Metasolv (MSLV) 10-Q 2005 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                    TO                    

Commission File Number: 0-17920

MetaSolv, Inc.

Delaware	75-2912166
(State of Incorporation)	(I.R.S. Employer Identification No.)

5556 Tennyson Parkway

Plano, Texas 75024

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (972) 403-8300

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨  Yes    þ  No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    ¨  Yes    ¨  No

APPLICABLE ONLY TO CORPORATE ISSUERS:

As September 30, 2005, there were 42,044,426 shares of the registrant’s common stock outstanding.

METASOLV, INC.

INDEX

		Page
PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	Condensed Consolidated Balance Sheets – September 30, 2005 and December 31, 2004	3
	Condensed Consolidated Statements of Operations – For the Three and Nine Months Ended September 30, 2005 and 2004	4
	Condensed Consolidated Statements of Cash Flows – For the Nine Months Ended September 30, 2005 and 2004	5
	Notes to Condensed Consolidated Financial Statements	6
ITEM 2.	MANAGEMENT’S DISCUSSIONAND ANALYSISOF FINANCIAL CONDITIONAND RESULTSOF OPERATIONS	10
ITEM 3.	QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	27
ITEM 4.	CONTROLSAND PROCEDURES	27
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	29
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIESAND USEOF PROCEEDS	29
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	29
ITEM 4.	SUBMISSIONOF MATTERSTOA VOTEOF SECURITY HOLDERS	29
ITEM 5.	OTHER INFORMATION	29
ITEM 6.	EXHIBITS	29
SIGNATURES		31

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

METASOLV, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

	September 30, 2005			December 31, 2004
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	13,639		$	11,858
Marketable securities		21,786			23,354
Trade accounts receivable, less allowance for doubtful accounts of $2,120 in 2005 and $2,110 in 2004		14,231			12,482
Unbilled receivables		3,200			1,156
Prepaid expenses		2,156			2,842
Other current assets		626			657
Total current assets		55,638			52,349
Property and equipment, net		5,557			6,685
Intangible assets		1,503			2,787
Other assets		815			945
Total assets	$	63,513		$	62,766
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,541		$	4,780
Accrued expenses		20,806			19,644
Deferred revenue		10,097			7,350
Total current liabilities		35,444			31,774
Stockholders’ equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued or outstanding		—			—
Common stock, $.005 par value, 100,000,000 shares authorized, shares issued and outstanding: 42,044,426 in 2005 and 40,937,985 in 2004		211			205
Additional paid-in capital		151,203			148,772
Deferred compensation		(436	)		(229	)
Accumulated other comprehensive income		426			370
Accumulated deficit		(123,335	)		(118,126	)
Total stockholders’ equity		28,069			30,992
Total liabilities and stockholders’ equity	$	63,513		$	62,766

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METASOLV, INC.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2005			2004			2005			2004
	(Unaudited)						(Unaudited)
Revenues:
License	$	6,610		$	5,623		$	19,036		$	17,445
Services		6,931			4,931			19,334			13,055
Maintenance		9,741			9,642			29,680			29,163
Total revenues		23,282			20,196			68,050			59,663
Cost of revenues:
License		259			175			494			542
Services		8,237			8,193			26,208			22,004
Amortization of intangible assets		438			926			1,284			2,840
Total cost of revenues		8,934			9,294			27,986			25,386
Gross profit		14,348			10,902			40,064			34,277
Operating expenses:
Research and development		6,347			5,057			18,673			17,866
Sales and marketing		5,348			5,264			16,979			16,754
General and administrative		2,680			2,655			6,986			8,081
Restructuring and other costs		2,235			—			2,235			4,896
Total operating expenses		16,610			12,976			44,873			47,597
Loss from operations		(2,262	)		(2,074	)		(4,809	)		(13,320	)
Gain (loss) on investments		(97	)		—			(97	)		15
Interest and other income (expense), net		178			(96	)		599			318
Loss before taxes		(2,181	)		(2,170	)		(4,307	)		(12,987	)
Income tax expense		309			206			901			559
Net loss	$	(2,490	)	$	(2,376	)	$	(5,208	)	$	(13,546	)
Basic and Diluted loss per share	$	(0.06	)	$	(0.06	)	$	(0.13	)	$	(0.34	)
Basic and Diluted weighted average shares outstanding		41,420			40,367			41,098			39,372

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METASOLV, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

	For the Nine Months Ended September 30,
	2005			2004
	(Unaudited)
Cash flows from operating activities:
Net loss	$	(5,208	)	$	(13,546	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization of intangible assets		1,283			2,840
Depreciation		2,105			3,755
Stock compensation		1,367			1,155
Provision for bad debts		(796	)		251
Loss on asset disposal		10			186
Loss (gain) on sale of investments		97			(15	)
Changes in operating assets and liabilities:
Trade accounts receivable		(1,136	)		(590	)
Unbilled receivables		(2,058	)		(100	)
Other assets		640			5
Accounts payable and accrued expenses		1,204			(2,281	)
Deferred revenue		2,758			(367	)
Net cash provided by (used in) operating activities:		266			(8,707	)
Cash flows from investing activities:
Purchases of property and equipment		(1,048	)		(1,446	)
Proceeds from the sale of property and equipment		20			104
Purchases of marketable securities		(9,777	)		(32,705	)
Proceeds from sale of marketable securities		11,306			32,154
Proceeds from sale of investments		—			15
Net cash provided by (used in) investing activities		501			(1,878	)
Cash flows from financing activities:
Proceeds from common stock transactions		863			1,547
Net cash provided by financing activities		863			1,547
Effect of exchange rate changes on cash		151			183
Increase (decrease) in cash and cash equivalents		1,781			(8,855	)
Cash and cash equivalents, beginning of period		11,858			17,870
Cash and cash equivalents, end of period	$	13,639		$	9,015

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METASOLV, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1) Basis of Presentation

These unaudited condensed consolidated financial statements reflect all adjustments (consisting only of those of a normal recurring nature), which are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows for the interim periods. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2004, contained in the Company’s Annual Report to Stockholders and Form 10-K filed with the Securities and Exchange Commission. Operating results for the nine months ended September 30, 2005, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2005.

Statement of Financial Accounting Standards (“SFAS”) No. 130,Reporting Comprehensive Income, establishes requirements for the reporting and display of comprehensive income and its components. Unrealized gains and losses on available-for-sale securities and foreign currency translation adjustments were the only items of other comprehensive income for the Company. Total comprehensive losses are as follows for the three-month and nine-month periods ended September 30, 2005 and 2004 (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005		2004
Net loss	$	(2,490	)	$	(2,376	)	(5,208	)	(13,546	)
Unrealized gains (losses) on marketable securities		(13	)		78		(68	)	(69	)
Foreign currency translation adjustments		135			152		124		(239	)
Total comprehensive loss	$	(2,368	)	$	(2,146	)	(5,152	)	(13,854	)

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The Company recognizes compensation cost associated with stock-based awards under the recognition and measurement principles of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. The excess of the quoted market price as of the date of the grant over the contract purchase price of shares is charged to operations over the vesting period. No compensation cost is recognized for fixed price stock options with exercise prices equal to the market price of the stock on the dates of grant (unless there has been a subsequent modification) or for shares acquired by employees under the Company’s stock purchase plans. Pro forma net loss and loss per share disclosures, as if the Company recorded compensation expense based on the fair value for stock-based awards, have been presented in accordance with the provisions of SFAS No. 148,Accounting for Stock-Based Compensation – Transition and Disclosure, and are as follows for the three-month and nine-month periods ended September 30, 2005 and 2004 (in thousands, except per share amounts):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net loss	$	(2,490	)	$	(2,376	)	$	(5,208	)	$	(13,546	)
Less stock-based employee compensation expense in reported net loss		520			109			1,367			1,155
Plus total stock-based employee compensation expense determined under fair value-based method for all awards		(1,352	)		(2,096	)		(4,673	)		(8,814	)
Pro forma net loss	$	(3,322	)	$	(4,363	)	$	(8,514	)	$	(21,205	)
Basic and diluted loss per share of common stock:
As reported	$	(0.06	)	$	(0.06	)	$	(0.13	)	$	(0.34	)
Pro forma	$	(0.08	)	$	(0.11	)	$	(0.21	)	$	(0.54	)

2) Revenue Recognition

The Company recognizes revenue using the “residual method” when there is vendor-specific objective evidence of the fair values of all undelivered elements in a multiple-element arrangement that is not accounted for using long-term contract accounting. Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred and subsequently recognized in accordance with the relevant sections of Statement of Position (“SOP”) 97-2,Software Revenue Recognition, and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements.

3) Earnings Per Share

Securities that were not included in the computation of earnings per share because their effect was antidilutive consist of restricted common stock shares and options to purchase shares of common stock as set forth below (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2005	2004	2005	2004
Options to purchase common stock	9,907	10,689	9,907	10,689
Restricted stock	458	186	458	186

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4) Segment Information

The Company operates in a single operating segment: communication software and related services. Revenue information regarding operations for different products and services is as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Revenues:
License	$	6,610	$	5,623	$	19,036	$	17,445
Services		6,931		4,931		19,334		13,055
Maintenance		9,741		9,642		29,680		29,163
Total revenues	$	23,282	$	20,196	$	68,050	$	59,663

5) Restructuring and Other Costs

During the three months ending September 30, 2005, the Company recorded $2.2 million of restructuring charges which were comprised of $1.0 million of severance of approximately 30 positions, $1.1 million for revised assumptions on the subleasing of vacant space in Europe, and $0.1 million for stock compensation related to an executive whose employment was terminated.

During the nine months ended September 30, 2004, the Company recorded restructuring charges of $4.9 million consisting of: approximately $2.7 million in the second quarter for vacating space in our London office ($1.1 million), revised sublease assumptions on previously vacated space ($0.7 million) and a stock compensation charge for options previously granted to an executive upon termination of his employment ($0.9 million); and $2.2 million in the first quarter for reduction in force of approximately 60 positions to align costs with expected market conditions and to integrate and rationalize the operations of previous acquisitions with those of the Company. The following table summarizes the status of the liability accounts established as part of these restructuring actions (in thousands):

	Employee Severance			Exit Costs			Other			Total
Balance at December 31, 2004	$	237		$	6,503		$	—		$	6,740
Provisions in 2005		1,022			1,107			(106	)		2,235
Amounts utilized		(492	)		(1,865	)		106			(2,463	)
Balance at September 30, 2005	$	767		$	5,745		$	—		$	6,512

Expenditures related to the remaining exit costs are expected to be completed by the end of 2010 and employee severance before the end of third quarter 2006.

6) Intangible Assets

The following is a summary of intangible assets at September 30, 2005 and December 31, 2004 (in thousands):

	September 30, 2005
	Gross Carrying Cost		Accumulated Amortization			Total		Weighted Average Amortization Period
Developed technology	$	12,290	$	(11,913	)	$	377	23 Months
Customer contracts		5,740		(5,740	)		—	35 Months
Customer relationships		2,298		(1,172	)		1,126	60 Months
Total intangible assets	$	20,328	$	(18,825	)	$	1,503

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	December 31, 2004
	Gross Carrying Cost		Accumulated Amortization			Total		Weighted Average Amortization Period
Developed technology	$	12,290	$	(10,930	)	$	1,360	23 Months
Customer contracts		5,740		(5,740	)		—	35 Months
Customer relationships		2,298		(871	)		1,427	60 Months
Total intangible assets	$	20,328	$	(17,541	)	$	2,787

The table below shows the amortization expense related to intangible assets (in thousands):

Three Months ended September 30,				Nine Months ended September 30,
2005		2004		2005		2004
$	438	$	926	$	1,284	$	2,840

Amortization expense related to intangible assets subject amortization at September 30, 2005 will be as follows (in thousands):

For the remaining three months:	2005	$	413
For years:	2006		582
	2007		460
	2008		48
		$	1,503

7) Indemnifications

The Company licenses its software and sells services to its customers under contracts that the Company refers to as Master Software License and Service Agreements (“MSLA”). Each MSLA contains the relevant terms of the contractual arrangement with the customer, and normally includes certain provisions for indemnifying the customer against losses, expenses, and liabilities from damages that may be awarded against the customer in the event the Company’s software is found to infringe upon a patent, copyright, trademark, or other proprietary right of a third party. The MSLA usually seeks to mitigate the potential impact of such indemnification obligations in various ways, including, but not limited, to certain geographic and time limitations, and a right to replace an infringing product.

To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material claims are outstanding as of September 30, 2005. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the MSLA, the Company cannot determine the maximum amount of future payments, if any, related to such indemnification provisions.

8) Subsequent Events

On October 26, 2005, the Company completed a private placement of $23.0 million of its common stock and warrants to purchase common stock. The Company sold 7,666,667 shares of its common stock in the private placement at a per share price of $3.00, and warrants to purchase an additional 3,833,333 shares of common stock. The warrants are exercisable at a price of $4.00 per share, may not be exercised until six months after the date of issuance and expire five years after the date of issuance. The Company has the right to call the warrants in the event that the common stock trading price exceeds $7.00 per share for twenty consecutive trading days. The warrants contain anti-dilution provisions that provide that the exercise price and the number of shares of common stock issuable upon exercise of each warrant will be adjusted if in the future the Company issues common stock for consideration per share less than the exercise price of the warrants in effect immediately prior to the time of issuance.

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

Overview

We are a leading global provider of operations support systems (OSS) software solutions that help communications service providers manage their networks and services. Our order management, inventory management, service activation and network mediation products and services automate service providers’ business processes across network planning and engineering, operations and customer care. Our customers successfully use MetaSolv products to introduce new services more easily, reduce service delivery times, reduce operating expenses, and optimize return on capital expenditures. All of our revenues come from the sale of software licenses, related professional services, and support of our software.

Our business was founded in 1992, and soon afterward we began to build order-processing software to help service providers needing to connect local telephone service networks with long distance service networks. By 1999, the year we became a publicly held company, we had evolved into a leading provider of order management and inventory management software for service providers offering voice and data communications services over both traditional communications networks and internet-based networks. During that period our customer base was largely composed of competitive local exchange companies in the United States. The communications market downturn in 2000 through 2001 saw the departure of many of these customers from the marketplace, as funding for competitive local exchange carriers declined severely. In 2002 and 2003, we extended our product portfolio to include service activation and network mediation products, through successive acquisitions of Nortel Network’s Service Commerce Division (2002) and Orchestream Holdings plc (2003). These acquisitions also provided MetaSolv with a significant worldwide expansion of our customer base, operations capabilities and staff of skilled employees. We have continued that expansion with organic operating growth in 2005. Today we have offices in 11 locations around the world, serving approximately 180 customers in over 40 countries, and are internationally recognized as a global leader in OSS software for next-generation communications service providers.

We expect worldwide use of converged, multi-service IP-based infrastructure for both mobile and fixed environments will continue to increase, and that overall growing demand for voice and data services will drive increasing demand for our products and services. We continue to invest in research and development of our products, particularly in the areas of network resource management and service activation capabilities, in order to meet the requirements of our customers and be well positioned for future growth.

We believe our product portfolio, our customer base, our people, and our continued investment and focus on network resource management and service activation position us well to provide end-to-end service fulfillment capabilities to both leading and emerging communications service providers around the world.

CRITICAL ACCOUNTING POLICIES

We prepare financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America. This requires management to make judgments, assumptions and estimates that affect significantly the amounts reported in the financial statements and accompanying notes. For example, estimates are used in the accounting for the allowance for doubtful accounts, contingencies, restructuring costs, realizability of tax assets, probability of achieving performance awards, and other special charges. Actual results may differ from these estimates.

Our software licensing and professional services agreements with customers typically have terms and conditions that are described in signed orders and a master agreement with each customer. Our sales for a given period typically involve large financial commitments from a relatively small number of customers. Accordingly, delays in the completion of sales during a quarter may negatively impact revenues in that quarter. Consistent with industry practice, we sometimes agree to bill our license fees in more than one installment over extended periods. When installments extend beyond six months, amounts not due immediately are deferred and recorded as revenue when payments are due, assuming all other revenue recognition criteria have been met.

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We recognize license revenues when our customer has signed a license agreement, we have delivered the software product, product acceptance is not subject to express conditions, the fees are fixed or determinable and we consider collection to be probable. We allocate the agreed fees for multiple products and services licensed or sold in a single transaction among the products and services using the “residual method” as required by SOP 98-9,Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, deferring the fair value of the undelivered elements and recognizing the residual amount of the fees as revenue upon delivery of the software license. On occasion we may enter into a license agreement with a customer requiring development of additional software functions or services necessary for the software’s performance of specified functions. For those agreements, we recognize revenue for the entire arrangement on a percentage-of-completion basis as the development services are provided, or on a milestone basis, as appropriate. We recognize services revenues as the services are performed. We recognize revenues from maintenance agreements ratably over the maintenance period, usually one year.

Our software products are priced to meet the needs of our target market segments, which include large facility-based incumbent wireline service providers and wireless and IP service providers. We charge a base price for core products, coupled with additional license fees for add-on modules. In addition, we typically scale our license pricing based on the extent of our customers’ usage as measured by the number of users of our product, the number of our customers’ subscribers, or the size of the network our product helps manage. We sell additional license capacity for our products when our customers’ usage of our product exceeds earlier license limits. Annual maintenance and support contracts are generally priced as a percentage of the license fee for the product being maintained. For a new customer, our initial sale of licenses and associated services, including maintenance and support, generally ranges from several hundred thousand to several million dollars.

Services revenues consist principally of solutions implementations and customer training. We use our own employees and subcontract with partners to provide consulting services to our customers. MetaSolv consulting and education services are offered on a fixed price and an hourly basis, depending on the nature of the work and customer preferences.

Since we implement some of our services on a fixed fee basis, if we incur more costs than we estimated, our profitability will suffer. Our process for tracking progress to completion on such arrangements is through individual detailed project plans and periodic review of labor hours incurred compared to estimated hours to complete the project. When estimates of costs to complete the project indicate that a loss will be incurred, such losses are recognized immediately.

Any estimation process, including that which is used in preparing contract accounting models, involves inherent risk. To the extent that our estimates of revenues and expenses on these contracts change periodically in the normal course of business, due to the modifications of our contractual arrangements or changes in cost, such changes would be reflected in the results of operations as a change in accounting estimate in the period the revisions are determined.

Maintenance revenues consist of income from software upgrades and support services for our customers. Our software maintenance agreements are typically contracted on an annual subscription basis and include both customer support and the right to product updates.

We normally ship our software and perform services shortly after we receive orders. As a result, our quarterly financial results are largely dependent on orders received during that period.

We recognize revenue only in cases where we believe collection is probable. In situations where collection is doubtful or when we have indications that a customer is facing financial difficulty, we recognize revenue as cash payments are received. In addition, for customers not on the cash basis of accounting, we maintain an allowance for doubtful accounts based upon the expected collectibility of accounts receivable. We regularly review the adequacy of our allowance for doubtful accounts through identification of specific receivables where it is expected that payment will not be received, in addition to establishing a general reserve based upon our collection history that is applied to all amounts that are not specifically identified. If there is a deterioration of a major customer’s credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected. The allowance for doubtful accounts reflects our best estimate of the ultimate recovery

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of accounts receivable as of the reporting date. Changes may occur in the future that may cause us to reassess the collectibility of amounts and at which time we may need to reduce or provide additional allowances in excess of that currently provided.

We assess the realizability of our deferred tax assets by projecting whether it is more likely than not that some portion or all of the deferred tax assets will not be realized in the foreseeable future. Accordingly, we carry a valuation allowance against our deferred tax assets, which are related primarily to net deductible temporary differences, tax credit carryforwards and net operating loss carryforwards. We evaluate a variety of factors in determining the amount of the deferred income tax assets to be recognized pursuant to SFAS No 109,Accounting for Income Taxes, including our earnings history, the number of years our operating loss and tax credits can be carried forward, the existence of taxable temporary differences, near-term earnings expectations, and the highly competitive nature of the communications industry and its potential impact on our business. As a result of these analyses we have continued to reserve all of our deferred tax assets.

We evaluate our long-lived assets, including acquired intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of any assets to be held and used is measured by a comparison of the carrying amount of any asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

PROFORMAFINANCIALRESULTS

We report quarterly unaudited financial statements prepared in accordance with generally accepted accounting principles in the United States of America. We also report pro forma financial information in earnings releases and investor conference calls. This pro forma financial information excludes certain non-cash and special charges, consisting primarily of the amortization and impairment of goodwill and other intangible assets, purchased in-process research and development, stock compensation expense, and restructuring costs. We believe the disclosure of the pro forma financial information helps investors evaluate the results of our ongoing operations. However, we urge investors to carefully review the financial information presented in accordance with generally accepted accounting principles included in our press releases, quarterly reports on Form 10-Q and our annual reports on Form 10-K.

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Results of Operations

The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain line items in our statements of operations.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Revenues:
License	28	%	28	%	28	%	29	%
Services	30	%	24	%	28	%	22	%
Maintenance	42	%	48	%	44	%	49	%
Total revenues	100	%	100	%	100	%	100	%
Cost of revenues:
License	1	%	1	%	1	%	1	%
Services and maintenance	35	%	41	%	38	%	37	%
Amortization of intangible assets	2	%	4	%	2	%	5	%
Total cost of revenues	38	%	46	%	41	%	43	%
Gross profit	62	%	54	%	59	%	57	%
Operating expenses:
Research and development	27	%	25	%	28	%	30	%
Sales and marketing	23	%	26	%	25	%	28	%
General and administrative	12	%	13	%	10	%	14	%
Restructuring and other costs	10	%	—		3	%	8	%
Total operating expenses	72	%	64	%	66	%	80	%
Loss from operations	(10	)%	(10	)%	(7	)%	(23	%)
Interest and other income, net	1	%	(1	)%	1	%	1	%
Loss before taxes	(9	)%	(11	)%	(6	)%	(22	%)
Income tax expense	1	%	1	%	2	%	1	%
Net loss	(10	)%	(12	)%	(8	)%	(23	)%

Revenues

Total revenues in the third quarter of 2005 were $23.3 million, a 15% increase from $20.2 million in the third quarter of 2004. For the first nine months of 2005, total revenues increased 14% to $68.1 million from $59.7 million in the first nine months of 2004. The increase in revenues in both the three-month and nine-month periods primarily resulted from improved sales of software and related services, and from maintenance revenues on new license sales.

License fees. License revenues in the third quarter of 2005 were $6.6 million, an 18% increase from $5.6 million in the third quarter of 2004. For the first nine months of 2005, license revenues increased 9% to $19.0 million from $17.4 million in the first nine months of 2004. This increase in license revenue during both the quarter and year to date period was due to higher sales in both activation and network resource management product licenses, particularly in North America and Asia.

Services. Services revenues consist of technical consulting and education services. Services revenues of $6.9 million in the third quarter of 2005 represent a 41% increase from $4.9 million in the third quarter of 2004. For the first nine months of 2005, services revenues increased 48% to $19.3 million from $13.1 million in the first nine months of 2004. The increase in services revenues in the three-month and nine-month periods of 2005 resulted from larger engagements with tier one customers. The size of the average services engagement during the first nine months of 2005 increased 63% over the year-ago period.

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Maintenance. Maintenance revenues consist of post-contract customer support, including license product updates. Maintenance revenues increased slightly to $9.7 million in the third quarter of 2005, from $9.6 million in the third quarter of 2004, due to growth in maintenance revenues from new license sales. For the first nine months of 2005, maintenance revenues were $29.7 million, up 2% from $29.2 million for the first nine months of 2004 due to growth in license revenues and maintenance contract retention rates in excess of 90%.

Concentration of revenues. As of September 30, 2005, our active customer list includes approximately 180 communication service providers worldwide, including approximately two-thirds of the world’s 30 largest service providers. During the third quarter of 2005, our top ten customers represented 42% of our total revenue with the largest customer representing 11% of total revenue. For the first nine months of 2005, our top ten customers represented 50% of total revenue with the largest customer representing 13% of total revenue. For the third quarter of 2004, our top ten customers represented 48% of our total revenues, with the largest customer representing 13%, and for the first nine months of 2004, our top ten customers represented 44% of our total revenues with the largest customer representing 12% of our total revenues.

In any given quarter, we generally derive a significant portion of our revenues from a small number of relatively large sales. A loss or significant decrease in the sale of products and services to any customer from whom we received a high percentage of our total revenues during a recent quarter is likely to have a material adverse affect on our results of operations and financial condition. Additionally, our inability to consummate one or more substantial sales in any future period could harm our operating results for that period.

International revenues. During the third quarter of 2005, we recognized $13.7 million in revenues from customers outside the United States compared to $11.5 million in the third quarter of 2004, representing 59% and 57% of revenue in each period, respectively. International revenues during the first nine months of 2005 and 2004 were $38.8 million and $35.9 million, representing 57% and 60% of total revenues, respectively.

Cost of Revenues

License cost. License cost of revenues consists primarily of royalties for third party software sold in conjunction with our products. License cost of revenues was $0.3 million in the third quarter of 2005 and $0.2 million in the third quarter of 2004, representing 4% and 3% of license revenues in each period, respectively. For the first nine months of both 2005 and 2004, license costs were $0.5 million, representing 3% of license revenue in both periods. The increase in license cost of revenues as a percentage of license revenues in the quarterly period was primarily due to the mix of products sold in each period.

We plan to continue the use of third party software where it provides an advantage for our customers. While this plan lowers our overall product development cost, it may increase our cost of license revenues, both in absolute terms and as a percentage of revenues.

Services and maintenance cost. Services and maintenance cost of revenues consists of expenses to provide consulting, training and post-contract customer support services. These costs include compensation and related expenses for our employees and fees for third party consultants who provide services for our customers under subcontractor arrangements.

Services and maintenance cost of revenues was $8.2 million in the third quarter of both 2005 and 2004, representing 49% and 56% of services and maintenance revenues in each period, respectively. For the first nine months of 2005, services and maintenance costs increased 19% to $26.2 million from $22.0 million in the first nine months of 2004, representing 53% and 52% of services and maintenance revenues in each period, respectively. The increase in services and maintenance cost of revenues in the nine-month period was primarily due to higher staffing and subcontractor costs related to growth in services revenues. Services margins improved in the third quarter primarily due to the increase in revenue and a reduction in customer-specific engineering expense. In the year-to-date period, as a percentage of revenue, the reduction in customer-specific engineering cost was largely offset by use of subcontracted resources during the first half of 2005 for a fixed price engagement that significantly exceeded its original cost expectations. The Company believes it has no additional obligations under this contract.

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Amortization of intangible assets. The value assigned to intangible assets, primarily technology rights, is amortized over the estimated useful life of the assets using the greater of straight-line or the ratio that current gross revenues related to those assets bears to the total current and anticipated future gross revenues related to those assets. The original estimated useful lives of these assets ranged from nine months to sixty months.

In the third quarter of 2005, cost of revenues included $0.4 million in amortization of intangible assets, a decrease of 53% from $0.9 million in the third quarter of 2004. For the first nine months of 2005, amortization expense for intangible assets totaled $1.3 million, a decrease of 54% from $2.8 million in the first nine months of 2004. The decrease in amortization expense between 2005 and 2004 in both the three-month and nine-month periods was due to completion of the amortization of certain intangibles from the acquisition of OSS assets from Nortel Networks in 2002.

Operating Expenses

Research and development expenses. Research and development expenses consist primarily of costs related to our staff of software developers, contracted development costs and the associated infrastructure costs required to support product development. During the third quarter of 2005, research and development expenses increased 26% to $6.3 million from $5.0 million in the third quarter of 2004, representing 27% and 25% of total revenues in each period, respectively. For the first nine months of 2005, research and development expenses increased 5% to $18.7 million from $17.9 million in the first nine months of 2004, representing 27% and 30% of revenues in each period, respectively. The increase in research and development expense in the third quarter and first nine months of 2005, compared to the same periods in 2004, reflects an increase in resources invested in our product roadmap releases, compared to customer-specific projects where the expense is recorded as a cost of revenue, partially offset by staffing reductions related to the consolidation of our European research and development function into our Canadian operations.

During the third quarter of 2005, our research and development investments were focused on our core competencies of network resource management, network mediation, and service activation, in support of mobility, internet protocol (IP) and voice over IP (VOIP) domains. Additionally, we are investing to ease software integration for our customers, enabling rapid flow-through of service requests not only within our portfolio but between MetaSolv products and other business systems to further automate our customers’ business processes and lower their overall cost of doing business. During the past year we have focused our development investments in core product areas, while lowering development costs by shifting many routine tasks to offshore development resources.

The modular structure of our products allows communication service providers to implement product functionality in phases, depending on their needs, to realize near-term value and to maximize opportunities for longer-term benefits from an integrated OSS system.

Our product development methodology generally establishes technological feasibility near the end of the development process, when we have a working model. Costs incurred after the development of a working model and prior to product release are insignificant. Accordingly, we have not capitalized any software development costs.

Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries, commissions, travel, trade shows, and other related expenses required to sell our software.

In the third quarter of 2005 and 2004, sales and marketing expenses totaled $5.3 million in each period, representing 23% and 26% of revenue in each period, respectively. For the first nine months of 2005, sales and marketing expenses increased slightly to $17.0 million from $16.8 million in the first nine months of 2004, representing 25% and 28% of revenues in each period, respectively. The increase in sales and marketing expense in 2005 compared to the same three-month and nine-month periods in 2004 was primarily due to expansion of our sales activities in Asia, Latin America and Europe, and to higher commission expense related to higher revenues.

General and administrative expenses. General and administrative expenses consist of costs for finance and accounting, legal, human resources, information systems, facilities, bad debt expense, and corporate management not directly allocated to other departments.

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General and administrative expenses in the third quarter of both 2005 and 2004 were $2.7 million, representing 12% and 13% of revenues in each period, respectively. For the first nine months of 2005, general and administrative expenses decreased 14% to $7.0 million from $8.1 million in the first nine months of 2004, representing 10% and 14% of revenues in each period, respectively. The decrease in general and administrative expenses between the year-to-date periods was primarily due to the settlement of a bankruptcy claim, which resulted in a net credit to bad debt expense of approximately $0.6 million in the second quarter of 2005.

Restructuring and other costs. During the third quarter of 2005, we recorded a restructuring charge of $2.2 million comprised of $1.1 million related to staffing reductions of approximately 30 employees, primarily in overhead functions and redundant engineering positions, a $1.0 million reduction in sublease assumptions for vacant space, and $0.1 million stock compensation charge for a terminated employee. The staffing reductions are expected to result in annual cost savings of approximately $6 million. There were no restructuring costs in the first half of 2005.

During the first half of 2004, we recorded restructuring charges of $4.9 million, comprised of $2.1 million for a reduction of 64 positions, $1.8 million related to consolidation of facilities and $0.9 million in stock compensation expense related to a former executive. The estimated annualized cost savings from these reductions were approximately $7 million. There were no restructuring costs in the third quarter of 2004.

Interest and Other Income, Net

In the third quarter of 2005, interest and other income, net, consisting primarily of interest income, was $0.2 million, compared to ($0.1) million in the third quarter of 2004. The improvement from a net other expense position in 2004 to net other income in 2005 was due primarily to the presence of a large Canadian dollar receivable, and the impact on this receivable of a 4% decline in the exchange rate between U.S. and Canadian dollars during the third quarter of 2004. Although there were similar declines in the U.S. dollar exchange rate during 2005, we did not have the same receivables exposure during 2005. During the first nine months of 2005, interest and other income, net, was $0.6 million compared to $0.3 million in the first nine months of 2004. This improvement was due primarily to improved interest yields on the Company’s cash and marketable securities.

We recorded a $0.1 million loss on investments in the third quarter of 2005, representing the write-off of an equity position we held in a privately held company.

Income Tax Expense

We recorded income tax expense of $0.3 million in the third quarter of 2005 and $0.2 million in the third quarter of 2004. For the first nine months of 2005, we recorded income tax expense of $0.9 million, compared to $0.6 million in the first nine months of 2004. The majority of our income tax expense in both 2005 and 2004 is foreign withholding taxes related to sales in countries that impose a withholding tax on funds transferred out of the country to companies that do not have a physical presence within that country. These withholding taxes are difficult to predict due to changes in geographic revenue mix, and are not based on our pre-tax income or loss. As a result, our income tax rate may not bear any relationship to our consolidated taxable income.

Under Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes (“SFAS 109”), deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax basis of assets and liabilities which are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. SFAS 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the available evidence, which included our operating performance and projections for near term future performance, we are continuing to fully reserve our deferred tax assets, which we started reserving in the second quarter of 2003. We believe that, when taxable income is generated, the reversal of this valuation reserve will result in a tax provision that will be lower than the expected tax rate based on the statutory U.S. federal tax rate.

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Liquidity and Capital Resources

At September 30, 2005, our primary sources of liquidity were cash and cash equivalents and marketable securities totaling $35.4 million and representing 56% of total assets. We invest our cash in excess of current operating requirements in short and intermediate term investment grade securities that are available for sale as needed. Total cash and marketable securities increased $0.2 million during the nine month period ended September 30, 2005, from a balance of $35.2 million at December 31, 2004.

Cash generated from operating activities during the nine months ended September 30, 2005, was $0.3 million, with a $3.7 million use of cash during the first half of the year offset by $4.0 million generated during the third quarter. Cash generated from operations in 2005 is comprised of our $5.2 million net loss adjusted for non-cash items including amortization of intangibles, depreciation expense, stock compensation, and a $1.4 million increase in working capital.

Net cash provided by investing activities was $0.5 million for the first nine months of 2005, comprised primarily of a net sale of $1.5 million of marketable securities and $1.0 million of expenditures for operating equipment and facilities improvement.

Cash generated by financing activities was $0.9 million, representing proceeds from stock transactions through our employee stock purchase plan and exercise of stock options. On October 26, 2005, the Company completed a private placement of $23.0 million of its common stock and warrants to purchase common stock. The Company sold 7,666,667 shares of its common stock in the private placement at a per share price of $3.00 and warrants to purchase an additional 3,833,333 shares of common stock. The warrants are exercisable at a price of $4.00 per share, may not be exercised until six months after the date of issuance and expire five years after the date of issuance. The Company has the right to call the warrants in the event that the common stock trading price exceeds $7.00 per share for twenty consecutive trading days. The warrants contain anti-dilution provisions that provide that the exercise price and the number of shares of common stock issuable upon exercise of each warrant will be adjusted if in the future the Company issues common stock for consideration per share less than the exercise price of the warrants in effect immediately prior to the time of issuance.

We believe that our projected cash flows to be generated by operations, together with our current cash and marketable securities balances, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. From time to time we evaluate potential acquisitions and other strategic relationships with complementary businesses, products and technologies. Should cash balances be insufficient to meet our long-term business objectives, or to complete an acquisition, we may seek to sell additional equity or debt securities. The decision to sell additional equity or debt securities could be made at any time and could result in additional dilution to our stockholders.

New Accounting Pronouncements

In December 2004, the FASB issued SFAS 123(R),Share Based Payment, which was a revision ofSFAS 123, Accounting for Stock Based Compensation. This statement superseded APB Opinion 25,Accounting for Stock Issued to Employees, and is effective for annual reporting periods beginning after June 15, 2005. SFAS 123(R) requires a public entity 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 limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The Company is planning to adopt SFAS 123(R) in the first quarter of 2006. Based on the current outstanding stock options, employee stock purchase plan participation and restricted stock awards, the estimated impact of this change in accounting will be an increase in stock compensation costs of approximately $0.8 million to $1.1 million per quarter in 2006.

Factors That May Affect Future Results

We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The following section describes some, but not all, of these risks and uncertainties that we believe may adversely affect our business, financial conditions or results of operations. There are

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additional risks and uncertainties that we do not presently know, or that we currently view as immaterial, that may also impair our business operations. This report is qualified in its entirety by these risks. You should carefully consider the risks described below before making an investment decision. If any of the following risks actually occur, they could materially harm our business, financial condition, or results of operations. In that case, the trading price of our common stock could decline.

OUR QUARTERLY OPERATING RESULTS CAN VARY SIGNIFICANTLYAND MAY CAUSE OUR STOCK PRICETO FLUCTUATE.

Our quarterly operating results can vary significantly and are difficult to predict. As a result, we believe that period-to-period comparisons of our results of operations are not a good indication of our future performance. It is likely that in certain quarters our operating results will be below the expectations of public market analysts or investors. In such an event, the market price of our common stock may decline significantly. A number of factors are likely to cause our quarterly results to vary, including:

• The overall level of demand for communications services by consumers and businesses and its effect on demand for our products and services by our customers;

• Our customers’ willingness to buy, rather than build, order management, inventory management, service activation, and network mediation software;

• The timing of individual software orders, particularly those of our major customers involving large license fees that would materially affect our revenue in a given quarter;

• The timing of software maintenance agreement renewals and related payments, which could impact our ability to recognize a portion of maintenance support revenues in a given quarter;

• The introduction of new communications services and our ability to react quickly compared to our competitors;

• Our ability to manage costs of operating the business;

• The utilization rate of our professional services employees and the extent to which we use third party subcontractors to provide consulting services;

• Costs related to possible acquisitions of other businesses;

• Our ability to collect outstanding accounts receivable;

• Innovation and introduction of new technologies, products and services in the communications and information technology industries;

• A requirement that we defer recognition of revenue for a significant period of time after entering into a contract due to undelivered products, extended payment terms, or product acceptance;

• The occasional sale of large pass-through licenses or sublicenses for software provided by third parties, where MetaSolv may incur a substantial license fee that decreases margins on license revenues for the period; and

• Changes in services and license revenues as a percentage of total revenues, as license revenues typically have higher gross margin than services revenues.

We forecast the volume and timing of orders for our operational planning, but these forecasts are based on many factors and subjective judgments, and we cannot assure their accuracy. We have hired and trained a large number of personnel in core areas, including product development and professional services, based on our forecast of future revenues. As a result, significant portions of our operating expenses are fixed in the short term. Therefore, failure to generate revenues according to our expectations in a particular quarter could have an immediate negative effect on results for that quarter.

Our quarterly revenues are dependent, in part, upon orders booked and delivered during that quarter. We expect that our sales will continue to involve large financial commitments from a relatively small number of customers. As a result, the cancellation, deferral, or failure to complete the sale of even a small

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number of licenses for our products and related services may cause our revenues to fall below expectations. Accordingly, delays in the completion of sales near the end of a quarter could cause quarterly revenues to fall substantially short of anticipated levels. Significant sales may also occur earlier than expected, which could cause operating results for later quarters to compare unfavorably with operating results from earlier quarters.

Some contracts for software licenses may not qualify for revenue recognition upon product delivery. Revenue may be deferred when there are significant elements required under the contract that have not been completed, there are express conditions relating to product acceptance, there are deferred payment terms, or when collection is not considered probable. A higher concentration of orders from large telecom service providers, and larger more complex agreements, may increase the frequency and amount of these deferrals. With these uncertainties we may not be able to predict accurately when revenue from these contracts will be recognized.

THE COMMUNICATIONS MARKETIS CHANGING RAPIDLY,AND FAILURETO ANTICIPATEAND REACTTOTHE RAPID CHANGE COULD RESULTIN LOSSOF CUSTOMERSOR UNPRODUCTIVE EXPENDITURES.

Over the last decade, the market for communications products and services has been characterized by rapid technological developments, evolving industry standards, dramatic changes in the regulatory environment, emerging companies, bankruptcy filings by many new entrants, changes in spending patterns, and frequent new product and services introductions. Our future success depends largely on our ability to enhance our existing products and services and to introduce new products and services that are capable of adapting to changing technologies, industry standards, regulatory changes, and customer spending patterns and preferences. If we are unable to successfully respond to these changes or do not respond in a timely or cost-effective way, our sales could decline and our costs for developing competitive products could increase.

New technologies, service industry standards, or spending patterns could require significant changes in our business model, development of new products or provision of additional services. New products and services may be expensive to develop and may result in our encountering new competitors in the marketplace. Furthermore, if the overall market for our software grows more slowly than we anticipate, or if our products and services fail in any respect to achieve market acceptance, our revenues would be lower than we anticipate and operating results and financial condition could be materially adversely affected.

THE COMMUNICATIONS INDUSTRYIS EXPERIENCING CONSOLIDATION, WHICH MAY REDUCETHE NUMBEROF POTENTIAL CUSTOMERSFOR OUR SOFTWARE.

The communications industry has experienced significant consolidation. In the future, there may be fewer potential customers requiring operations support systems and related services, increasing the level of competition in the industry. In addition, larger communications companies generally have stronger purchasing power, which could create pressure on the prices we charge and the margins we realize. These companies are also striving to streamline their operations by combining different communications systems and the related operations support systems into one system, reducing the number of vendors needed. Although we have sought to address this situation by continuing to market our products and services to new customers and by working with existing customers to provide products and services that they need to remain competitive, we cannot be certain that we will not lose customers as a result of industry consolidation.

OUR CUSTOMERS’ FINANCIAL WEAKNESSOR THEIR INABILITYTO OBTAIN FINANCING MAY LEADTO LOWER SALESAND DECREASED PROFITABILITY.

Some of our customers are small to medium sized competitive communications service providers with limited operating histories. Some of these customers are not profitable and dependent on private sources of capital to fund their operations, and many competitive communications service providers are currently unable to obtain sufficient funds to continue expansion of their businesses. At the same time, many communications companies are encountering significant difficulties in achieving their business plans and financial projections. During the last three years, several of our customers ceased their business operations, and some have initiated bankruptcy proceedings. The downturn in the communications industry and the inability of many communications companies to raise capital have resulted in a decrease in the number of potential customers that are capable of purchasing our software, a delay by some of our existing customers

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in purchasing additional products, decreases in our customers’ operating budgets relating to our software maintenance services, delays in payments by existing customers, or failure to pay for our products. If our customers are unable to obtain adequate financing, sales of our software could suffer. If we fail to increase revenue related to our software, our operating results and financial condition would be adversely affected. In addition, adverse market conditions and limitations on the ability of our current customers to obtain adequate financing could adversely affect our ability to collect outstanding accounts receivable resulting in increased bad debt losses and a decrease in our overall profitability. Decreases in our customers’ operating budgets relating to software maintenance services could adversely affect our maintenance revenues and profitability. Any of our current customers who cease to be viable business operations would no longer be a source of maintenance revenue, or revenue from sales of additional software or services products, and this could adversely affect our financial results.

WE RELYONA LIMITED NUMBEROF CUSTOMERSFORA SIGNIFICANT PORTIONOF OUR REVENUES.

A significant portion of revenues each quarter is derived from a relatively small number of large sales. As consolidation in the communications industry continues, our reliance on a limited number of customers for a significant portion of our revenues may increase. The amount of revenue we derive from a specific customer is likely to vary from period to period, and a major customer in one period may not produce significant additional revenue in a subsequent period. In the third quarter of 2005, our top ten customers represented 42% of our total revenue with the largest customer representing 11% of total revenue. For the first nine months of 2005, our top ten customers represented 50% of total revenue with the largest customer representing 13% of total revenues. To the extent that any major customer terminates its relationship with us, or that we are unable to consummate one or more substantial sales, our revenues could be adversely affected.

COMPETITIONFROM LARGER, BETTER CAPITALIZEDOR EMERGING COMPETITORSFORTHE COMMUNICATIONS PRODUCTSAND SERVICESTHAT WE OFFER COULD RESULTIN PRICE REDUCTIONS, REDUCED GROSS MARGINSAND LOSSOF MARKET SHARE.

Competition in our markets is intense and involves rapidly changing technologies and customer requirements, as well as evolving industry standards and frequent product introductions. Competitors vary in size and scope of products and services offered. We encounter direct competition from several product and services vendors. Additionally, we compete with OSS solutions sold by large equipment vendors. We also compete with systems integrators and with the information technology departments of large communications service providers. Finally, we are aware of communications service providers, software developers, and smaller entrepreneurial companies that are focusing significant resources on developing and marketing products and services intended to compete with ours. We anticipate continued long-term growth in the communications industry and the entrance of new competitors in the order processing, inventory management and fulfillment software markets, and we expect that the market for our products and services will remain intensely competitive.

IFTHE INTERNETOR BROADBAND COMMUNICATION SERVICES GROWTH SLOWS, DEMANDFOR OUR PRODUCTS MAY FALL.

Our success depends heavily on the continued acceptance of the Internet as a medium of commerce and communication, and the growth of broadband communication services. The growth of the Internet has driven changes in the public communication network and has given rise to the growth of the next-generation service providers who are our customers. If use of the Internet or broadband communication services does not continue to grow or grows more slowly than expected, the market for software that manages communication over the Internet may not develop and our sales would be adversely affected. Consumers and businesses may reject the Internet as a viable commercial medium for a number of reasons, including potentially inadequate network infrastructure, slow development of technologies, insufficient commercial support and security or privacy concerns. The Internet infrastructure may not be able to support the demands placed on it by increased usage and bandwidth requirements. In addition, delays in the development or adoption of new standards and protocols or increased government regulation, could cause the Internet to lose its viability as a commercial medium. Even if the required infrastructure, standards, protocols or complementary products, services or facilities are developed, we may incur substantial expense adapting our solutions to changing or emerging technologies.

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CHANGESIN COMMUNICATIONS REGULATIONS COULD ADVERSELY AFFECT OUR CUSTOMERSAND MAY LEADTO LOWER SALES.

Our customers are subject to extensive regulation as communications service providers. Changes in legislation or regulations that adversely affect our existing and potential customers could lead them to spend less on our software, which would reduce our revenues and could seriously affect our business and financial condition.

IF WE FAILTO ACCURATELY ESTIMATETHE RESOURCES NECESSARYTO COMPLETE ANY FIXED-PRICE CONTRACT, IF WE FAILTO MEET OUR PERFORMANCE OBLIGATIONS, OR IF WE FAILTO ANTICIPATE COSTS ASSOCIATED WITH PARTICULAR SALES OR SUPPORT CONTRACTS, WE MAY BE REQUIREDTO ABSORB COST OVERRUNSAND WE MAY SUFFER LOSSES ON PROJECTS.

In addition to time and materials contracts, we enter into fixed-price contracts for software implementation. These fixed-price contracts involve risks because they require us to absorb possible cost overruns. Our failure to accurately estimate the resources required for a project or our failure to complete our contractual obligations in a manner consistent with the project plan would likely cause us to have lower margins or to suffer a loss on such a project, which would negatively impact our operating results. Also, in some instances our sales and support contracts may require us to provide software functionality that we have procured from third party vendors. The cost of this third party functionality may impact our margins, and we could fail to accurately anticipate or manage these costs. On occasion we have been asked or required to commit unanticipated additional resources or funds to complete projects or fulfill sales and support contracts.

IN ORDERTO GENERATE INCREASED REVENUE, WE NEEDTO EXPAND OUR SALESAND DISTRIBUTION CAPABILITIES.

We must expand our direct and indirect sales operations to increase market awareness of our products and to generate increased revenue. We cannot be certain that we will be successful in these efforts. Our products and services require a sophisticated sales effort targeted at the senior management of our prospective customers. New hires will require training and take time to achieve full productivity. We cannot be certain that our recent hires will become as productive as necessary or that we will be able to hire enough qualified individuals in the future. As the communications service provider market consolidates, there may be an increased tendency on the part of the remaining service providers to purchase through large systems integrators and third-party resellers. We are working to expand our relationships with systems integrators and other partners to expand our indirect sales channels. Failure to expand these sales channels could adversely affect our revenues and operating results. In addition, we will need to manage potential conflicts between our direct sales force and third party reselling efforts.

WE DEPENDON SUBCONTRACTED OFFSHORE PRODUCT DEVELOPMENTAND CONSULTING RESOURCES,WHICH INTRODUCES RISKS RELATEDTO OUR COST STRUCTURE, INTELLECTUAL PROPERTY,AND RESOURCE AVAILABILITY.

We have increased our development investment in service activation products and lowered development expense in certain products by contracting with offshore development resources, and are also working to expand our availability of consulting and training resources through alliances with these subcontractors. We believe that our success will depend in part on our ability to continue, expand and manage the use of offshore subcontracting resources in these and other respects. There are certain risks entailed in these practices, including but not limited to: those described under the topic of international operations below; the continued availability of these resources is not assured; the potential for migration of some expertise to a contractor outside of our organization; and our policies relating to development and protection of intellectual property rights may be harder or not possible to institute, manage or enforce in a subcontractor organization.

OUR ABILITYTO ATTRACT, TRAINAND RETAIN QUALIFIED EMPLOYEESIS CRUCIALTO OUR RESULTSOF OPERATIONSAND FUTURE GROWTH.

As a company focused on the development, sale and delivery of software products and related services, our personnel are our most valued assets. Our future success depends in large part on our ability to hire, train and retain software developers, systems architects, project managers, communications business

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process experts, systems analysts, trainers, writers, consultants, and sales and marketing professionals of various experience levels. Competition for skilled personnel is intense. Any inability to hire, train and retain a sufficient number of qualified employees could hinder the growth of our business.

We also believe that our success will depend on the continued employment of our senior management team and key technical personnel. This dependence is particularly important to our business because personal relationships are a critical element of obtaining and maintaining business contacts with our customers. Our senior management team and key technical personnel would be very difficult to replace and the loss of any of these key employees could seriously harm our business.

OUR FUTURE SUCCESS DEPENDSON OUR CONTINUED USEOF STRATEGIC RELATIONSHIPSTO IMPLEMENTAND SELL OUR PRODUCTS.

We have entered into relationships with third party systems integrators and hardware platform and software applications developers. We rely on these third parties to assist our customers and to lend expertise in large scale, multi-system implementation and integration projects, including overall program management and development of custom interfaces for our products. Should these third parties go out of business or choose not to provide these services, we may be forced to develop those capabilities internally, incurring significant expense and adversely affecting our operating margins.

THE EXPANSIONOF OUR PRODUCTS WITH NEW FUNCTIONALITYANDTO NEW CUSTOMER MARKETS MAYBE DIFFICULTAND COSTLY.

We plan to invest significant resources and management attention to expanding our products by adding new functionality and to expanding our customer base by targeting customers in markets that we have not previously served. We cannot be sure that expanding the footprint of our products or selling our products into new markets will generate acceptable financial results due to uncertainties inherent in entering new markets and in our ability to execute our plans. Costs associated with our product and market expansions may be more costly than we anticipate, and demand for our new products and in new customer markets may be lower than we expect.

FOR SOME OF OUR PRODUCTS WE RELY ON SOFTWAREAND OTHER INTELLECTUAL PROPERTY THAT WE HAVE LICENSED FROM THIRD PARTY DEVELOPERSTO PERFORM KEY FUNCTIONS.

Some of our products contain software and other intellectual property that we license from third parties, including software that is integrated with internally developed software and used in our products to perform key functions. We could lose the right to use this software and intellectual property or it could be made available to us only on commercially unreasonable terms. We could fail to accurately recognize or anticipate the impact of the costs of procuring this third party intellectual property. Although we believe that alternative software and intellectual property is available from other third party suppliers, the loss of or inability to maintain any of these licenses or the inability of the third parties to enhance in a timely and cost-effective manner their products in response to changing customer needs, industry standards or technological developments could result in delays or reductions in product shipments by us until equivalent software could be developed internally or identified, licensed and integrated, which would harm our business.

OUR INTERNATIONAL OPERATIONS MAY BE DIFFICULTAND COSTLY.

We intend to continue to devote significant management and financial resources to our international operations. In particular, we will have to continue to attract experienced management, technical, sales, marketing and support personnel for our international offices. Competition for skilled people in these areas is intense and we may be unable to attract qualified staff. International expansion may be more difficult or take longer than we anticipate, especially due to cultural differences, language barriers, and currency exchange risks. Additionally, communications infrastructure in foreign countries may be different from the communications infrastructure in the United States.

Moreover, international operations are subject to a variety of additional risks that could adversely affect our operating results and financial condition. These risks include the following:

• Longer payment cycles and problems in collecting accounts receivable;

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• The impact of recessions in economies outside the United States;

• Unexpected changes in regulatory requirements;

• Variable and changing communications industry regulations;

• Trade barriers and barriers to foreign investment, in some cases specifically applicable to the communications industry;

• Barriers to the repatriation of capital or profits;

• Political instability or changes in government policy;

• Restrictions on the import and export of certain technologies;

• Lower protection for intellectual property rights;

• Seasonal reductions in business activity during the summer months, particularly in Europe;

• Potentially adverse tax consequences;

• Increases in tariffs, duties, price controls or other restrictions on foreign currencies;

• Requirements for a locally domiciled business entity; and

• Regional variations in adoption and growth of new technologies served by our products.

WE HAVE ACQUIRED OTHER BUSINESSESAND WE MAY MAKE ADDITIONAL ACQUISITIONSOR ENGAGEIN JOINT BUSINESS VENTURES THAT COULDBE DIFFICULTTO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUEAND ADVERSELY AFFECT OUR OPERATING RESULTS.

We have acquired other businesses and may make additional acquisitions, or engage in joint business ventures in the future that may be difficult to integrate, disrupt our business, dilute stockholder value, complicate our management tasks and affect our operating results. Acquisitions and investments in businesses involve significant risks, and our failure to successfully manage acquisitions or joint business ventures could seriously harm our business. Our past acquisitions and potential future acquisitions or joint business ventures create numerous risks and uncertainties including:

• Risk that the industry may develop in a different direction than anticipated and that the technologies we acquire will not prove to be those needed to be successful in the industry;

• Potential difficulties in completing in process research and development projects;

• Difficulty integrating new or acquired products and operations in an efficient and effective manner;

• Risk that we have inaccurately evaluated or forecasted the benefits, opportunities, liabilities, or costs of the acquired businesses;

• Risk of our customers or customers of the acquired businesses deferring purchase decisions as they evaluate the impact of the acquisition on our future product strategy;

• Risk that we may not properly determine or account for risks and benefits under acquired customer contracts;

• Potential loss of key employees of the acquired businesses;

• Risk of diverting the attention of senior management from the operation of our business;

• Risk of entering new markets in which we have limited experience;

• Risk of increased costs related to expansion and compensation of indirect sales channels;

• Difficulty in integrating our internal controls and procedures with acquired businesses and joint ventures;

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• Risk of increased costs related to royalties for third party products that may be included with our own software products and services; and

• Future revenues and profits from acquisitions and investments may fail to achieve expectations.

Our inability to successfully integrate acquisitions or to otherwise manage business growth effectively could have a material adverse effect on our results of operations and financial condition. Also, our existing stockholders may be diluted if we finance the acquisitions by issuing equity securities.

FUTURE SALESOF OUR COMMON STOCKWOULDBE DILUTIVETOOUR STOCKHOLDERSAND COULD ADVERSELY AFFECTTHE MARKET PRICEOF OUR COMMON STOCK.

We cannot predict the effect, if any, future sales of our common stock by us, or the availability of shares of our common stock for future sale, will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of our common stock (including shares issued upon the exercise of warrants or stock options), or the perception that such sales could occur, may materially and adversely affect prevailing market prices for our common stock.

OUR FAILURETO MEET CUSTOMER EXPECTATIONSOR DELIVER ERROR-FREE SOFTWARE COULD RESULTIN LOSSESAND NEGATIVE PUBLICITY.

The complexity of our products and the potential for undetected software errors increase the risk of claims and claim-related costs. Due to the mission-critical nature of network resources, management and fulfillment software, undetected software errors are of particular concern. The implementation of our products, which we accomplish through our professional services division and with our partners, typically involves working with sophisticated software, computing and communications systems. If our software contains undetected errors or we fail to meet our customers’ expectations or project milestones in a timely manner, we could experience:

• Delayed or lost revenues and market share due to adverse customer reaction;

• Loss of existing customers;

• Negative publicity regarding us and our products, which could adversely affect our ability to attract new customers;

• Expenses associated with providing additional products and customer support, engineering and other resources to a customer at a reduced charge or at no charge;

• Claims for substantial damages against us, regardless of our responsibility for any failure;

• Increased insurance costs; and

• Diversion of development and management time and resources.

Our licenses with customers generally contain provisions designed to limit our exposure to potential claims, such as disclaimers of warranties and limitations on liability for special, consequential and incidental damages. In addition, our license agreements usually cap the amounts recoverable for damages to the amounts paid by the licensee to us for the product or services giving rise to the damages. However, we cannot be sure that these contractual provisions will protect us from additional liability. Furthermore, our general liability insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims or the insurer may disclaim coverage as to any future claim. The successful assertion of any large claim against us could adversely affect our operating results and financial condition.

OUR LIMITED ABILITYTO PROTECT OUR PROPRIETARY TECHNOLOGY MAY ADVERSELY AFFECT OUR ABILITYTO COMPETE,AND WE MAY BE FOUNDTO INFRINGEONTHE PROPRIETARY RIGHTSOF OTHERS.

Our success depends in part on our proprietary software technology. We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect our technology. We cannot guarantee that the steps we have taken to assess and protect our proprietary rights will be adequate to deter misappropriation of our intellectual property, and we may not be able to detect unauthorized use

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and take appropriate steps to enforce our intellectual property rights. If third parties infringe or misappropriate our copyrights, trademarks, trade secrets or other proprietary information, our business could be seriously harmed. In addition, although we believe that our proprietary rights do not infringe on the intellectual property rights of others, other parties may assert infringement claims against us or claim that we have violated their intellectual property rights. These risks may be increased by the addition of intellectual property assets through business or product acquisitions. Claims against us, either successful or unsuccessful, could result in significant legal and other costs and may be a distraction to management. We currently focus on intellectual property protection within the United States. These risks may also be increased by our use or others’ use with our products of software made available under open source software licenses, the terms of which may be subject to varying or commercially unfavorable interpretations, and the enforcement and application of which have not been extensively tested or settled in applicable judicial systems. Protection of intellectual property outside of the United States will sometimes require additional filings with local patent, trademark, or copyright offices, as well as the implementation of contractual or license terms different from those used in the United States. Protection of intellectual property in many foreign countries is weaker and less reliable than in the United States. As our business expands into foreign countries, costs and risks associated with protecting our intellectual property abroad will increase. We also may choose to forgo the costs and related benefits of certain intellectual property benefits in some of these jurisdictions.

OUR STOCK PRICE HAS BEENAND MAY REMAIN VOLATILE, WHICH EXPOSES USTOTHE RISKOF SECURITIES LITIGATION.

The trading price of our common stock has in the past and may in the future be subject to wide fluctuations in response to factors such as the following:

• Revenues or results of operations in any quarter failing to meet the expectations, published or otherwise, of the investment community;

• Announcements of technological innovations by us or our competitors;

• Acquisitions of new products or significant customers or other significant transactions by us or our competitors;

• Developments with respect to our patents, copyrights or other proprietary rights or those of our competitors;

• Changes in recommendations or financial estimates by securities analysts;

• Rumors or dissemination of false and/or unofficial information;

• Changes in management;

• Stock transactions by our management or businesses with whom we have a relationship;

• Conditions and trends in the software and communications industries;

• Adoption of new accounting standards affecting the software industry; and

• General market conditions, including geopolitical events.

Fluctuations in the price of our common stock may expose us to the risk of securities lawsuits. Defending against such lawsuits could result in substantial costs and divert management’s attention and resources. In addition, any settlement or adverse determination of these lawsuits could subject us to significant liabilities.

IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE ABLE TO DETECT FRAUD OR REPORT OUR FINANCIAL RESULTS ACCURATELY, WHICH COULD HARM OUR BUSINESS.

Effective internal controls support our provision of reliable financial reports, as well as prevention and detection of fraud. We review and evaluate our internal controls systems periodically, to determine their effectiveness and identify potential areas of improvement. These evaluations and reports may indicate that enhancements or changes to these systems of internal controls are advisable. Furthermore, we may from time to time acquire businesses which have limited infrastructure and systems of internal controls.

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Assessing internal controls, making needed changes, and keeping internal controls processes effective is costly and consumes significant management time, especially with newly acquired entities. Even the best internal control systems are based in part on assessments of probability, and can give reasonable but not complete assurance that the system is working successfully. Given the inherent limitations of control systems, there can be no assurance that any design will achieve its stated goals under all potential future conditions. If we do not implement and maintain an effective system of internal controls or prevent fraud, we may incur losses or be subject to costly litigation. In those cases investors could lose confidence in our financial reporting. Our reputation and our operating results could be harmed, which could lower the trading price of our common stock.

PROVISIONS OF OUR CHARTER DOCUMENTS, DELAWARE LAWAND OUR STOCKHOLDER RIGHTS PLAN COULD DISCOURAGEA TAKEOVER YOU MAY CONSIDER FAVORABLE ORTHE REMOVAL OF OUR CURRENT MANAGEMENT.

Some provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that you may consider favorable or the removal of our current management. These provisions:

• Authorize the issuance of “blank check” preferred stock;

• Provide for a classified board of directors with staggered, three-year terms;

• Prohibit cumulative voting in the election of directors;

• Prohibit our stockholders from acting by written consent without the approval of our board of directors;

• Limit the persons who may call special meetings of stockholders; and

• Establish advance notice requirements for nominations for election to the board of directors or for proposing matters to be approved by stockholders at stockholder meetings.

Delaware law may also discourage, delay or prevent someone from acquiring or merging with us. In addition, purchase rights distributed under our stockholder rights plan will cause substantial dilution to any person or group attempting to acquire us without conditioning the offer on our redemption of the rights. As a result, our stock price may decrease and you might not receive a change of control premium over the then-current market price of the common stock.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk principally relates to changes in interest rates that may affect our fixed income investments and our exposure to adverse movements in foreign exchange rates.

(a) Fixed Income Investments

The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. Our exposure to market risks for changes in interest rates relate primarily to investments in debt securities issued by U.S. government agencies and corporate debt securities. We place our investments with high quality issuers and, by policy, limit the amount of the credit exposure to any one issuer.

Our general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. All investments with three months or less to maturity at the date of purchase are considered to be cash equivalents; investments with maturities at the date of purchase between three and twelve months are considered to be short-term investments; investments with maturities in excess of twelve months are considered to be long-term investments. At September 30, 2005, the weighted average pre-tax interest rate on the investment portfolio was approximately 2.8%. Market risk related to these investments can be estimated by measuring the impact of a near-term adverse movement of 10% in short-term market interest rates. If these rates average 10% more in 2005 than in 2004, there would be no material adverse impact on our results of operations or financial position.

(b) Foreign Currency

We transact business in various currencies. As we continue to expand our international business, we are subject to increasing exposure from adverse movements in foreign exchange rates. Our operating expenses in Europe are primarily in the local currency, which serves to mitigate some of our exposure to the exchange rate fluctuations of U.S. dollars to Euro and British Sterling. At the present time, we do not hedge our foreign currency exposure, nor do we use derivative financial instruments for speculative trading purposes.

Market risk related to foreign currency exchange rates can be estimated by measuring the impact of a near-term adverse movement of 10% in foreign currency exchange rates against the U.S. dollar. If these rates average 10% more in 2005 than in 2004, there would be no material adverse impact on our results of operations or financial position.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act as of September 30, 2005. Based on this evaluation the Company’s chief executive officer and chief financial officer concluded that, as of September 30, 2005, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported on a timely basis and accumulated and made known to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures.

(b) Changes in Internal Control over Financial Reporting

In evaluating changes in internal control over financial reporting during the quarter ended September 30, 2005, management identified no changes in its internal control over financial reporting that occurred during the quarter ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting, other than the changes the Company has implemented as remedial steps for the material weakness in internal control over financial reporting that

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was first disclosed in the Form 10-K for the year ended December 31, 2004, relating to accounting for income tax exposure and foreign income taxes.

As described in Item 4 (b) on Form 10-Q for the period ending June 30, 2005, management identified various remedial steps that were in the process of being implemented with respect to the previously disclosed material weakness. As of September 30, 2005 management has completed each of its remediation steps and concluded that the remedial actions have corrected the material weakness. Additionally, the Company’s internal audit department has evaluated the remedial action, retested each of the remediated controls and found the controls to be operating effectively. As a result of these new control processes and procedures, management believes it has remediated the material weakness in its internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

No change from that reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

(a) Exhibits

3.1 Bylaws of MetaSolv, Inc. Incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K filed on March 29, 2001.

3.2 Amended and Restated Certificate of Incorporation of MetaSolv, Inc. (the “Registrant”). Incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-3 filed on August 13, 2001, registration number 333-67428.

3.3 Certificate of Designation of Series A Junior Participating Preferred Stock setting forth the terms of the Series A Junior Participating Preferred Stock, par value $0.01 per share, filed with the Delaware Secretary of State on October 25, 2001, included as Exhibit A to the Rights Agreement filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-A filed on October 24, 2001.

4.1 Investors’ Rights Agreement, dated June 2, 1998, among MetaSolv, Inc. and the shareholders named therein, as amended. Incorporated by reference to exhibits to the Registrant’s Registration Statement on Form S-1 filed on September 10, 1999, registration number 333-86937.

4.2 Specimen Certificate of MetaSolv, Inc.’s common stock. Incorporated by reference to exhibits to the Registrant’s Registration Statement on Form S-1 filed on September 10, 1999, registration number 333-86937.

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4.3 Rights Agreement, dated as of October 24, 2001, between MetaSolv, Inc. and Mellon Investor Services LLC, as Rights Agent, specifying the terms of the Rights, which includes the form of Certificate of Designation of Series A Junior Participating Preferred Stock as Exhibit A, the form of Right Certificate as Exhibit B and the form of the Summary of Rights to Purchase Preferred Shares as Exhibit C. Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-A filed on October 25, 2001, file number 000-28129.

4.4 Form of Certificate of Designation of Series A Junior Participating Preferred Stock (included as Exhibit A to the Rights Agreement filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-A filed on October 24, 2001) setting forth the terms of the Series A Junior Participating Preferred Stock, par value $.01 per share.

4.5 Form of Right Certificate (included as Exhibit B to the Rights Agreement filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-A filed with the Securities and Exchange Commission on October 24, 2001). Pursuant to the Rights Agreement, printed Right Certificates will not be delivered until as soon as practicable after the Distribution Date.

4.6 Form of Summary of Rights to Purchase Preferred Shares (included as Exhibit C to the Rights Agreement filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-A filed on October 24, 2001), which, together with certificates representing the outstanding Common Shares of the Registrant, shall represent the Rights prior to the Distribution Date

4.7 Specimen of legend to be placed, pursuant to Section 3(d) of the Rights Agreement, on all new Common Share certificates issued by MetaSolv, Inc. after November 5, 2001 and prior to the Distribution Date upon transfer, exchange or new issuance. Incorporated by reference to Exhibit 4.5 to the Registrant’s Current Report on Form 8-A filed on October 24, 2001.

10.37 Employment Agreement dated as of May 9, 2005, by and between MetaSolv Software, Inc. and Michael J. Cullen.*

10.38 Employment Agreement dated as of September 22, 2005, by and between MetaSolv Software, Inc. and Jonathan K. Hustis. *

31.1 Certification of the Chief Executive Officer of MetaSolv, Inc. pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2 Certification of the Chief Financial Officer of MetaSolv, Inc. pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1 Certification of the Chief Executive Officer of MetaSolv, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

32.2 Certification of the Chief Financial Officer of MetaSolv, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

* Filed herewith.

** Furnished herewith.

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SIGNATURES

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

Dated: November 3, 2005

METASOLV, INC.

/s/    GLENN A. ETHERINGTON        

Glenn A. Etherington

Chief Financial Officer

Duly Authorized Officer on behalf of the Registrant

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