Actua (ACTA) 10-K 2008 FY Annual report

Exhibit 99.1

Metastorm Inc. and Subsidiaries

Consolidated Financial Statements and Report of Independent Certified Public Accountants

Years ended December 31, 2008, 2007 and 2006

CONTENTS

	Page
Report of Independent Certified Public Accountants		3
Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2008 and 2007		4
Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006		6
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2008, 2007 and 2006		7
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006		8
Notes to Consolidated Financial Statements		10

Report of Independent Certified Public Accountants

The Board of Directors of Metastorm Inc.

We have audited the accompanying consolidated balance sheets of Metastorm Inc. (a Maryland Corporation) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America as established by the American Institute of Certified Public Accountants. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Metastorm Inc. at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

Baltimore, Maryland
March  16, 2009

Metastorm Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

	December 31,
	2008		2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	10,153,869	$	9,021,003
Short-term investments		1,260,872		—
Accounts receivable, less allowance for doubtful accounts of $133,684 and $86,579, respectively		16,294,527		21,850,233
Prepaid expenses and other current assets		2,525,080		2,006,023
Deferred income taxes		—		433,601
Total current assets		30,234,348		33,310,860
PROPERTY AND EQUIPMENT, net		2,153,172		2,244,449
RESTRICTED CASH		20,000		361,068
OTHER ASSETS		700,515		184,229
SOFTWARE DEVELOPMENT COSTS, net		20,159		169,285
INTANGIBLE ASSETS, net		16,367,494		23,179,846
GOODWILL		35,235,191		34,746,405
DEFERRED INCOME TAXES		—		83,074
	$	84,730,879	$	94,279,216

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

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Metastorm Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (Continued)

	December 31,
	2008			2007
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	11,362,058		$	11,426,571
Deferred revenue		16,142,555			13,182,956
Capital leases		326,927			179,951
Notes payable		56,831			7,006
Income taxes payable		17,989			60,032
Total current liabilities		27,906,360			24,856,516
LONG-TERM LIABILITIES
Deferred rent		849,593			853,777
Deferred revenue		694,800			739,870
Capital leases		434,948			318,541
Other long-term liabilities		—			135,014
Fair value of derivative		4,192			224,432
Deferred tax liability		145,387			—
Notes payable, less current portion		173,246			73,634
		2,302,166			2,345,268
COMMITMENTS AND CONTINGENCIES		—			—
SERIES AA REEDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value, 71,012,991 shares authorized, 56,000,334 shares issued and outstanding at December 31, 2008 and 2007, aggregate liquidation preference of $94,596,798		92,761,895			85,969,589
SERIES CC REEDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value, 18,844,221 shares authorized, 18,834,583 shares issued and outstanding at December 31, 2008 and 2007, aggregate liquidation preference of $33,375,076		33,247,620			30,813,160
STOCKHOLDERS’ EQUITY (DEFICIT)
Common stock, $.01 par value, 120,000,000 shares authorized, 941,717 shares issued and outstanding at December 31, 2008 and 28,125 shares issued and outstanding at December 31, 2007		9,417			281
Additional paid-in capital		10,556,495			19,312,102
Accumulated other comprehensive (loss) income		(428,670	)		423,564
Accumulated deficit		(81,624,404	)		(69,441,264	)
		(71,487,162	)		(49,705,317	)
	$	84,730,879		$	94,279,216

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

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Metastorm Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31,
	2008			2007			2006
Revenues
Software licenses	$	28,074,927		$	25,772,327		$	17,772,317
Maintenance and support		23,509,829			17,091,686			12,860,893
Professional services		23,309,035			16,848,405			11,420,908
Total revenues		74,893,791			59,712,418			42,054,118
Cost of revenues
Software licenses (includes amortization expense of $3,856,000, $2,252,333 and $1,700,000, respectively)		4,658,609			4,381,683			3,225,519
Maintenance and support (includes amortization expense of $229,352, $387,820 and $0, respectively)		2,229,245			1,863,739			959,602
Professional services (includes amortization expense of $0, $33,000 and $0, respectively)		19,096,025			12,972,275			9,506,006
Total cost of revenues		25,983,879			19,217,697			13,691,127
Gross profit		48,909,912			40,494,721			28,362,991
Operating expenses
Research and development		10,381,904			6,549,159			4,473,806
Sales and marketing		33,443,418			24,598,054			16,018,285
General and administrative		9,987,440			7,677,586			7,194,641
Write-off of costs related to initial public offering		1,892,072			—			—
Litigation-related expenses		1,939,565			322,243			—
Depreciation		1,191,951			764,087			523,112
Amortization of intangible assets		2,727,000			1,105,001			—
Total operating expenses		61,563,350			41,016,130			28,209,844
(Loss) income from operations		(12,653,438	)		(521,409	)		153,147
Other income (expense)
Change in valuation of derivative and Series BB warrants		220,240			(956,374	)		(432,671	)
Interest expense		(283,781	)		(54,146	)		(296,579	)
Interest income		163,587			304,508			243,939
Other		219,723			(124,351	)		63,631
		319,769			(830,363	)		(421,680	)
Loss before income taxes		(12,333,669	)		(1,351,772	)		(268,533	)
Income tax (benefit) expense		(150,529	)		(1,936,761	)		390,262
Net (loss) income		(12,183,140	)		584,989			(658,795	)
Accretion of preferred stock and preferred stock dividends		(9,226,766	)		(9,471,463	)		(4,528,423	)
Net loss attributable to common stockholders	$	(21,409,906	)	$	(8,886,474	)	$	(5,187,218	)

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

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Metastorm Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

Years ended December 31, 2008, 2007 and 2006

							Series AA												Accumulated						Total
	Common Stock						Preferred Stock						Additional			Deferred			Other						Stockholders’
	Number						Number						Paid-in			Stock			Comprehensive			Accumulated			Equity
	of Shares			Amount			of Shares			Amount			Capital			Compensation			Income			Deficit			(Deficit)
Balance at January 1, 2006		—		$	—			37,056,696		$	370,567		$	83,245,731		$	(375,127	)	$	378,645		$	(69,367,458	)	$	14,252,358
Accretion of accrued and undeclared dividend on redeemable preferred stock		—			—			—			—			(420,407	)		—			—						(420,407	)
Amortization of restricted stock		—			—			—			—			—			375,127			—			—			375,127
Stock- based compensation expense		—			—			—			—			134,697			—			—			—			134,697
Comprehensive loss:
Net loss in 2006		—			—			—			—			—			—			—			(658,795	)		(658,795	)
Other comprehensive loss:
Foreign currency translation adjustment		—			—			—			—			—			—			(8,023	)		—			(8,023	)
Total comprehensive loss		—			—			—			—			—			—			—			—			(666,818	)
Balance at December 31, 2006		—			—			37,056,696			370,567			82,960,021			—			370,622			(70,026,253	)		13,674,957
Stock options exercised		28,125			281			—			—			7,594			—			—			—			7,875
Conversion of Series AA Redeemable convertible Preferred Stock to Series AA Redeemable Convertible Stock		—			—			(37,056,696	)		(370,567	)		(49,285,409	)		—			—			—			(49,655,976	)
Exchange of Series BB shares into Series AA shares and conversion of Series BB warrants for Series AA shares		—			—			—			—			(2,425,635	)		—			—			—			(2,425,635	)
Accretion of accrued and undeclared dividend on Series AA Redeemable Convertible Preferred Stock and Series CC Redeemable Convertible Preferred Stock		—			—			—			—			(12,024,840	)		—			—			—			(12,024,840	)
Accretion of accrued Series AA Redeemable Convertible Preferred Stock to redemption value		—			—			—			—			(141,186	)		—			—			—			(141,186	)
Accretion of issuance costs for Series CC Redeemable Convertible Preferred Stock		—			—			—			—			(14,822	)		—			—			—			(14,822	)
Stock-based compensation expense		—			—			—			—			236,379			—			—			—			236,379
Comprehensive income
Net income in 2007		—			—			—			—			—			—			—			584,989			584,989
Other comprehensive income:
Foreign currency translation adjustment		—			—			—			—			—			—			52,942			—			52,942
Total comprehensive income		—			—			—			—			—			—			—			—			637,931
Balance at December 31, 2007		28,125			281			—			—			19,312,102			—			423,564			(69,441,264	)		(49,705,317	)
Stock options exercised		1,132,475			11,325			—			—			308,448			—			—			—			319,773
Shares retired for cashless exercise of options		(218,883	)		(2,189	)		—			—			(232,016	)		—			—			—			(234,205	)
Accretion of accrued and undeclared dividend on Series AA Redeemable Convertible Preferred Stock and Series CC Redeemable Convertible Preferred Stock		—			—			—			—			(8,606,835	)		—			—			—			(8,606,835	)
Accretion of accrued Series AA Redeemable Convertible Preferred Stock to redemption value		—			—			—			—			(584,241	)		—			—			—			(584,241	)
Accretion of issuance costs for Series CC Redeemable Convertible Preferred Stock		—			—			—			—			(35,690	)		—			—			—			(35,690	)
Stock-based compensation expense		—			—			—			—			394,727			—			—			—			394,727
Comprehensive loss
Net loss in 2008		—			—			—			—			—			—			—			(12,183,140	)		(12,183,140	)
Other comprehensive loss:
Foreign currency translation adjustment		—			—			—			—			—			—			(852,234	)		—			(852,234	)
Total comprehensive loss		—			—			—			—			—			—			—			—			(13,035,374	)
Balance at December 31, 2008		941,717		$	9,417			—		$	—		$	10,556,495		$	—		$	(428,670	)	$	(81,624,404	)	$	(71,487,162	)

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

7

Metastorm Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31,
	2008			2007			2006
Cash flows from operating activities
Net (loss) income	$	(12,183,140	)	$	584,989		$	(658,795	)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation		1,191,951			764,087			523,112
Amortization of software development costs		134,525			365,684			480,744
Amortization of restricted stock		—			—			375,127
Amortization of intangible assets		6,812,352			3,778,154			1,700,000
Noncash compensation		78,688			—			—
Deferred rent		(4,184	)		(49,052	)		235,377
Bad debt expense (recovery)		349,207			(143,133	)		23,378
Loss (gain) on disposal of property and equipment		5,483			(94,518	)		390,478
Stock-based compensation expense		394,727			236,379			134,697
Interest income on short-term investments		(12,872	)		—			—
Change in fair value of derivative and Series BB Warrants		(220,240	)		956,374			432,671
Changes in operating assets and liabilities:
Accounts receivable		3,295,166			(9,270,394	)		3,358,481
Prepaid expenses and other current assets		(1,136,293	)		(326,889	)		(244,108	)
Deferred income taxes		(168,518	)		(2,055,893	)		390,262
Accounts payable and accrued expenses		702,112			2,188,485			(1,227,626	)
Income taxes payable		(42,043	)		60,032			—
Deferred revenue		4,445,275			2,658,153			1,017,040
Net cash provided by (used in) operating activities		3,642,196			(347,542	)		6,930,838
Cash flows from investing activities
Purchase of property and equipment		(543,960	)		(345,700	)		(813,262	)
Proceeds from sale of property and equipment		1,300			113,207			22,450
Receipt (payment) of restricted cash to collateralize letter of credit		341,068			30,892			(391,960	)
Cash paid for acquisition, net of cash acquired		(488,786	)		(27,181,487	)		—
Short-term investments purchased		(1,248,000	)		—			—
Net cash used in investing activities		(1,938,378	)		(27,383,088	)		(1,182,772	)

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

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Metastorm Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

	Year ended December 31,
	2008			2007			2006
Cash flows from financing activities
Borrowings under notes payable		—			—			508,707
Repayments of borrowings under notes payable		(11,476	)		(797,392	)		(3,074,685	)
Repayments of capital leases		(277,319	)		(82,405	)		—
Proceeds from stock options exercised		6,900			7,875			—
Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs of $177,966 in 2007		—			29,806,690			—
Net cash (used in) provided by financing activities		(281,895	)		28,934,768			(2,565,978	)
Effects of exchange rate changes on cash and cash equivalents		(289,057	)		37,157			55,654
Net increase in cash and cash equivalents		1,132,866			1,241,295			3,237,742
Cash and cash equivalents at beginning of year		9,021,003			7,779,708			4,541,966
Cash and cash equivalents at end of year	$	10,153,869		$	9,021,003		$	7,779,708
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	285,129		$	55,940		$	313,854
Income taxes		48,801			59,100			—
Supplemental schedule of non-cash investing and financing activities:
Leasehold improvements, paid by landlord	$	—		$	90,342		$	548,683
Fixed assets purchased under capital leases		531,202			580,897			—
Fixed assets purchased included in accounts payable at year-end		—			207,900			—
Process Competence purchase price payable		—			210,159			—
Fixed assets purchased under notes payable		136,690			—			—
Issuance of 9,276,033 shares of Convertible Preferred Stock as partial consideration to Proforma Corporation		—			12,429,884			—
Proforma acquisition purchase price receivable		—			248,337			—

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

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Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Metastorm Inc. (the “Company”) is a global provider of enterprise architecture modeling, business process analysis and business process management software, which we call Metastorm Enterprise, for commercial enterprises (e.g. business services, financial services, healthcare, manufacturing, retail) and federal and state government organizations. This comprehensive suite of software products enables the Company’s customers to understand, analyze, automate and continually improve their business processes. The Company is headquartered in Baltimore, Maryland, and was incorporated September 1996 under the laws of the state of Maryland.

2. Significant Accounting Policies

Principles of Consolidation

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions, and its beliefs on what could occur in the future, given available information. Estimates are used for, but are not limited to, revenue recognition, determination of fair value of stock awards, valuation of goodwill and intangible assets acquired in business combinations, impairment of goodwill and other intangible assets, amortization of intangible assets, contingencies and litigation, allowances for doubtful accounts, accrued liabilities, and income taxes. Actual results may differ from those estimates, and such differences may be material to the consolidated financial statements.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. The Company’s cash equivalents consist of money market accounts on deposit with a bank and are stated at cost, which approximates fair value.

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Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Short-Term Investments

Short-term investments consist of cash held in certificates of deposits that mature on various dates through May 5, 2009.

Property and Equipment

Property and equipment is recorded at cost and depreciated using the straight-line method based on estimated useful lives ranging from two to ten years. Leasehold improvements are amortized over the shorter of the lease term or the useful life of the assets.

Deferred Equity Offering Costs

The Company incurred costs in connection with the planned initial public offering of the Company’s common stock during 2008. Effective November 2008, the Company has withdrawn the initial public offering of the Company’s common stock, and the costs were deemed no longer realizable. Costs aggregating $1,892,072 have been expensed in the accompanying consolidated statement of operations for the year ended December 31, 2008.

Financial Instruments

The Company’s financial instruments, including cash and cash equivalents, short-term investments and certain term notes payable are carried at cost, which approximates their fair value because of the short-term maturity or variable-rate nature of these financial instruments.

As described in Note 11, the Company issued put options tied to warrants in connection with bank financings. The Company has valued these put options and has accounted for them as embedded derivatives in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 133,Accounting for Derivative Instruments and Hedging Activities. These derivative instruments are recognized as liabilities and carried at fair value. Gains and losses from changes in the fair value of embedded derivatives are recognized in earnings.

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Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Financial Instruments (Continued)

In conjunction with the sale of shares of Series BB redeemable convertible preferred stock, as disclosed in Note 11, the Company issued warrants to purchase 2,712,722 shares of Series BB redeemable convertible preferred stock that were considered liabilities pursuant to SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equityand related FASB Staff Position 150-5,Issuer’s Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable (FSP 150-5).The warrants were reported as liabilities at their estimated fair value, and any changes in fair value were reflected in the statement of operations during the period of the change in value.

The Company used the option pricing method to estimate the fair value of the Series BB warrants. The option pricing method considers all relevant terms of the stockholders agreement including the level of seniority among the securities, dividend policy, conversion ratios and redemption rights, upon liquidation of the enterprise as of the estimated liquidation date. The Company recorded charges of $895,198 and $379,781 during the years ended December 31, 2007 and 2006, respectively, to reflect the increase in fair value of these warrants.

In July 2007, the Company exchanged these warrants into 2,712,722 shares of Series AA redeemable convertible preferred stock. The warrants were reclassified at that time to Series AA redeemable convertible preferred stock and additional paid-in-capital. The warrants are no longer considered liabilities, and the Company ceased recording any related periodic fair value adjustments upon conversion.

Software Development Costs

In accordance with SFAS No. 86,Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, costs incurred for the development of new software products are expensed as incurred until technological feasibility is established, at which time any additional development costs are capitalized until the product is available for general release to customers. The Company defines the establishment of technological feasibility as the completion of a working model of the software product that has been tested to be consistent with the product design specifications. Because the Company’s current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no software development costs have been capitalized during the years ending December 31, 2008 and 2007.

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Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Software Development Costs (Continued)

Amortization of software development costs begins upon general release of the software. These costs are amortized on a product-by-product basis using the greater of: (i) the amount computed using the ratio that current gross revenues for each product bear to the total of current and anticipated future revenue for that product, or (ii) the amount computed using the straight-line method over the estimated useful economic life of three years. Amortization expense is included in the cost of license revenue.

Business Combinations

The Company accounts for business combinations in accordance with SFAS No. 141,Business Combinations(“SFAS 141”), which requires the purchase method of accounting for business combinations. In accordance with SFAS 141, the Company determines the recognition of intangible assets based on the following criteria: (i) the intangible asset arises from contractual or other rights; or (ii) the intangible is separable or divisible from the acquired entity and capable of being sold, transferred, licensed, returned or exchanged. In accordance with SFAS 141, the Company allocates the purchase price of its business combinations to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill.

The Company must make valuation assumptions that require significant estimates, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from customer contracts, customer lists, distribution agreements and discount rates. The Company estimates fair value based upon assumptions the Company believes to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

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Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Goodwill and Intangible Assets

Goodwill is not amortized, but rather it is assessed for impairment at least annually. The allocation of the acquisition cost to intangible assets and goodwill therefore could have a significant impact on the Company’s future operating results. The allocation process requires the extensive use of estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets. Further, when impairment indicators are identified with respect to previously recorded intangible assets, the potential for impairment is determined using discounted future cash flow techniques. Significant management judgment is required in the forecasting of future operating results that are used in the preparation of the projected discounted cash flows and should different conditions prevail, material write-downs of net intangible assets could occur. The Company periodically reviews the estimated remaining useful lives of its acquired intangible assets. A reduction in its estimate of remaining useful lives, if any, could result in increased amortization expense in future periods.

The Company tests goodwill for impairment annually and more frequently if events merit. The Company performs this fair-value based test in accordance with SFAS No. 142,Goodwill and Other Intangible Assets. Future goodwill impairment tests could result in a charge to earnings.

Deferred Rent

The Company is obligated under operating leases for the rental of office space. Minimum rents relating to operating leases are recognized on a straight-line basis over the lease term after consideration of lease incentives and scheduled rent escalations. Differences between rental expense and actual rental payments are recorded as deferred rent liabilities.

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Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Revenue Recognition

The Company derives fees for software licenses, fees for maintenance and customer support (post-contract support or “PCS”), and fees for a range of professional services. Software license arrangements for the Company’s off-the-shelf software typically contain multiple elements, including the product license, PCS, and professional services. The Company records revenue in accordance with Statement of Position 97-2,Software Revenue Recognition,as amended by Statement of Position 98-9, Modification of SOP 97-2,Software Revenue Recognition, with respect to certain transactions. The Company has established vendor specific objective evidence (“VSOE”) of fair value for professional services based on separate sales and for PCS based on consistent renewal rates. In multiple element arrangements when VSOE exists for all of the undelivered elements of the arrangement, but does not exist for the delivered elements in the arrangement, the Company recognizes revenues under the residual method. Under the residual method, at the outset of the arrangement with a customer, revenues are deferred for the fair value of the undelivered elements and revenues are recognized for the remainder of the arrangement fee attributed to the delivered elements (typically software licenses). In the event that VSOE for professional services does not exist, and this represents the only undelivered element, revenues for the entire arrangement are recognized ratably over the performance period of the professional services. In arrangements where a license is sold with PCS and professional services where VSOE for the professional services or the PCS does not exist, the entire arrangement fee is recognized ratably over the PCS term or the period of performance of the professional services, whichever is longer. In arrangements where a license is sold with just PCS and VSOE of fair value for PCS does not exist, revenues for the entire arrangement are recognized ratably over the performance period of the PCS. Revenues from PCS agreements not sold with other elements or where VSOE of fair value exists for the PCS are recognized on a straight-line basis over the life of the contract, which is typically twelve months.

The Company enters into software license, PCS and professional service agreements through direct sales to customers and through resellers and system integrators. PCS includes rights to receive unspecified software product updates and upgrades, maintenance releases and patches released during the term of the support period, and telephone access to technical support personnel and content. Professional services include installation and implementation of the Company’s software and customer training. Professional services are not essential to the functionality of the associated licensed software.

15

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Revenue Recognition (Continued)

The Company typically uses a binding purchase order in conjunction with either a signed contract or reference on the purchase order to the terms and conditions of the Company’s shrink-wrap or end-user license agreement as evidence of an arrangement for the license fee. In circumstances where the customer does not issue purchase orders separately from a signed contract, the Company uses the signed contract as evidence of the arrangement. Sales through its significant resellers are evidenced by a master agreement governing the relationship.

Resellers and systems integrators purchase products for specific end users and do not hold inventory. Resellers and systems integrators perform functions that can include delivery to the end customer, installation or integration and post-sales service and support. For these sales, the associated revenue is recorded on a net basis as the reseller or system integrator is the principal in the transaction. In situations where system integrators merely refer a customer to the company and the company is the principal in the transaction, revenue is recognized on a gross basis. The agreements with these resellers and systems integrators have terms that are generally consistent with the standard terms and conditions for the sale of the Company’s products and services to end users.

License revenues include fees from the sale of software developed and licensed by the Company. Off-the-shelf software sold by the Company is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable and collection is probable. The Company does not offer any rights of return or price protection either through direct or indirect sales. The Company’s payment terms for typical software sales require payment within three months. In certain sales in which customers make large-scale purchase and deployment of software, payment terms could extend beyond three months but in no case beyond twelve months. The Company considers all arrangements with payment terms extending beyond three months for typical software sales and beyond twelve months for sales involving large-scale deployment of software not to have fees that are fixed and determinable. The following are examples of situations where the Company determines the fee to not be fixed or determinable:

16

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Revenue Recognition (Continued)

• If a significant portion of the fee is due after the Company’s established payment terms, revenue recognition is deferred until payment has been received from the customer.

• If a transaction is subject to customer acceptance provisions where delivery is uncertain, revenue recognition is deferred until evidence of the customer’s acceptance of the product is received.

• If the price is subject to refund or forfeiture, concession or other adjustment, revenue recognition is deferred until these rights expire.

The Company assesses whether collection is reasonably assured based on a number of factors including the creditworthiness of the customer as determined by credit checks and analysis, past transaction history, geographic location and financial viability. If the determination is made at the time of the transaction that collection of the fee is not reasonably assured, then all of the related revenues are deferred until the time that collection becomes reasonably assured, which in some cases requires the collection of cash prior to recognition of the related revenues.

Professional services revenue includes consulting, implementation services, and training. Consulting and implementation services are generally sold on a time-and-materials basis. Professional services are generally separable from the other elements of the arrangement since the performance of the services is not essential to the functionality of any other element of the transaction (i.e., does not involve significant production, modification, or customization of the software or building complex interfaces) and are described in the contract such that the total price of the arrangement would vary as a result of the inclusion or exclusion of the services. Revenues for consulting and implementation services are recognized as the services are performed or as otherwise described above when part of a multiple element arrangement. Training services are sold on a per-day and per-student basis and are recognized upon completion of the training or similar to consulting and implementation services in multiple element arrangements.

17

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Revenue Recognition (Continued)

Deferred revenue consists of fees for license, PCS and professional services revenue. Deferred license revenue generally relate to software sales where collectability was not probable at the outset of the arrangement. Deferred PCS and professional services revenue generally relate to payments made in advance of the time of delivery. Deferred revenue also includes revenue from multiple element arrangements where VSOE of fair value did not exist for one or more of the undelivered elements and the entire arrangement fee is being recognized ratably.

In June 2006, the EITF reached a consensus on EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation)” (“EITF 06-3”). EITF 06-3 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The Company presents these taxes on a net basis.

Restricted Cash

Cash has been deposited in restricted accounts amounting to $20,000 and $361,068 as of December 31, 2008 and 2007, respectively, which is held as a security deposit for leased office space and to secure a merchant account for customer credit card payments.

Concentrations of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company places its cash with financial institutions and its balances may exceed federally insured limits. Cash at foreign banks at December 31, 2008 amounted to $886,883. The Company’s accounts receivable are derived from revenues earned from customers located primarily in the United States and Western Europe. The Company performs ongoing credit evaluations of its customers’ financial condition and maintains allowances for potential credit losses. The Company uses estimates to determine the amount of the allowance for potential credit losses necessary to reduce accounts receivable to their expected net realizable value. The Company estimates the amount of the required allowance by reviewing the status of past-due receivables and analyzing historical bad debt trends. Actual collection experience has not

18

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Concentrations of Credit Risk (Continued)

varied significantly from estimates. The Company does not require collateral or other security from its customers. Uncollectible accounts receivable are charged to the allowance for doubtful accounts.

The following describes activity in the allowance for doubtful accounts for years ending December 31, 2008, 2007 and 2006.

	2008			2007			2006
Balance beginning of year	$	86,579		$	254,195		$	259,878
Additions charged to cost and expenses		349,207			—			23,378
Deductions(1)		(302,102	)		(167,616	)		(29,061	)
Balance end of the year	$	133,684		$	86,579		$	254,195

(1) Uncollectable amounts written off, net of recoveries.

The Company’s revenues are derived from sales in North America, Europe, Middle East, Asia, and Australia. A significant portion of the Company’s foreign sales are derived from the United Kingdom and have been classified independently from other foreign revenues. The Company has wholly owned subsidiaries in the United Kingdom, Germany, The Netherlands, Belgium and France. These subsidiaries are responsible for sales and distribution of the Company’s product in territories outside of North America.

	2008		2007		2006
Revenues:
North America	$	50,902,895	$	41,531,196	$	30,655,383
United Kingdom		11,540,612		9,909,972		7,406,347
Rest of world		12,450,284		8,271,250		3,992,388
	$	74,893,791	$	59,712,418	$	42,054,118

U.S. Federal government agencies, which are considered to be a single customer for accounting purposes, did not exceed 10% of the Company’s revenues during the year ended December 31, 2008. U.S. Federal government agencies accounted for 11% and 18% of the

19

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Concentrations of Credit Risk (Continued)

Company’s revenues during the years ended December 31, 2007 and 2006, respectively. At December 31, 2008, one customer accounted for 12% of net accounts receivable. No single customer accounted for more than 10% of net accounts receivable at December 31, 2007.

Impairment of Long-Lived Assets

Long-lived assets, excluding goodwill and indefinite-lived intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. Fair value is generally determined by estimates of discounted cash flows. The discount rate used in any estimate of discounted cash flows would be the rate required for a similar investment of similar risk.

Foreign Currency Translation

The functional currency of the Company’s foreign subsidiaries is the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component of accumulated other comprehensive (loss) income. Income and expense accounts are translated into U.S. dollars at average rates of exchange prevailing during the periods presented. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rates in effect on the balance sheet dates.

Net foreign currency transaction gains (losses) of approximately $196,000, $(144,000) and $77,000 for the years ended December 31, 2008, 2007 and 2006, respectively, are included in other expense.

Advertising Costs

All advertising costs are expensed as incurred. Advertising expense was $100,373, $49,095 and $25,000 in 2008, 2007 and 2006, respectively.

20

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Research and Development Expenses

The Company expenses research and development expenses in the period in which these costs are incurred.

Income Taxes

The Company accounts for income taxes in accordance with FASB Statement No. 109,Accounting for Income Taxes. Deferred income taxes are recorded for the expected tax consequences of temporary differences between the tax basis of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss carry-forwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized, a valuation allowance is established to reduce the Company’s deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The Company adopted FASB Interpretation 48,Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109 (“FIN 48”), on January 1, 2007. The interpretation prescribes recognition and measurement parameters for the financial statement recognition and measurement of tax positions taken or expected to be taken in the Company’s tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. The Company did not have any unrecognized tax benefits as of the date of adoption and as of December 31, 2008 or 2007.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign tax jurisdictions in which it has a subsidiary or branch operation. The tax years 2005 to 2008 remain open to examination by U.S. and state tax authorities, and the tax years 2006 to 2008 remain open to examination by the foreign tax authorities.

The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not have any amounts accrued relating to interest and penalties as of December 31, 2008.

21

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Stock-Based Compensation

Prior to January 1, 2006, the Company accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (“APB”) No. 25,Accounting for Stock Issued to Employees(“APB 25”), and related interpretations. Accordingly, compensation cost for stock options generally was measured as the excess, if any, of the estimated fair value of the Company’s common stock over the amount an employee must pay to acquire the common stock on the date that both the exercise price and the number of shares to be acquired pursuant to the option are fixed. The Company had adopted the disclosure-only provisions of SFAS No. 123,Accounting for Stock-Based Compensation(“SFAS 123”) and SFAS No. 148,Accounting for Stock-Based Compensation—Transition and Disclosure(“SFAS 148”), which was released in December 2002 as an amendment to SFAS 123, and used the minimum value method of valuing stock options as allowed for non-public companies.

In December 2004, the FASB issued SFAS No. 123(R),Share-Based Payment(“SFAS 123(R)”), which revised SFAS 123 and supersedes APB 25. SFAS 123(R) focuses primarily on transactions in which an entity obtains employee services in exchange for share-based payments. Under SFAS 123(R), an entity generally is required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, with such cost recognized over the applicable requisite service period. In addition, SFAS 123(R) requires an entity to provide certain disclosures in order to assist in understanding the nature of share-based payment transactions and the effects of those transactions on the financial statements.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123(R) using the prospective transition method, which requires the Company to apply its provisions only to awards granted, modified, repurchased or cancelled after the effective date. Under this transition method, stock-based compensation expense recognized beginning January 1, 2006 is based on the grant-date fair value of stock awards granted or modified after January 1, 2006. As the Company had used the minimum value method for valuing its stock options under the disclosure requirements of SFAS 123, all options granted prior to January 1, 2006 continue to be accounted for under APB 25.

22

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Stock-Based Compensation (Continued)

As a result of adopting SFAS 123(R) on January 1, 2006, based on the estimated grant-date fair value of employee stock options subsequently granted or modified, the Company recognized aggregate compensation expense of $394,727, $236,379 and $134,697 for the years ended December 31, 2008, 2007 and 2006, respectively. The Company uses the Black-Scholes option pricing model to estimate the fair value of granted stock options. The use of option valuation models requires the input of highly subjective assumptions, including the expected term and the expected stock price volatility. However, the Company currently does not have sufficient information available on which to base a reasonable and supportable estimate of the expected volatility of its share prices. Accordingly, the Company uses an alternative method (defined as “calculated value”) that incorporates each of the inputs required by SFAS 123(R) with the exception of the expected volatility of its stock.

Rather than use the expected volatility of the Company’s own stock, the Company has identified similar public entities for which share price information is available and has considered the historical volatility of those entities’ share prices in estimating expected volatility.

The fair value of stock awards was estimated using the Black-Scholes option pricing model. The following are the weighted average assumptions and fair values used in valuing the stock options granted and a discussion of the Company’s assumptions:

	2008			2007
Risk-free interest rate		3.46	%		4.59	%
Expected dividend rate		0.00	%		0.00	%
Expected useful life	5.4 years			5.4 years
Expected volatility		43.2	%		52.5	%
Fair value of stock option awards during the year	$	0.45		$	0.25

Risk-free interest rate— This is the U.S. Treasury rate (with a term that most closely resembles the expected life of the option) for the month in which the option was granted.

Expected dividend yield— The Company has never declared or paid dividends and does not anticipate paying dividends in the foreseeable future.

Expected term— This is the period of time that the options granted are expected to remain outstanding. This estimate is derived from the average of the expected terms used by a peer group of companies due to the lack of historical data for the Company.

23

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Stock-Based Compensation (Continued)

Expected volatility— Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. As previously discussed, the Company has calculated volatility based on peer group historical volatility which includes the historical volatility of companies that are similar in revenue size, are in the same industry or are competitors.

The grant date aggregate fair value of options, net of estimated forfeitures, not yet recognized as expense as of December 31, 2008 was $1,088,763, which will be recognized over a weighted-average period of 2.3 years. To the extent the actual forfeiture rate is different from what the Company has anticipated, stock based compensation related to these awards will differ from the Company’s expectations.

Compensation cost under SFAS 123(R) is included in the accompanying consolidated statement of operations as follows for each of the years presented:

	December 31,
	2008		2007		2006
Cost of revenues
Maintenance and support	$	5,900	$	3,571	$	2,702
Professional services		15,118		12,678		7,566
Stock-based compensation expense included in cost of revenues		21,018		16,249		10,268
Operating expenses
Research and development		54,367		19,094		12,160
Sales and marketing		179,119		109,973		60,487
General and administrative		140,223		91,063		51,782
Total stock-based compensation expense	$	394,727	$	236,379	$	134,697

24

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Comprehensive (Loss) Income

The Company reports comprehensive (loss) income in accordance with SFAS No. 130,Reporting Comprehensive Income.Comprehensive (loss) income includes certain unrealized gains and losses that are recorded as a component of stockholders’ equity and excluded from the determination of net income. The Company’s accumulated other comprehensive loss consists of cumulative currency translation adjustments resulting from the translation of the financial statements of its foreign subsidiaries and the effects of foreign currency changes to the deferred tax asset.

Litigation Reserves

The Company accrues for loss contingencies associated with outstanding litigation, claims and assessments for which it has determined it is probable that a loss contingency exists and the amount of loss can be reasonably estimated. The Company expenses professional fees associated with litigation claims and assessments as incurred.

Recent Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendment of FAS 133(“SFAS 161”). SFAS 161 applies to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS 133. The provisions of SFAS 161 require entities to provide greater transparency through additional disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the effects, if any, that SFAS 161 may have on our financial statements.

25

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Recent Accounting Pronouncements (Continued)

In December 2007, the FASB issued SFAS No. 160,Non-controlling Interests in Consolidated Financial Statements(“SFAS 160”). SFAS 160 requires entities to report non-controlling (minority) interests in subsidiaries as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the effects, if any, that SFAS 160 may have on our financial statements.

In December 2007, the FASB issued SFAS 141(revised 2007),Business Combinations(“SFAS 141R”). SFAS 141R will significantly change the accounting for business combinations in a number of areas, including the treatment of contingent consideration, contingencies, acquisition costs, in-process research and development and restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS 141R is effective for fiscal years beginning after December 15, 2008, and the Company will adopt this standard on January 1, 2009. The Company has not yet determined the impact, if any, of SFAS 141R on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The FASB issued FSP FAS 157-b which delayed the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This FSP partially defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. Effective for fiscal year 2008, the Company adopted SFAS 157 except as it applies to those non-financial assets and non-financial liabilities as noted in FSP FAS 157-b. The partial adoption of SFAS 157 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. The Company is currently evaluating the effect, if any; the adoption of FSP FAS 157-b will have on its consolidated results of operations, financial position and cash flows.

26

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Significant Accounting Policies (Continued)

Recent Accounting Pronouncements (Continued)

In February 2007, the FASB issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS 159”), which allows companies the option to measure certain financial assets or liabilities at fair value and include unrealized gains and losses in net income rather than equity. Subsequent measurements for the financial instruments and liabilities an entity elects to measure at fair value will be recognized in earnings. SFAS 159 also establishes additional disclosure requirements. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted provided that the entity also adopts SFAS 157. Effective for fiscal year 2008, the Company adopted SFAS 159. The adoption of SFAS 159 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

3. Acquisitions

Proforma Corporation

On July 31, 2007, the Company acquired 100% of the outstanding stock of Proforma Corporation (“Proforma”), a leading provider of enterprise architecture and business process analysis software. The acquisition of Proforma expanded the Company’s business process management capabilities by adding enterprise architecture modeling and business process analysis functionality to its product suite. The Company believes the acquisition of Proforma supports its strategic direction, strengthens its competitive position in the business process management suite market, expands its customer base, and expands its product offering. The purchase price consisted of $24,751,679 cash and 9,276,033 shares of the Company’s Series AA Redeemable Convertible Preferred Stock, with a fair value of $1.34 per share. The fair value of the Series AA Redeemable Convertible Preferred Stock was determined by the Company’s board of directors. The operating results of Proforma have been included in the accompanying consolidated financial statements from the date of acquisition.

27

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Acquisitions (Continued)

Proforma Corporation (Continued)

The aggregate purchase consideration consisted of the following:

Cash paid	$	24,751,679
Series AA Redeemable Convertible Preferred Stock		12,429,884
Transaction costs		289,434
Cash acquired on acquisition		(261,641	)
	$	37,209,356

Acquisition-related transaction costs include legal and accounting fees, and other external costs directly related to the merger.

The total purchase price was allocated to acquired net tangible and identifiable intangible assets and liabilities assumed based on their estimated fair values as set forth below. The excess of the purchase price over the net tangible and identifiable intangible assets and liabilities assumed was recorded as goodwill (none of which is deductible for tax purposes). Total goodwill of $18.0 million was allocated to the Company’s America’s operating segment as the majority of revenue from the sale of Proforma products is expected to be in North America for the foreseeable future. The following table summarizes the acquired tangible and identifiable intangible assets, liabilities assumed and goodwill:

Trade receivables	$	3,049,552
Prepaid expenses and other current assets		294,572
Fixed assets		275,629
Customer relationships with a useful life of 4.4 years		10,184,000
Acquired technologies with a useful life of 6.2 years		8,487,000
Customer order backlog with a useful life of 3.3 years		637,000
Goodwill		18,000,217
Deferred tax liability recognized for acquired definite-lived assets		(7,616,041	)
Reduction in valuation allowance attributable to deferred tax assets		6,564,651
Accounts payable and accrued expenses		(773,360	)
Deferred revenue		(1,571,289	)
Notes payable		(322,575	)
Total acquired assets and liabilities	$	37,209,356

28

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Acquisitions (Continued)

Proforma Corporation (Continued)

In connection with the purchase price allocation, the Company estimated the fair value of the customer support obligation assumed from Proforma in connection with the purchase in accordance with EITF No 01-3Accounting in a Business Combination for Deferred Revenue of an Acquiree.As a result, in allocating the acquisition purchase price, the Company recorded an adjustment to reduce the carrying value of Proforma’s July 31, 2007 deferred support revenue by $956,482 to $1,571,289, which amount represents the Company’s estimate of the fair value of the support obligation assumed.

The fair values of the identified intangible assets were determined by an independent appraisal. The intangible assets are being amortized over their estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed. During the year ended December 31, 2008, the Company recorded amortization expense related to acquired intangible assets of $4,115,000. For the period August 1, 2007 to December 31, 2007, the Company recorded amortization related to the intangible assets of $1,995,000.

The weighted-average amortization period for the intangible assets acquired is 5.1 years.

The unaudited Pro Forma consolidated results of operations presented below assume that the Proforma acquisition occurred on January 1, 2006:

	(Unaudited)
	Years ended December 31,
	2007			2006
Pro Forma revenues	$	71,737,278		$	57,518,475
Pro Forma net loss	$	(3,728,751	)	$	(114,475	)
Accretion of preferred stock and preferred stock dividends		(9,471,463	)		(4,528,423	)
Pro Form net loss attributable to common stockholders	$	(13,200,214	)	$	(4,642,898	)

Process Competence B.V.

On November 19, 2007, the Company acquired Netherlands based Process Competence B.V. and its subsidiaries (collectively “Process Competence”). The acquisition of Process Competence provided the Company with skilled professional services professionals as well as a direct sales presence in Belgium, Luxembourg, France and the Netherlands. The operating results of Process Competence have been included in the accompanying consolidated financial statements from the date of acquisition.

29

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Acquisitions (Continued)

Process Competence B.V. (Continued)

The purchase price was $1,667,335, which consisted of cash consideration of $1,176,835 (net of $39,823 cash acquired on acquisition), a contingent payment of $369,251 and $121,249 of acquisition related transaction costs, which include legal and accounting fees, and other external costs directly related to the acquisition. At December 31, 2007, the Company has recorded $210,159 of cash consideration due to the seller in accounts payable and accrued expenses in the accompanying consolidated balance sheet.

The purchase price was allocated based on net liabilities acquired of $175,508 and an intangible asset relating to order backlog of $55,000 which is being amortized over five years. The excess of the purchase price over net liabilities and intangible assets of $1,787,843 was recorded as goodwill (none of which is deductible for tax purposes). The goodwill balance was allocated to the Company’s international operating segment as the majority of revenue is expected to be recognized internationally for the foreseeable future. A contingent payment of $369,251 was paid in 2008 based on satisfaction of certain financial performance objectives related to 2008. The payment was recorded as additional goodwill at the time of the achievement of the performance objectives during 2008.

Spotlight Data Solution, Inc.

On November 30, 2007, the Company acquired substantially all of the assets of Spotlight Data Solution, Inc. (“Spotlight Data”) for cash consideration of $1,220,000. The acquisition of Spotlight Data provided the Company with process discovery technology that complements its business process management product suite. The total purchase price was allocated to intangible assets, which are being amortized over fifteen months. During 2008, and 2007, the Company recorded amortization related to the acquired intangible assets of $976,000 and $81,333, respectively.

The Pro Forma effects of Process Competence and Spotlight Data acquisitions individually or in the aggregate, were not material to our results of operations for 2007 or 2006 and therefore, are not presented.

30

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Property and Equipment

Property and equipment consists of the following:

	Years ended December 31,
	2008			2007
Computer equipment	$	2,041,300		$	1,800,314
Office furniture and equipment		482,994			436,451
Equipment under capital lease		1,112,099			580,897
Leasehold improvements		1,168,618			1,095,330
		4,805,011			3,912,992
Accumulated depreciation		(2,651,839	)		(1,668,543	)
	$	2,153,172		$	2,244,449

Depreciation for the years ended December 31, 2008, 2007 and 2006, was $1,192,000, $764,000 and $523,000, respectively.

5. Goodwill

The changes in the carrying amounts of goodwill for the years ended December 31, 2008, and 2007 by operating segment and in total are as follows:

	Americas		International
	Operating		Operating
	Segment		Segment		Total
Balance at January 1, 2007	$	15,447,131	$	—	$	15,477,131
Proforma Corporation acquisition		17,995,186		—		17,995,186
Process Competence acquisition		—		1,304,088		1,304,088
Balance at December 31, 2007		33,442,317		1,304,088		34,746,405
Adjustments to purchase price allocations		5,031		483,755		488,786
Balance at December 31, 2008	$	33,447,348	$	1,787,843	$	35,235,191

31

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Acquired Intangible Assets

Acquired intangible assets consisted of the following:

	Weighted-
	Average		Gross					Net
	Useful Life		Carrying		Accumulated			Carrying
	in Years		Amount		Amortization			Amount
December 31, 2008:
Customer relationships		4.4	$	10,184,000	$	(3,834,000	)	$	6,350,000
Acquired technology		5.3		18,207,000		(8,231,334	)		9,975,666
Backlog		3.4		692,000		(650,172	)		41,828
December 31, 2007:
Customer relationships		4.4	$	10,184,000	$	(1,106,000	)	$	9,078,000
Acquired technology		5.3		18,207,000		(4,376,334	)		13,830,666
Backlog		3.4		692,000		(420,820	)		271,180

As of December 31, 2008, future estimated amortization costs per year for the Company’s existing intangible assets other than goodwill are follows:

	Amortization
Years ending December 31,	Expense
2009	$	6,134,357
2010		5,017,481
2011		2,594,404
2012		1,261,252
2013 and thereafter		1,360,000

32

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Software Development Costs

Software development costs consist of the following:

	December 31,
	2008			2007
Internal development costs	$	2,748,746		$	2,659,067
Capitalized interest		42,152			49,545
		2,790,898			2,708,612
Accumulated amortization		(2,770,739	)		(2,539,327	)
	$	20,159		$	169,285

Amortization of software development costs for the years ended December 31, 2008, 2007 and 2006 was $135,000, $366,000 and $481,000 respectively.

8. Notes Payable

	December 31,
	2008			2007
Note payable issued to the landlord in February 2006 to fund leasehold improvements. The note is being repaid monthly in installments of principal and interest through March 1, 2016. The note accrues interest at 9%.	$	73,634		$	80,640
Note payable issued to a vendor in December 2008 to fund the implementation of accounting software. The note is being repaid monthly in installments of principal through December 2011. The note accrues interest at 0%.		156,443			—
		230,077			80,640
Less current portion		(56,831	)		(7,006	)
	$	173,246		$	73,634

33

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Notes Payable (Continued)

Aggregate maturities as of December 31, 2008 of the Company’s long-term debt for the years ending December 31 are as follows:

Years	Amount
2009	$	56,831
2010		62,019
2011		62,806
2012		10,028
2013 and thereafter		38,393

9. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

	December 31,
	2008		2007
Accounts payable	$	4,488,787	$	3,700,623
Accrued expenses		3,767,801		3,475,534
Accrued commissions		2,116,057		2,546,183
Other accrued compensation and related expenses		989,413		1,704,231
	$	11,362,058	$	11,426,571

10. Preferred Stock

Series AA Redeemable Convertible Preferred Stock

In September 2004, the Company completed a recapitalization of its equity structure by eliminating preference variances and creating a single class of preferred security, which was the Company’s Series AA. In connection with this recapitalization all common stockholders converted their entire position into Series AA.

The Company issued 15,400,000 shares of Series AA to acquire the assets of CommerceQuest, Inc. on October 5, 2005. The Company issued 9,276,033 shares of Series AA on July 31, 2007 to acquire the outstanding stock of Proforma Corporation. Also on July 31, 2007, the Company issued 9,667,605 shares of Series AA in exchange for all shares of Series BB and warrants for the purchase of Series BB as more fully described below.

34

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Preferred Stock (Continued)

Series AA Redeemable Convertible Preferred Stock (Continued)

On July 31, 2007, the Company amended and restated its articles of incorporation changing certain rights and preferences of the Series AA. Primarily, the amendment added a redemption provision making the Series AA redeemable at the option of the holders. There were 56,000,334 shares of Series AA shares issued and outstanding at the time of the amendment and restatement to the Company’s articles of incorporation. The Series AA ranks junior to the Series CC Redeemable Convertible Preferred Stock (“Series CC”) and senior to the common stock with respect to dividend and liquidation rights, has a stated value of $1.38572 per share, and has the following rights and provisions:

The Series AA holders continue to be entitled to receive dividends when and if authorized by the Board of Directors and declared by the Company, at a cumulative rate of 8% of stated value per annum. Dividends will accrue monthly and be cumulative from the date of issuance of the Series AA whether or not the dividends are authorized or declared, whether or not funds are legally available for payment and whether or not the Company has earnings. As part of the amendment and restatement of our articles of incorporation on July 31, 2007, dividends shall be deemed to have accrued beginning January 1, 2006 with respect to all prior issuances of Series AA. At December 31, 2008 the Company had accrued dividends on the Series AA totaling $16,996,016. The dividends are reflected in the accompanying financial statements since the Series AA is redeemable at its stated value plus cumulative dividends.

Upon any liquidation, as defined in the Company’s articles of incorporation, but before any payment to holders of other classes of stock, the Series AA holders are entitled to receive an amount per share equal to the greater of (i) the Series AA stated value plus the amount of any accrued and unpaid dividends (whether or not declared) on such share of Series AA; or (ii) the amount per share of Series AA the holders would be entitled to receive if all shares of Preferred Stock were converted into shares of common stock. The redemption value per share as of December 31, 2008 was $1.69.

Each share of Series AA has voting rights equal to an equivalent number of shares of common stock into which it is convertible and votes together as one class with the common stockholders. The Series AA is convertible into common stock on a one-to-one basis at any time.

There is no conversion discount (no beneficial conversion feature). The conversion price is subject to adjustment based on the effects of dilution.

35

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Preferred Stock (Continued)

Series AA Redeemable Convertible Preferred Stock (Continued)

At any time after the fifth anniversary of the Series CC original issue date and upon written request of the holders of more than 66% of the then outstanding shares of Series AA, the Company shall redeem from the holders all of the then issued and outstanding shares of Series AA at the redemption price. The redemption price per share is equal to the Series AA liquidation preference per share as of the redemption date. As the Series AA is redeemable for cash outside the control of the issuer at a certain future date, the security will be presented in the financial statements in mezzanine equity and carried at redemption value.

Series CC Redeemable Convertible Preferred Stock

In July and August of 2007, the Company issued 18,834,583 of Series CC to new and certain existing investors for total cash proceeds of $29,984,656, or $1.592 per share.

The Series CC ranks senior to the Series AA and common stock for dividend and liquidation rights, has a stated value of $1.592 per share.

The Series CC holders are entitled to receive dividends when and if authorized by the Board of Directors and declared by the Company, at a cumulative rate of 8% per annum. Dividends will accrue monthly and be cumulative from the date of issuance of the Series CC whether or not the dividends are authorized or declared, whether or not funds are legally available for payment and whether or not the corporation has earnings. The Company accrued $3,390,421 of dividends as of December 31, 2008. The dividends are reflected in the accompanying financial statements since the Series CC is redeemable as more fully described below, at the stated value plus cumulative dividends.

Upon any liquidation (as defined in the articles of incorporation), before any payment to holders of other classes of stock, the Series CC holders are entitled to receive an amount per share equal to the greater of (i) Series CC stated value plus the amount of any accrued and unpaid dividends (whether or not declared) on such share of Series CC; or (ii) the amount per share of Series CC the holders would be entitled to receive if all shares of Preferred Stock were converted into shares of common stock. The redemption value per share as of December 31, 2008 was $1.77.

36

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Preferred Stock (Continued)

Series CC Redeemable Convertible Preferred Stock (Continued)

Each share of Series CC has voting rights equal to an equivalent number of shares of common stock into which it is convertible and votes together as one class with the common stockholders.

The Series CC is convertible to common stock on a one-to-one basis at any time. There is no conversion discount (no beneficial conversion feature). The conversion price is subject to adjustment based on the effects of dilution.

At any time after the fifth (5th) anniversary of the Series CC original issue date and upon written request of any holder of Series CC, the Company shall redeem from such holder all of the issued and outstanding shares of Series CC held by such holder at the redemption price. The redemption price per share is equal to the Series CC liquidation preference per share as of the redemption date. As the Series CC is redeemable for cash outside the control of the issuer at a certain future date, the security will be presented in the financial statements in mezzanine equity and carried at redemption value.

Issuance costs incurred of $177,966 will be amortized (accreted) over 5 years using the straight line method.

Series BB Redeemable Convertible Preferred Stock

On July 31, 2007 the Company issued 9,667,605 shares of Series AA in exchange for all issued and outstanding shares of Series BB and warrants. Issued and outstanding shares of Series BB were exchanged for Series AA Convertible Preferred Stock based on an exchange rate of 1.83 shares of Series AA for each share of Series BB. In addition, each outstanding warrant to purchase a share of Series BB was converted into one share of Series AA.

Prior to the conversion of the Series BB and warrants to purchase Series BB to Series AA, in October 2005, the Company issued 3,792,317 shares of Series BB to certain existing investors for total proceeds of $5,255,090, or $1.39 per share. In connection to the issuance of the Series BB, the Company issued detachable stock purchase warrants to purchase 2,712,722 shares of Series BB at an exercise price of $1.39 per share to certain investors participating in the Series BB offering. As stated in Note 2, the warrants were recorded as liabilities at fair value with changes in fair value recorded as a component of operations until their conversion. The Series BB had liquidation, voting and dividend rights similar to the Series AA.

37

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Preferred Stock (Continued)

Series BB Redeemable Convertible Preferred Stock (Continued)

The holders were entitled to receive dividends when and if authorized by the Board of Directors and declared by the Company at a cumulative rate of 8% of stated value per annum. Dividends accrued monthly and were cumulative from the date of issuance of the Series BB whether or not the dividends were authorized or declared, whether or not funds were legally available for payment and whether or not the corporation has earnings. During the period from January 1, 2007 to July 31, 2007 (date of conversion) and for the year ended December 31, 2006, the Company accrued dividends on the Series BB of $245,236 and $420,407, respectively. The dividends are reflected in the accompanying financial statements since the Series BB were redeemable at the stated value plus cumulative dividends.

11. Stock Purchase Warrants

At December 31, 2008, the Company has outstanding warrants summarized as follows:

Number		Exercise
of Shares	Class	Price		Expiration Date
1,257	Series AA		29.84	February 2009
8,486	Series AA		14.14	February 2010
4,536	Series AA		7.35	October 2010
39,155	Common		1.28	March 2012
53,434

In connection with a revolving promissory note which was paid in full during 2006, the Company previously issued warrants to a bank to purchase 8,486 and 4,536 shares of Series AA at exercise prices of $14.14 and $7.35 per share, respectively and 39,155 shares of common stock for $1.28 per share. Included in the warrant agreements is a non-assumption provision which allows the bank to put the warrants back to the Company at three times the exercise price in the event of an acquisition and the acquirer does not assume the obligations of the warrants. In accordance with FASB SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, the non-assumption provisions included in the warrant agreements were accounted for as embedded derivatives. Using a probability weighted valuation methodology, the Company calculated the fair value of each non-assumption provision at the time of issuance and at each year-end and has recorded the aggregate fair value of the non-assumption provisions as a long term liability in the consolidated balance sheets. The fair value was determined based on an estimated probability of non-assumption discounted to present value at a discount rate commensurate with the Company’s cost of capital.

38

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Stock Purchase Warrants (Continued)

There was no material value associated to the warrants separate from the non-assumption provision as the exercise price of the warrants were substantially in excess of the fair market value of the stock the warrant was exercisable into.

As described in further detail in Notes 2 and 10, the Company issued warrants to purchase 2,712,722 shares of Series BB redeemable convertible preferred stock that were considered liabilities pursuant to FASB Statement No. 150,Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equityand related FASB Staff Position 150-5,Issuer’s Accounting under FASB Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable (FSP 150-5).The warrants were reported as liabilities at their estimated fair value, and any changes in fair value were reflected in the statement of operations during the period of the change in value.

The table below summarizes the change in fair value of the derivative liability and the Series BB warrant liability:

				Series BB
	Derivative			Warrant
	Liability			Liability			Total
Fair value at January 1, 2006	$	110,366		$	3,228,140		$	3,338,506
Change in value		52,890			379,781			432,671
Fair value at December 31, 2006		163,256			3,607,921			3,771,177
Change in value		61,176			895,198			956,374
Conversion of Series BB warrants to Series AA Preferred Stock		—			(4,503,119	)		(4,503,119	)
Fair value at December 31, 2007		224,432			—			224,432
Change in value		(220,240	)		—			(220,240	)
Fair value at December 31, 2008	$	4,192		$	—		$	4,192

39

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. Shares Reserved for Future Issuance

At December 31, 2008, the Company has reserved shares of common stock for future issuance as follows:

Conversion of Series AA	71,012,991
Conversion of Series CC	18,844,221
Exercise and conversion of Restricted Stock Units	1,443,780
Exercise of common stock purchase warrants	39,155
Exercise of stock options	8,404,192
Stock options reserved by the Board of Directors	3,205,440
	102,949,779

13. Stock Option Plan

Equity Incentive Plans

In 2004, the Company adopted the Metastorm Inc. 2004 Omnibus Stock Plan (the “2004 Plan”). Prior to adoption of the 2004 Plan, the Company issued options under the 1999 Equity Incentive Plan (the “1999 Plan”). On September 15, 2004, the Company completed an equity recapitalization in which all issued and outstanding common stock, options to purchase common stock and preferred stock outstanding at the date of the recapitalization were converted to Series AA. As a result of the recapitalization all options for common stock outstanding under the 1999 Plan were converted to options to purchase Series AA for an exercise price substantially higher than the fair value of the Series AA at the date of the conversion. Options outstanding to purchase Series AA were approximately 40,000 and 45,000 as of December 31, 2008 and 2007, respectively, with a weighted average exercise price of $65.00 and $64.12 per share, respectively. No options have been granted under the 1999 Plan since adoption of the 2004 Plan.

The 2004 Plan is administered by the Compensation Committee of the Board of Directors. The 2004 Plan provides for the granting of qualified and nonqualified stock options to purchase an aggregate of up to 12,770,232 shares of common stock to eligible employees, officers, and directors of the Company. The options generally vest ratably over a service period of four years and have a ten year contractual life. The 2004 Plan also provides for the granting of Restricted Stock Units of up to 1,443,780 shares of preferred stock.

40

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Stock Option Plan (Continued)

Equity Incentive Plans (Continued)

The following table summarizes the activity of the 2004 Plan:

								Weighted
						Weighted		Average
				Range of		Average		Remaining
	Number			Exercise		Exercise		Contractual
	of Shares			Prices		Prices		Life
Outstanding at December 31, 2005		2,709,000			0.28		0.28
Granted		2,710,000			0.28		0.28
Forfeited		(293,375	)		0.28		0.28
Outstanding at December 31, 2006		5,125,625			0.28		0.28
Granted		3,192,500			0.28 – 0.46		0.45
Exercised		(28,125	)		0.28		0.28
Forfeited		(77,500	)		0.28 – 0.46		0.37
Outstanding at December 31, 2007		8,212,500			0.28 – 0.46		0.35
Granted		1,451,667			1.09		1.09
Exercised		(1,132,475	)		0.28 – 0.46		0.29
Forfeited		(127,500	)		0.28 – 0.46		0.45
Outstanding at December 31, 2008		8,404,192			0.28 – 1.09		0.48		7.83
Exercisable at December 31, 2008		4,301,223			0.28 – 1.09		0.36		7.11
Vested and expected to vest at December 31, 2008		7,886,397					0.46		6.89

The weighted average grant-date fair value of options granted during the years ended December 31, 2008, 2007 and 2006 was $0.45, $0.25 and $0.28, respectively.

Total intrinsic value of options exercised during the years ended December 31, 2008 and 2007 was $869,306 and $0, respectively.

41

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Stock Option Plan (Continued)

Restricted Stock Units

In September 2004, the Company awarded to certain key executives 1,443,780 Restricted Stock Units (“Units”). Each Unit entitles the grantee to the issuance of one share of Series AA Convertible Preferred Stock of the Company (a Share). The Units vested 50% immediately and 50% ratably over eight consecutive calendar quarters from the grant date. The shares of stock underlying the fully vested units are not issuable until the earlier of (i) September 1, 2009 or (ii) the date of a change in control. As of December 31, 2008, no shares have been issued for the Units and all Units remain outstanding. The Units were valued on the measurement date (grant date) based on the fair value of the Series AA Convertible Preferred Stock. The total value of the Units was determined to be $2,000,674, which was amortized as stock compensation expense over the vesting period of such Units. Stock compensation expense of $375,127 is included in sales and marketing expense and general and administrative expense in the consolidated statements of operations for the year ended December 31, 2006. As of December 31, 2006, the Units were fully vested and were fully amortized as stock compensation expense.

14. Income Taxes

The provision for income taxes consists of the following for the years ended December 31:

	2008			2007			2006
Federal	$	343,577		$	102,680		$	343,576
State and local		64,275			75,409			46,686
Foreign		(558,381	)		(2,114,850	)		—
Total income tax expense	$	(150,529	)	$	(1,936,761	)	$	390,262
Current	$	17,989		$	119,132			—
Deferred		(168,518	)		(2,055,893	)		390,262
Total income tax (benefit) expense	$	(150,529	)	$	(1,936,761	)	$	390,262

42

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Income Taxes (Continued)

The significant components of the Company’s deferred tax assets and liabilities are as follows:

	2008			2007
Net operating loss carryforwards	$	14,077,592		$	14,846,922
Deferred stock compensation		1,040,760			935,536
Accrued expenses and deferred revenue		1,518,642			624,693
Amortization of intangible assets and goodwill		4,250,507			1,822,184
Provision for bad debts		39,032			10,195
Depreciation		233,092			182,595
AMT credit		98,772			102,680
Capital loss carryover		34,153			34,153
R&D credit carryover		85,246			85,246
Other		18,306			—
Total deferred tax assets		21,396,102			18,644,204
Valuation allowance for deferred assets		(12,304,866	)		(9,279,279	)
Net deferred tax assets		9,091,236			9,364,925
Deferred tax liabilities Prepaid expenses		325,134			335,360
Goodwill		1,295,448			896,849
Basis difference for intangibles on acquisitions		7,616,041			7,616,041
Total deferred tax liabilities		9,236,623			8,848,250
Net deferred tax asset (liability)	$	(145,387	)	$	516,675

43

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Income Taxes (Continued)

The change in the valuation allowance for deferred assets during the years ended December 31, 2008 and 2007 was as follows:

	December 31,
	2008			2007
Balance at beginning of year	$	(9,279,279	)	$	(21,113,324	)
(Increase) reduction due to operations		(3,025,587	)		2,806,780
Reduction to the release of the U.K. valuation allowance		—			2,462,614
Reduction due to the purchase of Proforma		—			6,564,651
Balance at end of year	$	(12,304,866	)	$	(9,279,279	)

The change in the valuation allowance due to fluctuations in foreign currency exchange rates is included in reductions due to operations.

At December 31, 2008, the Company had a net operating loss carry forward for U.S. federal and state income tax purposes of approximately $23.7 million which will begin to expire in 2020. The tax benefit of approximately $1.3 million of net operating loss carry forwards related to stock option exercises will be credited to equity when the benefit is realized. At December 31, 2008, the Company had a net operating loss carry forward for U.K. income tax purposes of approximately $ 15.9 million that may be carried forward indefinitely to offset future U.K. taxable income. The U.K. net operating loss carry forward decreased in value during 2008 on a U.S. dollar equivalent basis by $6.7 million due to changes in foreign exchange rates. The utilization of a portion of the U.S. net operating loss carry forwards will be subject to an annual limitation due to prior changes in ownership. Additionally, despite the net operating loss carry forwards, the Company may have a current and future U.S. tax liability due to alternative minimum tax or state tax requirements. At December 31, 2008, the Company also had net operating loss carry forwards in The Netherlands, Belgium and France aggregating approximately $800,000.

A valuation allowance has been recorded against the Company’s U.S., Netherlands, Belgium, France, and certain U.K. separate company deferred tax assets primarily due to the inability to predict future taxable income. The Company has considered all available evidence, including its historical levels of taxable income, the future reversal of existing temporary differences and estimated future taxable income in determining the need for a valuation allowance.

44

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Income Taxes (Continued)

At December 31, 2007, Sysgenics Ltd, a U.K. subsidiary of Metastorm Inc., released $8.8 million of valuation allowance previously recorded against its deferred tax assets, resulting in the recognition of $2.5 million of deferred tax benefit. In accordance with Financial Accounting Standard 109, Accounting for Income Taxes, future realization of a tax benefit depends on the existence of sufficient taxable income of the appropriate character within the carryback/carryforward period available under the tax law. The weight given to the potential effects of negative and positive evidence is commensurate with the extent to which it can be objectively verified. The Company believes that sufficient positive evidence still exists in both quality and quantity to carry the continuing deferred tax benefit without a valuation allowance.

A reconciliation of the reported income tax expense to the amount that would result by applying the U.S. federal statutory tax rate to the net losses is as follows:

	December 31,
	2008			2007			2006
Tax (benefit) expense at U.S. statutory rate	$	(4,196,424	)	$	(459,602	)	$	(91,300	)
Effect of permanent differences		586,793			1,272,614			221,104
State income benefits, net of federal effect		(645,123	)		(16,625	)		3,373
Foreign income tax rates different from U.S. statutory rate		(105,666	)		(105,799	)		(42,599	)
Alternative minimum tax		—			52,709			—
Other reconciling items		(131	)		52,564			(169,592	)
Change in valuation allowance		4,210,022			(2,732,622	)		469,276
	$	(150,529	)	$	(1,936,761	)	$	390,262

Other reconciling items relate primarily to prior year tax provision to tax return differences that were recorded in the current year.

45

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. Leases

The Company leases office space and certain office equipment under noncancelable operating lease agreements that expire through March 2016. Future minimum rental commitments for the years ending December 31 are as follows:

Years	Amount
2009	$	2,097,621
2010		1,764,840
2011		1,473,525
2012		1,182,949
2013		941,295
Thereafter		1,059,743

Rent expense under all operating leases for the years ended December 31, 2008, 2007 and 2006 was $1,990,148, $1,601,304 and $1,479,125, respectively. The rent expense for the years ended December 31, 2008, 2007 and 2006 includes sublease income of $16,200, $97,200 and $115,744, respectively.

The Company also leases office furniture, equipment and computer equipment under noncancelable capital leases that expire through April 2012. Amortization expense associated with the capital leases is combined with depreciation expense of fixed assets. Future minimum capital lease payments for the years ending December 31 are as follows:

Years	Amount
2009	$	393,368
2010		296,787
2011		132,086
2012		66,533
2013		—
Future minimum payments		888,774
Less:
Amounts representing interest		71,898
Amounts representing taxes		55,001
Current portion of capital leases		326,927
Long-term portion of capital leases	$	434,948

46

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. Employee Defined Contribution Retirement Plans

The Company maintains a 401(k) benefit plan (the “Plan”) allowing eligible U.S.-based employees to contribute a portion of their annual compensation to the Plan, subject to an annual maximum amount as set periodically by the Internal Revenue Service. Under the Plan, eligible employees are allowed to contribute up to 100% of their annual compensation, subject to the IRS limitation. The Company matches contributions equal to 100% of employee 401(k) elective deferral contributions which are not over 3% of employee pay, plus 50% of employee 401(k) elective deferral contributions which are over 3% of employee pay, but not to exceed 5% of employee pay. The Company may also make a discretionary annual contribution based on a formula defined by the Plan. The Company has not made a discretionary contribution in any year. In 2008, 2007 and 2006, the Company contributed approximately $880,000, $526,000 and $173,000, respectively.

In April 2001, the Company established a defined contribution plan for employees based in the United Kingdom. All permanent employees can contribute to the plan up to certain limits based on age, as set by HM Revenue and Customs. The Company makes contributions to the plan on behalf of eligible employees at a maximum rate of 5% of their eligible salary. In 2008, 2007 and 2006, the Company contributed approximately $499,000, $271,000 and $210,000, respectively.

17. Related Party Transaction

At December 31, 2008 and 2007, the Company owed $488,039 and $507,585, respectively, to one of our stockholders. The amount is payable in connection with the acquisition of CommerceQuest in October 2005 and was repaid in full in January 2009.

On November, 30, 2007, the Company acquired substantially all of the assets of Spotlight Data for $1,220,000 in cash. A member of the Company’s board of directors, was a stockholder and a creditor of Spotlight Data, and in connection with the acquisition, he received $65,096 as a stockholder of Spotlight Data and an aggregate of $351,325 as a creditor.

47

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. Commitments and Contingencies

The Company is subject to legal actions arising in the ordinary course of business. In management’s opinion, the Company has adequate legal defenses and/or insurance coverage with respect to the eventuality of such actions and does not believe any settlement would be material to the Company’s financial position or results of operations.

The Company licenses certain software components included in its product offering from third-party software vendors. The Company pays royalties to these vendors based on sales volume of the third- party products. At times, the Company will make royalty commitments to these vendors to cover a shortfall in committed sales volume. At December 31, 2008 and 2007, the Company had no minimum royalty commitments but has accrued $146,160 with respect to a prior minimum royalty commitment not met during 2008 and 2007, respectively.

On August 17, 2007, JuxtaComm Technologies, Inc. filed a complaint against the Company and several other defendants in the United States District Court for the Eastern District of Texas, Marshall Division, for infringement of United States Patent No. 6,195,662, issued to JuxtaComm on February 27, 2001. JuxtaComm is seeking preliminary and permanent injunctions enjoining any further infringement and an unspecified amount of damages, including actual and enhanced damages. The plaintiff alleges that the Metastorm BPM and Metastorm Enterprise software infringed and continues to infringe the plaintiff’s patent either directly, contributorily or by the inducement of others to infringe. The plaintiff also alleges that predecessor and related products of Metastorm BPM and Metastorm Enterprise may also infringe the plaintiff’s patent. The alleged infringing acts include, but are not limited to, the manufacture, use, sale, importation and/or offer for sale of products and/or services related to the transformation and exchange of data between heterogeneous computer systems.

As of March 2, 2009, the parties were in the process of conducting discovery. The Company intends to defend this matter vigorously. The Company has not accrued for any damages or settlement of this matter. The trial is set for November 2009.

48

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19. Geographic and Segment Information

FASB Statement No. 131,Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments. Operating segments are defined a components of an enterprise about which separate financial information is available that is evaluated regularly by the chief decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the chief executive officer. The Company is organized geographically. While the chief executive officer evaluates results in a number of ways, the geographical management structure is the primary basis for which the allocation of resources and financial results are assessed.

Reportable segments are the Company’s Americas and International business units. Each business unit is engaged in licensing the Company’s software products, providing unspecified software products and maintenance releases and technical support, and assisting the Company’s customers in the implementation of the software products.

Segment margins only reflect the direct controllable expenses of each business unit and do not represent the actual margins because they do not contain an allocation of corporate and general and administrative expenses incurred in support of the business units. Additionally, the margins do not reflect the amortization in intangible assets, restructuring costs and stock based compensation.

The Company does not track its assets by operating segments. Consequently, it is not practical to show assets by operating segment.

49

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19. Geographic and Segment Information (Continued)

Reportable segment data for the three years ending December 31 is a follows (in thousands):

	Americas						International							Total
	2008		2007		2006		2008		2007		2006			2008		2007		2006
Revenues
Software licenses	$	18,937	$	16,954	$	13,126	$	9,138	$	8,818	$	4,646		$	28,075	$	25,772	$	17,772
Professional services		18,705		13,882		9,651		4,604		2,966		1,770			23,309		16,848		11,421
Maintenance and support		15,884		11,315		7,879		7,626		5,777		4,982			23,510		17,092		12,861
Revenues		53,526		42,151		30,656		21,368		17,561		11,398			74,894		59,712		42,054
Cost of revenues
Software licenses		608		1,003		958		195		1,126		567			803		2,129		1,525
Professional services		15,238		10,367		7,654		3,842		2,559		1,844			19,080		12,926		9,498
Maintenance and support		1,889		662		455		105		811		502			1,994		1,473		957
Cost of revenues		17,735		12,032		9,067		4,142		4,496		2,913			21,877		16,528		11,980
Segment gross profit
Software licenses		18,329		15,951		12,168		8,943		7,692		4,079			27,272		23,643		16,247
Professional services		3,467		3,515		1,997		762		407		(74	)		4,229		3,922		1,923
Maintenance and support		13,995		10,653		7,424		7,521		4,966		4,480			21,516		15,619		11,904
Segment gross profit		35,791		30,119		21,589		17,226		13,065		8,485			53,017		43,184		30,074
Operating expenses
Research and development		5,490		4,691		2,632		4,835		1,839		1,830			10,325		6,530		4,462
Sales and marketing		18,642		13,258		7,539		10,959		8,294		5,986			29,601		21,552		13,525
Operating expenses		24,132		17,949		10,171		15,794		10,133		7,816			39,926		28,082		17,987
Segment operating profit	$	11,659	$	12,170	$	11,418	$	1,432	$	2,932	$	669		$	13,091	$	15,102	$	12,087

Revenues from software licenses are attributed to geographic regions based on territories and quota assigned to the sales director of that region. Revenues from software licenses concerning principal geographic regions are as follows for the years ended December 31 (in thousands):

	2008		2007		2006
Americas	$	18,937	$	16,954	$	13,126
United Kingdom		3,671		3,765		3,172
Foreign		5,467		5,053		1,474
	$	28,075	$	25,772	$	17,772

50

Metastorm Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19. Geographic and Segment Information (Continued)

Reconciliation of operating segment margin to loss before provision for income taxes is as follows for the years ended December 31 (in thousands):

	2008			2007			2006
Total margin from operating segments	$	13,091		$	15,102		$	12,087
Corporate and general and administrative expenses		(18,538	)		(11,610	)		(9,724	)
Amortization of intangible assets		(6,812	)		(3,778	)		(1,700	)
Stock-based compensation		(395	)		(236	)		(510	)
Interest expense		(284	)		(54	)		(297	)
Non-operating income (expense), net		604			(776	)		(125	)
Loss before provision for income taxes	$	(12,334	)	$	(1,352	)	$	(269	)

51