UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 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, 2003

¨	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 0-26376

ON TECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		04-3162846
(State of incorporation)		(IRS Employer Identification Number)

Waltham Woods

880 Winter Street, Building 4

Waltham, Massachusetts 02451-1449

(781) 487-3300

(Address and telephone of principal executive offices)

Indicate by check mark whether 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, and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

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

23,913,106 shares of the registrant’s Common Stock, $0.01 par value, were outstanding as of November 10, 2003.

ON TECHNOLOGY CORPORATION

FORM 10-Q, September 30, 2003

CONTENTS

Item Number		Page
PART I: FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (unaudited)

Balance sheet: September 30, 2003 and December 31, 2002		3

Statement of operations: Three and nine months ended September 30, 2003 and 2002		4

Statement of cash flows: Nine months ended September 30, 2003 and 2002		5

Notes to consolidated financial statements		6-10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11-25

Item 3. Quantitative and Qualitative Disclosures About Market Risk		26

Item 4. Controls and Procedures		26

PART II: OTHER INFORMATION

Item 1. Legal Proceedings		27

Item 2. Changes in Securities and Use of Proceeds		27

Item 3. Defaults Upon Senior Securities		27

Item 4. Submission of Matters to a Vote of Security Holders		27

Item 5. Other Information		27

Item 6. Exhibits and Reports on Form 8-K		27

SIGNATURES		28

EXHIBIT INDEX		29

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

ON TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEET

(in thousands, except share data)

(unaudited)

	September 30, 2003			December 31, 2002
*Assets*
Current Assets:
Cash and cash equivalents	$	13,743		$	13,636
Accounts receivable, net of allowances of $520 and $830, respectively		9,665			8,473
Prepaid expenses and other current assets		1,076			1,256
Deferred tax asset		557			501

Total current assets		25,041			23,866
Property and equipment, net		1,030			1,097
Deferred tax asset		557			501
Other assets and deposits		167			337

Total assets	$	26,795		$	25,801

*Liabilities and Stockholders’ Equity*
Current Liabilities:
Accounts payable	$	2,079		$	2,574
Accrued expenses		2,041			2,202
Taxes payable		3,873			1,978
Capital lease obligations		48			48
Deferred revenue		9,098			7,265

Total current liabilities		17,139			14,067
Long-term portion of capital lease obligations		10			45
Other liabilities		1,682			1,514

Total liabilities		18,831			15,626


Commitments and contingencies

Stockholders’ Equity:
Preferred stock, $0.01 par value – 2,000,000 shares authorized – no shares issued and outstanding		—			—
Common stock, $0.01 par value – 50,000,000 shares authorized – 23,908,169 and 23,757,754 shares issued and 23,893,169 and 23,742,754 shares outstanding, respectively		239			238
Additional paid-in capital		81,396			81,123
Deferred stock-based compensation		(35	)		(74	)
Accumulated deficit		(74,130	)		(71,695	)
Accumulated other comprehensive income		541			630
Treasury stock – 15,000 shares at cost		(47	)		(47	)

Total stockholders’ equity		7,964			10,175

Total liabilities and stockholders’ equity	$	26,795		$	25,801

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

ON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Revenue:
Net software license	$	5,447		$	4,783		$	14,358		$	14,212
Service and maintenance		4,156			3,435			12,130			9,041
Hardware		10			245			21			2,291

Total revenue		9,613			8,463			26,509			25,544

Cost of Revenue:
Cost of software license revenue		997			477			2,554			1,435
Cost of service and maintenance revenue		1,023			898			3,058			2,375
Cost of hardware revenue		6			121			13			1,375

Total cost of revenue		2,026			1,496			5,625			5,185

Gross profit		7,587			6,967			20,884			20,359

Operating expenses:
Sales and marketing		4,313			3,520			12,895			9,672
Research and development		1,808			2,071			5,567			6,075
General and administrative		1,169			1,178			3,445			3,741

Total operating expenses		7,290			6,769			21,907			19,488

Income (loss) from operations		297			198			(1,023	)		871
Interest income, net		19			54			75			89
Other income (expense), net		86			(6	)		596			309

Income (loss) before provision for income taxes		402			246			(352	)		1,269
Provision for income taxes		1,200			230			2,083			660

Net income (loss)	$	(798	)	$	16		$	(2,435	)	$	609

Basic net income (loss) per share	$	(0.03	)	$	0.00		$	(0.10	)	$	0.03
Diluted net income (loss) per share	$	(0.03	)	$	0.00		$	(0.10	)	$	0.03
Weighted average common shares outstanding – basic		23,848			23,229			23,811			23,065
Weighted average common shares outstanding – diluted		23,848			24,064			23,811			24,115

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

ON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2003			2002
Cash Flows from Operating Activities:
Net income (loss)	$	(2,435	)	$	609
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		680			756
Non-cash impact associated with the revaluation of intercompany loans to foreign subsidiaries (Note 5)		(950	)		(347	)
Stock-based compensation expense		39			63
Provision for sales returns and allowances		(10	)		(20	)
Changes in operating assets and liabilities:
Accounts receivable		(1,182	)		1,258
Prepaid expenses and other current assets		180			(201	)
Accounts payable		(495	)		338
Accrued expenses and other liabilities		1,902			10
Deferred revenue		1,833			86

Net cash provided by (used in) operating activities		(438	)		2,552

Cash Flows from Investing Activities:
Change in other assets and deposits		10			17
Purchases of property and equipment		(453	)		(640	)

Net cash used in investing activities		(443	)		(623	)

Cash Flows from Financing Activities:
Proceeds from the exercise of stock options		131			195
Proceeds from the sale of stock under the Employee Stock Purchase Plan		143			75
Proceeds from the exercise of warrants		—			6
Principal repayments on capital lease obligations		(35	)		—

Net cash provided by financing activities		239			276

Effect of exchange rates on cash and cash equivalents		749			500

Net increase in cash and cash equivalents		107			2,705
Cash and cash equivalents, beginning of period		13,636			9,767

Cash and cash equivalents, end of period	$	13,743		$	12,472

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

ON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

1. Interim Financial Statements

The accompanying unaudited consolidated financial statements have been prepared by ON Technology Corporation (together with its consolidated subsidiaries, the “Company”) in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Regulation S-X pertaining to interim financial statements. Accordingly, these interim financial statements do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements reflect all adjustments and accruals, consisting only of normal and recurring adjustments, which management considers necessary for a fair presentation of financial position as of September 30, 2003 and results of operations for the three and nine months ended September 30, 2003 and September 30, 2002. The results for the interim periods presented are not necessarily indicative of results to be expected for any future period. The December 31, 2002 balance sheet is derived from audited financial statements and these financial statements do not include all related required disclosures. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

For all periods presented, the Company operated in one reportable segment.

At September 30, 2003, the Company had no line of credit arrangement.

2. Accounting for Stock-Based Compensation

The Company accounts for stock-based awards to employees using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no compensation expense is recorded for options issued to employees in fixed amounts and with fixed exercise prices at least equal to the fair market value of the Company’s common stock at the date of grant. When the exercise price of stock options granted to employees is less than the fair market value of common stock at the date of grant, the Company records that difference multiplied by the number of shares under option as deferred stock-based compensation, which is then amortized over the vesting period of the options. The Company reverses any remaining deferred stock-based compensation associated with options issued at below fair market value upon the cancellation of such options for terminated employees. The Company follows the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, (“SFAS No. 123”) for employee awards. All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123.

The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee awards:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Net income (loss) as reported	$	(798	)	$	16		$	(2,435	)	$	609
Add-back: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects		13			21			39			63
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(894	)		(569	)		(2,652	)		(1,707	)

Pro forma net loss	$	(1,679	)	$	(532	)	$	(5,048	)	$	(1,035	)

Net income (loss) per share:
Basic–as reported	$	(0.03	)	$	0.00		$	(0.10	)	$	0.03
Basic–pro forma	$	(0.07	)	$	(0.02	)	$	(0.21	)	$	(0.04	)
Diluted–as reported	$	(0.03	)	$	0.00		$	(0.10	)	$	0.03
Diluted–pro forma	$	(0.07	)	$	(0.02	)	$	(0.21	)	$	(0.04	)

ON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

3. Concentration of Credit Risk

The financial instruments that subject the Company to credit risk consist of cash and cash equivalents and accounts receivable. The Company has no significant off-balance sheet risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company maintains the majority of its cash balances with two highly rated financial institutions. For the quarters ended September 30, 2003 and 2002, international revenue was 77% and 82%, respectively, of total revenue. For the nine months ended September 30, 2003 and 2002, international revenue was 81% and 71%, respectively, of total revenue. The Company typically experiences increased collection times of up to 30 days on international sales.

During the three months ended September 30, 2003, one customer represented 10.2% of the Company’s total revenue; during the three months ended September 30, 2002, no customer represented more than 10% of the Company’s total revenue.

During the nine months ended September 30, 2003, no single customer represented more than 10% of the Company’s total revenue; during the nine months ended September 30, 2002, one customer accounted for 12.4% of the Company’s total revenue.

As of September 30, 2003, one customer represented 14.0% of the Company’s accounts receivable; at December 31, 2002, no single customer represented more than 10% of the Company’s accounts receivable.

4. Comprehensive Income (Loss)

Total comprehensive loss was $808 and $2,524 for the three and nine months ended September 30, 2003, respectively; and total comprehensive income was $90 and $860 for the three and nine months ended September 30, 2002, respectively. Total comprehensive income (loss) consists of net income (loss) and the net change in the foreign currency translation adjustment, included in accumulated other comprehensive income, which is presented separately as a component of stockholders’ equity.

5. Foreign Currency Transaction Gains

During the three months ended September 30, 2003 and 2002, the Company recorded a net foreign exchange gain of $86 and a net foreign exchange loss of $6, respectively. For the nine months ended September 30, 2003 and 2002, the Company recorded a net foreign exchange gain of $605 and $310, respectively. These amounts primarily resulted from revaluing intercompany loans to foreign subsidiaries denominated in foreign currencies, U.S. dollar-denominated debt at a foreign subsidiary, and a foreign subsidiary investment in U.S. dollars. The net foreign exchange transaction gains are included in other income (loss), net in the accompanying consolidated statement of operations. As of September 30, 2003, the Company had not entered into any foreign currency contracts to hedge the exposure of movements in foreign currency.

6. Net Income (Loss) per Share

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of common stock and potential common stock outstanding during the period, if dilutive. For the three and nine months ended September 30, 2003 and 2002, certain stock options and warrants have been excluded from the diluted weighted average shares outstanding calculation, as their effect would be anti-dilutive. For periods that the Company reports a net loss, all potential common stock is considered anti-dilutive; for periods when the Company reports net income, only potential common shares with exercise prices in excess of the Company’s average common stock fair value during the related period are considered anti-dilutive.

ON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

Basic and diluted net income (loss) per share are calculated as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2003			2002		2003			2002
Net income (loss)	$	(798	)	$	16	$	(2,435	)	$	609

Weighted average shares outstanding - basic		23,848			23,229		23,811			23,065
Weighted average potential common stock		—			835		—			1,050

Weighted average shares outstanding - diluted		23,848			24,064		23,811			24,115

Basic net income (loss) per share	$	(0.03	)	$	0.00	$	(0.10	)	$	0.03
Diluted net income (loss) per share	$	(0.03	)	$	0.00	$	(0.10	)	$	0.03
Securities that were not included in diluted weighted average shares outstanding are as follows:
Common stock options and warrants		4,053			3,514		3,987			3,029

7. Guarantees

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34 (“FIN 45”). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. FIN 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.

The Company has identified the following guarantees for which it believes no liabilities are required to be recorded at September 30, 2003:

As permitted under Delaware law, the Company has agreements with certain of its officers and directors whereby it agrees to indemnify them for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer or director’s lifetime. Pursuant to the Company’s Fourth Restated Certificate of Incorporation, the Company is obligated to indemnify officers and directors from and against all expenses, judgments, fines and settlement amounts incurred by them in actions, suits or proceedings, whether civil, criminal or administrative; provided such officer or director acted in good faith in a manner reasonably believed to be in the best interests of the Company and, with respect to a criminal proceeding, had no reasonable cause to believe such conduct was unlawful. The maximum potential amount of future payments the Company could be required to make under these indemnification arrangements is unlimited; however, the Company has a Director and Officer insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid.

The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally its business partners or customers, in connection with any U.S. patent, or any copyright or other intellectual property infringement claim by any third party with respect to its products. The term of these indemnification agreements is generally perpetual after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements.

The Company enters into standard indemnification agreements with its customers, whereby it indemnifies them for certain acts, such as personal injury or property damage caused by Company personnel or by the Company’s subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has general and umbrella insurance policies that enable it to recover a portion of any amounts paid. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements.

The Company warrants that its software products will perform for a limited period of time (generally 90 days) in all material respects in accordance with its standard published specifications in effect at the time of delivery of the licensed products to the customer. Additionally, the Company warrants that its maintenance and professional services will be performed consistent with generally accepted industry standards through completion of the agreed upon services. If necessary, the Company would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history, however, the Company has never incurred significant expense under its product or services warranties.

ON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

In addition, from time to time the Company may provide an end user a limited right of return if, after the Company’s commercially reasonable efforts, the Company’s software products do not perform to standard published specifications. To date, the Company has never had to accept a return under these provisions.

8. Reclassifications

Certain amounts from prior periods have been reclassified to conform to the current period’s presentation.

9. Income Taxes

The Company recorded tax provisions of $1,200 and $2,083 during the three and nine months ended September 30, 2003, respectively, and $230 and $660 for the three and nine months ended September 30, 2002, respectively. The tax provisions recorded in each of these periods principally reflect income taxes owed by the Company’s profitable foreign operations; no tax benefit was recorded in any period for losses in the United States.

10. Recent Accounting Pronouncements

In November 2002, the Emerging Issues Task Force of the Financial Accounting Standards Board (“FASB”) reached a consensus on Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). EITF 00-21 requires that for revenue arrangements with multiple deliverables, those deliverables be divided into separate units of accounting if the deliverables meet certain criteria as defined by EITF 00-21. Arrangement consideration is to be allocated among the separate units of accounting based on their relative fair values and revenue recognition decisions should be considered separately for each separate unit of accounting. EITF 00-21 is effective for all arrangements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. In May 2003, as a result of questions raised regarding applicability of EITF 00-21 to software revenue recognition arrangements, the EITF reached a consensus regarding the application of the provisions of SOP 97-2 to arrangements containing software deliverables and non-software deliverables. The consensus reached in May 2003 was confirmed in July 2003 and was issued as Issue 03-05, “Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software” (“EITF 03-05”). EITF 03-05 concludes that software-related elements include software-related products and services such as those listed in paragraph 9 of SOP 97-2, as well as other deliverables for which the software is essential to their functionality (e.g. computer hardware). Elements included in arrangements that do not qualify as software-related elements are to be accounted for under the guidance of EITF 00-21 and not SOP 97-2. Adoption of EITF 03-05 would require a cumulative catch-up adjustment and may be applied to new revenue arrangements entered into after the beginning of an entity’s next reporting period beginning after August 13, 2003. The Company’s multiple element arrangements fall within the scope of SOP 97-2 therefore, the adoption of EITF 00-21 and EITF 03-05 did not have a material impact on the Company’s financial position or results of operations.

In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“SFAS No. 150”) which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on a fixed monetary amount known at inception, variations in something other than the fair value of the issuer’s equity shares or variations inversely related to changes in the fair value of the issuer’s equity shares. SFAS No. 150 was originally effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, however certain elements of SFAS No. 150 have been deferred. The adoption of the provisions of SFAS No. 150 not deferred did not have a material impact on the Company’s financial position or results of operations and the Company does not expect the adoption of the deferred elements of SFAS No. 150 to have a material impact on its financial position or results of operations.

ON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

(unaudited)

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”). This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (“EITF 94-3”). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. EITF 94-3 allowed for an exit cost liability to be recognized at the date of an entity’s commitment to an exit plan. SFAS 146 also requires that liabilities recorded in connection with exit plans be initially measured at fair value. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 did not have a material impact on the Company’s financial position or results of operations.

In December 2002, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). In general, a variable interest entity is a corporation, partnership, trust or other legal structure used for business purposes that either (a) does not have equity investors with characteristics of a controlling financial interest or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. Additionally, companies with significant investments in variable interest entities, even if not required to consolidate the variable interest entity, have enhanced disclosure requirements. The adoption of FIN 46 did not have a material impact on the Company’s financial position or results of operations.

11. Subsequent Events

On October 27, 2003, the Company and Symantec Corporation (“Symantec”) announced the signing of an Agreement and Plan of Merger pursuant to which a wholly owned subsidiary of Symantec will merge with and into the Company, and the Company will become a wholly owned subsidiary of Symantec.

Pursuant to the Agreement and Plan of Merger, each outstanding share of the Company’s common stock will be exchanged for the right to receive $4.00 in cash, and each outstanding vested option to purchase Company common stock shall entitle the holder thereof to receive an amount in cash equal to the excess, if any, of $4.00 less the per share exercise price of the option. The merger is subject to several conditions, including approval by the Company’s stockholders, the expiration of applicable waiting periods under antitrust laws and other customary conditions. The Company anticipates that the merger will be completed prior to March 2004.

In the event the merger is not completed, under certain circumstances, the Company could be required to pay Symantec a termination fee of approximately $3.1 million and/or provide reimbursement to Symantec for certain transaction costs incurred by them.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

ON Technology Corporation and its subsidiaries (“ON”, the “Company”, “Our” or “We”) provide remote software management solutions for desktops, mobile PCs, handhelds, retail POS devices, and servers. Our products, ON Command CCM^® and ON iCommand^™, are used by enterprise IT organizations and service providers to rapidly deliver business-critical software over corporate networks. Our products are designed to reduce operational costs while enhancing both IT productivity and end-user satisfaction.

At September 30, 2003, we had approximately 200 employees worldwide, of which approximately 125 were located in Europe. Our headquarters is located in Waltham, Massachusetts and our main European office is located in Starnberg, Germany. For the quarter ended September 30, 2003, software license and service and maintenance revenue in the United States accounted for approximately 23% of total revenue compared to 18% for the same period in 2002. For the nine months ended September 30, 2003, software license and service and maintenance revenue in the United States accounted for approximately 19% of total revenue compared to 29% for the same period in 2002.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to revenue recognition and bad debt reserve levels, income taxes and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Recent Events

On October 27, 2003, the Company and Symantec Corporation (“Symantec”) issued a joint press release announcing that they have signed an Agreement and Plan of Merger pursuant to which a wholly owned subsidiary of Symantec will merge with and into the Company, and the Company will become a wholly owned subsidiary of Symantec. Pursuant to the Agreement and Plan of Merger, each outstanding share of the Company’s common stock will be exchanged for the right to receive $4.00 in cash, and each outstanding vested option to purchase Company common stock shall entitle the holder thereof to receive an amount in cash equal to the excess, if any, of (1) $4.00 over (2) the per share exercise price of the option. The merger is subject to several conditions, including approval by the Company’s stockholders, the expiration of applicable waiting periods under antitrust laws and other customary conditions. The Company anticipates that the merger will be completed prior to March 2004. The Company filed a Current Report on Form 8-K with respect to the proposed merger on October 27, 2003. For a description of certain risks related to the proposed merger with Symantec, see “Certain Factors That May Affect Future Results” below.

The Company intends to file a Proxy Statement and other relevant documents concerning the proposed merger with Symantec with the Securities and Exchange Commission (the “SEC”) as soon as possible. Company stockholders are urged to read the Proxy Statement and any other relevant documents filed with the SEC when they become available, as they will contain important information. Investors can obtain free copies of the Proxy Statement and other documents when they become available by contacting the Company at the address set forth on the first page of this Quarterly Report on Form 10-Q. In addition, documents filed with the SEC by the Company will be available free of charge at the SEC web site (http://www.sec.gov).

Information regarding the identity of the persons who may, under the rules of the SEC, be deemed to be participants in the solicitation of the Company’s stockholders in connection with the proposed merger, and their interests in the solicitation, will be set forth in Proxy Statement that will be filed by the Company with the SEC.

Accounting Policies

Our significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 15 of ON’s Annual Report on Form 10-K for the year ended December 31, 2002. We believe the following accounting policies are critical to an understanding of our consolidated financial statements and involve our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue in accordance with the American Institute of Certified Public Accountants’ Statement of Position No. 97-2, Software Revenue Recognition, as amended by Statement of Position 98-9, Software Revenue Recognition with Respect to Certain Transactions, and the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. Software license revenue principally consists of revenue earned under perpetual software license agreements and is generally recognized upon delivery of the software, provided that the arrangement does not require significant modification or customization of the software, any services included in the arrangement are not considered essential to the functionality of the software, evidence of the arrangement exists, collection of the resulting receivable is reasonably assured, the fee is fixed or determinable, and vendor-specific objective evidence exists for all undelivered elements to allow allocation of the total fee to all delivered and undelivered elements of the arrangement.

Services and maintenance revenue primarily consists of fees for consulting services, training and support and maintenance services provided to end users. Consulting and training services are typically provided on a time and materials basis with revenue recognized as the services are performed. In the infrequent instances when fixed-fee consulting agreements are entered into, we recognize revenue using the percentage-of-completion method of accounting. In applying this method, we measure each arrangement’s percentage-of-completion by the ratio of labor hours incurred to date to estimated total labor hours to complete the project. We do not consider consulting and training services to be essential to the functionality of the other elements of the arrangement. Revenue related to maintenance and support arrangements is recognized ratably over the contract period.

We occasionally, at the request of a single customer, sell hardware, which is recorded separately in our consolidated statement of operations. Resold hardware revenue is typically recognized upon delivery, provided that evidence of the arrangement exists, the fees are fixed or determinable, and all other revenue recognition criteria have been met.

We may sell, under one contract or a series of related contracts, software licenses, related professional services and a maintenance and support arrangement. The total contract value is attributed to both the maintenance and support arrangement based on their fair value, equal to the maintenance and support arrangement’s stated list price as a fixed percentage of the related software product’s price or based on a stated renewal rate for subsequent periods of maintenance included in the contract, as well as for professional services we are committed to provide based on the related fair value, equal to the price charged when such services are sold separately. The remainder of the contract value is then allocated to the software licenses, with the effect that discounts inherent in the total contract value are attributed to the software licenses.

Under our maintenance and support arrangements, we offer unspecified upgrades and enhancements on software products only on a when-and-if-available basis. Typically, we do not contract in advance for specified upgrades, enhancements or additional software products. In arrangements where we agree to provide additional products, specified upgrades or enhancements, we allocate revenue from the entire arrangement first to any undelivered elements including the specified future deliverables, professional services and the maintenance and support arrangement, based on the fee charged when products are sold separately. The remainder of the contract value is allocated to software licenses. We defer recognition of revenue allocated to the specified future deliverable until delivery has occurred and any remaining contractual terms relating to that element have been met. In situations where fair value does not exist for all elements to be delivered under the arrangement, we defer all revenue from the arrangement until the earlier of the date when all elements have been delivered or fair value exists for all undelivered elements. We do not offer rights of return to our customers. In situations where negotiated contracts require limited rights of return or contain acceptance criteria, we do not recognize revenue until all significant obligations have been delivered and accepted by the client.

We also sell products to resellers. There is generally no contractual right of return nor has the Company historically permitted returns notwithstanding the contractual arrangement. We typically do not ship products to resellers until an end user is identified, at which point we recognize revenue under the arrangement.

We record a returns reserve based on historical experience where we granted a right of return, although we were not contractually obligated to do so. Material differences may result in the amount and timing of our revenue from any period if management makes judgments or uses estimates that prove to be materially different from actual experience.

At the time of a sale transaction, we assess whether the fee associated with our revenue transaction is fixed or determinable based on the payment terms associated with the transaction. If a significant portion of the fee is due after our normal payment terms, which are 30 to 90 days from the invoice date, we account for the fee as not being fixed or determinable. In these cases, we recognize revenue as the fees become due.

We assess collectibility based on a number of factors, including past transaction history with the customer and the credit worthiness of the customer by reviewing credit reports, as well as bank and trade references. We do not require collateral from our customers. If we determine that collection of the fee is not reasonably assured, we defer the fee and recognize revenue at the time collection become reasonably assured, which is generally upon receipt of cash. Significant judgments and estimates are involved in assessing the collectibility of customer transactions. Different assumptions could yield materially different results.

Accounts Receivable

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on historical write-off experience and management’s evaluation of the customers in the receivable portfolio. If collection is not deemed reasonably assured at the transaction date, revenue is deferred and typically recognized on a cash basis. While management believes the allowance is adequate, if the financial condition of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.

Accounting for Income Taxes

As part of the process of preparing our consolidated financial statements, management is required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves management estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets, which are included within our consolidated balance sheet. Management must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and if management does not believe we meet the more likely than not recoverability threshold, we must establish a valuation allowance for the amount deemed not likely to be realized. To the extent management establishes a valuation allowance or increases this allowance in a period, we must include a deferred tax provision in the consolidated statement of operations.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $22.7 million as of September 30, 2003, due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of U.S. net operating loss carryforwards before they expire. The valuation allowance is based on management’s estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or management adjusts these estimates in future periods, we may need to establish an additional valuation allowance, which could materially impact our financial position and results of operations.

The net deferred tax asset as of September 30, 2003 was $1.1 million, net of the aforementioned valuation allowance of $22.7 million, which relates to certain foreign deferred tax assets deemed more likely than not to be realizable.

Results of Operations

The following table sets forth, for the periods indicated, certain financial data as percentages of our total revenue:

	Three Months Ended				Nine Months Ended
	September 30, 2003		September 30, 2002		September 30, 2003		September 30, 2002
Revenue:
Net software license	56.7	%	56.5	%	54.2	%	55.6	%
Service and maintenance	43.2	%	40.6	%	45.7	%	35.4	%
Hardware	0.1	%	2.9	%	0.1	%	9.0	%

Total revenue	100.0	%	100.0	%	100.0	%	100.0	%

Cost of revenue:
Cost of software license revenue	10.4	%	5.6	%	9.6	%	5.6	%
Cost of service and maintenance revenue	10.6	%	10.6	%	11.5	%	9.3	%
Cost of hardware revenue	0.1	%	1.5	%	0.1	%	5.4	%

Total cost of revenue	21.1	%	17.7	%	21.2	%	20.3	%

Gross profit	78.9	%	82.3	%	78.8	%	79.7	%

Operating expenses:
Sales and marketing	44.8	%	41.6	%	48.6	%	37.9	%
Research and development	18.8	%	24.5	%	21.0	%	23.8	%
General and administrative	12.2	%	13.9	%	13.0	%	14.6	%

Total operating expenses	75.8	%	80.0	%	82.6	%	76.3	%

Income (loss) from operations	3.1	%	2.3	%	(3.8	)%	3.4	%
Interest income, net	0.2	%	0.7	%	0.3	%	0.4	%
Other income (expense), net	0.9	%	(0.1	)%	2.2	%	1.2	%

Income (loss) before provision for income taxes	4.2	%	2.9	%	(1.3	)%	5.0	%
Provision for income taxes	12.5	%	2.7	%	7.9	%	2.6	%

Net income (loss)	(8.3	)%	0.2	%	(9.2	)%	2.4	%

Net Software License Revenue. Net software license revenue is derived from the licensing of proprietary and third party software products. For the three months ended September 30, 2003, this revenue increased $664 thousand, or 14%, from the same period in 2002. This increase was primarily due to an increase in North America software license seats sold of approximately 29,000 over the same period in 2002, primarily due to one large deal for 25,000 seats in the third quarter of 2003. This increase was offset by a decrease in European seats sold of approximately 7,000 over the same period in 2002. The impact of this was reduced by approximately $430 thousand due to the favorable exchange rate impact, resulting from the stronger Euro versus the US Dollar during the third quarter of 2003 versus the same period in 2002. For the nine months ended September 30, 2003, software license revenue modestly increased by $146 thousand, or 1% from the same period in 2002. This slight increase was primarily due to a $2.3 million increase in foreign license sales, of which $1.84 million was due to a favorable exchange rate impact resulting from the stronger Euro versus the US Dollar during the first nine months of 2003 versus the same period in 2002. This increase was offset by reduction in US license revenue of $2.1 million over the same period in 2002 which included three significant deals with license revenue valued at approximately $3 million. For the three and nine months ended September 30, 2003, the US contributed 27% and 18% of overall license revenue, respectively, compared to 11% and 33%, respectively, for the same periods in 2002. The Company expects US license revenue will continue to trend toward 30% of consolidated license revenue for the fourth quarter of 2003.

Service and Maintenance Revenue. Service and maintenance revenue consists of maintenance, training and professional services. This revenue increased by $721 thousand, or 21%, for the three months ended September 30, 2003 as compared to the same period in 2002. The increase was primarily due to an increase in maintenance revenue of $923 thousand, resulting from approximately $280 thousand due to more favorable foreign exchange rates in effect over those for the same period in 2002 and the balance due to an increase in the Company’s customer base. This was partially offset by a decrease in overall consulting and training revenue of $200 thousand, net of $100 thousand in favorable exchange rates, for the three months ended September 30, 2003 over the same period in 2002. Service and maintenance revenue also increased by $3.1 million, or 34%, for the nine months ended September 30, 2003 as compared to the same period in 2002. The increase was primarily due to an increase in maintenance revenue of $2.7 million, of which approximately $1.1 million was due to favorable foreign exchange rates over the same period in 2002 and the balance to an increase in the customer installed base. In addition, overall consulting and training revenue increased $409 thousand in the nine months ended September 30, 2003 over the same period in 2002. This increase was due to approximately $439 thousand in favorable exchange rates over the same period in 2002.

Hardware Revenue. For the three months ended September 30, 2003, hardware sales to one European customer decreased to $10 thousand, compared with $245 thousand for the same period in 2002. For the nine months ended September 30, 2003, hardware sales decreased to $21 thousand, compared with $2.3 million for the same period in 2002. As previously reported, hardware sales have diminished significantly from the prior year because our single hardware customer is now dealing with its supplier directly. The Company expects minimal hardware revenue in the future.

Cost of Software License Revenue. Cost of software license revenue consists primarily of expenses associated with product documentation, production and fulfillment costs, and royalty and license fees associated with products that are licensed from third party developers. Cost of software license revenue, as a percentage of like revenue, was 18.3% and 10.0% for the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, cost of software license revenue, as a percentage of like revenue, was 17.8% and 10.1%, respectively. These percentage increases were primarily due to higher costs during 2003 resulting from increased third party license sales over 2002 of $359 thousand and $814 thousand, respectively, resulting in a less favorable product mix.

Cost of Service and Maintenance Revenue. Cost of service and maintenance revenue consists primarily of expenses associated with direct consulting and training costs as well as costs of our help desk and fees paid to third parties based on new customer maintenance or renewals. Cost of service and maintenance, as a percentage of like revenue, was 24.6% and 26.1% for the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, cost of service and maintenance, as a percentage of like revenue, was 25.2% and 26.3%, respectively. This decrease in cost of sales was primarily attributable to an improved services mix due to the growth in higher margin maintenance revenue of approximately $923 thousand and $2.7 million, respectively, for the three and nine months ended September 30, 2003 compared to the same periods in 2002. This higher margin associated with maintenance revenue was partially offset by higher consulting utilizations, resulting in increased costs allocated to cost of maintenance revenue, and an increase in fees associated with third party maintenance renewals of $42 thousand and $154 thousand, respectively, for the three and nine months ended September 30, 2003 versus the same periods in 2002.

Cost of Hardware Revenue. Cost of hardware revenue consists of the expense of acquiring hardware for European hardware sales. Cost of hardware was $6 thousand and $121 thousand for the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, cost of hardware was $13 thousand and $1.4 million, respectively. These decreases were due to the expected decrease in hardware sales.

Sales and Marketing Expense. Sales and marketing expense primarily consists of compensation paid to sales and marketing personnel, the costs of direct mail and telemarketing campaigns and the costs of product trials requested by potential customers. Sales and marketing expense also includes the costs of trade shows, seminars, conferences, travel, telephone, and information technology costs associated with sales activities. Sales and marketing expense increased $793 thousand for the three months ended September 30, 2003, over the comparable period in 2002. The increased spending is primarily due to an increase in compensation expenses of $782 thousand as a result of six new employees over September 30, 2002 levels and the annualized impact of the thirteen sales employees hired in 2002 and the strengthening Euro’s impact on overseas salaries in 2003. Additionally, corresponding travel expenses and allocated overhead costs increased by $183 thousand and $125 thousand, respectively, for the three months ended September 30, 2003, over the comparable period in 2002. A decrease of $233 thousand in marketing activities due to current year expense controls partially offset these increases. For the nine months ended September 30, 2003, sales and marketing expense increased $3.2 million over the comparable period in 2002. The increased spending is primarily due to an increase in compensation and recruiting expenses of $2.6 million, along with a corresponding increase in travel expenses of $633 thousand, as a result of the aforementioned personnel increase, and an increase in allocated overhead costs of $362 thousand due to an increase in sales locations. A decrease of $283 thousand in marketing activities partially offset these increases.

Research and Development Expense. Research and development expense includes costs associated with the development of new products, the enhancement of existing products and costs associated with providing indirect technical support, training and consulting, as well as certain information technology costs. Research and development expenses decreased $263 thousand for the three months ended September 30, 2003, over the comparable period in 2002. The decrease was primarily due a $224 thousand reduction in allocated overhead expenses, due primarily to the new US office lease executed in late 2002. For the nine months ended September 30, 2003, research and development expenses decreased $508 thousand, over the comparable period in 2002. The decrease was primarily due to a reduction in allocated overhead expenses of $580 thousand, due primarily to the new US office lease executed in late 2002, partially offset by an increase in travel and entertainment expenses of $101 thousand. For both periods, increases in salary expenses due to the six incremental hires were principally offset by an increase in costs allocable to cost of services due to increased employee utilization on customer projects.

General and Administrative Expense. General and administrative expense includes executive compensation and the administrative expense associated with our foreign operations, executive support costs, accounting operations, planning, investor relations, other public company costs, bad debt expense, and business development activities. General and administrative expense were flat at $1.2 million during the three months ended September 30, 2003 compared to the same period in 2002. For the quarter ended September 30, 2003, the Company incurred an increase in bad debt charges of $86 thousand and a reduction in professional fees of $109 thousand over the same period in 2002.

For the nine months ended September 30, 2003 and 2002, general and administrative expense decreased $296 thousand principally due to decreased professional fees of $332 thousand and a favorable change in the bad debt provision of $123 thousand, due to a second quarter recovery of $185 thousand. This was partially offset by $123 thousand in higher allocated costs, principally due to increased support for our growing operations in Switzerland and the United Kingdom.

Interest Income, Net. For the three months ended September 30, 2003, interest income, net decreased $35 thousand from the same period in 2002 while the overall cash balances increased slightly over the same period due to lower investment yields. For the nine months ended September 30, 2003, interest income, net decreased by $14 thousand due to lower investment yields partially in 2003 from the same period in 2002. The interest income in 2002 is net of a $30 thousand interest assessment related to a routine tax examination.

Other Income, Net. Other income, net for the three months ended September 30, 2003 consisted primarily of $88 thousand of non-cash foreign currency transaction gains, due to the strengthening Euro’s impact on intercompany balances, net of exchange losses on US dollars held in overseas subsidiaries. Other income, net for the third quarter in 2002 consisted primarily of a net $5 thousand non-cash expense also due primarily to the exchange rate impact on temporary intercompany obligations.

For the nine months ended September 30, 2003, other income, net consisted primarily of $950 thousand of non-cash foreign currency transaction gains due primarily to the strengthening Euro’s impact on intercompany balances net of a $320 thousand exchange loss on US dollars held in overseas subsidiaries. For the nine months ended September 30, 2002, other income, net consisted primarily of $347 thousand of non-cash foreign currency transaction gains also due primarily to the strengthening Euro’s impact on intercompany balances net of a $45 thousand exchange loss on US dollars held in overseas subsidiaries.

Management continues to evaluate hedging alternatives and is working with its advisors and financial institutions to maintain its strategy of repatriating funds while minimizing realizable foreign exchange losses and income taxes.

Provision for Income Taxes. For the three months ended September 30, 2003 and 2002, the Company recorded income tax provisions of $1.2 million and $230 thousand, respectively, primarily to reflect estimated foreign taxes due by its profitable foreign operations; no tax benefit was recorded on losses in the United States. For the nine months ended September 30, 2003 and 2002, income tax provisions for profitable foreign operations were $2.1 million and $660 thousand, respectively. Taxable income at foreign operations increased in 2003 as a result of currency exchange gains on partial settlement of intercompany balances. Taxable income at foreign operations in 2002 was partially offset by net operating loss carry forwards. The Company continues to work with its tax advisors to develop additional tax strategies to minimize foreign income taxes payable.

Liquidity and Capital Resources

Through 2001, we funded our operations primarily through private and public placements of capital stock and the sale of certain product lines. During 2002, we funded our operations with cash generated from operations. For the first nine months of 2003, we have used $438 thousand of cash in funding our operations while benefiting from the Euro’s increased strength over the dollar to lower our overall use of cash. At September 30, 2003, we had available cash and cash equivalents of $13.7 million and working capital of $7.9 million.

Net cash provided by (used in) operating activities for the nine months ended September 30, 2003 and 2002 was ($438) thousand and $2.6 million, respectively. In 2003, net cash used in operating activities consisted mainly of a net loss of $2.4 million and an increase in accounts receivable of $1.2 million, offset by increases in deferred revenue and accounts payable and accrued expenses of $1.8 million and $1.4 million, respectively. In 2002, net cash provided by operating activities consisted mainly of net income of $609 thousand, depreciation expense of $756 thousand, a decrease in accounts receivable of $1.3 million and an increase in accounts payable and accrued expenses of $348 thousand. This was offset by a non-cash gain on intercompany loan revaluation of $347 thousand.

Net cash used in investing activities for the nine months ended September 30, 2003 and 2002 was $443 thousand and $623 thousand, respectively. Both of these amounts related primarily to the purchase of computer equipment.

Net cash provided by financing activities for the nine months ended September 30, 2003 and 2002 was $239 thousand and $276 thousand, respectively. In 2003, this cash activity resulted from the exercise of stock options of $131 thousand and the sale of stock under the Employee Stock Purchase Plan of $143 thousand, offset by capital lease repayments of $35 thousand. In 2002, the cash proceeds resulted primarily from the exercise of stock options of $195 thousand and the sale of stock under the Employee Stock Purchase Plan of $75 thousand.

For the nine months ended September 30, 2003, we experienced an increase in cash and cash equivalents of $107 thousand compared to an increase in cash and cash equivalents of $2.7 million for the same period in 2002. Management believes that the Company’s available cash resources, including cash and cash equivalents and cash it expects to generate from sales of products and services, will be sufficient to finance presently anticipated operating expenses and capital expenditure requirements at least through the next twelve months. Our future liquidity is, however, dependent on a number of factors, including but not limited to, our ability to reach forecasted sales targets and to maintain current expense levels. There can be no assurance that we will not require additional capital resources during this period of time. If we do require additional capital resources, we may seek to sell additional equity or debt securities, secure a bank line of credit, or consider strategic alliances. The sale of additional equity or convertible debt securities could result in additional dilution to stockholders. There can be no assurance that additional financing, in any form, will be available at all or, if available, will be on terms acceptable to us.

For additional information concerning risks associated with the Company’s liquidity and capital resources see

“Certain Factors That May Affect Future Results”.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

This Report on Form 10-Q contains forward-looking statements within the meaning of the Federal Securities Laws. In addition, from time to time, management may make forward-looking statements in press releases, in other public discussions and in other documents that we file with the Securities and Exchange Commission (including those documents incorporated by reference into this Quarterly Report on Form 10-Q). The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for these statements. For this purpose, a forward-looking statement is any statement that is not a statement of historical fact. You can identify forward-looking statements by the words “may,” “believes,” “anticipates,” “plans,” “expects,” “estimates” and similar expressions. Our forward-looking statements are based on currently available information and management’s expectations of future results but necessarily involve certain assumptions. We caution readers that our assumptions involve substantial risks and uncertainties. Consequently, any forward-looking statement could turn out to be wrong. Many factors could cause actual results to differ materially from our expectations. Moreover, the Company assumes no obligation to update forward-looking statements or update the reasons actual results could differ materially from those anticipated in forward-looking statements, except as required by law. Below we describe some of the important factors that could affect our revenue or results of operations.

OUR BUSINESS AND RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY THE PROPOSED MERGER WITH SYMANTEC CORPORATION

On October 27, 2003, we issued a joint press release with Symantec Corporation to announce that the parties have signed an Agreement and Plan of Merger pursuant to which a wholly owned subsidiary of Symantec will merge with and into the Company, and the Company will become a wholly owned subsidiary of Symantec. Pursuant to the Agreement and Plan of Merger, each outstanding share of our common stock will be exchanged for the right to receive $4.00 in cash, and each outstanding vested option to purchase our common stock shall entitle the holder thereof to receive an amount in cash equal to the excess, if any, of (1) $4.00 over (2) the per share exercise price of the option. The merger is subject to several conditions, including approval by our stockholders, the expiration of applicable waiting periods under antitrust laws and other customary conditions. The Agreement and Plan of Merger also includes certain representations and warranties with respect to the business and operations of the Company. We anticipate that the merger will be consummated prior to March 2004. In connection with the proposed merger, we filed a Current Report on Form 8-K on October 27, 2003.

The announcement of the merger could have an adverse effect on our revenue if customers delay, defer, or cancel purchases pending consummation of the planned merger. Current and prospective customers could be reluctant to purchase our software due to potential uncertainty about the combined company’s product offerings and its support and service of existing products. If our announcement of the merger causes our customers to delay purchase decisions pending consummation of the planned merger, our business, condition (financial or otherwise), prospects and results of operations could be materially adversely affected. In addition, any such delays of orders or related disruptions could cause our quarterly operating results to fall below management’s reported expectations, which could cause a decline in our stock price. Finally, the uncertainty surrounding the proposed merger may cause employee turnover and /or result in increased difficulty in our ability to add new employees to our sales and support organization. Any significant employee turnover or delays in hiring forecasted sales positions could have an adverse effect on our business, condition (financial or otherwise), prospects and results of operations.

IF THE PLANNED MERGER WITH SYMANTEC IS NOT COMPLETED, OUR BUSINESS AND STOCK PRICE MAY BE ADVERSELY AFFECTED

If the planned merger with Symantec is not completed, we could suffer a number of consequences that may adversely affect our business, condition (financial or otherwise) prospects, results of operations and stock price, including the following:

•

we would not realize the benefits we expect from combining with Symantec, including the potentially enhanced financial and competitive position;

•

the market price of our common stock could decline following an announcement that the merger has been abandoned, to the extent that the current market price reflects a market assumption that the merger will be completed;

•

we could, under certain circumstances, be required to pay Symantec a termination fee of approximately $3.1 million and/or provide reimbursement to Symantec for certain transaction costs incurred by them;

•

we would remain liable for our costs related to the transaction, such as legal, accounting and certain investment banking fees, and we expect these costs to be significant; and

•

activities relating to the merger may divert our management’s attention from our business and cause disruptions among our employees and to our relationships with customers and business partners, thus detracting from our ability to grow revenue and minimize costs and possibly leading to a loss of revenue and market position that we may not be able to regain if the transaction does not occur.

WE HAVE EXPERIENCED CASH FLOW DEFICITS IN THE PAST AND MAY EXPERIENCE CASH FLOW DEFICITS IN THE FUTURE.

For nine months ended September 30, 2003, we had an operating loss of $1.0 million. At September 30, 2003, we had an accumulative deficit of $74.0 million. Management’s current 2003 forecast projects that the Company will be profitable from operations for the year. Based upon these assumptions, management believes the Company has sufficient cash to fund its operations for the next twelve months. If the Company is unable to attain forecasted revenue levels and management is unsuccessful in controlling expenses, the Company may have to seek additional external equity or debt financing to continue its operations. There can be no assurance that we will be able to secure such external financing.

OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF GENERAL ECONOMIC AND BUSINESS CONDITIONS.

Our business is subject to the effects of general economic and business conditions. ON’s operating results have been affected by recent unfavorable economic conditions and reduced information technology spending. In addition, the continued fallout from the September 11, 2001 terrorist attacks, U.S. military action in Iraq and Afghanistan and the heavily publicized corporate transgressions and resulting investigations causing investor uncertainty about the integrity of US financial markets have added (or exacerbated) general economic, political and other uncertainties. If economic and market conditions do not improve and these uncertainties continue to exist, ON’s business, condition (financial or otherwise), prospects and results of operations could be materially adversely affected.

OUR SALES AND MARKETING REQUIRES SIGNIFICANT INVESTMENTS

Sales of our products require significant up-front investments in marketing, technical and financial resources. We have adopted a sales and marketing strategy that relies significantly on a direct sales force, third-party resellers and in-house field service organization. This strategy requires significant investments in identifying and hiring qualified sales and technical personnel, ongoing product development, and expansion of an in-house field service organization. We have developed valuable marketing and service experience and expertise in Europe and, more recently, in the United States. However, there can be no assurance that we will be able to continue to expand and apply such experience and expertise to our target market.

WE HAVE HISTORICALLY DERIVED A SIGNIFICANT PORTION OF OUR REVENUE FROM A RELATIVELY SMALL NUMBER OF CUSTOMERS

For the three months ended September 30, 2003, one customer accounted for 10.2% of total revenue. For the nine months ended September 30, 2003, no customer accounted for greater than 10%. However, for the twelve months ended December 31, 2002, 2001 and 2000, two customers accounted for $6.2 million (17.8%), $4.3 million (17.7%), and $6.3 million (23.9%) of total revenue, respectively. It is possible that in the future other customers will account for a significant portion of ON’s total revenue. The loss of significant customers could have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations.

WE WILL NEED TO CONTINUE TO EXPAND OUR DISTRIBUTION CHANNELS IN ORDER TO DEVELOP OUR BUSINESS AND INCREASE REVENUE

We sell our products through our direct sales force and a number of distributors, and we provide maintenance and support services through our technical and customer support staff. We plan to continue to invest large amounts of resources in our direct sales force. In addition, management is committed to developing additional sales and marketing channels through value added resellers, system integrators, original equipment manufacturers and other channel partners. We may not be able to attract channel partners that will be able to market our products effectively, or that will be qualified to provide timely and cost-effective customer support and service. If we establish distribution through such indirect channels, our agreements with channel partners may not be exclusive. As a result, such channel partners may also carry competing product lines. If we do not establish and maintain such distribution relationships, this could materially adversely affect our business, condition (financial or otherwise), prospects and results of operations.

IF WE DO NOT RESPOND ADEQUATELY TO OUR INDUSTRY’S EVOLVING TECHNOLOGY STANDARDS, OR DO NOT CONTINUE TO MEET THE SOPHISTICATED NEEDS OF OUR CUSTOMERS, SALES OF OUR PRODUCTS MAY DECLINE

As a result of rapid technological change in our industry, product advances can quickly erode our position in existing markets or other markets that we may enter. The life cycles of our products are difficult to estimate. Our growth and future financial performance depend in part upon our ability to improve existing products and develop and introduce new products that keep pace with technological advances, meet changing customer needs and respond to competitive products. The introduction during the first quarter of 2003 of our ON iCommand product is an example of our commitment to respond to these issues. Our product development efforts will continue to require substantial investments. We may not have sufficient resources to make the necessary investments.

We have experienced product development delays in the past and may experience delays in the future. Difficulties in product development could delay or prevent the successful introduction or marketing of new or improved products. Any such new or improved products, including the new ON iCommand product, may not achieve market acceptance. Our current or future products may not conform to industry requirements. Our ability to continue to enhance our current products to meet customer and market requirements will depend substantially on our ability to effectively manage this development effort, to attract and retain the required development personnel in Waltham, Massachusetts and Starnberg, Germany and to coordinate and manage geographically remote development efforts. If, for technological or other reasons, we are unable to develop and introduce new and improved products in a timely manner, our business, condition (financial or otherwise), prospects and results of operations could be adversely affected.

ERRORS IN OUR PRODUCTS COULD RESULT IN SIGNIFICANT COSTS TO US AND COULD IMPAIR OUR ABILITY TO SELL OUR PRODUCTS

Because our software products are complex, these products may contain errors that could be detected at any point in a product’s life cycle. In the past, we have discovered software errors in certain of our products and have experienced delays in shipment of our products during the period required to correct these errors. Despite testing by ON and by current and potential customers, errors in our products may be found in the future. Detection of such errors may result in, among other things, loss of, or delay in, market acceptance and sales of our products, diversion of development resources, injury to our reputation, or increased service and warranty costs. If any of these results were to occur, our business, condition (financial or otherwise), prospects and results of operations could be materially adversely affected.

IN THE FUTURE, INCLUSION OF FUNCTIONS PROVIDED BY OUR PRODUCTS IN SYSTEM SOFTWARE AND APPLICATION SUITES MAY AFFECT OUR COMPETITIVE POSITION

In the future, vendors of operating system software and applications sold for a single price (generally referred to as application suites) may continue to enhance their products to include functions that are currently provided by our products. In addition, some vendors may bundle these products in their existing application suites at no additional charge. The widespread inclusion of the functions provided by our products as standard features of operating system software could render our products obsolete and unmarketable particularly if the quality of such functions were comparable to the functions offered by our products. Furthermore, even if the software functions provided as standard features by operating systems are more limited than those of our products, there is no assurance that a significant number of customers would not elect to accept such functions instead of purchasing additional software. If we were unable to develop new software products to further enhance operating systems and to successfully replace any obsolete products, our business, condition (financial or otherwise), prospects and results of operations could be materially adversely affected.

THE INTENSE COMPETITION IN THE MARKET FOR OUR PRODUCTS COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS

The market for our products is highly competitive, and we expect competition to continue to increase in the future. We believe that the principal competitive factors affecting the market for our products include brand name recognition, company reputation, performance, functionality, ease-of-use, breadth of product line, quality, customer support, adherence to industry standards, integration with third-party solutions and price.

As is the case in many segments of the software industry, we may encounter increasing price competition in the future. This could reduce average selling prices and, therefore, profit margins. Competitive pressures could result not only in sustained price reductions but also in a decline in sales volume, which could adversely affect our business, condition (financial or otherwise), prospects and results of operations. There can be no assurance that we will continue to compete effectively against existing and potential competitors in our markets, many of whom have substantially greater financial, technical, marketing and support resources and name recognition than we have.

The market for our products is highly competitive and diverse. The technology for remote software management products can change rapidly. New products are frequently introduced and existing products are continually enhanced. Competitors vary in size and in the scope and breadth of the products and services offered. The Company has faced competition from a number of sources, including:

•

Large and established companies such as Microsoft, Computer Associates International and IBM/Tivoli that offer software distribution tools as part of their overall network and/or systems management frameworks.

•

Software companies like Novadigm and Marimba as well as others that provide software management solutions.

•

Vendors of low-priced suites such as LANDesk and Altiris that target both small business and enterprise accounts.

•

Hardware suppliers such as IBM and Hewlett–Packard that offer or bundle software management capabilities in conjunction with their hardware offerings.

•

The internal information technology departments of those companies with infrastructure management needs.

In addition, Microsoft has bundled new management capabilities in its Windows 2000 and XP operating systems that, in conjunction with its Systems Management Server (SMS) framework, directly compete with capabilities provided by ON. Their latest version, SMS 2003 (code-named “Topaz”) is expected to be released during 2003 and includes additional capabilities that directly compete with capabilities provided by the ON product offering, including support for mobile and remote users as well as integration with Microsoft Active Directory. Even if the functionality provided with Microsoft’s operating system software were more limited than that of our software management products, customers or potential customers might elect to accept more limited functionality in lieu of purchasing additional software. Competition resulting from this type of bundling could lead to price reductions for our products, which would reduce our margins and correspondingly affect our business, condition (financial or otherwise), prospects and results of operations.

Some of our current and many of our potential competitors have much greater financial, technical, marketing, and other resources than we have. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer needs. They may also be able to devote greater resources to the development, promotion, and sale of their products than ON. The Company may not be able to compete successfully against current and future competitors. Competitive pressures faced by the Company may materially adversely affect the Company’s business, condition (financial or otherwise), prospects and results of operations.

DUE TO THE TECHNOLOGICAL CHALLENGES ASSOCIATED WITH OUR CURRENT PRODUCTS, WE MAY NOT HAVE THE FINANCIAL RESOURCES NECESSARY TO CONDUCT THE BUSINESS AS PRESENTLY CONTEMPLATED

Based on management’s 2003 forecasts, product development, marketing and sales costs for our current products are approximately $2.1 million per month. Based on our existing cash and forecasted revenue, we believe that we have enough cash to fund these costs for the next twelve months. There can be no assurance that our estimate of the marketing, sales and product development costs of our products or our revenue forecasts is correct, or that these costs will not exceed our available financial resources, or that we will be able to locate additional sources of financing, if and when needed.

OUR RELIANCE ON INTERNATIONAL REVENUE COULD ADVERSELY AFFECT OUR OPERATING RESULTS

For the three and nine months ended September 30, 2003, international revenue was 77% and 81% of total revenue, respectively. For fiscal years 2002, 2001, and 2000, total international revenue from the Company’s foreign subsidiaries and other foreign sources was 73%, 71%, and 65% of total revenue, respectively. We expect that international revenue will continue to constitute a significant portion of our total revenue in the future. Accordingly, a significant percentage of our total revenue may be subject to the risks inherent in international sales, including the impact of fluctuating exchange rates, longer payment cycles, greater difficulty in protecting intellectual property rights, greater difficulty in accounts receivable collection, unexpected changes in legal and regulatory requirements, seasonality due to the slowdown of European business activity in the third quarter and tariffs and other trade barriers. There can be no assurance that these factors will not have a material adverse effect on our future international license revenue.

Our continued growth and profitability will require continued expansion of our international operations, particularly with continued expansion in Europe and initial inroads into Latin America and the Pacific Rim. Accordingly, we intend to expand our current international operations and enter additional international markets. Such expansion will require significant management attention and financial resources. We have only limited experience in developing local-language versions of our products and marketing and distributing our products internationally. We may not be able to successfully translate, market, sell and deliver our products internationally. If we are unable to expand our international operations successfully and in a timely manner, our business, condition (financial or otherwise), prospects and results of operations could be adversely affected.

AS OUR EXPANDING INTERNATIONAL OPERATIONS IN EUROPE AND ELSEWHERE ARE INCREASINGLY CONDUCTED IN CURRENCIES OTHER THAN THE U.S. DOLLAR, FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY EXCHANGE LOSSES

A large portion of our business is conducted in foreign currencies. Fluctuations in the value of foreign currencies relative to the U.S. dollar have caused and will continue to cause currency transaction gains and losses. We cannot predict the effect of exchange rate fluctuations upon future operating results. We may experience currency losses in the future. Although we have no current plans to do so, we may, in the future, implement a foreign exchange hedging program, consisting principally of purchases of forward-rate currency contracts. However, if undertaken, our hedging activities may not adequately protect us against the risks associated with foreign currency fluctuations.

FUTURE FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS DUE TO A NUMBER OF FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL, COULD ADVERSELY AFFECT OUR STOCK PRICE

Our quarterly operating results have varied significantly in the past and may vary significantly in the future depending upon a number of factors, many of which are beyond our control. These factors include, among others:

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our ability to develop, introduce and market new and enhanced versions of our software on a timely basis;

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market demand for our software, including our latest product, ON iCommand;

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the size, timing and contractual terms of significant orders;

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the timing and significance of new software product announcements or releases by ON or our competitors;

•

changes in our pricing policies or those of our competitors;

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changes in our business strategies;

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budgeting cycles of our potential customers;

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changes in the mix of software products and services sold, including increases in third party software sales;

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reliance on indirect sales forces;

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changes in the mix of revenues attributable to domestic and international sales and the related rates of exchange;

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the impact of acquisitions of competitors;

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seasonal trends;

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the cancellations of maintenance agreements;

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product life cycles, software defects and other product quality problems; and

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personnel changes.

We have often recognized a substantial portion of our revenue in the last month or weeks of a quarter. As a result, license revenue in any quarter is substantially dependent on orders booked and shipped in the last month or weeks of that quarter. Due to the foregoing factors, quarterly revenue and operating results are not predictable with any significant degree of accuracy. In particular, the timing of revenue recognition can be affected by many factors, including the timing of contract execution and delivery. The timing between initial customer contact and fulfillment of criteria for revenue recognition can be lengthy and unpredictable, and revenue in any given quarter can be adversely affected as a result of such unpredictability.

OUR SALES CYCLE IS LONG AND UNPREDICTABLE, AND POTENTIAL DELAYS IN THE CYCLE MAKE OUR REVENUE SUSCEPTIBLE TO FLUCTUATIONS

The licensing of our software generally requires us to engage in a sales cycle that typically takes approximately four to nine months to complete. The length of the sales cycle may vary depending on a number of factors over which we may have little or no control, including the size of the transaction and the level of competition that we encounter in our selling activities. During the sales cycle, we typically provide a significant level of education to prospective customers regarding the use and benefits of our products and, in some cases, permit the potential customer to utilize an evaluation version of our software products. Any delay in the sales cycle of a large license or a number of smaller licenses could have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations.

SEASONAL TRENDS IN SALES OF OUR SOFTWARE PRODUCTS MAY AFFECT OUR QUARTERLY OPERATING RESULTS

Our business has experienced and is expected to continue to experience seasonality. Our revenue and operating results in our December quarter typically benefit from purchase decisions made by the large concentration of customers with calendar year-end budgeting requirements, and from the efforts of our sales force to meet fiscal year-end sales quotas. In addition, we are currently attempting to further expand our presence in international markets, including Europe. International revenue comprises a significant percentage of our total revenue, and we may experience additional variability in demand associated with seasonal buying patterns in such foreign markets.

ANY FUTURE ACQUISITIONS PRESENT RISKS WHICH COULD ADVERSELY AFFECT OUR BUSINESS

In the future, ON may evaluate and make acquisitions of, or large investments in, other businesses that offer products, services, and technologies that further our goal of providing remote software management solutions to businesses or which complement our current business. Any future acquisitions or investments that we may evaluate or complete present risks commonly encountered with these types of transactions. The following are examples of such risks:

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significant out of pocket expenses during the evaluation period;

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difficulty in combining the technology, operations, or work force of the acquired business;

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disruption of on-going businesses;

•

difficulty in realizing the potential financial and strategic position of ON through the successful integration of the acquired business;

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difficulty in maintaining uniform standards, controls, procedures, and policies;

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possible impairment of relationships with employees and clients as a result of any integration of new businesses and management personnel;

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difficulty in adding significant numbers of new employees, including training, evaluation, and coordination of effort of all employees towards our corporate mission;

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diversion of management attention; and

•

potential dilutive effect on earnings.

The risks described above, either individually or in the aggregate, could materially adversely affect our business, operating results, and financial condition. Future acquisitions, if any, could provide for consideration to be paid in cash, shares of ON common stock, Company debt, or a combination of cash, ON common stock, and Company debt.

OUR ABILITY TO MANAGE GROWTH WILL AFFECT OUR ABILITY TO ACHIEVE AND MAINTAIN PROFITABILITY

Over the last 5 years, total software license revenue (ON Command CCM and related products only) has increased significantly from $11.3 million in fiscal 1998 to $34.8 million in fiscal 2002. If we achieve our future growth plans, such growth may burden our operating and financial systems. This burden will require significant senior management attention and will require the use of other ON resources. Our ability to compete effectively and to manage future growth (and our future operating results) will depend in part on our ability to implement and expand operational, customer support, and financial control systems and to expand, train, and manage our employees. We may not be able to augment or improve existing systems and controls or implement new systems and controls in response to future growth, if any. Any failure to do so could materially adversely affect our business, condition (financial or otherwise), prospects and results of operations.

OUR BUSINESS DEPENDS IN LARGE PART UPON THE PROTECTION OF OUR PROPRIETARY TECHNOLOGY, THE LOSS OF WHICH WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS

Our success is heavily dependent upon our proprietary software technology. We rely on a combination of contractual rights, trademarks, trade secrets and copyright to establish and protect our proprietary rights in software.

We use a printed “shrink-wrap” license for users of our products distributed through our reseller distribution channels in order to protect our copyrights and trade secrets in those products. Since the licensee does not sign these shrink-wrap licenses, many authorities believe that they may not be enforceable under many state laws and the laws of many foreign jurisdictions. If such licenses were not enforceable, the user would not be bound by the license terms, including the terms that seek to protect our proprietary technology. If the printed shrink-wrap licenses prove to be unenforceable, this may have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations.

The laws of some foreign countries either do not protect our proprietary rights or offer only limited protection for those rights. Furthermore, in countries with a high incidence of software piracy, we may experience a higher rate of piracy of our products.

We have obtained registrations in the United States for the following trademarks: ON Technology, CCM, ON Command, and ON Command CCM. We have obtained registrations in the European Union and Australia for the following trademarks: ON Technology and ON Command CCM. In Canada, we have obtained trademark registrations for ON Technology and ON Command. Given our relatively limited number of registered trademarks, , we may not be able to prevent a third party from using our trademarks in many foreign jurisdictions. We have not to date registered any of our copyrights.

There can be no assurance that the steps taken by ON to protect our proprietary software technology will be adequate. Lesser sensitivity by corporate, government or institutional users to avoiding infringement of propriety rights could have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations.

There has been substantial litigation in the software industry involving intellectual property rights of technology companies. We have not been involved in any such litigation. Although we do not believe that we are infringing the intellectual property rights of others, any involvement in this type of litigation may have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations. In addition, since we currently license, or may in the future license or acquire a portion of the software included in our products from third parties, our exposure to infringement actions may increase because we must rely upon these third parties for information as to the origin and ownership of any software. We generally obtain representations as to the origin and ownership of such acquired or licensed software and we generally obtain indemnification to cover any breach of such representations. However, there can be no assurance that these representations are accurate or that such indemnification will provide us with adequate compensation for a breach of these representations. In the future, we may need to initiate litigation to enforce and protect trade secrets and other intellectual property rights owned by us. We may also be subject to litigation to defend against claimed infringement of the rights of others or to determine the scope and validity of the proprietary rights of others. This litigation could be costly and cause diversion of management’s attention, either of which could have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations. Adverse rulings or findings in such litigation could result in the loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from third parties, or prevent us from manufacturing or selling our products. Any one of these items could have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations. Furthermore, there can be no assurance that any necessary licenses will be available to us on reasonable terms, or at all.

IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE TO USE OUR TECHNOLOGY OR TRADEMARKS AND THIS COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE OUR REVENUE AND INCREASE COSTS

We rely primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. Such laws provide only limited protection. Despite precautions that we take, it may be possible for unauthorized third parties to copy aspects of our current or future products or to obtain and use information that we regard as proprietary. In particular, we may provide our licensees with access to our data model and other proprietary information underlying our licensed applications. Such means of protecting our proprietary rights may not be adequate. Policing unauthorized use of software is difficult and, while we do not expect software piracy to be a persistent problem, some foreign laws do not protect our proprietary rights to the same extent as United States laws. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of resources, and could materially adversely affect our business, condition (financial or otherwise), prospects and results of operations.

THIRD PARTIES COULD ASSERT, FOR COMPETITIVE OR OTHER REASONS, THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS, AND SUCH CLAIMS COULD INJURE OUR REPUTATION, CONSUME TIME AND MONEY, AND ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS

While we are not aware that any of our software product offerings infringe the proprietary rights of third parties, third parties may claim infringement with respect to our current or future products. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the software industry grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements may not be available on acceptable terms, or at all. As a result, infringement claims could have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations.

WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT COSTS TO US

Our license agreements with our customers typically contain provisions designed to limit exposure to potential product liability claims. Such limitation of liability provisions may, however, not be effective under the laws of certain jurisdictions. Although we have not experienced material product liability claims to date, the sale and support of our products entails the risk of such claims. We may be subject to such claims in the future. A material product liability claim could materially adversely affect our business, condition (financial or otherwise), prospects and results of operations.

OUR SENIOR MANAGEMENT AND OTHER KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND IF THEY CHOOSE TO LEAVE, IT COULD HARM OUR BUSINESS

Our success will depend to a significant extent on the continued service of our senior management and certain other key employees, including selected sales, consulting, technical and marketing personnel. While our employees are required to sign standard agreements concerning confidentiality and ownership of inventions and many of our employees are bound by an employment or non-competition agreement, enforcing these agreements may be difficult and costly, particularly with respect to provisions concerning non-competition. In addition, we do not generally maintain key man life insurance on any employee. The loss of the services of one or more of our executive officers or key employees or the decision of one or more such officers or employees to join a competitor or otherwise compete directly or indirectly with us could have a material adverse effect on our business, condition (financial or otherwise), prospects and results of operations.

WE WILL NEED TO RECRUIT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL TO SUCCESSFULLY GROW OUR BUSINESS

Our future success will likely depend in large part on our ability to attract and retain additional highly skilled technical, sales, management and marketing personnel. Competition for such personnel in the computer software industry is intense, and in the past we have experienced difficulty in recruiting qualified personnel. New employees generally require substantial training in the use of our products. We may not succeed in attracting and retaining such personnel. If we do not, our business, condition (financial or otherwise), prospects and results of operations could be materially adversely affected.

PROVISIONS IN OUR CHARTER DOCUMENTS AND IN DELAWARE LAW MAY DISCOURAGE POTENTIAL ACQUISITION BIDS FOR ON AND PREVENT CHANGES IN OUR MANAGEMENT WHICH OUR STOCKHOLDERS FAVOR

Certain provisions of ON’s charter documents eliminate the right of stockholders to act by written consent without a meeting and specify certain procedures for nominating directors and submitting proposals for consideration at stockholder meetings. Such provisions are intended to increase the likelihood of continuity and stability in the composition of the ON board of directors and in the policies set by the board. These provisions also discourage certain types of transactions, which may involve an actual or threatened change of control transaction. These provisions are designed to reduce the vulnerability of ON to an unsolicited acquisition proposal. As a result, these provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. These provisions are also intended to discourage certain tactics that may be used in proxy fights. However, they could have the effect of discouraging others from making tender offers for ON’s shares. As a result, these provisions may prevent the market price of ON’s common stock from reflecting the effects of actual or rumored takeover attempts. These provisions may also prevent changes in the management of ON.

ON’s board of directors has the authority to issue up to 2,000,000 shares of preferred stock in one or more series. The board of directors can fix the price, rights, preferences, privileges, and restrictions of such preferred stock without any further vote or action by ON’s stockholders. The issuance of preferred stock allows ON to have flexibility in connection with possible acquisitions and other corporate purposes. However, the issuance of shares of preferred stock may delay or prevent a change in control transaction without further action by the ON stockholders. As a result, the market price of the ON common stock and the voting and other rights of the holders of ON common stock may be adversely affected. The issuance of preferred stock may result in the loss of voting control to others. ON has no current plan to issue any shares of preferred stock.

ON is subject to the anti-takeover provisions of the Delaware General Corporation Law, which regulates corporate acquisitions. The Delaware law prevents certain Delaware corporations, including ON, from engaging, under certain circumstances, in a “business combination” with any “interested stockholder” for three years following the date that such stockholder became an interested stockholder. For purposes of Delaware law, a “business combination” includes, among other things, a merger or consolidation involving ON and the interested stockholder and the sale of more than 10% of ON’s assets. In general, Delaware law defines an “interested stockholder” as any entity or person beneficially owning 15% or more of the outstanding voting stock of a company and any entity or person affiliated with or controlling, or controlled by such entity or person. Under Delaware law, a Delaware corporation may “opt out” of the anti-takeover provisions. ON has not “opted out” of the anti-takeover provisions of Delaware law.

OUR STOCK WILL LIKELY BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS WHICH MAY PREVENT STOCKHOLDERS FROM RESELLING THEIR SHARES AT OR ABOVE THE PRICE AT WHICH THEY PURCHASED THEIR SHARES

In the past, the market price of our common stock has varied greatly and the volume of our common stock traded has fluctuated greatly as well. We expect such fluctuation to continue. The fluctuation results from a number of factors including:

•

any shortfall in revenue or income as compared to revenue or income projected by management or expected by investors and securities analysts;

•

announcements of new products by ON or our competitors;

•

quarterly fluctuations in our financial results or the results of other software companies, including those of our direct competitors;

•

changes in analysts’ estimates of our financial performance, the financial performance of our competitors, or the financial performance of software companies in general;

•

general conditions in the software industry;

•

changes in prices for our products or the products of our competitors;

•

changes in our revenue growth rates or the growth rates of our competitors;

•

sales of large blocks of ON common stock; and

•

conditions in the financial markets in general.

In addition, the stock market may from time to time experience extreme price and volume fluctuations. Many technology companies, in particular, have experienced such fluctuations. Often, such fluctuations have been unrelated to the operating performance of the specific companies. The market price of our common stock may experience significant fluctuations in the future.

RISK OF DELISTING BY NASDAQ STOCK MARKET

Companies with securities listed on the NASDAQ National Market must meet at least one of two Continued Listing Standards in order to maintain such listing. As applicable to ON, the primary requirements of Continued Listing Standard 1 are that (i) the issuer must maintain stockholders’ equity of at least $10 million, and (ii) the issuer must have at least 750,000 publicly held shares and such publicly held shares must have a minimum market value of $5 million. The primary requirements of Continued Listing Standard 2 are that (i) the issuer’s listed securities must have a minimum market value of $50 million, and (ii) the issuer must have at least 1.1 million publicly held shares and such publicly held shares must have a minimum market value of $15 million. Both listing standards require that the issuer’s listed securities maintain a minimum bid price of $1.00.

As of the date of filing this Quarterly Report on Form 10-Q, the Company is in compliance with Continued Listing Standard 2 for the NASDAQ National Market. Should ON’s market capitalization drop below $50 million in the future, ON’s common stock may be delisted unless ON takes affirmative action to increase its stockholders’ equity above the required $10 million minimum (such as by issuing securities in an equity financing) or the market value of ON’s listed securities strengthens to exceed the $50 million minimum on a consistent basis. Alternatively, management also may consider transferring ON’s listing from the NASDAQ National Market to the NASDAQ Smallcap Market. Delisting could have a material adverse effect on the price of ON’s common stock and on the level of liquidity currently available to the Company’s shareholders.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to the impact of interest rate changes, foreign currency fluctuations, and investment changes.

Interest Rate Risk. The Company’s exposure to market rate risk for changes in interest rates relates primarily to the Company’s cash equivalent investments. The Company has not used derivative financial instruments. The Company invests its excess cash in short-term floating rate instruments and senior secured floating rate loan funds, which carry a degree of interest rate risk. These instruments may produce less income than expected if interest rates fall.

Foreign Currency Risk. International revenue from the Company’s foreign subsidiaries and other foreign sources for the three and nine months ended September 30, 2003 was 77% and 81% of total revenue, respectively. International sales are made primarily from the Company’s subsidiary in Germany and are denominated in the local currency. Accordingly, the Company’s German and other foreign subsidiaries use its local currency as its functional currency. The Company is exposed to foreign currency exchange rate fluctuations as the financial results of its foreign subsidiary are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall profitability.

Investment Risk. The Company may invest in the future in the equity instruments of privately held companies for business and strategic purposes. However, as of September 30, 2003, the Company holds no such material investments. For these non-quoted investments, the Company’s policy is to regularly review the assumptions underlying the operating performance and cash flow forecasts in assessing the carrying values. The Company identifies and records impairment losses on long-lived assets when events or circumstances indicate that such assets might be impaired.

Item 4: Controls and Procedures.

Evaluation of disclosure controls and procedures. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2003. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of September 30, 2003, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in internal controls. No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

FORM 10-Q, September 30, 2003

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company may be a party to litigation and claims incident to the ordinary course of its business. As of the date of this Quarterly Report on Form 10-Q, there is no litigation pending against the Company that would have a material adverse effect on the Company’s results of operations or financial position.

Item 2. Changes in Securities and Use of Proceeds

Not Applicable

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

The exhibits listed in the accompanying Exhibit Index on page 29 are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q.

(b) Reports on Form 8-K

Report on Form 8-K furnished by the Company on July 31, 2003.

ON TECHNOLOGY CORPORATION AND SUBSIDIARIES

FORM 10-Q, September 30, 2003

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.

	ON TECHNOLOGY CORPORATION

		/s/ ROBERT L. DORETTI
Date November 12, 2003	Name:	Robert L. Doretti
	Title:	Chairman, President, and Chief Executive Officer

		/s/ STEVEN R. WASSERMAN
Date: November 12, 2003	Name:	Steven R. Wasserman
	Title:	Vice President of Finance, Chief Financial Officer, and Chief Accounting Officer

INDEX TO.

EXHIBITS

EXHIBIT NO.		EXHIBIT TITLE

10.1*#		Amendment Letter to Employment Agreement dated as of June 30, 2003 by and between the Company and Steven Wasserman.

10.2*#		Amendment Letter to Employment Agreement dated as of June 30, 2003 by and between the Company and Ram Sudama.

10.3*#		Amendment Letter to Employment Agreement dated as of June 30, 2003 by and between the Company and Robert P. Nault.

10.4*#		Severance Benefit Letter Agreement, dated as of June 30, 2003, by and between the Company and Paul Demko, Jr.

10.5*#		Amendment Letter to Employment Agreement dated July 1, 2003 by and between the Company and Michael Carey.

31.1#		Section 302 Certification of Chief Executive Officer

31.2#		Section 302 Certification of Chief Financial Officer

32#		Section 906 Certification of Chief Executive Officer and Chief Financial Officer

#	Filed with this report.

*	Management contracts or compensatory plans or arrangements covering executive officers or directors the Company.

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ON TECHNOLOGY CORP 10-Q