFINANCIAL INFORMATION



Item 1. Consolidated Financial Statements





ROGUE WAVE SOFTWARE, INC.

AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS



(in thousands)



|                                           |  | December 31, 2002 |         |   | September 30, 2002 |  
|------------------------------------------ |  | ----------------- | ------- | - | ------------------ | -
|                                           |  | (unaudited)       |         |   |                    |  
|ASSETS                                     |  |                   |         |   |                    |  
|Current assets:                            |  |                   |         |   |                    |  
|Cash and cash equivalents                  |  | $                 | 15,090  |   |                    | $
|Short-term investments                     |  |                   | 11,899  |   |                    |  
|Accounts receivable, net                   |  |                   | 7,205   |   |                    |  
|Prepaid expenses and other current assets  |  |                   | 948     |   |                    |  
|Income tax receivable                      |  |                   | 1,416   |   |                    |  
|                                           |  |                   |         |   |                    |  
|Total current assets                       |  |                   | 36,558  |   |                    |  
|Furniture, fixture, and equipment, net     |  |                   | 2,311   |   |                    |  
|Intangibles, net                           |  |                   | 281     |   |                    |  
|Other assets, net                          |  |                   | 1,104   |   |                    |  
|                                           |  |                   |         |   |                    |  
|Total assets                               |  | $                 | 40,254  |   |                    | $
|                                           |  |                   |         |   |                    |  
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |                   |         |   |                    |  
|Current liabilities:                       |  |                   |         |   |                    |  
|Accounts payable                           |  | $                 | 440     |   |                    | $
|Accrued expenses                           |  |                   | 4,914   |   |                    |  
|Deferred revenue                           |  |                   | 8,037   |   |                    |  
|                                           |  |                   |         |   |                    |  
|Total current liabilities                  |  |                   | 13,391  |   |                    |  
|                                          
|Stockholders equity:                      |  |                   |         |   |                    |  
|Common stock                               |  |                   | 10      |   |                    |  
|Additional paid-in capital                 |  |                   | 42,024  |   |                    |  
|Treasury stock                             |  |                   | (2,231  | ) |                    |  
|Deferred compensation                      |  |                   | (404    | ) |                    |  
|Accumulated deficit                        |  |                   | (12,963 | ) |                    |  
|Accumulated other comprehensive income     |  |                   | 427     |   |                    |  
|                                           |  |                   |         |   |                    |  
|Total stockholders equity                 |  |                   | 26,863  |   |                    |  
|                                           |  |                   |         |   |                    |  
|Total liabilities and stockholders equity |  | $                 | 40,254  |   |                    | $
|                                           |  |                   |         |   |                    |  



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



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ROGUE WAVE SOFTWARE, INC.

AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER

COMPREHENSIVE LOSS



(in thousands, except per share data, unaudited)



|                                                                                 |  | Three Months Ended December 31, |       
|-------------------------------------------------------------------------------- |  | ------------------------------- | ------
|                                                                                 |  | 2002                            |       
|Revenue:                                                                         |  |                                 |       
|License revenue                                                                  |  | $                               | 5,719 
|Service and maintenance revenue                                                  |  |                                 | 3,870 
|                                                                                 |  |                                 |       
|Total revenue                                                                    |  |                                 | 9,589 
|                                                                                 |  |                                 |       
|Cost of revenue:                                                                 |  |                                 |       
|Cost of license revenue                                                          |  |                                 | 233   
|Cost of service and maintenance revenue                                          |  |                                 | 1,122 
|                                                                                 |  |                                 |       
|Total cost of revenue                                                            |  |                                 | 1,355 
|                                                                                 |  |                                 |       
|Gross profit                                                                     |  |                                 | 8,234 
|                                                                                 |  |                                 |       
|Operating expenses:                                                              |  |                                 |       
|Product development                                                              |  |                                 | 2,097 
|Sales and marketing                                                              |  |                                 | 4,568 
|General and administrative                                                       |  |                                 | 1,151 
|Restructuring, severance, relocation, asset impairment and goodwill
amortization |  |                                 | 2,095 
|                                                                                 |  |                                 |       
|Total operating expenses                                                         |  |                                 | 9,911 
|                                                                                 |  |                                 |       
|Loss from operations                                                             |  |                                 | (1,677
|Other income, net                                                                |  |                                 | 92    
|                                                                                 |  |                                 |       
|Loss before income taxes                                                         |  |                                 | (1,585
|Income tax expense (benefit)                                                     |  |                                 | 53    
|                                                                                 |  |                                 |       
|Net loss                                                                         |  | $                               | (1,638
|                                                                                 |  |                                 |       
|Basic and diluted loss per share                                                 |  | $                               | (0.16 
|                                                                                 |  |                                 |       
|Shares used in basic and diluted per share calculation                           |  |                                 | 10,231
|                                                                                 |  |                                 |       
|Net loss                                                                         |  | $                               | (1,638
|                                                                                
|Other comprehensive income (loss):                                               |  |                                 |       
|Foreign currency translation gain (loss)                                         |  |                                 | 314   
|                                                                                 |  |                                 |       
|Total other comprehensive loss                                                   |  | $                               | (1,324
|                                                                                 |  |                                 |       



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



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ROGUE WAVE SOFTWARE, INC.

AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



(in thousands, unaudited)



|                                                                            |  | Three Months Ended December 31, |       
|--------------------------------------------------------------------------- |  | ------------------------------- | ------
|                                                                            |  | 2002                            |       
|Cash flows provided by (used in) operating activities:                      |  |                                 |       
|Net loss                                                                    |  | $                               | (1,638
|Adjustments to reconcile net loss to net cash used in operating
activities: |  |                                 |       
|Depreciation and amortization                                               |  |                                 | 614   
|Loss on disposal of assets                                                  |  |                                 | 44    
|Changes in assets and liabilities:                                          |  |                                 |       
|Accounts receivable                                                         |  |                                 | 1,308 
|Prepaid expenses and other current assets                                   |  |                                 | (297  
|Income tax receivable                                                       |  |                                 |      
|Other noncurrent assets                                                     |  |                                 | 196   
|Accounts payable and accrued expenses                                       |  |                                 | 171   
|Amortization of deferred compensation                                       |  |                                 | 45    
|Deferred revenue                                                            |  |                                 | (1,186
|                                                                            |  |                                 |       
|Net cash used in operating activities                                       |  |                                 | (743  
|                                                                            |  |                                 |       
|Cash flows provided by (used in) investing activities:                      |  |                                 |       
|Maturities of short-term investments                                        |  |                                 | 9,039 
|Purchase of short-term investments                                          |  |                                 | (3,208
|Purchase of equipment                                                       |  |                                 | (19   
|                                                                            |  |                                 |       
|Net cash provided by (used in) investing activities                         |  |                                 | 5,812 
|                                                                            |  |                                 |       
|Cash flows provided by (used in) financing activities:                      |  |                                 |       
|Net proceeds from issuance of common stock                                  |  |                                 | 8     
|Treasury stock purchases                                                    |  |                                 | (608  
|                                                                            |  |                                 |       
|Net cash used in financing activities                                       |  |                                 | (600  
|                                                                            |  |                                 |       
|Effect of exchange rate changes on cash and cash equivalents                |  |                                 | 96    
|                                                                            |  |                                 |       
|Net change in cash and cash equivalents                                     |  |                                 | 4,565 
|Cash and cash equivalents at beginning of period                            |  |                                 | 10,525
|                                                                            |  |                                 |       
|Cash and cash equivalents at end of period                                  |  | $                               | 15,090
|                                                                            |  |                                 |       



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



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ROGUE WAVE SOFTWARE, INC.

NOTES TO UNAUDITED

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1. Basis of Presentation



The accompanying unaudited financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (which are of a normal and
recurring nature) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with Rogue Wave Software, Inc.s (Rogue Wave or the Company) consolidated
financial statements and notes thereto (the Consolidated Financial Statements) for the year ended September 30, 2002, included in the Companys annual report on Form 10-K. The interim results presented are not necessarily indicative
of results for any subsequent quarter or for the fiscal year ending September 30, 2003.



2. Revenue Recognition



The Company derives revenue from licensing its software products and providing related maintenance and support, and training and consulting services. License revenue is recognized in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition, amended by SOP No. 98-9. Revenue is recognized upon execution of an agreement with fixed or determinable fees, upon shipment or electronic delivery of the product and
managements determination that collection of the resulting receivable is probable. The Company considers fees relating to arrangements with payment terms extending beyond twelve months not to be fixed or determinable. If the fee is not fixed
or determinable, revenue is recognized as payments become due from the customer. Maintenance and service revenue includes maintenance revenue that is deferred and recognized ratably over the maintenance period. Service revenue, including training
and consulting services, is recognized as services are performed. In instances where the Company enters into customized software consulting contracts, the fees are recognized using the percentage of completion method of contract accounting in
accordance with SOP No. 81-1, Accounting for Performance of Construction-Type and Certain Product-Type Contracts.



3. Concentration of Credit Risk



Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash
equivalents, short-term investments and accounts receivable. The counter parties to the agreements relating to the Companys cash equivalents and short-term investments consist of various major corporations and financial institutions of high
credit standing. The Companys receivables are derived primarily from the sales of software products and services to customers in diversified industries as well as distributors in the U.S. and foreign markets. As of December 31, 2002, the
accounts receivable balance was $8.5 million, before allowance for doubtful accounts and sales returns of $1.3 million. One customer accounted for 14% of the gross accounts receivable balance at December 31, 2002. This customer also accounted for
12% of the revenue for the quarter ended December 31, 2002, respectively. International revenue was approximately 35% and 31% of the Companys total revenue for the quarters ended December 31, 2002 and 2001, respectively.



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4. Basic and Diluted Loss Per
Share



Basic loss per share for
the three months ended December 31, 2002 and 2001 is computed on the basis of the weighted average number of common shares outstanding. Diluted loss per share is computed on the basis of the weighted average number of common shares outstanding plus
the effect of outstanding stock options using the treasury stock method unless the impact is anti-dilutive. As a result of the net loss incurred for the three months ended December 31, 2002 and 2001, all options are anti-dilutive and,
accordingly, the number of shares used in computing the basic and diluted shares is the same. The Company had approximately 4.5 million and 3.8 million options outstanding at December 31, 2002 and 2001, respectively, of which approximately 56,000
and 224,000, respectively, were considered in the money. During the three months ended December 31, 2002 and 2001, options to acquire approximately 35,000 and 55,000 shares, respectively, calculated using the treasury stock
method, were excluded from the calculation because of their anti-dilutive effect.



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



|                                                                                                 |  | Three months ended December 31, |       
|------------------------------------------------------------------------------------------------ |  | ------------------------------- | ------
|                                                                                                 |  | 2002                            |       
|Numerator:                                                                                       |  |                                 |       
|Net loss                                                                                         |  | $                               | (1,638
|                                                                                                 |  |                                 |       
|Denominator:                                                                                     |  |                                 |       
|Historical common shares outstanding for basic and diluted loss per share at beginning
of period |  |                                 | 10,480
|Weighted average number of common equivalent shares issued during the
period                     |  |                                 | 3     
|Weighted average number of common equivalent shares purchased during the
period                  |  |                                 | (252  
|                                                                                                 |  |                                 |       
|Denominator for basic and diluted loss per share     weighted
average shares                    |  |                                 | 10,231
|                                                                                                 |  |                                 |       
|Basic and diluted loss per share                                                                 |  | $                               | (0.16 
|                                                                                                 |  |                                 |       



5. Common Stock
Repurchases



In September 2001,
the Board of Directors authorized the Company to repurchase up to an aggregate of the lesser of $5.0 million or 2.5 million shares of its common stock. During the quarter ended December 31, 2002, the Company repurchased 337,000 shares for $608,000,
at prices ranging from $1.72$2.00 per share. Since September 2001, the Company has purchased approximately 1.1 million shares, at a cost of approximately $2.8 million at prices ranging from $1.72$3.65 per share.



6. Stockholder Rights Plan



On January 3, 2003, the Board of Directors,
declared a dividend of one right for each share of common stock outstanding on January 16, 2003. Each right represents the right to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock, $0.01 par value, at a price
of $14.16 per one one-hundredth share, subject to adjustment. In the event any person or group acquires 15% or more of the Companys common stock or announces a tender offer or exchange offer for 15% or more of the Companys common stock,
subject to certain exceptions, the holders of the rights generally will be entitled to receive, upon exercise, common stock of the Company having a value equal to two times the exercise price of the right. The Board of Directors may, at its option



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after a person or group acquires 15% or more of the Companys common stock or
announces a tender offer or exchange offer for 15% or more of the Companys common stock, exchange all or part of the rights for shares of the Companys common stock. In the event that the Company is acquired in a merger or other business
combination or 50% or more of the Companys assets or earning power is sold or transferred, the holders of the rights have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise
price of the right. The Company may redeem the rights at a price of $0.001 per right at any time prior to an event triggering the exercisability of the rights. The rights expire January 6, 2013, unless earlier redeemed or exchanged by the Company.



7. Restructuring, Severance, Relocation, Asset Impairment and
Goodwill Amortization



Restructuring



During the first quarter of
fiscal 2003, as a result of the continued slowdown in the economy, Rogue Wave initiated several actions designed to mitigate adverse financial impact attributable to the soft economic climate. The Company implemented several cost reduction
initiatives to achieve operating efficiencies, including consolidation of facilities in the U.S. and international operations. Consolidation activities included termination of employees at the Companys Corvallis, Oregon facility and
termination of Large Scale Object Solutions (LSOS) development operations in Southboro, Massachusetts as a result of anticipated reduced market demand for LSOS products. As a part of the consolidation of facilities, during the three
months ended December 31, 2002, the Company recognized a restructuring charge of $1.7 million, related primarily to severance costs associated with the termination of approximately 75 employees as well as certain closure costs, including those
related to facility lease costs. These actions are expected to reduce fiscal 2003 operating expenses as compared to fiscal 2002 by approximately $11.0 million.



The following table summarizes restructuring costs by primary component and related reserve at December 31, 2002 (in
thousands). The remaining costs of $727,000 at December 31, 2002 are expected to be paid by the end of fiscal year 2003.



|                                                                         |  | Employee Severance & Related |       |   | Site Closure Costs |   | Other |  | Total |   
|------------------------------------------------------------------------ |  | ---------------------------- | ----- | - | ------------------ | - | ----- |  | ----- | --
|Consolidation costs incurred in the three months ended December 31,
2002 |  | $                            | 1,239 |   |                    | $ | 404   |  | $     | 70
|Cash paid                                                                |  |                              | (986  | ) |                    |   |      |  |       |  
|                                                                         |  |                              |       |   |                    |   |       |  |       |   
|Balance at December 31, 2002                                             |  | $                            | 253   |   |                    | $ | 404   |  | $     | 70
|                                                                         |  |                              |       |   |                    |   |       |  |       |   



Relocation



As described above, the Company consolidated certain operations in the U.S. and international facilities to achieve cost reductions and streamline operations. The Company relocated certain development and information technology
functions from the Companys Corvallis, Oregon facility to its headquarters in Boulder, Colorado. As a result of the consolidation, the Company recognized a relocation expense of $217,000 for the three months ended December 31, 2002.



Asset Impairment



The Company incurred an asset impairment
charge of $165,000 during the three months ended December 31, 2002. The asset impairment charge resulted primarily from the closure of its Southboro, Massachusetts facility and was related to software, furniture and fixtures. The carrying amount of
the assets prior to the asset impairment charge was $165,000.



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Severance



During the three months ended December 31, 2001, the Company terminated the employment of certain senior managers. As a result, the Company recognized approximately $505,000 in severance costs in December 2001.



Goodwill Amortization



During the three months ended December 31,
2001, the Company recognized approximately $58,000 of goodwill amortization.



8. Foreign Exchange Contracts



The Company accounts for foreign exchange contracts under Statement of Financial Accounting Standards (SFAS) No. 133 Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and
SFAS No. 138, which establishes accounting and reporting standards for derivative instruments, including foreign exchange forward contracts.



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



When hedging the intercompany receivable exposure, the effective portion of the derivatives gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the
period in which earnings are impacted by the variability of the cash flow of the hedged item. The ineffective portion of the gain or loss is reported in current period earnings immediately. The realized gains and losses are recorded in Other
income-net in the statement of operations.



The notional amount of foreign exchange contracts outstanding at December 31, 2002 was $1.0 million with a derivative related fair value of $10,000. The fair value of the forward contracts is estimated based on quoted exchange rates
at December 31, 2002. The effective or unrealized gain related to the outstanding contracts at December 31, 2002 was $72,000 and the unrealized loss at December 31, 2001 was $6,000. Also during the three months ended December 31, 2002 and 2001,
certain foreign currency contracts matured resulting in a total realized net loss of $4,000 and a net gain of $4,000, respectively.



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9. Worldwide Operations



Revenue by geographic area for
the three months ended December 31, 2002 and 2001 was 65% and 69% in the Americas, 21% and 22% in Europe, Middle East, Eastern Europe and Africa (EMEA), and 14% and 9% in Asia Pacific, respectively.



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



|                                                   |  | Americas |        |   | EMEA |   |       | Asia1 Pacific |  | Eliminations |       |  | Total |       
|-------------------------------------------------- |  | -------- | ------ | - | ---- | - | ----- | ------------- |  | ------------ | ----- |  | ----- | ------
|December 31, 2002, and for the quarter then ended: |  |          |        |   |      |   |       |               |  |              |       |  |       |       
|Revenue to unaffiliated customers                  |  | $        | 6,246  |   |      | $ | 2,017 |               |  | $            | 1,326 |  | $     |      
|Intercompany transfers                             |  |          | 1,913  |   |      |   |      |               |  |              |      |  |       | (1,913
|                                                   |  |          |        |   |      |   |       |               |  |              |       |  |       |       
|Net revenue                                        |  |          | 8,159  |   |      |   | 2,017 |               |  |              | 1,326 |  |       | (1,913
|Operating income (loss)                            |  |          | (1,278 | ) |      |   | (630  | )             |  |              | 231   |  |       |      
|Longlived assets                                  |  |          | 2,010  |   |      |   | 285   |               |  |              | 16    |  |       |      
|                                                  
|December 31, 2001, and for the quarter then ended: |  |          |        |   |      |   |       |               |  |              |       |  |       |       
|Revenue to unaffiliated customers                  |  | $        | 8,234  |   |      | $ | 2,599 |               |  | $            | 1,113 |  | $     |      
|Intercompany transfers                             |  |          | 1,372  |   |      |   |      |               |  |              |      |  |       | (1,372
|                                                   |  |          |        |   |      |   |       |               |  |              |       |  |       |       
|Net revenue                                        |  |          | 9,606  |   |      |   | 2,599 |               |  |              | 1,113 |  |       | (1,372
|Operating income (loss)                            |  |          | (2,007 | ) |      |   | (71   | )             |  |              | 378   |  |       |      
|Longlived assets                                  |  |          | 4,299  |   |      |   | 320   |               |  |              |      |  |       |      



| | 1. |  | Japan was the only country reported in Asia Pacific for the three months ended December 31, 2001. Due to the Companys international focus and realignment in
fiscal 2002, Asia Pacific now includes Japan, Hong Kong, Australia and India.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



10. Accounting for Income Taxes



At December 31, 2002, the Company had net operating loss carryforwards for Federal and foreign income tax purposes of $9.4 million and various tax credits and temporary differences, which expire in
varying amounts between 2003 and 2022. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse. SFAS No. 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the requirements of SFAS No. 109, the
Company has established a valuation allowance related to deferred tax assets of approximately $6.7 million and $5.9 million as of December 31, 2002 and September 30, 2002, respectively. The net recoverable tax asset balance of $1.4 million at
December 31, 2002 is expected to be carried back and offset against income in prior taxable years.



11. New Accounting Pronouncements



On July 29, 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, Accounting for
Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred
instead of the date of an entitys commitment to an exit plan. This Statement also establishes that fair value is the objective for initial measurement of the liability. Severance pay under Statement No. 146, in many cases, would be recognized
over time rather than upfront for employees who render future services beyond a minimum retention period. The minimum retention



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period would be based on the legal notification period, or if there is no such
requirement, 60 days. The provisions of SFAS No. 146 are effective for the Company for disposal activities initiated after December 31, 2002. Management does not believe adoption of this statement will have a material impact on the Companys
financial position, results of operations or cash flows.



In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies, relating to the guarantors accounting for,
and disclosure of the issuance of certain types of guarantees. Guarantees meeting the characteristics described in the Interpretation, which are not included in a long list of exceptions, are required to be initially recorded at fair value, which is
different from the general current practice of recording a liability only when a loss is probable and estimable, as those terms are defined in FASB Statement No. 5, Accounting for Contingencies. The disclosure provisions of the
Interpretation are effective for financial statements of interim or annual reports that end after December 15, 2002. However the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued
or modified after December 31, 2002, irrespective of the guarantors year end. Management does not believe adoption of this statement will have an impact on the Companys financial position, results of operations or cash flows.



In December 2002, the FASB
issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123 Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company will adopt the disclosure requirements of
SFAS No. 148 in its second quarter of fiscal 2003 consolidated financial statements. However, the Company, at this time, does not intend to change to the fair value based method of accounting for stock-based employee compensation. Management
currently does not believe that adoption of the disclosure requirements of SFAS No. 148 will have an impact on the Companys financial position, results of operations or cash flows.



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks
and uncertainties. The Companys actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, as well as in the
section Risk Factors and Business in the Companys Annual Report on Form 10-K for the year ended September 30, 2002. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect
managements analysis only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements, which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. The following discussions should be read in conjunction with our condensed consolidated financial statements and the notes thereto.



The Rogue Wave Strategy and Business Model



Rogue Wave Software develops, markets and supports
object-oriented software technology. Rogue Waves strategic objective is to provide technology and services that allow customers to optimize productivity when building software solutions to address their business requirements. The Company
strives to create products that efficiently and effectively align underlying information technology with a customers application of that technology.



Historically, the Company has marketed its products primarily through its direct sales force and, to a lesser extent, through the Internet
and an indirect channel consisting of original-equipment-manufacturers, value added resellers, dealers and distributors. The Companys direct sales force consists of an inside telesales group that focuses on smaller orders ($50,000 or less),
and an outside sales force that focuses on larger enterprise-wide technology customers. The Company makes certain of its products available for sale and distribution over the Internet. Revenue through this channel has not been significant to date,
and there can be no assurance that the Company will be successful in marketing its products through this channel.



Products



Core TechnologySourceProC++



The
Companys principal product is SourcePro C++. SourcePro C++ is comprised of four products: SourcePro Core, SourcePro DB, SourcePro Net and SourcePro Analysis. Pricing of the SourcePro C++ products is based on a customer value model, which
considers scope of deployment, including operating systems.



Light Weight Enterprise Integration Framework (LEIF)



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



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platforms and languages. Pricing of the LEIF product is based on a customer value model, which also
considers scope of deployment, including operating systems.



Stingray Studio



Stingray
Studio offers higher-level graphical user interface (GUI) components for Microsoft Windows platforms providing ease of use, shortening development time and making it easier to maintain GUI applications. Stingray Studio lets developers
rapidly build scalable, distributed GUI applications that can be easily integrated with current enterprise systems and applications.



Large Scale Object Solutions



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



The second implementation of LSOS technology is SynopticaST. SynopticaST is a framework producer platform that enables the quick
development of very high-performance data dissemination applications that consume, store, manipulate and distribute mission critical enterprise data in real time, while preserving transactional integrity, maintaining history and audit trails and
ensuring continuous availability. Initial development of this product was completed in November 2002.



Because of global economic uncertainties, which have resulted in significant spending constraints for information technology
organizations, and the recent elimination of the T+1 compliance requirements by the Securities Industry Association, the Company reexamined the marketplace opportunities for CornerstoneST and SynopticaST. Although the Company plans to continue to
market and sell these products to potential customers that it has identified, it has suspended all future investment related to these products. The Companys future involvement with these products will depend on its ability to contract with
customers to which it can provide custom LSOS solutions. In connection with overall cost containment initiatives and the uncertainty of the marketplace for these products, the Company terminated its LSOS operations in Southboro, Massachusetts in
November 2002 and incurred a related restructuring charge during the quarter ended December 31, 2002. See Note 7 of Notes to Condensed Consolidated Financial Statements.



New Product Initiatives



The Company is aggressively investigating new product development opportunities that allow it to optimize its current cross-platform
expertise, engineering expertise, sales channels and customer base. Areas of particular interest are J2EE and .NET.



Strategic Realignment



Globalization



During fiscal 2002, Rogue Wave continued to solidify its worldwide presence. The Company announced a realignment of its strategy to
include an aggressive focus on expansion in EMEA, Asia Pacific and Latin America. In conjunction with this action and to better align its cost structure with its



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new international business focus, the Company restructured certain areas of its global operations, which
resulted in severance related charges of $479,000 in fiscal 2002.



Additionally, as part of this restructuring plan and to better meet the needs of its customers, the Company has established three separate regional operations, the Americas, EMEA and Asia Pacific, in an effort to drive
autonomy and greater accountability. During the second fiscal quarter of 2002, the Company opened an office in Australia and increased its resources in other areas of the Asia Pacific region and EMEA. The Company began the process of establishing
several new distributor arrangements. As a part of the strategy to move into new international markets, the Company is creating a streamlined license and packaging process to be utilized by these new distributor channels. The Company anticipates
further expansion in foreign countries, including within the Asia Pacific markets, and expects that international license and service and maintenance revenue will account for an increasing portion of its total revenue in the future. There can be no
assurance, however, that the Company will be able to maintain or increase international market demand for its products. See Risk Factors for additional risk factors associated with the Companys global expansion.



Outlook



The world economy has recently experienced a significant slowdown, particularly in the Americas region. The
technology sector, including telecommunications, computer/software and financial services, which represents approximately 75% of the Companys customer base, has been severely impacted. Significant information technology spending constraints
have resulted, with fewer new project initiations expected in the near term and spending limited to mission critical functions. Further, the Company anticipates greater use of open source products by customers for internal
development, coupled with greater focus on competitive technologies, including Java as well as others. As a result, of continuing uncertainty arising from these factors, the Company anticipates no growth in revenue in fiscal 2003.



The Company initiated several actions during the first fiscal
quarter of 2003 that were designed to mitigate adverse financial impact attributable to the current economic climate. The Company implemented several cost management initiatives to achieve operating efficiencies, including consolidation of
facilities in the U.S. and international operations. Consolidation activities included termination or relocation of employees at the Companys Corvallis, Oregon facility to its headquarters in Boulder, Colorado and termination of LSOS
development operations in Southboro, Massachusetts as a result of anticipated reduced market demand for LSOS products.



These restructuring initiatives resulted in workforce reductions of approximately 75 employees and a charge for restructuring, severance,
lease termination, asset impairment, relocation and other related costs of approximately $2.1 million. The Company expects to implement additional cost reduction measures in the second quarter of fiscal year 2003, resulting in an estimated charge of
approximately $300,000 to $350,000.



Critical Accounting
Policies



The preparation of the
consolidated financial statements in conformity with accounting principles generally accepted in the United States requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related
disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The Securities and Exchange Commission has defined a companys most critical accounting policies as those that are most important
to the portrayal of the companys financial condition and results of operations, and which



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require the company to make its most difficult and subjective judgments, often as a result of the need to
make estimates of matters that are inherently uncertain. Based on this definition, the Company has identified the following critical accounting policies and judgments and assumptions. Actual results may differ significantly from these estimates
under different assumptions or conditions. For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies.



Revenue Recognition



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



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



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



The fee is fixed or determinable.The Company negotiates the fee for its products at the outset of an arrangement. In these
arrangements, the majority of the development licenses are perpetual and nonrefundable. The fees are generally due within one to 12 months depending on the length of the contract. The Company considers fees relating to arrangements with payment
terms extending beyond 12 months not to be fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. The Company has no history of concessions and there has been no indicator that
fees are not fixed or determinable.



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



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



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Sales Returns and Allowance
for Doubtful Accounts



The
Companys management must make estimates of potential future product returns related to current period product revenue. Management analyzes historical returns, current economic trends, and changes in customer demand and acceptance of the
products when evaluating the adequacy of the sales returns. Based on this analysis, management must make subjective judgments in connection with establishing the estimated sales returns in any accounting period.



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



Accounting for Income Taxes



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



The Company has reported net operating losses for the past
several years, in part due to cost restructuring efforts coupled with an overall continued decline in revenue. As a result, the Company determined that it did not meet the applicable accounting requirements for recognition of deferred tax assets
and, during the fourth quarter of fiscal 2002, increased its income tax valuation allowance by approximately $4.3 million through a charge to income. In the first quarter of fiscal 2003, the Company incurred a loss and, subsequently, established a
valuation allowance equal to the tax benefit estimated for the quarter. If, in the future, the Company were to determine that accounting requirements for the recognition of tax assets are met, the Company would decrease the recorded valuation
allowance in the period that such determination is made. See Note 10 of Notes to Condensed Consolidated Financial Statements.



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Results of Operations



The following table sets forth for the
periods indicated the percentage of total revenue represented by certain line items in the Companys Condensed Consolidated Statements of Operations.



|                                                                                 |  | Three months ended December 31, |   
|-------------------------------------------------------------------------------- |  | ------------------------------- | --
|                                                                                 |  | 2002                            |   
|Revenue:                                                                         |  |                                 |   
|License revenue                                                                  |  | 60                              | % 
|Service and maintenance revenue                                                  |  | 40                              |   
|                                                                                 |  |                                 |   
|Total revenue                                                                    |  | 100                             |   
|                                                                                 |  |                                 |   
|Cost of revenue:                                                                 |  |                                 |   
|Cost of license revenue                                                          |  | 2                               |   
|Cost of service and maintenance revenue                                          |  | 12                              |   
|                                                                                 |  |                                 |   
|Total cost of revenue                                                            |  | 14                              |   
|                                                                                 |  |                                 |   
|Gross profit                                                                     |  | 86                              |   
|                                                                                 |  |                                 |   
|Operating expenses:                                                              |  |                                 |   
|Product development                                                              |  | 22                              |   
|Sales and marketing                                                              |  | 48                              |   
|General and administrative                                                       |  | 12                              |   
|Restructuring, severance, relocation, asset impairment and goodwill
amortization |  | 22                              |   
|                                                                                 |  |                                 |   
|Total operating expenses                                                         |  | 104                             |   
|                                                                                 |  |                                 |   
|Loss from operations                                                             |  | (18                             | ) 
|Other income, net                                                                |  | 1                               |   
|                                                                                 |  |                                 |   
|Loss before income taxes                                                         |  | (17                             | ) 
|Income tax expense (benefit)                                                     |  | 1                               |   
|                                                                                 |  |                                 |   
|Net loss                                                                         |  | (17                             | )%
|                                                                                 |  |                                 |   



Revenue



Total revenue for
the three months ended December 31, 2002 and 2001 was $9.6 million and $11.9 million, respectively, representing a decrease of 19%. License revenue decreased $351,000 or 6% compared to the same quarter last year. The decrease in license revenue is
due to the softness in overall demand, resulting primarily from a weakened economy and overall drop in U.S. sales volume for C++ based products without an offset from international operations.



Service and maintenance revenue for
the three months ended December 31, 2002 and 2001 was $3.9 million and $5.9 million, respectively, representing a decrease of $2.0 million or 34%. Because most of our support revenue is recognized over a term of one year, the decrease in service and
maintenance revenue was primarily attributable to the overall decline in gross sales during several of the previous quarters, coupled with minimal new consulting contracts.



See Strategic Realignment for further discussion on the Companys revenue
outlook.



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Cost of Revenue



Cost of license
revenue consists primarily of amortization of purchased software, materials, packaging, royalties and freight expense. Cost of license revenue for the three months ended December 31, 2002 and 2001 was $233,000 and $169,000, respectively,
representing an increase of $64,000 or 38%. The increase in costs was primarily the result of an increase in royalties associated with certain technology licensing rights acquired in the last half of fiscal 2002.



Cost of service and maintenance
revenue consists primarily of personnel related and facilities costs incurred in providing customer support and training services as well as third party costs incurred in providing training and consulting services. Cost of service and maintenance
revenue for the three months ended December 31, 2002 and 2001 was $1.1 million and $2.0 million, respectively, representing a decrease of $900,000 or 45%. This decrease was due primarily to staff reductions resulting from cost management actions
instituted during the last several quarters and a decline in the utilization of third-party consulting services. The Company expects that the cost of such revenue will decline as a percentage of total revenue in fiscal 2003.



Operating Expenses



Product development expenses for the
three months ended December 31, 2002 and 2001 were $2.1 million and $3.2 million, respectively, representing a decrease of $1.1 million or 34%. As a percent of revenue, product development expense for the three months ended December 31, 2002 and
2001 was 22% and 27%, respectively. The overall decrease in product development expense during the three months ended December 31, 2002 was primarily attributable to the consolidation of development and information technology functions in the first
fiscal quarter of 2003. These actions included the closure of the LSOS operations in Southboro, Massachusetts in November 2002 and the reduction of the Corvallis, Oregon operation by approximately 75%, in part through relocations of certain
functions to Boulder, Colorado as well as streamlining certain processes. Although the Company anticipates that it will continue to devote substantial resources to product development and that product development expenses will increase, the Company
believes such expenses will increase slightly as a percentage of total revenue for fiscal 2003. All costs incurred in the research and development of software products and enhancements to existing products have been expensed as incurred.



Sales and marketing
expenses for the three months ended December 31, 2002 and 2001 were $4.6 million and $6.0 million, respectively, representing a decrease of $1.4 million or 23%. As a percentage of total revenue, sales and marketing expenses were 48% and 50%,
respectively. The decrease in sales and marketing expense is due to the decrease in sales and marketing personnel and related costs associated with the implementation of cost containment programs coupled with the overall decrease in sales. The
Company expects that sales and marketing expenses will remain stable as a percentage of total revenue for fiscal 2003.



General and administrative expenses for the three months ended December 31, 2002 were $1.2 million as compared to
$1.6 million for the three months ended December 31, 2001, representing a decrease of $400,000 or 25%. The decrease is due primarily to a reduction in personnel as a result of the cost containment programs instituted in fiscal 2002 and early in the
first quarter of fiscal 2003. These expenses are not expected to vary significantly as a percentage of total revenue for fiscal 2003.



Restructuring, relocation and asset impairment expenses totaling $2.1 million were recognized during the three
months ended December 31, 2002. The Company incurred severance of $1.2 million,



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lease realignment of $404,000, relocation costs of $217,000, an asset impairment charge of $165,000 and
other related costs of $70,000 associated with the consolidation of facilities in the Americas, EMEA and Asia Pacific and the streamlining of operating functions. See Note 7 of Notes to Condensed Consolidated Financial Statements. These actions
resulted in an overall personnel reduction of 37% as of December 31, 2002 compared to December 31, 2001 and are expected to reduce fiscal 2003 expenses from fiscal 2002 by approximately $11.0 million.



Severance and goodwill expenses
totaling approximately $562,000 were recognized during the three months ended December 31, 2001. The Company incurred severance of $505,000 for the termination of two senior managers and approximately $57,000 related to goodwill amortization.



Other Income, Net



Other income was $92,000 and $260,000
for the three months ended December 31, 2002 and 2001, respectively, and primarily consists of interest income on the Companys cash, cash equivalents and short-term investments. The decrease in other income of $168,000 or 65% for the three
months ended December 31, 2002, compared to the three months ended December 31, 2001, is primarily due to a decrease in investments, specifically corporate notes and commercial paper, during the current fiscal quarter as compared to the same fiscal
quarter last year.



Income Tax Expense



Income taxes for the
three months ended December 31, 2002 are provided during interim periods based on the expected tax rate for the year. The provision for income taxes for the three months ended December 31, 2002 was (3.4)%. Income tax expense relates primarily to
state and foreign income taxes that the Company expects to pay. The Company increased its valuation allowance on the deferred tax assets generated during the three months ended December 31, 2002 as a result of uncertainties associated with future
realization. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. SFAS No. 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the requirements of SFAS No. 109, the Company has recorded, as of
December 31, 2002, a $6.7 million valuation allowance against certain deferred tax assets. The Company will continue to record very minimal tax benefit or expense until at least four quarters of profitability have been achieved.



Liquidity and Capital Resources



As of December 31, 2002, the Company
had cash, cash equivalents and short-term investments of $27.0 million. Net cash used in operating activities was $743,000 during the three months ended December 31, 2002 compared to $1.7 million used in operating activities during the three months
ended December 31, 2001. The overall increase in cash from operating activities was attributable to a smaller decrease in deferred revenue from the prior quarter compared to first quarter in fiscal 2002 and an increase in the Companys accrued
expenses, when compared to fiscal 2002, as well as a decrease in accounts receivable.



In the first fiscal quarters of 2003 and 2002, the Companys investing activities consisted primarily of purchases of equipment and purchases and maturities of short-term
investments. In the first fiscal quarter of 2003, the Company had maturities of $9.0 million in short-term investments and purchased $3.2 million in short-term investments and $19,000 in equipment, resulting in net cash provided from investing
activities of $5.8 million.



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Net cash used in financing activities during the three months ended December 31, 2002 was $600,000, primarily as a result of the Company purchasing its common stock, offset, in part, by the proceeds from the
exercise of stock options. In September 2001, the Board of Directors authorized the Company to repurchase up to an aggregate of $5.0 million or 2.5 million shares of its common stock. For the quarter ended December 31, 2002, the Company repurchased
337,375 shares for $608,000, at prices ranging from $1.72$2.00 per share. Since September 2001, the Company has purchased approximately 1.1 million shares, at a cost of approximately $2.8 million at prices ranging from $1.72$3.65 per
share.



The Company
believes that expected cash flows from operations combined with existing cash and cash equivalents and short-term investments will be sufficient to meet its cash requirements for the foreseeable future. See Risk Factors.



Risk Factors



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



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



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



| |  | overall economic conditions of the U.S. and the rest of the world;
|- |  | ------------------------------------------------------------------



| |  | overall economic conditions in the software and information systems, telecommunications, financial services and defense industries;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  | the demand for our products and services;
|- |  | -----------------------------------------



| |  | the level of product and price competition;
|- |  | -------------------------------------------



| |  | the size, type and timing of individual license transactions;
|- |  | -------------------------------------------------------------



| |  | the delay or deferral of customer implementations;
|- |  | --------------------------------------------------



| |  | our success in expanding our direct sales force and indirect distribution channels;
|- |  | -----------------------------------------------------------------------------------



| |  | timing of new product introductions and product enhancements;
|- |  | -------------------------------------------------------------



| |  | levels of international sales;
|- |  | ------------------------------



| |  | obsolescence of our products or the programming languages that our products are designed to enhance;
|- |  | ----------------------------------------------------------------------------------------------------



| |  | changes in our pricing policy or that of our competitors;
|- |  | ---------------------------------------------------------



| |  | publication of opinions about us, our products and object-oriented and infrastructure component technology by industry analysts;
|- |  | --------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to retain key employees and hire new employees;
|- |  | -----------------------------------------------------------



| |  | our ability to develop and market new products and control costs; and
|- |  | ---------------------------------------------------------------------



| |  | our ability to effectively deploy our new strategy including our new business model.
|- |  | ------------------------------------------------------------------------------------



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



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



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



| |  | lack of a reliable means to assess overall customer demand;
|- |  | -----------------------------------------------------------



| |  | we typically earn a substantial portion of our revenue in the last weeks, or even days, of each quarter;
|- |  | --------------------------------------------------------------------------------------------------------



| |  | larger customer orders are subject to long sales cycles and are frequently delayed; and
|- |  | ---------------------------------------------------------------------------------------



| |  | our service and maintenance revenue tends to fluctuate as consulting contracts are undertaken, renewed, completed or terminated.
|- |  | --------------------------------------------------------------------------------------------------------------------------------



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



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



Our future performance depends significantly upon the continued service of our key technical, sales and senior
management personnel, none of whom is bound by an employment agreement. We believe that the technological and creative skills of our personnel are essential to establishing and maintaining a leadership position, particularly in light of the fact
that our intellectual property, once sold to the public market, is easily replicated. The loss of the services of one or more of our executive officers or key technical personnel may have a material adverse effect on our business.



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



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



We distribute our products primarily through two different direct sales channels, a telesales force and a field
sales force, each of which is subject to a variable sales cycle. Products sold by our telesales force may be sold after a single phone call or may require several weeks of education and negotiation before a sale is made. As such, the sales cycle
associated with telesales typically ranges from a few days to two months. The purchase of products from our field sales force is often an enterprise-wide decision and may require the sales person to provide a significant level of education to
prospective customers regarding the use and benefits of our products. For these and other reasons, the sales cycle associated with the sale of our products through our field sales force typically ranges from two to six months and is subject to a
number of significant delays over which we have little or no control. As a result, quarterly



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revenue and operating results are variable and are difficult to forecast, and we believe that
period-to-period comparisons of quarterly revenue are not necessarily meaningful and should not be relied upon as an indicator of future revenue.



We face risks involving future business acquisitions.



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



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



A significant portion of our revenue
is derived from international sources. To service the needs of our international customers, we must provide worldwide product support services. We have expanded, and intend to continue expanding, our international operations and plan to enter
additional international markets. This will require significant management attention and financial resources that could adversely affect our operating margins and earnings. We may not be able to maintain or increase international market demand for
our products. If we do not, our international sales will be limited, and our business, operating results and financial condition could be materially and adversely affected.



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



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



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



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



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



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



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



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



Our products
target the markets for Visual C++/MFC and Visual Basic/ActiveX software parts and programming tools. Direct competitors in the C++ market include Microsoft (with its MFC), ILOG and several privately held companies. Microsoft is a particularly strong
competitor due to its large installed base and the fact that it bundles its MFC library with its own and other C++ compilers. Microsoft may decide in the future to devote more resources to or broaden the functions of MFC in order to address and more
effectively compete with the functionality of our products.



Software applications can also be developed using software parts and programming tools in environments other than C++. Indirect competitors with such offerings include Microsoft, Borland and Oracle. Many of
these competitors have significantly greater resources, name recognition and larger installed bases of customers than Rogue Wave. These potential competitors have well-established relationships with current and potential customers and have the
resources to enable them to more easily offer a single vendor solution. As a result, these potential competitors may be able to respond more



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quickly to new or emerging technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than Rogue Wave can.



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



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



We operate in an industry with rapidly changing technology and, if we do
not successfully modify our products to incorporate new technologies, they may become obsolete and sales will suffer.



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



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



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



| |  |  | authorizing the issuance of preferred stock without stockholder approval;
| | - |  | -------------------------------------------------------------------------



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



| |  |  | prohibiting stockholder action by written consent;
| | - |  | --------------------------------------------------



| |  |  | establishing advance notice requirements for nominations for election to the board of directors and for proposing other matters that can be acted on by stockholders
at stockholder meetings;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | requiring super-majority voting to effect certain amendments to our certificate of incorporation or to amend our by-laws; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



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| |  |  | requiring parties to request board approval prior to acquiring 15% or more of the voting power of our common stock to avoid economic and voting dilution of their
stock holdings.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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



As of December 31, 2002, the Company had short-term investments of $11.9 million, which are classified as held to maturity and are carried at their amortized cost. All
investments have acquired maturities of less than 360 days. Short-term investments consist primarily of high credit and highly liquid corporate notes and commercial paper. A reduction in overall interest rates would not have a material affect on the
fair value of the investments or the financial position of the Company.



Exposure to variability in foreign currency exchange rates is managed primarily through the use of natural hedges, whereby funding obligations and assets are both managed in the local currency. In
addition, the Company will from time to time enter into foreign currency exchange agreements to manage its exposure arising from fluctuating exchange rates, primarily in the Euro. The Company does not enter into any derivative transactions for
speculative purposes. The sensitivity of earnings and cash flows to variability in exchange rates is assessed by applying an appropriate range of potential rate fluctuations to the Companys assets, obligations and projected results of
operations denominated in foreign currencies. Based on the Companys overall foreign currency rate exposure at December 31, 2002, movements in foreign currency rates would not materially affect the financial position of the Company. At December
31, 2002, the Company had outstanding short-term forward exchange contracts to exchange Euros for U.S. dollars in the amount of $1.0 million. See Note 8 of Notes to Condensed Consolidated Financial Statements.



ITEM 4.CONTROLS AND PROCEDURES



Based on their evaluation of the Companys disclosure controls and procedures (as defined by Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the
filing date of this quarterly report, the Companys Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by the
Company in its periodic reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission.



There were no significant changes in the Companys internal controls or in other
factors that could significantly affect these controls subsequent to the date of their evaluation. Because there were no significant deficiencies or material weaknesses in these controls, no corrective actions were taken with respect to them.



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PART IIOTHER
INFORMATION



ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K



a. Exhibits:



|99.1 |  | Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | ------------------------------------------------------------------------------------------------
|    
|99.2 |  | Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



b. Reports on Form 8-K:



On January 6, 2002, the Company
filed a Form 8-K with the Securities and Exchange Commission, reporting in Item 5 that on January 3, 2002, the Board of Directors adopted a stockholder rights plan.



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SIGNATURES



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



|                        |  |  |  | ROGUE WAVE SOFTWARE, INC. (Registrant)
|----------------------- |  |  |  | --------------------------------------
|                       
|Date: February 14, 2003 |  |  |  | /s/ Merle A.Waterman                  
|                        |  |  |  |                                       



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I, John Floisand, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Rogue Wave Software, Inc.;
| | -- |  | --------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly 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 quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other information included in this quarterly 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 quarterly 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 quarterly 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 of this quarterly report
(the Evaluation Date); and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this quarterly 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 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 weakness 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;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly 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.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                 
|-----------------
|February 14, 2003
|                 



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##### Table of Contents



I, Merle A. Waterman, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Rogue Wave Software, Inc.;
| | -- |  | --------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly 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 quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other information included in this quarterly 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 quarterly 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 quarterly 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 of this quarterly report
(the Evaluation Date); and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this quarterly 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 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 weakness 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;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly 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.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                 
|-----------------
|February 14, 2003
|