SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

----------------------

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2001

[_] 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.
(Exact name of registrant as specified in its charter)

Delaware 75-2912166
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)

5560 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 such filing
requirements for the past 90 days.

Yes [X] No [_]

As of October 31, 2001, there were 37,231,691 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, 2001 and
December 31, 2000....................................................................... 3

Condensed Consolidated Statements of Operations - For the Three Months
and the Nine Months Ended September 30, 2001 and 2000.................................. 4

Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended
September 30, 2001 and 2000............................................................. 5

Notes to Condensed Consolidated Financial Statements (Unaudited)........................ 6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................... 9

Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 23

PART II. OTHER INFORMATION

Item 1. Legal Proceedings....................................................................... 24

Item 2. Changes in Securities and Use of Proceeds............................................... 24

Item 6. Exhibits and Reports on Form 8-K........................................................ 25

SIGNATURES............................................................................................ 26

PART I. FINANCIAL INFORMATION

METASOLV, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)

September 30, December 31,
ASSETS 2001 2000
------ --------- ---------
(Unaudited)

Current assets:
Cash and cash equivalents........................................ $ 124,351 $ 93,695
Restricted cash.................................................. 2,000 --
Marketable securities............................................ 15,626 48,843
Trade accounts receivable, less allowance for doubtful accounts
of $6,446 in 2001 and $5,200 in 2000............................ 12,315 23,994
Unbilled receivables............................................. 740 1,510
Prepaid expenses................................................. 3,177 6,090
Other current assets............................................. 8,156 4,921
--------- ---------
Total current assets........................................... 166,365 179,053
Property and equipment, net....................................... 17,408 14,491
Equity investments................................................ 571 4,000
Goodwill and intangible assets.................................... 9,205 --
Other assets...................................................... 291 84
--------- ---------
Total assets................................................... $ 193,840 $ 197,628
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
Accounts payable.................................................... $ 4,797 $ 7,910
Accrued expenses.................................................... 21,496 16,468
Deferred revenue.................................................... 9,973 24,025
--------- ---------
Total current liabilities.......................................... 36,266 48,403
Deferred income taxes................................................. 344 275

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,
37,220,651 shares and 35,930,345 shares issued and outstanding at
September 30, 2001 and December 31, 2000, respectively............ 186 180
Additional paid-in capital.......................................... 135,296 130,522
Deferred compensation............................................... (217) (300)
Unrealized gains on marketable securities........................... 179 --
Retained earnings................................................... 21,786 18,548
--------- ---------
Total stockholders' equity......................................... 157,230 148,950
--------- ---------
Total liabilities and stockholders' equity......................... $ 193,840 $ 197,628
========= =========

See Notes to Condensed Consolidated Financial Statements

-3-

METASOLV, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)

Three Months Ended Nine months Ended
September 30, September 30,
------------------------ ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Unaudited) (Unaudited)

Revenues:
License................................... $ 12,111 $ 19,216 $ 60,855 $ 48,153
Service................................... 11,521 16,570 39,279 45,920
-------- -------- -------- --------
Total revenues......................... 23,632 35,786 100,134 94,073
-------- -------- -------- --------
Cost of revenues:
License................................... 299 901 6,060 2,031
Amortization of intangible assets......... 963 -- 963 --
Service................................... 4,581 8,926 18,644 26,235
-------- -------- -------- --------
Total cost of revenues................. 5,843 9,827 25,667 28,266
-------- -------- -------- --------
Gross profit........................... 17,789 25,959 74,467 65,807
-------- -------- -------- --------

Operating expenses:
Research and development.................. 7,708 8,450 24,140 22,528
Sales and marketing....................... 5,727 6,287 22,058 17,525
General and administrative................ 5,279 5,875 17,195 13,430
Restructuring costs....................... 3,142 -- 3,142 --
In-process research and development....... 2,940 -- 2,940 --
-------- -------- -------- --------
Total operating expenses............... 24,796 20,612 69,475 53,483
-------- -------- -------- --------
Income (loss) from operations............... (7,007) 5,347 4,992 12,324
Loss on investments......................... (3,429) -- (3,429) --
Interest and other income, net.............. 1,191 2,016 4,618 5,604
-------- -------- -------- --------
Income (loss) before taxes.................. (9,245) 7,363 6,181 17,928
Income tax expense (benefit)................ (2,841) 2,677 2,943 6,918
-------- -------- -------- --------
Net income (loss)........................... $ (6,404) $ 4,686 $ 3,238 $ 11,010
======== ======== ======== ========

Earnings (loss) per share of common stock:
Basic..................................... $ (0.17) $ 0.13 $ 0.09 $ 0.31
======== ======== ======== ========
Diluted................................... $ (0.17) $ 0.12 $ 0.08 $ 0.27
======== ======== ======== ========

See Notes to Condensed Consolidated Financial Statements

-4-

METASOLV, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)

Nine months Ended
September 30,
-------------------
2001 2000
-------- --------
(Unaudited)

Cash Flows from Operating Activities:
Net income................................................................................. $ 3,238 $ 11,010
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................................................ 4,129 2,121
Loss on asset disposal................................................................... 70 21
Deferred income taxes.................................................................... (2,657) (2,691)
Tax benefit from employee stock options.................................................. 182 3,892
Loss on investments...................................................................... 3,429 --
Purchased in-process research and development............................................ 2,940 --
Changes in operating assets and liabilities (net of effect of acquisition):
Trade accounts receivable, net........................................................... 11,723 (6,807)
Unbilled receivables..................................................................... 770 2,148
Prepaid and other assets................................................................. 2,528 (3,591)
Accounts payable and accrued expenses.................................................... (2,107) 7,496
Deferred revenue......................................................................... (14,100) 5,755
-------- --------
Net cash provided by operating activities.............................................. 10,145 19,354
-------- --------

Cash Flows from Investing Activities:
Purchases of property, plant and equipment................................................. (5,749) (5,097)
Purchase of equity investments............................................................. -- (4,000)
Purchase of marketable securities.......................................................... -- (12,152)
Increase in restricted cash................................................................ (2,000) --
Proceeds from sale of marketable securities................................................ 33,396 --
Acquisition of LAT45 Information Systems Inc............................................... (6,779) --
-------- --------
Net cash provided by (used in) investing activities.................................... 18,868 (21,249)
-------- --------

Cash Flows from Financing Activities:
Proceeds from common stock transactions.................................................... 3,234 3,018
Purchase of treasury stock................................................................. (1,602) (1)
Re-issuance of treasury stock.............................................................. 11 389
-------- --------
Net cash provided by financing activities.............................................. 1,643 3,406
-------- --------

Increase in cash and cash equivalents....................................................... 30,656 1,511
Cash and cash equivalents, beginning of period.............................................. 93,695 112,341
-------- --------
Cash and cash equivalents, end of period.................................................... $124,351 $113,852
======== ========

See Notes to Condensed Consolidated Financial Statements

-5-

METASOLV, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 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 footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles 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, 2000, 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, 2001, are not necessarily indicative of
the results that may be expected for the full year ending December 31, 2001.

Note 2. Revenue Recognition

Effective January 1, 2000, the Company adopted Statement of Position
(SOP) 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect
to Certain Transactions. SOP 98-9 amends SOP 97-2 to require recognition of
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 SOP 97-2 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. Adoption of SOP 98-9
did not have a material effect on the Company's financial position or results of
operations.

Note 3. Earnings Per Share

Following is a reconciliation of the weighted average shares used to
compute basic and diluted earnings per share (in thousands):

Three Months Ended Nine months Ended
September 30, September 30,
------------------ -----------------
2001 2000 2001 2000
------ ------ ------ ------

Weighted average common shares outstanding.. 37,127 35,598 36,515 35,285
Effect of dilutive securities:
Options.................................... -- 4,807 3,138 5,170
------ ------ ------ ------
Weighted average common and common
equivalent shares outstanding.............. 37,127 40,405 39,653 40,455
====== ====== ====== ======

Securities that were not included in the computation of diluted earnings
per share because their effect was antidilutive consist of options to purchase
the following shares of common stock (in thousands):

Three Months Ended Nine months Ended
September 30, September 30,
------------- ---------------
2001 2000 2001 2000
---- ---- ---- ----

Antidilutive stock options........ 7,216 541 1,500 39

-6-

Note 4. Segment Information

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

Three Months Ended Nine months Ended
September 30, September 30,
------------------ -----------------
2001 2000 2001 2000
-------- ------- -------- -------

Software license fees........... $12,111 $19,216 $ 60,855 $48,153
Professional services........... 3,000 8,549 12,384 27,735
Post-contract customer support.. 8,521 8,021 26,895 18,185
------- ------- -------- -------
Total revenues................. $23,632 $35,786 $100,134 $94,073
======= ======= ======== =======

Note 5. Acquisition

On July 20, 2001, the Company, through its wholly owned subsidiary MetaSolv
Canada Holdings Inc., acquired all of the outstanding shares of capital stock of
Montreal based LAT45 Information Systems Inc., a developer of geospatial
software for planning, design and management of communications networks. The
aggregate purchase price consisted of $6.2 million in cash and 366,666
exchangeable shares of MetaSolv Canada Holdings Inc. Initially each of these
shares is exchangeable for one share of MetaSolv Inc. common stock. In
addition, the shareholders of LAT45 Information Systems Inc. are eligible to
receive up to an additional $2 million in cash upon the completion of certain
revenue milestones prior to December 31, 2001, and the absence of any
misrepresentation or breach of warranty within one year from the closing of the
acquisition.

The acquisition was accounted for under the purchase method of accounting
and, accordingly, the result of operations of LAT45 Information Systems Inc.
have been included in the Company's consolidated financial statements since July
21, 2001. The purchase price has been allocated to the assets acquired and
liabilities assumed based on a preliminary estimation of fair values at the date
of acquisition. The excess of the purchase price over the fair value of the net
identifiable assets, totaling $4.2 million, was allocated to goodwill.
Approximately $5.9 million was allocated to intangible assets, primarily
technology rights, which will be amortized over a three-year period.
Approximately $2.9 million was allocated to purchased in-process research and
development. The purchased in-process research and development cost was charged
to results of operations in the third quarter. Proforma financial information
for this acquisition has not been presented since the proforma information would
not differ materially from the historical results of the Company.

The acquisition of LAT45 Information Systems Inc. allows MetaSolv to
leverage graphical geospatial technology to business and communications network
planning and engineering functions that are key to the customer's Service
Resource Management (SRM) capabilities. This acquisition extends the MetaSolv
Solution functionality to include support for market demand forecasting, network
planning and design, service fulfillment, and executive decision support.
MetaSolv is offering LAT45 Information Systems Inc.'s Red Telecom(TM) product
under the brand, MetaSolv Network and Service Planning both as a separate
product and integrated with the MetaSolv Solution.

-7-

Note 6. In-process Research and Development

In connection with the acquisition of LAT45, the Company recorded a pre-tax
charge of $2.9 million for acquired in-process research and development (R&D).
At the date of the acquisition, the in-process R&D projects had not yet reached
technological feasibility and had no alternative future uses. The projects
generally included enhancements and upgrades to existing technology, enhanced
communication among systems, introduction of new functionality and the
development of new technology primarily for integration purposes. The value of
the in-process R&D was calculated using a discounted cash flow analysis of the
anticipated income stream of the related product sales. The projected net cash
flows were computed using a discount rate of 35% for the in-process research and
development projects. It is anticipated that remaining costs to complete the
projects will be approximately $1.4 million and project release dates will range
from the fall 2002 through spring 2003. If these projects are not successfully
developed, future revenues and profitability may be adversely affected, and the
value of intangible assets acquired may become impaired.

Note 7. Restructuring

During the quarter ended September 30, 2001, the Company recorded a pre-tax
restructuring charge of $3.1 million. This charge consisted of $2.0 million for
a reduction in force of approximately 100 positions, and approximately $1.1
million for consolidation of facilities and related fixed assets. The
restructuring was in response to lower software license bookings and the
expectation of lower revenues in future periods. The staff reductions were
completed as of September 30, 2001. Approximately $1.4 million is included in
accrued liabilities, related primarily to future minimum lease commitments which
expire in 2004. The following table summarizes the status of the restructuring.

Employee
Severance Exit Costs Total
----------------------- -------------------------- --------------------------

Restructuring charge $2.0M $1.1M $3.1M
Amounts utilized (1.5) (0.2) (1.7)
----- ----- -----
Balance at September 30, 2001 $0.5M $ 0.9M $1.4M

Note 8. Shareholder Rights Plan

On October 11, 2001, the Board of Directors of MetaSolv, Inc. (the
"Company") authorized the issuance of one preferred share purchase right (a
"Right") with respect to each outstanding share of common stock, par value $.005
per share (the "Common Shares"), of the Company. The Rights were issued on the
record date of October 29, 2001 to the holders of record of Common Shares on
that date. Each Right entitles the registered holder to purchase from the
Company one one-thousandth (1/1000) of a share of Series A Junior Participating
Preferred Stock, par value $.01 per share (the "Preferred Shares"), of the
Company at a price of $45.00 per one one-thousandth of a Preferred Share (the
"Purchase Price"), subject to adjustment. Such Rights become exercisable if and
when a potential acquiror takes certain steps to acquire 15% or more of the
Company's Common Shares. Upon certain circumstances, the Rights are redeemable
by the Company at a price of $.00001 per Right. The description and terms of the
Rights are set forth in a Rights Agreement (the "Rights Agreement") dated as of
October 17, 2001 between the Company and Mellon Investor Services LLC, as Rights
Agent.

-8-

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

Forward-Looking Statements

From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange commission, including this form 10-Q report, may contain certain
"forward-looking" information, as that term is defined by the Private Securities
Litigation Reform Act of 1995 (the "Act"). Statements that describe future
market conditions, future revenues, future profitability or company plans are
forward-looking statements. The words "expects," "anticipates," "believes" and
similar words generally signify a "forward-looking" statement. These forward-
looking statements are made pursuant to the safe harbor provisions of the Act.
The reader is cautioned that all forward-looking statements are necessarily
speculative and that there are certain risks and uncertainties that could cause
actual events or results to differ materially from those referred to in such
forward-looking statements. Such risks and uncertainties include those in the
section below entitled "Certain Factors That May Affect Future Results." The
Company undertakes no obligation to publicly revise any forward-looking
statement due to changes in circumstances after the date of this report, or to
reflect the occurrence of unanticipated events.

Overview

MetaSolv, Inc., headquartered in Plano, Texas, was founded in 1992.
MetaSolv, Inc., is the leading provider of solutions that help global
communications providers and businesses manage their next-generation networks
and services. The MetaSolv Solution(TM) integrates and automates key
communications management processes from network planning and engineering to
operations and customer care. With the MetaSolv Solution, communications
providers and businesses can reduce costs through more efficient management of
network resources, and more quickly deploy communications resources, as business
needs change.

We derive substantially all of our revenue from the sale of licenses,
related professional services, and support of our MetaSolv Solution(TM) packaged
software to communications service providers.

We generally 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,
deferring the fair market 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. We generally recognize service
revenues as the services are performed. We recognize revenues from maintenance
agreements ratably over the maintenance period, usually one year.

Licensing and service terms are typically covered by signed orders that
reference our master agreement with the customer. We normally ship our software
and perform services shortly after we receive orders. As a result, our quarterly
license revenues are largely dependent on orders booked and delivered during
that quarter. 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 near the end of a quarter could negatively impact
revenues in that quarter. Consistent with industry practice, we sometimes agree
to bill our license fees in more than one installment. Generally in these
situations, amounts not billed immediately are deferred and recorded as revenue
when payments are due, assuming all revenue recognition criteria have been met.

Our software products are priced to meet the needs of each of our target
market segments, from start-up resellers and corporate enterprises to large,
facility-based incumbent service providers. We charge a base price for the core
subsystems, coupled with additional license fees for add-on modules. In
addition, we typically charge a per-user license fee, with customary volume
discounts on purchases of large numbers of user licenses. We price annual
maintenance and support contracts as a percentage of the license fee that is
current 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.

-9-

We occasionally include complementary software developed by third parties
to extend the capabilities of our software, accelerate product introductions and
to otherwise utilize proprietary intellectual property. From time to time we
also evaluate opportunities to provide a broader solution to our customers by
acquiring complementary software technology.

Service revenues consist principally of software implementation, consulting
and customer training, as well as software maintenance agreements that include
both customer support and the right to product updates. We use our own employees
and subcontract with our alliance partners to provide implementation consulting
services to our customers. We primarily offer and expect to continue to offer
the majority of our services on an hourly basis. We also offer several fixed-
price consulting packages, primarily for repeatable solutions.

We anticipate that future revenues will be generated from five principal
sources:

. License fees from new customers;

. License fees for additional products to existing customers;

. License fees for additional users in our existing customer base;

. Implementation and other service fees related to product license sales;
and

. Maintenance fees from both existing and new customers.

Percentage of Revenues and Year over Year Growth

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

Nine months
Three Months Ended September 30,
Ended September 30, -----------------------------------------
------------------- Percentage Dollar
2001 2000 2001 2000 Change
------------------- ----------------- --------------------
(Unaudited) (Unaudited)

Revenues:
License.................................... 51% 54% 61% 51% 26%
Service.................................... 49% 46% 39% 49% (14%)
--- --- --- --- ---
Total revenues............................ 100% 100% 100% 100% 6%
--- --- --- --- ---

Cost of revenues:
License.................................... 1% 3% 6% 2% 198%
Amortization of intangible assets.......... 4% 0% 1% 0% --
Service.................................... 19% 25% 19% 28% (29%)
--- --- --- ---
Total cost of revenues.................... 25% 27% 26% 30% (9%)
--- --- --- ---

Gross profit................................. 75% 73% 74% 70% 13%
--- --- --- --- ---

Operating expenses:
Research and development................... 33% 24% 24% 24% 7%
Sales and marketing........................ 24% 18% 22% 19% 26%
General and administrative................. 22% 16% 17% 14% 28%
Restructuring costs........................ 13% 0% 3% 0% --
In-process research and development........ 12% 0% 3% 0% --
--- --- --- --- ---
Total operating expenses.................. 105% 58% 69% 57% 30%
--- --- --- --- ---

Income (loss) from operations................ (30%) 15% 5% 13% (59%)
Loss on investments.......................... (15%) --- (3%) --- ---

Interest and other income, net............... 5% 6% 5% 6% (18%)
--- --- --- --- ---

Income (loss) before taxes................... (39%) 21% 6% 19% (66%)
Income tax expense (benefit)................. (12%) 7% 3% 7% (57%)
--- --- --- --- ---
Net income (loss)............................ (27%) 13% 3% 12% (71%)
=== === === === ===

-10-

Revenues

Total revenues decreased 34% to $23.6 million for the quarter ended
September 30, 2001, from $35.8 million for the quarter ended September 30, 2000.
The decrease in revenue resulted from a decline in orders from North American
customers, partially offset by higher revenues from international communications
service providers and higher maintenance revenues. For the nine months ended
September 30, 2001, total revenues increased 6% to $100.1 million from $94.1
million in the first nine months of 2000. The increase in revenue in the nine
month period resulted primarily from higher license and higher maintenance
revenue, partially offset by lower revenues from implementation services.

For the nine months ended September 30, 2001, we recognized $20.2 million
of revenue from sources outside the continental United States and Canada,
representing 20% of total revenue. This compares to 4% of total revenues for the
year ago period. We expect our international revenues to continue to increase
during the next twelve months as we strengthen our sales and customer support
capabilities in overseas markets. We cannot be certain that our investments in
international operations will produce desired levels of revenues or
profitability.

Our revenues are largely dependent on customer order activity during each
period, which we believe is largely related to overall capital spending in the
communications markets that we serve. It is the opinion of management that the
lower order activity we have experienced in recent months is related to an
overall slowdown in communications infrastructure spending by our potential
customers. We can provide no guarantees on either future market conditions or
our success in increasing our sales in our new or existing markets. These and
other risks are described in the section of this report titled Certain Factors
That May Affect Future Results.

License fees. License revenues decreased 37% to $12.1 million for the
quarter ended September 30, 2001, from $19.2 million for the quarter ended
September 30, 2000. The decrease in license revenue during the three month
period was due to a lower number of customer orders from new start-up
communications companies in the U.S. For the first nine months of 2001, license
revenues increased 26% to $60.9 million from $48.2 million in the first nine
months of 2000. The increase in license revenues in the nine month period was
primarily due to introduction of our Metasolv Solution 5.0 products, released in
April of this year that generated higher revenue from international customers.
License revenue includes sales of software to new customers, and follow-on sales
of additional modules and user seats to existing customers.

During the quarter ended September 30, 2001, we signed orders with two new
customers, compared to seven new customers in the first half of this year and a
quarterly average of 13 new customers during 2000. The adverse revenue impact
from the lower number of new customer orders during the nine months ended
September 30, 2001, was partially offset by revenues earned from orders signed
in prior periods, primarily related to our release of MetaSolv Solution 5.0
functionality for multinational providers.

Services. Service revenues declined 30% to $11.5 million for the quarter
ended September 30, 2001, from $16.6 million for the quarter ended September 30,
2000. For the nine months ended September 30, 2001, service revenues decreased
14% to $39.3 million from $45.9 million in the first nine months of 2000. The
declines in service revenues were primarily due to fewer software sales
requiring our implementation services. The decline in revenues from consulting
and education services was partially offset by increased maintenance revenues.

Consulting and training revenues declined 65% to $3.0 million for the
quarter ended September 30, 2001, from $8.5 million for the quarter ended
September 30, 2000. For the nine months ended September 30, 2001, consulting and
training revenues decreased 55% to $12.4 million from $27.7 million in the first
nine months of 2000. The decline in consulting and training revenues in both
periods is attributable to fewer new customer product implementations, the
increasing ability of alliance partners to provide consulting services directly
to our customers, and shortened software implementation times that have reduced
consulting costs for our customers.

Post-contract customer support, or maintenance revenues, increased 6% to
$8.5 million for the quarter ended September 30, 2001, from $8.0 million for the
quarter ended September 30, 2000. For the nine months ended September 30, 2001,
maintenance revenues increased 48% to $26.9 million from $18.2 million in the
first nine months of 2000. The increases in maintenance revenues in both the
three month and nine month periods were due to higher per-customer revenues. The
higher per customer support revenues result from our customers' purchase of
follow-on named user seats and software modules during the past year and the
loss of some smaller customers. Despite high maintenance renewal rates from our
customers, some smaller customers have recently declared bankruptcy, ceased
operations, or have experienced financial problems that have prevented them from
continuing our customer support. The number of customers from whom

-11-

we recognized maintenance revenues has declined 13% between the quarter ended
September 30, 2001 and the year-ago quarter. The loss of customers will result
in a decline in maintenance revenues in future periods if we are unsuccessful in
offsetting the losses with additional revenues from new and existing customers.

Cost of Revenues

License Costs. License costs consist primarily of royalties for third party
software that is embedded in our products and for product development that was
customer-funded. These software components are now included in our software and
payments are made to the original companies that funded the development of those
components. Cost of license revenues also includes costs of packaging materials
and the production of software media and documentation.

License costs were $0.3 million for the quarter ended September 30, 2001,
and $0.9 million for the quarter ended September 30, 2000, representing 2% and
5% of license revenues during each period, respectively. The decrease in license
costs as a percentage of license revenue in the three month period reflects the
reduced use of customer funding in our products on which we pay royalties.

For the nine month period ended September 30, 2001, license costs were $6.1
million, compared to $2.0 million for the nine month period ended September 30,
2000, representing 10% and 4% of license revenues during each period,
respectively. The increase in license costs in the nine month period was due to
royalty obligations for use of third party e-commerce software during the first
half of 2001. In July 2001, we replaced our prior royalty-based agreement with a
one-time payment for a perpetual license, thus reducing royalty expense as a
percentage of license revenue to 2% of license revenue in the quarter ended
September 30, 2001. We plan to continue use of third party software where it
provides an advantage for our customers and where it lowers our overall product
development cost.

Amortization of Intangible Assets. For the quarter ended September 30,
2001, cost of revenues includes a $1.0 million charge for amortization of
intangible assets. This amortization consists of $0.5 million of purchased
technology rights and $0.5 million attributable to customer contracts purchased
from LAT45 Information Systems Inc. Amortization of the purchased technology
rights is computed on a straight-line basis over the estimated useful lives of
the assets acquired.

Service Costs. Service costs consist primarily of compensation and related
expenses for MetaSolv employees and fees for third-party consultants who provide
consulting, training and customer support services for our customers.

Service costs were $4.6 million for the quarter ended September 30, 2001,
and $8.9 million for the quarter ended September 30, 2000, representing 40% and
54% of service revenues in each period, respectively. For the nine month period
ended September 30, 2001, service costs were $18.6 million compared to $26.2
million in the year-ago period, representing 47% and 57% of service revenue in
each period. The declines in service costs in both periods were primarily due to
lower use of subcontracted consultants, partially offset by higher costs for
customer support. The decrease in service costs as a percentage of service
revenues were primarily due to the relatively higher proportion of higher-margin
maintenance revenues, compared to consulting and training revenues.

Operating Expenses

Research and Development Expense. 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. Product research and development expenses decreased 9% to
$7.7 million for the quarter ended September 30, 2001, from $8.5 million for the
quarter ended September 30, 2000, representing 33% and 24% of total revenues in
each period, respectively. The decrease in expense in the three month period was
primarily due to a $1.9 million reduction in contracted development expense,
partially offset by higher costs related to an 18% increase in research and
development personnel to meet market demand for new features and advances in
product architecture. The reduction in contracted development expense is
associated with eService product development in 2000, and also lower negotiated
rates for contract labor in 2001. The increase in development expense as a
percent of revenue in the most recent quarter reflects the decline in revenues
and a relatively stable investment in future products. During the quarter ended
September 30, 2001, research and development work included product enhancements
for next-generation communications networks, new features to address the needs
of multinational communications providers and user-group defined product
enhancements.

-12-

For the nine months ended September 30, 2001, research and development
expenses increased 7% to $24.1 million, compared to $22.5 million in the year
ago period, equating to 24% of total revenues in both periods. The higher
research and development expenses this year reflects costs associated with an
18% increase in development staff, partially offset by $3.4 million reduction in
contracted development expense.

We expect that our future investment in product development will continue
to be significant as we address additional emerging technologies to enable
communications providers and businesses to manage their next generation networks
and services worldwide.

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

Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salary, commission, travel, tradeshow and other related expenses
required to sell our software in our targeted markets. Sales and marketing
expenses decreased 9% to $5.7 million for the quarter ended September 30, 2001,
from $6.3 million for the quarter ended September 30, 2000, representing 24% and
18% of total revenues in each period, respectively. The decrease in sales and
marketing expenses in the three month period was primarily due to lower
commission expense associated with our lower revenues and lower contracted
marketing services, partially offset by higher employee-related expenses related
to our expansion into new geographic regions and new markets. For the nine month
period ended September 30, 2001, sales and marketing expenses increased 26% to
$22.1 million in the current year from $17.5 million in the year-ago period. The
increase in sales and marketing expense in the nine month period was primarily
related to the expansion in our sales and marketing staff to support our global,
next-generation and enterprise strategies, and revenue-related commission
expense for our sales force and alliance partners who assisted in selling our
products.

General and Administrative Expenses. General and administrative expenses
consist of costs related to information systems infrastructure, facilities,
finance and accounting, legal, human resources and corporate management that
have not been allocated to other departments. General and administrative
expenses decreased 10% to $5.3 million for the quarter ended September 30, 2001,
from $5.9 million for the quarter ended September 30, 2000, representing 22% and
16% of total revenues in each period, respectively. The decrease in general and
administrative expenses in the three month period was due to a smaller provision
for doubtful accounts and less use of contracted professional services.

For the nine months ended September 30, 2001, general and administrative
expenses increased 28% to $17.2 million, compared to $13.4 million in the year
ago period, equating to 17% and 14% of revenues in each period, respectively.
The increase in general and administrative expenses in the nine month period, in
dollars and as a percent of revenues, resulted from a 63% higher provision for
doubtful accounts and from higher salary expense for our internal systems
department to support our larger scale of operations.

In-Process Research and Development. In connection with the acquisition of
LAT45, the Company recorded a pre-tax charge of $2.9 million for acquired in-
process research and development (R&D). At the date of this acquisition, the
in-process R&D projects had not yet reached technological feasibility and had no
alternative future uses. The projects generally included enhancements and
upgrades to existing technology, enhanced communication among systems,
introduction of new functionality and the development of new technology
primarily for integration purposes. The value of the in-process R&D was
calculated using a discounted cash flow analysis of the anticipated income
stream of the related product sales. The projected net cash flows were computed
using a discount rate of 35% for the IPR&D project. It is anticipated that
remaining costs to complete the projects will be approximately $1.4 million and
project release dates will range from the fall 2002 through spring 2003. If
these projects are not successfully developed, future revenues and profitability
may be adversely affected, and the value of intangible assets acquired may
become impaired.

Restructuring Costs. During the quarter ended September 30, 2001, the
Company recorded a pre-tax restructuring charge of $3.1 million. This charge
consisted of $2.0 million for a reduction in force of approximately 100
positions, and approximately $1.1 million for consolidation of facilities and
related fixed assets. The restructuring was in response to lower software
license bookings and the expectation of lower revenues in future periods. These
actions are expected to generate savings of approximately $7.0 million annually
and were completed as of September 30, 2001. Approximately $1.4 million is
included in accrued liabilities, related primarily to future minimum lease
commitments which expire in 2004.

-13-

Loss on Investments

During the quarter ended September 30, 2001, the Company determined that
the decline in fair value of two equity investments below their carrying value
was other than temporary. Accordingly, the Company recorded a pre-tax charge of
$3.4 million to write down the value of investments, based on an independent
appraisal.

Interest and Other Income, Net

Interest and other income, net, was $1.2 million in the quarter ended
September 30, 2001, compared to $2.0 million in the quarter ended September 30,
2000. For the nine months ended September 30, 2001, interest and other income,
net, decreased 18% to $4.6 million, compared to $5.6 million in the year ago
period. The decreases in interest and other income in the most recent fiscal
quarter and year to date were primarily due to lower interest rates earned on
invested balances, partially offset by higher balances of cash and marketable
securities.

Income Tax Expense (Benefit)

Income tax provision for the quarter ended September 30, 2001, was a credit
of $2.8 million, compared to $2.7 million expense in the quarter ended September
30, 2000. Income tax expense in the nine month period ended September 30, 2001,
was $2.9 million, compared to $6.9 million in the equivalent year-ago period,
representing 48% and 39% of pretax income in each period, respectively. The
increase in the effective tax rate is attributable to non-recurring events that
are not deductible for tax purposes.

Net Income (Loss)

The company recorded a net loss of $6.4 million during the three month
period ended September 30, 2001, equating to $0.17 per share of common stock.
The loss resulted from the in-process research and development charge from the
LAT45 Information Systems Inc. acquisition, corporate restructuring, and write-
down of equity investments. On a pre-tax basis, $3.9 million of the loss is
attributed to the LAT45 Information Systems Inc. acquisition, where we expensed
in-process research and development costs of $2.9 million and amortized $1.0
million of intangible assets. The company's restructuring charge contributed
$3.1 million to our loss on a pre-tax basis. The write-down of equity
investments contributed $3.4 million to the pre-tax loss.

Liquidity and Capital Resources

At September 30, 2001, our primary sources of liquidity were $124.4 million
in cash and cash equivalents, and $15.6 million in marketable securities,
totaling $140.0 million and representing 72% of total assets. The company has
invested its cash in excess of current operating requirements in short and
intermediate term investment grade securities that are available for sale as
needed to finance future company growth. Total cash and marketable securities
decreased slightly from $142.5 million at year-end 2000, with cash provided from
operations of $10.1 million more than offset by the expenditures incurred to
acquire LAT45 Information Systems Inc. and our capital expenditures.

Cash provided by operating activities was $10.1 million during the nine
month period ended September 30, 2001, compared to $19.4 million during the
equivalent period in 2000. The $10.1 million in cash from operating activities
for the nine month period ended September 30, 2001, resulted from our $3.2
million of net income, adjusted for the following non-cash items included in our
net income: depreciation and amortization expense of $4.1 million, write-downs
of investment assets of $3.4 million and purchased in-process research and
development expense of $2.9 million.

Deferred revenue consists of customer payments that we have received for
future deliverables and includes prepaid maintenance revenue that we recognize
on a pro-rata basis over the term of the agreement. Deferred revenues were
$10.0 million as of September 30, 2001, compared to $24.0 million at
December 31, 2000, with the decrease primarily resulting from recognition of
revenue earned upon production release of new software.

Accounts receivable, net, declined from $24.0 million at the end of 2000 to
$12.3 million as of September 30, 2001. The decline in accounts receivable
resulted from the decline in revenues and improved collections from customers.

-14-

Cash provided by investing activities was $18.9 million in the nine month
period ended September 30, 2001. This amount includes $33.4 million in cash and
cash equivalents generated by conversions of marketable securities, reduced by
$6.8 million expended in the purchase of the LAT45 Information Systems Inc.
business, $2.0 million of restricted cash investments and $5.7 million for
purchases of computer hardware and software, furniture and leasehold
improvements.

Net cash generated in financing activities was $1.6 million for the nine
month period ended September 30, 2001, primarily due to the proceeds of $3.2
million from the exercise of stock options partially offset by $1.6 million of
treasury stock purchases.

The acquisition was accounted for under the purchase method of accounting
and, accordingly, the result of operations of LAT45 Information Systems Inc.
have been included in the Company's consolidated financial statements since July
21, 2001. The purchase price has been allocated to the assets acquired and
liabilities assumed based on a preliminary estimation of fair values at the date
of acquisition. The excess of the purchase price over the fair value of the net
identifiable assets, totaling $4.2 million, was allocated to goodwill.
Approximately $5.9 million was allocated to intangible assets, primarily
technology rights, which will be amortized over a three-year period.
Approximately $2.9 million was allocated to purchased in-process research and
development for work that was in various stages of development and had not
reached technological feasibility. No alternative future uses were identified
prior to reaching technological feasibility because of the uniqueness of the
projects. This purchased in-process research and development was valued using
the income approach, which includes an analysis of the markets, cash flows, and
risks associated with achieving such cash flows. The purchased in-process
research and development cost was charged to results of operations in the third
quarter. Up to an additional $2.0 million in cash is payable subject to the
completion of certain revenue milestones prior to December 31, 2001.

We believe our cash flows generated from operations, together with current
cash and marketable security 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 will continue to evaluate
potential acquisitions of complementary businesses, products and technologies.
Should cash balances be insufficient to complete one of these acquisitions, 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 Standards

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives not be amortized, but instead
tested for impairment at least annually. SFAS No. 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values.

We are required to adopt the provisions of SFAS No. 141 immediately and
SFAS No. 142 effective January 1, 2002. Goodwill and intangible assets
determined to have an indefinite useful life that are acquired in a purchase
business

-15-

combination completed after June 30, 2001, will not be amortized, but will
continue to be evaluated for impairment. The adoption of SFAS No. 142 is not
expected to have a material effect on our results of operations or financial
position.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 establishes one accounting model
to be used for long-lived assets to be disposed of by sale and broadens the
presentation of discontinued operations to include more disposal transactions.
SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30, Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, relative to discontinued operations. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. We are currently evaluating the
requirements and impact of this Standard on our results of operations and
financial position.

Certain Factors That May Affect Future Results

The Communications Market is Changing Rapidly, and Failure to Anticipate
and React to the Rapid Change Could Result in Loss of Customers or Wasteful
Spending

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
and frequent new product and service 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 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, services or standards 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 order processing, management and fulfillment 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 Industry is Experiencing Consolidation, Which May Reduce
the Number of Potential Customers for Our Software

The North American 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, consolidated communications
companies have strengthened their 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 Strength, Their Ability to Obtain Financing and
the Recent Downturn in the Communications Industry May Lead to Lower Sales and
Decreased Profitability

Many of our customers are small to medium sized competitive communications
service providers with limited operating histories. Many of these customers are
not profitable and highly dependent on private sources of venture capital to
fund their operations. During the last half of 2000 and this year, many
competitive communications service providers have been unable to obtain
sufficient funds to continue expansion of their business. During the same
period, many communications companies have encountered significant difficulties
in achieving their business plans and financial projections, and it is possible
that this downturn in the communications industry could continue for an
indefinite period of time. 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 in purchasing additional
products, delays in payments by existing customers, or failure to

-16-

pay for our products. We cannot be certain that market conditions will not
continue to affect the ability of these customers to obtain adequate financing
for capital expenditures. Because we currently derive all of our revenue from
the licensing, related professional services and maintenance and support of our
MetaSolv Solution software products, if our customers are unable to obtain
adequate financing, sales of our software could suffer. The failure to continue
to increase revenue related to our software would adversely affect our operating
results and financial condition. 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. 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 MetaSolv license or services products, and this could
adversely affect our profitability.

We Rely on a Limited Number of Customers for a Significant Portion of Our
Revenue

A significant portion of revenue each quarter is derived from a relatively
small number of large sales. 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.
During the year 2000, our top ten customers accounted for 27% of our total
revenue, compared to 44% during the year 1999. No single customer accounted for
more than 5% of total revenue in 2000. However, to the extent that any major
customer terminates its relationship with us, our revenue could be adversely
affected. While we believe that the loss of any single customer would not
seriously harm our overall business or financial condition, our inability to
consummate one or more substantial sales in any future period could seriously
harm our operating results for that period.

Competition from Larger, Better Capitalized or Emerging Competitors for the
Communications Products and Services that We Offer Could Result in Price
Reductions, Reduced Gross Margins and Loss of Market Share

Competition in the communications products market is intense. Although we
compete against other companies selling communications software and services,
the in-house development efforts of our customers may also result in our making
fewer sales. We expect competition to persist and intensify in the future. We
cannot be certain that we will be able to compete successfully with existing or
new competitors, and increased competition could result in price reductions,
reduced gross margins and loss of market share.

Competitors vary in size and scope, in terms of products and services
offered. We encounter direct competition from several vendors, including Eftia
OSS Solutions, Granite Systems, Telcordia Technology, and Wisor Telecom. We
compete indirectly with large equipment vendors like Nortel Networks and ADC
Telecommunications, since their respective acquisitions of Architel and CommTech
Corp. 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 that will compete with MetaSolv. We
anticipate continued growth in the communications industry and the entrance of
new competitors in the order processing, management and fulfillment software
market. We believe that the market for our products and services will remain
intensely competitive.

Some of our current competitors have longer operating histories, a larger
customer base, greater brand recognition and greater financial, technical,
marketing and other resources than we do. This may place us at a disadvantage in
responding to our competitors' pricing strategies, technological advances,
advertising campaigns, strategic alliances and other initiatives. In addition,
many of our competitors have well-established relationships with our current and
potential customers and have extensive knowledge of our industry. As a result,
our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements. They may also be able to
devote more resources to the development, promotion and sale of their products
and services than we can. To the extent that our competitors offer customized
products that are competitive with our more standardized product offerings, our
competitors may have a substantial competitive advantage, which may cause us to
lower our prices and realize lower margins.

Current and potential competitors also have established or may establish
cooperative relationships among themselves or with others to increase their
ability to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. In addition, some of our competitors may develop
products and services that are superior to, or have greater market acceptance
than, the products and related services that we offer.

-17-

If the Internet and Internet-Based Services Growth Slows, Demand for Our
Products May Fall

Our success depends heavily on the Internet being accepted and widely used
as a medium of commerce and communication. The growth of the Internet has driven
changes in the public communications network and has given rise to the growth of
the next-generation service providers who are our core customers. Rapid growth
in the use of the Internet and on-line services is a recent phenomenon, and it
may not continue. If use of the Internet does not continue to grow or grows more
slowly than expected, the market for software that manages communications 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 or insufficient commercial
support. 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 required to handle
increased levels of Internet activity, 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.

Changes in Communications Regulation Could Adversely Affect Our Customers
and May Lead to Lower Sales

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

We Rely on Sales of Our MetaSolv Solution Products and Related Services for
Our Revenue

We currently derive all of our revenue from the licensing, related
professional services and maintenance and support of our MetaSolv Solution
software products, previously known as Telecom Business Solution. We expect
that we will continue to depend on revenue related to new and enhanced versions
of our software for the foreseeable future. We cannot be certain that we will be
successful in upgrading and marketing our software or that we will successfully
develop and market new products or services. Failure to continue to increase
revenue related to our software or to generate revenue from new products and
services would adversely affect our operating results and financial condition.

If We Fail to Accurately Estimate the Resources Necessary to Complete Any
Fixed-Price Contract, Or If We Fail to Meet Our Performance Obligations, We May
Be Required to Absorb Cost Overruns and We May Suffer Losses On Projects

In addition to time and materials contracts, we have periodically entered
into fixed-price contracts for software implementation, and we may do so in the
future. 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. On occasion we have been required to commit unanticipated
additional resources to complete projects. We may experience similar situations
in the future.

Our Quarterly Operating Results Can Vary Significantly and May Cause Our
Stock Price to 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 some future quarter or 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 processing,
management and fulfillment 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;

-18-

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

. Our ability to manage costs, including costs related to professional
services and support services;

. 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 from very large
product licenses;

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

. Costs related to the expansion of our operations.

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 revenue according to our expectations in a particular
quarter could have an immediate negative effect on results for that quarter.

Our quarterly revenue is 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 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 revenue 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. With these
uncertainties we may not be able to predict accurately when revenue from these
contracts will be recognized.

In Order to Generate Increased Revenue, We Need to Expand Our Sales and
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. We also plan to expand our relationships with systems
integrators and other third-party resellers to build an indirect sales channel.
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.

-19-

We Depend on Certain Key Personnel, and the Loss of Any Key Personnel Could
Affect Our Ability to Compete

We 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. In addition, we currently do not have non-compete agreements
in place, and if any of these key employees were to join a competitor or form a
competing company, some of our customers might choose to use the products or
services of that competitor or of a new company instead of ours.

Our Ability to Attract, Train and Retain Qualified Employees is Crucial to
Results of Operations and Future Growth; Management Turnover Could Affect Our
Ability to Achieve Operating Results

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 process experts, systems analysts, trainers, writers, consultants and
sales and marketing professionals of various experience levels. Skilled
personnel are in short supply, and this shortage is likely to continue. As a
result, competition for these people is intense, and the industry turnover rate
for them is high. Any inability to hire, train and retain a sufficient number of
qualified employees could hinder the growth of our business.

We have undergone significant management changes during the last twelve
months and may experience additional management changes in the future. New
managers typically bring new strengths to our business, but their short tenure
with us could affect our ability to execute business plans and achieve our
planned operating results.

Our Future Success Depends on Our Continued Use of Strategic Relationships
to Implement and 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 product. 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. In addition, we have
derived and anticipate that we will continue to derive a significant portion of
our revenues from customers that have established relationships with our
marketing and platform alliances. We could lose sales opportunities if we fail
to work effectively with these parties or fail to grow our base of marketing and
platform alliances.

The Expansion of Our Products With New Functionality and to New Customer
Markets May be Difficult and 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.

Our Planned International Operations May Be Difficult and Costly

We intend to devote significant management and financial resources for our
international expansion. In particular, we will have to attract experienced
management, technical, sales, marketing and support personnel for our
international offices. Competition for these people 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 language barriers, currency
exchange risks and the fact that the communications infrastructure in foreign
countries may be different than the communications infrastructure in the United
States. If we are unable to expand our international operations successfully and
in a timely manner, our expenses could increase at a greater rate than our
revenues, and our operating results could be adversely affected.

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:

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. Longer payment cycles;

. Problems in collecting accounts receivable;

. 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;

. Fluctuations in currency exchange rates;

. 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; and

. Requirements of a locally domiciled business entity.

Acquisitions or Joint Business Ventures Could Be Difficult to Integrate,
Disrupt Our Business, Dilute Stockholder Value and Adversely Affect Our
Operating Results

Acquisitions and investments in businesses involve significant risks. We
may acquire or invest in companies to expand the footprint of our products or
accelerate growth of our business into new markets, and our failure to
successfully manage these acquisitions or other joint business ventures could
seriously harm our business. Also, our existing stockholders may be diluted if
we finance the acquisitions by issuing equity securities. The risks and
uncertainties associated with acquisitions or investments include:

. Risk that the industry may develop in a different direction than
anticipated and that the technologies we acquire do 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 businesses and operations in an efficient and
effective manner;

. Risks 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;

. Potential loss of key employees of the acquired businesses; and

. Risk of diverting the attention of senior management from the operation
of our business, and the risks of entering new markets in which we have
limited experience.

Our inability to successfully integrate acquisitions or to otherwise manage
business growth effectively could have a material adverse effect on our
business, results of operations, and financial condition. Future revenues and
profits from acquisitions and investments may fail to achieve expectations.

The Value of our Assets May Become Impaired

Should the Company's marketing and sales plan not materialize in the near
term, the realization of the Company's intangible assets could be severely and
negatively impacted. The accompanying consolidated financial statements have

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been prepared based on management's estimates of realizability, and these
estimates may change in the future due to unforeseen changes in the company or
market conditions.

Our Failure to Meet Customer Expectations or Deliver Error-Free Software
Could Result in Losses and 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 order processing, 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 alliance 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 Ability to Protect Our Proprietary Technology May Adversely
Affect Our Ability to Compete, and We May Be Found to Infringe on the
Proprietary Rights of 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 protect our proprietary rights will be adequate to deter
misappropriation of our intellectual property, and we may not be able to detect
unauthorized use 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. 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. 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. If our business expands into foreign countries, costs and risks
associated with protecting our intellectual property abroad will increase.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risks principally relates to changes in interest
rates that may affect our fixed income investments. Our excess cash is invested
in debt securities issued by U.S. government agencies and corporate debt
securities. We place our investments with high quality issuers and limit our
credit exposure by restricting the amount of securities that may be placed with
any single issuer. Our general policy is to limit the risk of principal loss and
assure the safety of invested funds by limiting market and credit risk. All
highly liquid investments with original maturities of three months or less are
considered to be cash equivalents. At September 30, 2001, the weighted average
pre-tax interest rate on the investment portfolio is approximately 4.0%. 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 2001 than in 2000, there would be no material adverse
impact on our results of operations or financial position. During the quarter
ended September 30, 2001, had short-term market interest rates averaged 10% more
than in 2000, there would have been no material adverse impact on our results of
operations or financial position.

Our exposure to adverse movements in foreign exchange rates is
insignificant. Therefore, 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. During the quarter ended September 30, 2001, had
these rates averaged 10% more than in 2000, there would have been no material
impact on our results of operations or financial position.

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PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

On November 1, 2001, Bernstein Liebhard & Lifshitz, LLP announced a class action
suit against MetaSolv Software, Inc., Morgan Stanley Dean Witter, Inc.,
BancBoston Robertson Stephens, Inc., Jeffries & Company, Inc., James P. Janicki
and Glenn A. Etherington, alleging violations of Sections 11, 12(a)(2) and 15 of
the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. We believe that the suit is without
merit and that MetaSolv and its officers have fully complied with applicable law
and regulations. We do not expect this action will impact operations,
financial results, or public perceptions in any material way.

ITEM 2. Changes in Securities and Use of Proceeds

(a) On October 11, 2001, the Board of Directors of MetaSolv, Inc. (the
"Company") authorized the issuance of one preferred share purchase right (a
"Right") with respect to each outstanding share of common stock, par value $.005
per share (the "Common Shares"), of the Company. The Rights were issued on the
record date of October 29, 2001 to the holders of record of Common Shares on
that date. Each Right entitles the registered holder to purchase from the
Company one one-thousandth (1/1000) of a share of Series A Junior Participating
Preferred Stock, par value $.01 per share (the "Preferred Shares"), of the
Company at a price of $45.00 per one one-thousandth of a Preferred Share (the
"Purchase Price"), subject to adjustment. Such Rights become exercisable if and
when a potential acquiror takes certain steps to acquire 15% or more of the
Company's Common Shares. Upon certain circumstances, the Rights are redeemable
by the Company at a price of $.00001 per Right. The description and terms of the
Rights are set forth in a Rights Agreement (the "Rights Agreement") dated as of
October 17, 2001 between the Company and Mellon Investor Services LLC, as Rights
Agent.

(c) On July 20, 2001, MetaSolv Canada Holdings Inc., our wholly-owned
subsidiary incorporated under the laws of Nova Scotia ("MCH") acquired all of
the outstanding shares of capital stock of Montreal-based LAT45, a developer of
geospatial software for planning, design and management of communications
networks. As set forth in the Share Purchase Agreement dated July 20, 2001, as
amended, by and among MetaSolv, Inc., MetaSolv Canada Inc., MCH, LAT45
Information Systems Inc. ("LAT45"), each of the shareholders of LAT45 and each
of Joseph Hatchuel, Toufik Abdallah, Serge Bouhadana and Jean-Nicolas Guet, the
consideration paid to the LAT45 shareholders in connection with the acquisition
consisted of approximately $6.2 million in cash and 366,666 exchangeable shares
of MCH. In accordance with their terms, the exchangeable shares of MCH may be
exchanged by the holders of the shares for a period of five years. In addition,
the shareholders of LAT45 are eligible to receive up to an additional $2 million
in cash upon the completion of certain revenue milestones prior to December 31,
2001, and the absence of any misrepresentation or breach of warranty within one
year from the closing of the acquisition.

The holders of the exchangeable shares can acquire the shares of our common
stock upon the exchange of the exchangeable shares of capital stock of MCH which
were issued by MCH pursuant to the terms of the Share Purchase Agreement dated
July 20, 2001. The exchange of the exchangeable shares of MCH for our common
stock is governed by the terms of the exchangeable shares and by the Exchange
Agreement dated July 20, 2001, by and among MetaSolv, Inc., MetaSolv Canada
Inc., MCH and each of the shareholders of LAT45. In connection with the
transactions contemplated by the Share Purchase Agreement, we agreed to register
the shares of our common stock to be issued upon exchange of the exchangeable
shares pursuant to the Registration Rights Agreement dated July 20, 2001, as
amended, by and among MetaSolv, Inc., each of the shareholders of LAT45 and
Joseph Hatchuel, as shareholders' representative.

None of the LATA45 shareholders receiving exchangeable shares of MCH
pursuant to the terms of the Share Purchase Agreement dated July 20, 2001 were
U.S. persons as that term is defined in Regulation S promulgated under the
Securities Act of 1933. The issuance of the exchangeable shares by MCH were
exempt from the registration requirements of Section 5 of the Securities Act of
1933 pursuant to Regulation S promulgated under the Securities Act of 1933. In
addition, the issuance of shares of our common stock upon exchange of the
exchangeable shares of MCH will be exempt from the registration requirements of
Section 5 of the Securities Act of 1933 pursuant to Regulation S promulgated
under the Securities Act of 1933.

We did not receive any proceeds from the transactions consummated pursuant
to the Share Purchase Agreement dated July 20, 2001.

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ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit
Number Description
------ -----------

*3.1 Amended and Restated Certificate of Incorporation of MetaSolv, Inc.
filed on May 30, 2001 (incorporated by reference to Exhibit 3.1 of our
Registration Statement on Form S-3 (File No. 333-67428)).

*3.2 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock (included as Exhibit A to the Rights Agreement and
incorporated by reference to Exhibit 4.2 of our Registration Statement
filed on Form 8-A (File No. 000-28129)).

*10.1 Rights Agreement, dated as of October 17, 2001, between the Company and
Mellon Investor Services LLC, as Rights Agent, 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 of our Registration Statement
filed on Form 8-A (File No. 000-28129)).

*10.2 Form of Right Certificate (included as Exhibit B to the Rights Agreement
and incorporated by reference to Exhibit 4.3 of our Registration
Statement filed on Form 8-A (File No. 000-28129)).

*10.3 Form of Summary of Rights to Purchase Preferred Shares (included as
Exhibit C to the Rights Agreement and incorporated by reference to
Exhibit 4.4 of our Registration Statement filed on Form 8-A (File No.
000-28129)).

*10.4 Terms of Exchangeable Shares of MetaSolv Canada Holdings Inc. adopted as
a special resolution by its sole shareholder on July 20, 2001
(incorporated by reference to Exhibit 10.1 of our Registration Statement
on Form S-3 (File No. 333-67428)).

*10.5 Share Purchase Agreement dated July 20, 2001, by and among MetaSolv,
Inc., MetaSolv Canada Inc., MetaSolv Canada Holdings Inc., LAT45
Information Systems Inc., each of the shareholders of LAT45

Information Systems Inc. and each of Joseph Hatchuel, Toufik Abdallah,
Serge Bouhadana and Jean-Nicolas Guet (incorporated by reference to
Exhibit 10.2 of our Registration Statement on Form S-3 (File No. 333-
67428).

10.6 Amendment No. 1 to the Share Purchase Agreement dated August 20, 2001,
by and between MetaSolv Canada Holdings Inc. and Joseph Hatchuel, as
shareholders' representative.

*10.7 Exchange Agreement dated July 20, 2001, by and among MetaSolv, Inc.,
MetaSolv Canada Inc., MetaSolv Canada Holdings Inc. and each of the
shareholders of LAT45 Information Systems Inc. (incorporated by
reference to Exhibit 10.3 of our Registration Statement on Form S-3
(File No. 333-67428).

*10.8 Registration Rights Agreement dated July 20, 2001, by and among
MetaSolv, Inc., each of the shareholders of LAT45 Information Systems
Inc. and Joseph Hatchuel, as shareholders' representative (incorporated
by reference to Exhibit 10.4 of our Registration Statement on Form S-3
(File No. 333-67428)).

*10.9 Amendment No. 1 to the Registration Rights Agreement dated August 3,
2001, by and between MetaSolv, Inc. and Joseph Hatchuel, as
shareholders' representative (incorporated by reference to Exhibit 10.5
of our Registration Statement on Form S-3 (File No. 333-67428)).

*10.10 Amendment No. 2 to the Registration Rights Agreement dated August 10,
2001, by and between MetaSolv, Inc. and Joseph Hatchuel, as
shareholders' representative (incorporated by reference to Exhibit 10.6
of our Registration Statement on Form S-3 (File No. 333-67428)).

* Previously filed.

(b) Reports on Form 8-K.

(i) Current report on Form 8-K of MetaSolv, Inc. dated July
13, 2001, reporting the filing of a press release.

(ii) Current report on Form 8-K of MetaSolv, Inc. dated October
18, 2001, reporting the filing of a press release.

(iii) Current report on Form 8-K of MetaSolv, Inc. dated October
25, 2001, reporting the adoption of a Stockholder Rights
Plan.

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SIGNATURES

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

Dated: November 14, 2001

METASOLV, INC.

/s/ Glenn A. Etherington
---------------------------------------
Glenn A. Etherington
Chief Financial Officer
Duly Authorized Officer on behalf of the Registrant

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