**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|------------|------------|----------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                         |
|       |       | **For the Quarter Ended June 30, 2004**                                                            |
|       |       |                                                                                               |
|       |       | **Commission File Number 000-31589**                                                               |

 

**VASTERA, INC.**

(Exact Name of Registrant as Specified in itsCharter)

 

| **Delaware**                                                               | ** ** | **54-1616513**                           |
|----------------------------------------------------------------------------|------------|------------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization)            |       | (I.R.S. Employer  Identification Number) |
|                                                                       |       |                                     |
| **45025 Aviation Drive, Suite 300  Dulles, VA 20166  (703) 661-9006** |
| (Address and Phone Number of Principal  Executive Offices)                 |

 

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Indicate by check number whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes   ý   No   o

 

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

 

As of August 3, 2004 there were 42,007,783 shares of the registrant’scommon stock, $.01 par value per share, outstanding.

 

 

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**VASTERA, INC.**

 

**TABLE OF CONTENTS**

 
| PART I - FINANCIAL INFORMATION (UNAUDITED) |                                                  |
|--------------------------------------------|-------------------------------------------------------|
|                                       |                                                  |   |   |
| Item 1:                                    |                                                  | Financial Statements |   |
|                                       |                                                  |   |   |
|                                       | CONDENSED CONSOLIDATED BALANCE SHEETS                 |   |
|                                       |                                                  |   |   |
|                                       | CONDENSED CONSOLIDATED STATEMENTS OF  OPERATIONS      |   |
|                                       |                                                  |   |   |
|                                       | CONDENSED CONSOLIDATED STATEMENTS OF CASH  FLOWS      |   |
|                                       |                                                  |   |   |
|                                       | NOTES TO CONDENSED CONSOLIDATED FINANCIAL  STATEMENTS |   |
|                                       |                                                  |   |   |
| Item 2:                                    |                                                  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
| Item 3:                                    |                                                  | Qualitative and Quantitative Disclosures  About Market Risk |   |
| Item 4:                                    |                                                  | Controls and Procedures |   |
|                                       |                                                  |   |   |
| PART II - OTHER INFORMATION                |                                                  |
|                                       |                                                  |   |   |
| Item 1:                                    |                                                  | Legal  Proceedings |   |
| Item 2:                                    |                                                  | Changes in Securities and Use of Proceeds |   |
| Item 3:                                    |                                                  | Defaults Upon Senior Securities |   |
| Item 4:                                    |                                                  | Submission of Matters to a Vote of Security  Holders |   |
| Item 5:                                    |                                                  | Other  Information |   |
| Item 6:                                    |                                                  | Exhibits and Reports on Form 8-K |   |
|                                       |                                                  |   |   |
| SIGNATURES                                 |                                                  |

 

2

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# **PART I - FINANCIAL INFORMATION (UNAUDITE**D)

 

## **Item 1:**                   Financial Statements

 

**VASTERA, INC.AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

**(In thousands,except per share data)**

 
| ** **                                                                                                                | ** ** | **June 30,   2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|
|                                                                                                                      |       | **(Unaudited)**     |       |                        |       |
| **Assets**                                                                                                                |       |                |       |                        |       |
| Current assets:                                                                                                           |       |                |       |                        |       |
| Cash and cash equivalents                                                                                                 |       | $                   | 19,067     |                        | $          | 16,046 |   |
| Short-term investments                                                                                                    |       | 37,853              |       | 40,402                      |       |
| Accounts receivable, net of allowance for  doubtful accounts of $1,044 and $994, respectively                             |       | 17,304              |       | 17,599                      |       |
| Prepaid expenses and other current assets                                                                                 |       | 4,228               |       | 4,212                       |       |
| Total current assets                                                                                                      |       | 78,452              |       | 78,259                      |       |
| Property and equipment, net                                                                                               |       | 9,978               |       | 10,806                      |       |
| Intangible assets, net                                                                                                    |       | 1,206               |       | 1,863                       |       |
| Goodwill                                                                                                                  |       | 5,044               |       | 5,044                       |       |
| Deposits and other assets                                                                                                 |       | 850                 |       | 1,292                       |       |
|                                                                                                                      |       |                |       |                        |       |
| Total assets                                                                                                              |       | $                   | 95,530     |                        | $          | 97,264 |   |
|                                                                                                                      |       |                |       |                        |       |
| **Liabilities and  Stockholders’ Equity**                                                                            |       |                |       |                        |       |
| Current liabilities:                                                                                                      |       |                |       |                        |       |
| Line of credit and capital lease  obligations, current                                                                    |       | $                   | 826        |                        | $          | 1,867 |   |
| Accounts payable                                                                                                          |       | 816                 |       | 921                         |       |
| Accrued expenses                                                                                                          |       | 5,853               |       | 5,260                       |       |
| Accrued compensation and benefits                                                                                         |       | 3,012               |       | 3,452                       |       |
| Deferred revenue, current                                                                                                 |       | 11,714              |       | 9,451                       |       |
| Total current liabilities                                                                                                 |       | 22,221              |       | 20,951                      |       |
| Long-term liabilities:                                                                                                    |       |                |       |                        |       |
| Line of credit and capital lease  obligations, net of current portion                                                     |       | 263                 |       | 698                         |       |
| Deferred revenue, net of current portion                                                                                  |       | 1,872               |       | 2,393                       |       |
| Total liabilities                                                                                                         |       | 24,356              |       | 24,042                      |       |
| Commitments and contingencies (See Note 6)                                                                                |       |                |       |                        |       |
|                                                                                                                      |       |                |       |                        |       |
| Stockholders’ equity:                                                                                                |       |                |       |                        |       |
| Common stock, $0.01 par value; 100,000  shares authorized; 42,006 and 41,745 shares issued and outstanding,  respectively |       | 420                 |       | 417                         |       |
| Additional paid-in capital                                                                                                |       | 328,021             |       | 327,234                     |       |
| Accumulated other comprehensive loss                                                                                      |       | (1,212              | )          | (715                        | )          |
| Deferred compensation                                                                                                     |       | —              |       | (46                         | )          |
| Accumulated deficit                                                                                                       |       | (256,055            | )          | (253,668                    | )          |
|                                                                                                                      |       |                |       |                        |       |
| Total stockholders’ equity                                                                                           |       | 71,174              |       | 73,222                      |       |
| Total liabilities and stockholders’ equity                                                                           |       | $                   | 95,530     |                        | $          | 97,264 |   |

 

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

 

3

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**VASTERA, INC.AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPE**RATIONS

 

**(UNAUDITED)**

 

**(In thousands,except per share data)**

 
| ** **                                  | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenues:**                               |       |                             |       |                           |       |   |   |   |   |
| Managed services revenues                   |       | $                                | 13,970     |                           | $          | 13,644 |   | $ | 28,180 |   | $ | 27,259 |   |
| Software revenues                           |       | 2,436                            |       | 2,885                          |       | 4,705 |   | 5,616 |   |
| Services revenues                           |       | 4,790                            |       | 4,995                          |       | 9,232 |   | 9,593 |   |
| Total revenues                              |       | 21,196                           |       | 21,524                         |       | 42,117 |   | 42,468 |   |
|                                        |       |                             |       |                           |       |   |   |   |   |
| **Cost of revenues:**                       |       |                             |       |                           |       |   |   |   |   |
| Cost of managed services revenues           |       | 8,082                            |       | 7,499                          |       | 16,154 |   | 14,935 |   |
| Cost of software revenues                   |       | 694                              |       | 712                            |       | 1,358 |   | 1,394 |   |
| Cost of services revenues                   |       | 3,587                            |       | 3,637                          |       | 6,994 |   | 7,006 |   |
|                                        |       |                             |       |                           |       |   |   |   |   |
| **Operating expenses:**                     |       |                             |       |                           |       |   |   |   |   |
| Sales and marketing                         |       | 2,474                            |       | 2,302                          |       | 4,930 |   | 4,546 |   |
| Research and development                    |       | 3,126                            |       | 2,999                          |       | 6,024 |   | 6,036 |   |
| General and administrative                  |       | 2,980                            |       | 2,733                          |       | 5,777 |   | 5,473 |   |
| Depreciation                                |       | 1,376                            |       | 1,263                          |       | 2,712 |   | 2,564 |   |
| Intangible amortization expense             |       | 247                              |       | 707                            |       | 477 |   | 1,387 |   |
| Stock-based compensation                    |       | —                           |       | 275                            |       | 46 |   | 645 |   |
| Total operating expenses                    |       | 10,203                           |       | 10,279                         |       | 19,966 |   | 20,651 |   |
|                                        |       |                             |       |                           |       |   |   |   |   |
| Loss from operations                        |       | (1,370                           | )          | (603                           | )          | (2,355 | ) | (1,518 | ) |
| Other income, net                           |       | 88                               |       | 148                            |       | 196 |   | 336 |   |
| Loss before income taxes                    |       | (1,282                           | )          | (455                           | )          | (2,159 | ) | (1,182 | ) |
| Income taxes                                |       | (146                             | )          | (157                           | )          | (228 | ) | (308 | ) |
|                                        |       |                             |       |                           |       |   |   |   |   |
| Net loss                                    |       | $                                | (1,428     | )                              | $          | (612 | ) | $ | (2,387 | ) | $ | (1,490 | ) |
|                                        |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted net loss per common share |       | $                                | (0.03      | )                              | $          | (0.01 | ) | $ | (0.06 | ) | $ | (0.04 | ) |
|                                        |       |                             |       |                           |       |   |   |   |   |
| Weighted-average common shares outstanding  |       | 41,942                           |       | 40,849                         |       | 41,844 |   | 40,725 |   |

 

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

 

4

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**VASTERA, INC.AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CAS**H FLOWS

 

**(UNAUDITED)**

 

**(In thousands)**

 
| ** **                                                                                              | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                              | ** ** | **2004**                       | ** ** | **2003** | ** ** |
| **Cash flows from  operating activities:**                                                              |       |                           |       |   |   |
| Net loss                                                                                                |       | $                              | (2,387     | ) | $ | (1,490 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities:              |       |                           |       |   |   |
| Stock-based compensation                                                                                |       | 46                             |       | 645 |   |
| Depreciation and intangible amortization  expense                                                       |       | 3,189                          |       | 3,951 |   |
| Provision for allowance for doubtful  accounts                                                          |       | 339                            |       | 96 |   |
| Amortization of revenue discounts related  to customer contracts                                        |       | 170                            |       | 150 |   |
| Amortization of capitalized internal-use  software costs                                                |       | 336                            |       | 220 |   |
| Asset disposal                                                                                          |       | 96                             |       | — |   |
| Changes in operating assets and  liabilities:                                                           |       |                           |       |   |   |
| Accounts receivable                                                                                     |       | (206                           | )          | (247 | ) |
| Prepaid expenses and other current assets                                                               |       | (121                           | )          | (348 | ) |
| Deposits and other assets                                                                               |       | 563                            |       | (685 | ) |
| Accounts payable and accrued expenses                                                                   |       | 411                            |       | (4,910 | ) |
| Accrued compensation and benefits                                                                       |       | (418                           | )          | 226 |   |
| Deferred revenue                                                                                        |       | 1,794                          |       | 576 |   |
| Net cash provided by (used in) operating  activities                                                    |       | 3,812                          |       | (1,816 | ) |
|                                                                                                    |       |                           |       |   |   |
| **Cash flows from  investing activities:**                                                              |       |                           |       |   |   |
| Acquisition of subsidiaries                                                                             |       | —                         |       | (3,000 | ) |
| Net (purchases) sales of short-term  investments                                                        |       | 2,439                          |       | (7,239 | ) |
| Acquisition of property and equipment                                                                   |       | (2,254                         | )          | (1,893 | ) |
| Net cash provided by (used in) investing  activities                                                    |       | 185                            |       | (12,132 | ) |
|                                                                                                    |       |                           |       |   |   |
| **Cash flows from  financing activities:**                                                              |       |                           |       |   |   |
| Proceeds from the exercise of stock options  and issuance of stock for the employee stock purchase plan |       | 790                            |       | 1,940 |   |
| Principal payments on long-term debt                                                                    |       | (1,476                         | )          | (1,342 | ) |
| Proceeds from equipment line of credit                                                                  |       | —                         |       | 614 |   |
| Net cash provided by (used in) financing  activities                                                    |       | (686                           | )          | 1,212 |   |
| Effect of foreign currency exchange rate  changes on cash and cash equivalents                          |       | (290                           | )          | 206 |   |
| Net increase (decrease) in cash and cash  equivalents                                                   |       | 3,021                          |       | (12,530 | ) |
| Cash and cash equivalents, beginning of  period                                                         |       | 16,046                         |       | 23,696 |   |
| Cash and cash equivalents, end of period                                                                |       | $                              | 19,067     |   | $ | 11,166 |   |

 

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

 

5

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**VASTERA, INC.AND SUBSIDIARIES**

 

**NOTES TO CONDENSEDCONSOLIDATED FINANCIA**L STATEMENTS

 

**(Unaudited)**

 

### **1.**                                      Basis ofPresentation and Nature of Business:

 

The accompanying unaudited condensedconsolidated financial statements of Vastera, Inc. and its subsidiaries(“Vastera” the “Company,” “we,” or “us”) have been prepared on the same basisas audited financial statements and include all adjustments, including allnormal recurring adjustments that are necessary for a fair presentation of thefinancial condition, results of operations, and cash flows for the interimperiods presented.  The results ofoperations for the interim periods presented are not necessarily indicative ofthe results to be expected for any subsequent quarter or for the entire yearending December 31, 2004.  Allsignificant intercompany balances and transactions have been eliminated inconsolidation.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to the Securities and Exchange Commission’s (the “SEC”) rulesand regulations.  The Company’s interimfinancial statements should be read in conjunction with the Company’s auditedconsolidated financial statements and notes thereto, as filed with the SEC withthe Company’s Annual Report on Form 10-K and other reports filed with theSEC.

 

Vastera is a leading provider of solutionsfor Global Trade Management and was incorporated in Virginia inNovember 1991 under the name Export Software International, Inc.  The Company reincorporated in Delaware inJuly 1996 and changed its name to Vastera, Inc. inJune 1997.  The Company’s principalsolutions offerings include software solutions, Trade Management Consulting,and Managed Services.  Managed Servicesrange from management of a client’s specific global trade function to providingcomplete management of a client’s global trade operations.  The Company has operations in the UnitedStates, Belgium, Brazil, Canada, China, France, Germany, Ireland, Japan,Mexico, the Netherlands, Poland, Spain, and the United Kingdom.

 

The Company’s operations are subject tocertain risks and uncertainties, including among others, uncertainties relatingto product development, rapidly changing technology, current and potentialcompetitors with greater financial, technological, production, and marketingresources, the potential loss of significant customers, dependence on key managementpersonnel, limited protection of intellectual property and proprietary rights,uncertainty of future profitability and possible fluctuations in financialresults.

 

### **2.**                                      Summary ofSignificant Accounting Policies:

 

**Use of Estimates**

 

The preparation of the consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosures of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  Estimates that are mostsusceptible to change are the Company’s estimates of collections of accountsreceivable and the estimated lives and the realization of its internal usesoftware and intangible assets.

 

**Revenue Recognition**

 

The Company’s revenues consist of managedservices revenues, software revenues, and services revenues.

 

*Managed Services Revenues*

 

Managed services revenues are derived fromagreements that provide for transaction or services fees based on theperformance and delivery of the Company’s Managed Services solutions.  Managed Services solutions include theprocessing of the Company’s clients’ customs and shipment entries and theclassifying of clients’ goods.  ManagedServices transaction arrangements are often subject to annual or quarterlyminimum transaction thresholds and revenues are recognized based on the lowerof the cumulative actual transactions processed using a weighted-averagetransaction rate or the cumulative amount billable.  For those Managed Services transactionarrangements subject to annual minimums and for those arrangements where theamount billable for interim periods is limited to the pro-rata portion of theannual minimum, transactions processed in excess of the minimum in each periodare not billable, and, therefore, revenue is not recognized until the end ofthe related year.  Certain ManagedServices arrangements are based upon a fixed services fee.  Revenues associated with these arrangementsare recognized ratably over the term of the arrangement and limited to theamounts billable.  In addition, theCompany may receive annual gainsharing fees under certain Managed Servicesarrangements based on a percentage of the clients’ annual cost savings, asdefined in those Managed Services arrangements. These gainsharing fees are recognized when they become fixed and determinable.

 

6

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*Software Revenues*

 

Software revenues consist of term licenserevenues, perpetual software license revenues, and transaction-basedrevenues.  The Company recognizes revenuefrom the sale of software products in accordance with Statement of Position(“SOP”) 97-2, Software Revenue Recognition.

 

Term license revenues are derived from termsoftware license arrangements in which the Company’s clients license itssoftware products and obtain the right to unspecified enhancements on awhen-and-if-available basis, ongoing support and content update services.  Content updates are significant andfrequent.  Revenues are recognized ratablyover the contract term.  Term licensearrangements typically range from three to five years.  To the extent the Company hosts the softwarefor its customers, the hosting fee is recognized ratably over the contractperiod in conjunction with the recognition of the license fee.

 

Perpetual software license revenues arederived from perpetual software license arrangements and related maintenancecontracts.  Maintenance contracts includethe right to unspecified enhancements on a when-and-if available basis, ongoingsupport, and content update services. The content updates provided under maintenance arrangements aresignificant and frequent, and, as a result, revenues from perpetual softwarelicense sales are recognized ratably over the estimated economic life of theproduct.  The Company has estimated thatthe life of the product is three years, which is consistent with the historicalperiods between major upgrades to the functionality and architecture of itsproducts.  Revenues from maintenancecontracts are recognized ratably over the contract term, which is typically oneyear.  To the extent the Company hoststhe software for its customers, the hosting fee is recognized ratably over thecontract period in conjunction with the recognition of the license fee.

 

Transaction-based revenues are derived fromarrangements that provide for transaction fees based on a client’s usage of theCompany’s software products.  Revenuesfrom the usage of its software products are recognized as transactions occur.

 

The Company recognizes revenues fromarrangements with resellers beginning when the software product is sold to theend user.  Any annual transactionminimums not sold by the reseller to the end customers are recognized asrevenues upon the expiration of the annual minimum period.

 

*Services Revenues*

* *

Services revenues are derived from softwareimplementation, Trade Management Consulting, and training services.  Services are performed on a time andmaterials basis or under fixed price arrangements.  Revenues on time and materials contracts arerecognized based on fixed billable rates for hours delivered, and revenues onfixed priced contracts and are recognized as the services are performed, usingthe percentage of completion method of accounting based on the ratio of costsincurred to total estimated costs to be incurred.  Losses on arrangements are recognized whenknown.

 

For multiple-element arrangements where theCompany provides both software and services, the Company defers the servicefee, based on vendor-specific objective evidence, and recognize it as theservices are performed.

 

**Deferred Revenues**

 

Deferred revenues include amounts billed toclients for revenues that have not been recognized and generally result frombilled, but deferred license revenues and services not yet performed.  Deferred revenues are recognized over theterm of the agreement, the remaining economic life of the product, or when theservices are performed.

 

**Cost of Revenues**

 

Cost of revenues includes the cost of managedservices revenues, the cost of software revenues, and the cost of servicesrevenues.

 

Cost of managed services revenues consist ofthe cost of salaries and related expenses for the Company’s Managed Servicesorganization and the amortization of capitalized internal use software costsrelated to the implementation and integration of the Company’s trade managementplatform to the Managed Services operation.

 

Cost of software revenues includes royaltiesowed to third parties for technology products integrated into the Company’ssoftware products, as well as the cost of salaries and related expenses for thetechnical support organization.

 

7

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Cost of services revenues includes the costof salaries and related expenses for implementation, management consulting andtraining services provided to clients, as well as the cost of third partiescontracted to provide either application consulting or implementation servicesor Trade Management Consulting to the Company’s clients.

 

**Internal Use Software**

 

In accordance with SOP 98-1, *Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use*, the Company capitalizescosts associated with the implementation and integration of its trademanagement platform to its Managed Services operations.  The Company capitalized approximately$165,000 and $93,000 of direct labor costs in the second quarters of 2004 and2003, respectively, and $336,000 and $284,000 in the six months ended June 30,2004 and 2003, respectively, related to certain capitalizable tasks includingthe technical design, system configuration and testing phases of theintegration process.  Judgment isinvolved in determining which development tasks associated with the platformintegration are capitalizable pursuant to SOP 98-1.  These costs are amortized as costs of managedservices revenues over three years and amortization commences upon thecompletion of the integration to the Vastera platform.  Total amortization expense in the threemonths and six months ended June 30, 2004 was approximately $111,000 and$337,000, respectively.  Total amortizationexpense in the three months and six months ended June 30, 2003 wasapproximately $97,000 and $220,000, respectively.  Net capitalized costs as of June 30, 2004 andDecember 31, 2003 was approximately $1.8 million and $1.7 million,respectively.

 

**Concentrations of Credit Risk**

 

Financial instruments that potentiallysubject the Company to concentrations of credit risk consist primarily of cashequivalents, short-term investments, and accounts receivable.  The Company limits the amount of investmentexposure in any one financial instrument and does not have any foreign currencyinvestments.  The Company sells productsand services to customers across several industries throughout the worldwithout requiring collateral.  However,the Company routinely assesses the financial strength of its customers andmaintains allowances for anticipated losses.

 

As of June 30, 2004 and December 31,2003, Ford accounted for 24% and 25%, respectively, of total accountsreceivable.

 

**Net Loss Per Common Share**

 

Basic net loss per common share is computedby dividing net loss applicable to common stockholders by the weighted-averagenumber of common shares outstanding for the period.  Diluted net loss per common share includesthe potential dilution that would occur if securities or other contracts toissue common stock were exercised or converted into common stock.  As of June 30, 2004 and December 31,2003, options to purchase approximately 8,140,000 and 8,436,000 shares of commonstock were outstanding, respectively.  Dueto the anti-dilutive effect of the options, they have been excluded from thecalculation of weighted-average shares for diluted earnings per share.  As a result, the basic and diluted loss pershare amounts are identical.

 

**Comprehensive Income (Loss)**

 

As of June 30, 2004 and December 31,2003, accumulated other comprehensive loss includes unrealized gains and losseson investments and foreign currency translation adjustments.  As of June 30, 2004 and December 31,2003, accumulated net unrealized (loss) gain on available for sale investmentswas approximately $(3,000) and $107,000, respectively.  As of June 30, 2004 and December 31,2003, accumulated foreign currency translation adjustment was a loss of approximately$1.2 million and $822,000, respectively.

 

**Goodwill and Intangible Assets**

 

Goodwill represents the excess of costs overfair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase businesscombination and determined to have an indefinite useful life are not amortized,but instead tested for impairment at least annually in accordance with theprovisions of SFAS No. 142.  TheCompany’s assessment date is December 31 each year.  SFAS No. 142 also requires thatintangible assets with estimable useful lives be amortized over theirrespective estimated useful lives to their estimated residual values, andreviewed for impairment in accordance with SFAS No. 144, *Accounting for Impairment or Disposal of Long-LivedAssets*.

 

Intangible assets are amortized on a straight-linebasis over their expected economic life, generally one to five years.  The value assigned to the Ford and GEcontracts in connection with the Ford and GE acquisitions are being amortizedas a discount to revenue over the minimum terms of the contracts.

 

8

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**Stock Options**

 

The Company has adopted the disclosure requirements of SFASNo. 123, *Accounting for Stock-BasedCompensation*.  The Companyapplies Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*,and related interpretations in accounting for its Plans.  No options granted during the first andsecond quarters of 2004 and 2003 were granted with exercise prices that wereless than fair value.  The Company had deferredcompensation balances from options issued prior to 2001.  The deferred compensation was recognized overthe vesting period of the related options using an accelerated method.  The Company recognized compensation expenseduring the first six months of 2004 and 2003 of approximately $46,000 and$645,000, respectively.  As of June 30,2004, all deferred compensation has been recognized.

 

Had compensation expense for the Company’s1996 Plan, 2000 Plan and Employee Stock Purchase Plan been determined based onthe fair value at the grant dates for awards under the Plans consistent withthe method of SFAS No. 123, the Company’s net loss would have beenincreased to the pro forma amounts indicated below (in thousands, except pershare data).

 
| ** **                                                                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                          | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                |       |                             |       |                           |       |   |   |   |   |
| Net loss applicable to common stockholders,  as reported                                            |       | $                                | (1,428     | )                              | $          | (612 | ) | $ | (2,387 | ) | $ | (1,490 | ) |
| Add: stock-based compensation included in  net loss, net of tax                                     |       | —                           |       | 275                            |       | 46 |   | 645 |   |
| Deduct: stock-based compensation determined  under the fair value method for all awards, net of tax |       | (2,036                           | )          | (9,566                         | )          | (4,909 | ) | (11,640 | ) |
| Net loss, pro forma                                                                                 |       | $                                | (3,464     | )                              | $          | (9,903 | ) | $ | (7,245 | ) | $ | (12,485 | ) |
| Pro forma net loss per common share                                                                 |       | $                                | (0.08      | )                              | $          | (0.24 | ) | $ | (0.17 | ) | $ | (0.31 | ) |

 

**Income Taxes**

 

Deferred taxes are provided utilizing theasset and liability method as prescribed by SFAS No. 109, *Accounting for Income Taxes*, wherebydeferred tax assets are recognized for deductible temporary differences andoperating loss and tax credit carryforwards and deferred tax liabilities arerecognized for taxable temporary differences. Temporary differences are the differences between the reported amountsof assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects ofchanges in tax laws and rates on the date of enactment.  Deferred tax assets are reduced by avaluation allowance when, in the opinion of management, it is more likely thannot that some portion or all of the deferred tax assets will not be realized.

 

### **3.**                                      Restructuring

 

During 2002, the Company recordedrestructuring costs of approximately $1.1 million associated with thetermination of employees and approximately $2.2 million associated withthe closing of redundant facilities, the cancellation of certain contracts, andother non-personnel related actions.

 

As of June 30, 2004 and December 31,2003, the balance of the restructuring reserve was approximately $52,000 and$112,000, respectively.  The Company paidapproximately $30,000 and $146,000 of these costs during the second quarters of2004 and 2003, respectively.  The Companypaid approximately $60,000 and $577,000 of these costs during the six monthsended June 30, 2004 and 2003, respectively. The Company expects to pay out the remainder of the restructuringreserve in 2004.

 

### **4.**                                      Acquisitions

 

On June 19, 2003, the Company acquiredGeneral Electric Company’s (“GE”) internal U.S. customs operations.  The Company also entered into a managedservices agreement under which Vastera will manage the U.S. customs operationsfor five of GE’s US divisions for a minimum term of 3 years.  The purchase method of accounting has beenapplied to this acquisition, and accordingly, the results of GE’s internal UScustoms operations are included in the Company’s operations beginningJuly 1, 2003, the effective date of the acquisition.

 

9

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In exchange for its internal US customsoperations, GE received $3.0 million in cash and 51,046 shares of the Company’scommon stock valued at approximately $312,000. The purchase price, including transaction costs of approximately$62,000, has been allocated based on fair values as follows (in thousands):

 

| ** **                            | ** ** | **Value** | ** ** |
|---------------------------------------|------------|-----------|------------|
|                                  |       |      |       |
| Prepaid expenses                      |       | $         | 126        |   |
| Property and equipment                |       | 150       |       |
| Acquired technology and know-how      |       | 1,000     |       |
| GE contract and customer relationship |       | 200       |       |
| Goodwill                              |       | 1,898     |       |
|                                  |       | $         | 3,374      |   |

 

 

Beginning July 1, 2003, the amountallocated to the acquired technology and know-how intangible is being amortizedon a straight-line basis over five years, the estimated useful life of theasset.  Beginning July 1, 2003, theamount allocated to the GE contract and customer relationship is beingamortized as a discount to revenue over five years, the estimated useful lifeof the asset.

 

### **5.**                                      Long-Term Debt:

 

**Lines of Credit**

 

The Company has a term loan, a securedrevolving line of credit (Line of Credit) and an equipment line of credit(Equipment Line of Credit) with Comerica Bank.

 

The Company paid the remaining term loanbalance of approximately $502,000 during the second quarter of 2004.  The balance under the term loan was zero andapproximately $1.0 million as of June 30, 2004 and December 31, 2003,respectively.

 

The Company may borrow up to$10.0 million under the Line of Credit, with a $2.5 million sub-limitfor the issuance of letters of credit. Advances under the Line of Credit are limited to the lesser of$10 million or 80% of eligible accounts receivable, as defined in the loanagreement.  The Line of Credit bearsinterest at the bank’s prime rate (4.25 as of June 30, 2004).  The Line of Credit matures in July 2004.  There were no outstanding balances under theLine of Credit as of June 30, 2004 and December 31, 2003.

 

In the first and third quarters of 2003, theCompany borrowed approximately $614,000 and $488,000, respectively, against theEquipment Line of Credit.  Theavailability under the Equipment Line of Credit expired in July 2003.  Commencing on July 31, 2003, interestand principal began to be payable in monthly installments on all borrowingsmade under the Equipment Line of Credit, which matures in full on July 30,2005.  The outstanding balance andcurrent portion of balance under the Equipment Line of Credit was approximately$552,000 and $490,000 as of June 30, 2004, respectively, and $796,000 and$490,000, respectively, as of December 31, 2003.  The Equipment Line of Credit has twointerest-only payment periods and bears interest at the bank’s prime rate plus50 basis points (4.75 as of June 30, 2004).

 

The terms of the Line of Credit and EquipmentLine of Credit require the Company to comply with several financial covenants,including restrictions and limitations on future indebtedness, sale of assetsand material changes in the Company’s business. Through June 30, 2004, the Company was in compliance with the covenantsof the Company’s credit facility.

 

In July 2004, the Company commencedrenegotiation of its existing Line of Credit for $10 million, with a $2.5million sub-limit for the issuance of letters of credit, and a new equipmentterm loan for $5 million with Comerica Bank. The renewed Line of Credit will mature in July 2006 and the newequipment term loan will mature three years from the date of the generalequipment or software purchases.  Theterms of the renewed Line of Credit, new equipment term loan, and existingEquipment Line of Credit require the Company to comply with several financialcovenants, including restrictions and limitations on future indebtedness, saleof assets and material changes in the Company’s business.

 

10

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**Capital Lease Obligations and Other**

 

The Company leases office equipment undervarious non-cancelable capital leases. Amounts borrowed under the equipment leasing arrangement are due over36- to 48-month repayment periods.  As ofJune 30, 2004 and December 31, 2003, capital lease obligations outstandingwere approximately $537,000 and $764,000, respectively.  Approximately $336,000 and $372,000 of thecapital lease obligation balance was current as of June 30, 2004 andDecember 31, 2003, respectively. Property and equipment includes approximately $925,000 of equipmentunder capital lease arrangements at June 30, 2004 and December 31,2003.  Related accumulated depreciationwas approximately $401,000 and $247,000 at June 30, 2004 and December 31,2003, respectively.

 

As of December 31, 2002, the Company hada note payable outstanding of approximately $120,000 due to a third partyissued in connection with a 2002 acquisition. The Company repaid the loan in February of 2003.  Interest accrued monthly at an annual rate ofapproximately 6.5%.

 

### **6.**                                      Commitments andContingencies:

 

The Company is periodically a party todisputes arising from normal business activities.  In the opinion of management, resolution ofthese matters will not have a materially adverse effect upon the financialcondition or future operating results of the Company.

 

 

On March 14, 2001, ExpeditorsInternational of Washington, Inc. and Expeditors Tradewin, L.L.C. (collectively“Expeditors”) filed suit against the Company in the United States DistrictCourt for the Eastern District of Michigan, Southern Division primarilyalleging that the Company misappropriated certain of Expeditors’ trade secretsin connection with its acquisition of Ford’s customs operations, by utilizingsystems and business processes that Expeditors assisted in developing for Fordand through its employee hiring practices. In connection with its acquisitionof Ford’s customs operations, Ford agreed to indemnify the Company forintellectual property infringement claims, and Ford is currently indemnifyingthe Company in connection with this litigation. Although Ford is obligated to indemnify the Company of claims ofintellectual property infringement arising from the property the Companyacquired from it, Ford is not obligated to indemnify the Company for legal feesarising from any claims that pertained solely to the Company’s acts, upon whichcertain of the claims asserted in this matter were based. Trial in this mattercommenced on July 15, 2004.  On August 4,2004, the jury found in favor of Vastera.

 

 

In some of its software license arrangements,the Company has agreed to indemnify customers for any damages they sustain froma claim for intellectual property infringement. Additionally, subject to specified contractual limitations on amount,under our Managed Services agreements, the Company has agreed to indemnify itscustomers for any damages they sustain from the Company’s performance ofManaged Services in a non-compliant manner. Although management does not believe that the Company’s productsinfringe the intellectual property rights of any third party or that it isperforming services in a non-compliant manner, the Company cannot estimate ourmaximum liability exposure, because of the inherent uncertainty associated withany such claims and the varying nature of the indemnification levels to whichthe Company has agreed.

 

### **7.**                                      Segment Information:

 

The Company has three reportable operatingsegments: managed services, software, and services.  The managed services segment generatesrevenues from managed services transaction and service arrangements.  The software segment generates revenues from termlicense, perpetual license, and transaction license agreements of its GlobalTrade Management solutions.  The servicessegment generates revenues by charging its customers for implementation,management consulting and training services.

 

The Company evaluates the performance of eachsegment based on revenues and gross profit. The Company’s unallocated costs include corporate and other costs notallocated to the segments for management’s reporting purposes.

 

11

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The following table summarizes the Company’sthree segments (in thousands):

 

| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                 | ** ** | **(unaudited)**                  | ** ** | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| Revenues:                  |       |                             |       |                            |       |   |   |   |   |
| Managed services           |       | $                                | 13,970     |                            | $          | 13,644 |   | $ | 28,180 |   | $ | 27,259 |   |
| Software                   |       | 2,436                            |       | 2,885                           |       | 4,705 |   | 5,616 |   |
| Services                   |       | 4,790                            |       | 4,995                           |       | 9,232 |   | 9,593 |   |
| Total revenues             |       | 21,196                           |       | 21,524                          |       | 42,117 |   | 42,468 |   |
|                       |       |                             |       |                            |       |   |   |   |   |
| Gross Profit:              |       |                             |       |                            |       |   |   |   |   |
| Managed services           |       | 5,888                            |       | 6,145                           |       | 12,026 |   | 12,324 |   |
| Software                   |       | 1,742                            |       | 2,173                           |       | 3,347 |   | 4,222 |   |
| Services                   |       | 1,203                            |       | 1,358                           |       | 2,238 |   | 2,587 |   |
| Gross profit               |       | 8,833                            |       | 9,676                           |       | 17,611 |   | 19,133 |   |
|                       |       |                             |       |                            |       |   |   |   |   |
| Net loss:                  |       |                             |       |                            |       |   |   |   |   |
| Unallocated expense        |       | (10,203                          | )          | (10,279                         | )          | (19,966 | ) | (20,651 | ) |
| Interest income            |       | 150                              |       | 204                             |       | 298 |   | 433 |   |
| Interest and other expense |       | (62                              | )          | (56                             | )          | (102 | ) | (97 | ) |
| Income tax                 |       | (146                             | )          | (157                            | )          | (228 | ) | (308 | ) |
| Net loss                   |       | $                                | (1,428     | )                               | $          | (612 | ) | $ | (2,387 | ) | $ | (1,490 | ) |

 

**Geographic Information**

 

The Company sells its products and servicesthrough its offices in the United States, Brazil, Canada, Mexico, Germany,Japan, and the United Kingdom. Information regarding revenues and long-lived assets attributable to theUnited States and to all foreign countries is stated below.  The geographic classification of product andservices revenues was based upon the location of the customer.  The Company’s product and services revenueswere generated in the following geographic regions (in thousands):

 
| ** **                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                  | ** ** | **(unaudited)**                  | ** ** | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| United States               |       | $                                | 16,019     |                            | $          | 15,813 |   | $ | 32,108 |   | $ | 31,750 |   |
| Other North America         |       | 2,229                            |       | 2,609                           |       | 4,495 |   | 4,706 |   |
| Europe                      |       | 2,190                            |       | 2,053                           |       | 4,399 |   | 3,829 |   |
| Other international regions |       | 758                              |       | 1,049                           |       | 1,115 |   | 2,183 |   |
| Total revenues              |       | $                                | 21,196     |                            | $          | 21,524 |   | $ | 42,117 |   | $ | 42,468 |   |

 

The Company’s tangible long-lived assets werelocated as follows (in thousands):

 
| ** **                    | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **(unaudited)**    | ** ** | ** **                  | ** ** |
| United States                 |       | $                  | 8,762      |                        | $          | 9,590 |   |
| Other North America           |       | 697                |       | 826                         |       |
| Europe                        |       | 283                |       | 202                         |       |
| Other international locations |       | 236                |       | 188                         |       |
| Total long-lived assets       |       | $                  | 9,978      |                        | $          | 10,806 |   |

 

**Significant Customers**

 

For the quarters ended June 30, 2004 and2003, the Company derived approximately 63% and 65%, respectively, of its totalrevenues from the Company’s top five customers. For the six months ended June 30, 2004 and 2003, the Company derivedapproximately 63% and 66%, respectively, of its total revenues from theCompany’s top five customers.  For thequarters ended June 30, 2004 and 2003, Ford accounted for 30% and 31%, of totalrevenues respectively.  For the six monthsended June 30, 2004 and 2003, Ford accounted for 31% and 30% of total revenues,respectively.  For the quarters endedJune 30, 2004 and 2003, Lucent accounted for 13% and 15% of total revenuesrespectively.  For the six months endedJune 30, 2004 and 2003, Lucent accounted for 13% and 15% of total revenuesrespectively.

 

12

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### **8.**                                      Transactions withFord Motor Company:

 

On August 29, 2000, the Company acquiredFord’s global customs import operations and merged Ford’s global customs importoperations into its Managed Services operations.  Ford received 8,000,000 shares of theCompany’s common stock valued at approximately $79.2 million inconsideration at the time of the transaction. As of June 30, 2004, Ford owned 8,000,000 shares or approximately 19% ofthe Company.

 

In August 2000, the Company also enteredinto a Managed Services agreement under which Vastera manages Ford’s globaltrade import operations.  InJanuary 2001 and March 2001, the Company entered into ManagedServices agreements with Ford Mexico and Ford Canada, respectively.  In November 2002, the Company enteredinto a Managed Services agreement with Ford Europe to manage operations in theUnited Kingdom, Spain, Belgium, and Germany. The agreements with Ford have initially had minimum terms of four years.

 

In July 2002, the Company amended itsagreement with Ford U.S. to provide for billing Ford at a fixed annual rate of$11.8 million for the remaining life of the agreement, beginningJanuary 1, 2003.  Either party mayterminate this agreement for convenience commencing on August 1, 2004, afterproviding the non-terminating party one-year advance notice.  Commencing on August 1, 2005 and continuingthereafter, either party may terminate the agreement upon providing six-months’advance written notice. Ford U.S. has not informed the Company that they planto terminate the agreement.  The Companyis currently reviewing with Ford U.S. the scope of services it performs and theassociated fees charged for these services. As part of this review, effective June 1, 2004, the Company has agreedto reduce the managed services fees charged to Ford U.S. by approximately$500,000 on an annual basis.

 

For the quarters ended June 30, 2004 and2003, Ford accounted for 30% and 31%, of total revenues respectively.  For the six months ended June 30, 2004 and2003, Ford accounted for 31% and 30% of total revenues respectively.  As of June 30, 2004 and December 31,2003, Ford accounted for 24% and 25%, respectively, of total accountsreceivable.

 

The Company reimburses Ford for expensesincurred by Ford for the use of its facilities, the costs of leased employees,and the maintenance and expenses related to the acquired technology.  For the quarters ended June 30, 2004 and2003, Ford charged the Company approximately $1 million and$1.9 million, respectively.  For thesix months ended June 30, 2004 and 2003, Ford charged the Company approximately$2.1 million and $3.9 million, respectively. In 2003, these payments began to decrease as the Company began deployingits own technology in North America.

 

 

### **9.**                                      Stock-basedCompensation

 

In October 2002, the Company offeredeach eligible employee an opportunity to cancel certain of his or her stockoptions (the “Options Exchange”) in exchange for the right to receive a futurestock option grant for the same number of shares six months and one day fromthe date of cancellation with a strike price equal to the market price on thenew grant date.  Options to purchaseapproximately 3.8 million shares were cancelled pursuant to the OptionsExchange.  In April 2003, theCompany issued replacement options to employees to purchase approximately3.6 million shares of common stock at an exercise price of $4.06 per sharein exchange for the options previously canceled.  The vesting schedule of the canceledoptions remained in effect for the replacement options.  The Company deferred the issuance of annualoption grants to employees during this six-month period and accordingly, inApril 2003, the Company issued additional options to purchase 930,000shares of common stock to these employees at an exercise price of $4.06 pershare.

 

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The Company applies APB Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations inaccounting for it stock option plan.  TheCompany recorded deferred compensation cost of approximately $6.4 millionin the last nine months of 1999 and approximately $13.4 million in thefirst nine months of 2000.  OnMarch 29, 2001, the Company also recorded approximately $465,000 ofdeferred compensation in connection with the issuance of options to acquire64,000 shares of its common stock in exchange for the unvested Speedchain stockoptions it assumed in the related business combination.  These deferred compensation amounts representthe aggregate difference between the exercise price and the fair value foraccounting purposes of the underlying shares of common stock at the date ofgrant.  This amount is included as acomponent of stockholders’ equity and is being amortized on an acceleratedbasis over the applicable vesting period. Stock-based compensation, which has been separately identified in theaccompanying condensed consolidated statement of operations, has not beenincluded in costs of revenues, sales and marketing, research and development,and general and administrative expense as indicated below (in thousands):

 

| ** **                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                        | ** ** | **(unaudited)**                  | ** ** | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| Cost of managed services revenues |       | $                                | —     |                            | $          | 8 |   | $ | 1 |   | $ | 18 |   |
| Cost of software revenues         |       | —                           |       | 1                               |       | — |   | 3 |   |
| Cost of services revenues         |       | —                           |       | 39                              |       | 6 |   | 91 |   |
| Sales and marketing               |       | —                           |       | 110                             |       | 19 |   | 258 |   |
| Research and development          |       | —                           |       | 27                              |       | 4 |   | 63 |   |
| General and administrative        |       | —                           |       | 90                              |       | 16 |   | 212 |   |
| Total stock-based compensation    |       | $                                | —     |                            | $          | 275 |   | $ | 46 |   | $ | 645 |   |

 

### **10.**                               SupplementalInformation:

 

# **Cash Flow Information**

 

Cash paid for interest was approximately$60,000 and $81,000 for the six months ended June 30, 2004 and 2003,respectively.  Noncash activities were asfollows (in thousands):

 
| ** **                                                                                                              | ** ** | **Six Months Ended   June 30,,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                              | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| ** **                                                                                                              | ** ** | **(unaudited)**                  | ** ** | **(unaudited)** | ** ** |
| Increase in capital lease obligations                                                                                   |       | $                                | —     |   | $ | 886 |   |
| Issuance of common stock and stock options in acquisitions                                                              |       | —                           |       | 312 |   |
| Assumed liabilities, transaction costs and other, net of tangible  assets and deferred revenue acquired in acquisitions |       | —                           |       | (214 | ) |
|                                                                                                                         |            |                                  |            |  |  |  |  |

 

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## **Item 2:**   Management’s Discussion and Analysis of Financial Condition and Resultsof Operations

 

*The following discussion and analysis of ourfinancial condition and results of operations should be read in conjunctionwith our condensed consolidated financial statements and related notesappearing elsewhere in this Report, which are deemed to be incorporated intothis section.  Some of the statements wemake in “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and elsewhere in this Report constitute forward-lookingstatements within the meaning of Section 21E of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”). These statements involve known and unknown risks, uncertainties andother factors that may cause our actual results, levels of activity,performance or achievements as expressed or implied by such forward-lookingstatements not to be achieved fully. These forward-looking statements relate to future events and our futurefinancial performance.  In some cases,you can identify forward-looking statements by words such as “may,” “should,”“expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” and“continue,” or the negative of such terms or other comparable words.  These statements are only predictions andincluded risks and uncertainties particularly those described in this Reportunder the caption “Risks Relating to Our Business.”  Consequently, our actual results may differmaterially from those expressed or implied by these forward-looking statements.*

 

**Overview**

 

Vastera is the worldwide leader in solutionsfor Global Trade Management.  We are aninternational company with a presence in 13 countries, serving an internationalclient base that utilizes our solutions to manage trade worldwide.  Our solutions have been designed to enableour clients to manage efficiently and effectively the information flowsassociated with the cross border movement of goods and comply with the myriadof rules and regulations to which global trade is subject.

 

Our solutions facilitate our clients’abilities to manage the complexities and inefficiencies inherent in globaltrading in a manner that allows them to capitalize on the large, highlyfragmented, and rapidly growing opportunity existing in the internationalmarket.  We have three major product andservices offerings, which are: TradeSphere Solutions; Trade ManagementConsulting; and Managed Services.  Thefoundation upon which our product and services offerings are based is ourcollection of proprietary processes, data, rules, and regulations, which wecall our Global Trade Content.

 

**Global Trade Content**is our proprietary rules-based application that provides comprehensivemanagement of trade regulations and programs and it functions as theinformation repository for our entire suite of Global Trade Management solutions.  **TradeSphereSolutions** is our suite of software solutions that helps managecritical trade processes, and provides visibility into shipment and carrierperformance.  **Trade Management Consulting** is our consulting servicesoffering that applies our global trade expertise and our proprietarymethodologies.  Our consulting servicesrange from performing opportunity and compliance assessments to implementingdetailed strategic analyses designed to improve a client’s global tradepractices.  **Managed Services** is our business process outsourcing offeringthrough which we combine our Global Trade Content, trade expertise, andtechnology to improve client regulatory compliance and reduce transactionprocessing costs.  We offer ManagedServices to address all or a portion of a client’s global trade operations,ranging from one or more specific global trade functions to providing acomplete suite of Managed Services.

 

The potential market into which we offer ourproducts and services is an expansive one. Our product and services offerings, however, are new to their targetedaudience and the ultimate market size is difficult to quantify.  While our offerings are critical to a companyremaining compliant with import and export rules and regulations, generally ourofferings are not core to the business needs of a company.  This can often mean that the decision as towhether to purchase one of our solutions is predicated more on expected costsavings to be achieved by an entity than it is upon enhanced compliance.  In 2001 and 2002, our sales cycle averagedapproximately six to nine months for software sales and nine to 12 monthsfor Managed Services sales.  In 2003,however, we experienced a lengthening of these cycle times.

 

During the last 18 months, we experienced a significant slowing insigning new business, reflected by an extended average sales cycle and sales ofManaged Services and software at lower than expected levels.  Total revenues during this perioddemonstrated only modest growth, especially when compared to the revenue growthrates we experienced in 2001 and 2002. Total sales of Managed Services and software for 2003 and the first halfof 2004 were lower than planned and considerably lower than what we achieved inthe prior three years.  We expect thatour revenues will remain at or below our 2003 revenue level until such time aswe can accelerate the rate of our sales growth.

 

In 2003, we implemented several expense reduction activities to helpoffset the lack of aggregate revenue growth and achieve profitabilitytargets.  We expected that these costreduction actions would be short in duration. Moreover, we expected to return to normalized spending levels once newsales reached established targets.  Wedid not, however, achieve our anticipated sales levels and, accordingly, thedesired outcome was not achieved.  Theexpense reduction actions taken in 2003 have slowed our progress in sales andmarketing, product development and Managed Services operations.  To satisfy customer expectations for productquality better, to serve our Managed Services customers better, and tore-invest in sales and marketing, and re-invigorate our revenue growth, weexpect to increase spending on operating expenses by $2.0 million to$3.0 million in 2004, which increased spending began at the end

 

15

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of the first quarter of2004.  Additionally, we anticipatespending more on our Managed Services operations in 2004 than we did in 2003and in the first half of 2004, which will result in a reduction in managedservices gross margins during the foreseeable future and a reduction in ourcash generated from operations due to continued net losses.

 

For the foreseeable future, we expect costsof managed services as a percentage of managed services revenues to increase aswe make investments in personnel to expand our Managed Services platform andcontinue our geographic expansion.  Overthe longer term, we expect to realize productivity improvements from ourinvestment in our infrastructure.  As weenter into large multi-year Managed Services agreements in new industry sectorsor new geographic regions that require significant investments in the relatedinfrastructure, the costs associated with these Managed Services agreements maybe greater in the initial year, and in certain circumstances exceed the revenuerecognized in the initial year, than in the later years, when we realizeproductivity improvements from these infrastructure investments.  There is offsetting pressure to theanticipated productivity benefits from price pressure in our marketplace.  Consequently, the long-term gross margins ofour business are difficult to predict.

 

Our new management team is currentlyreviewing the level of investment we make in each of our product and serviceslines of business and geographic areas of presence.  We are streamlining our product and serviceslines and consolidating and reorganizing our geographic locations and willcontinue doing so through 2004.  In doingso, we anticipate incurring costs associated with exiting contractualrelationships and terminating personnel. Although management does not currently believe such costs will bematerial, we cannot yet quantify them or the effects these actions may have onfuture revenues.

 

In July 2004, VisteonCorporation notified us that it will not renew its agreement for ManagedServices when it expires on December 31, 2004. We have provided outsourced global trade management services to Visteonthroughout North America since 2000. Vastera and Visteon are working through a transition period, which mayextend into 2005.  We expect to recognize2004 revenues of approximately $6 million associated with the Visteoncontract.  Additionally, revenue derivedfrom other large customer contracts may change as we renew thesecontracts.  If we fail to maintain orexpand the scope of services provided under these contracts, our revenues fromthese contracts will decrease.  If wefail to close a significant amount of new business in the second half of 2004,our revenues in 2005 will decrease when compared to 2004.  If we also fail to reduce the expenses of ourbusiness to match lower revenues, our net losses may increase and our cashflows could be negatively impacted.

 

 

**Relationship with Ford Motor Company**

 

On August 29, 2000, we acquired Ford’sglobal customs import operations and merged Ford’s global customs importoperations into our Managed Services operations.  Ford received 8,000,000 shares of our commonstock valued at approximately $79.2 million in consideration at the timeof the transaction.  As of June 30, 2004,Ford owned 8,000,000 shares or approximately 19% of our common stock.

 

In August 2000, we also entered into aManaged Services agreement under which we manage Ford’s global trade importoperations.  In January 2001 andMarch 2001, we entered into Managed Services agreements with Ford Mexicoand Ford Canada, respectively.  InNovember 2002, we entered into a Managed Services agreement with FordEurope to manage operations in the United Kingdom, Spain, Belgium, andGermany.  The agreements with Ford haveinitially had minimum terms of four years. Our agreement with Ford U.S. provides for billing Ford at a fixed annualrate of $11.8 million for the remaining life of the agreement, beginningJanuary 1, 2003.  Either party mayterminate this agreement for convenience commencing on August 1, 2004, afterproviding the non-terminating party one-year advance notice.  Commencing on August 1, 2005 and continuingthereafter, either party may terminate the agreement upon providing six-months’advance written notice.  Ford U.S. hasnot informed us they plan to terminate the agreement.  We are currently reviewing with Ford U.S. thescope of services we perform and the associated fees charged for theseservices.  As part of this review,effective June 1, 2004, we agreed to reduce the managed services fees chargedto Ford U.S. by approximately $500,000 on an annual basis.

 

For the quarters ended June 30, 2004 and2003, Ford accounted for 30% and 31%, of total revenues respectively.  For the six months ended June 30, 2004 and2003, Ford accounted for 31% and 30% of our total revenues respectively.  As of June 30, 2004 and December 31, 2003,Ford accounted for 24% and 25%, respectively, of total accounts receivable.

 

We reimburse Ford for expenses incurred byFord for the use of its facilities, the costs of leased employees, and themaintenance and expenses related to the acquired technology.  For the quarters ended June 30, 2004 and2003, Ford charged us approximately $1 million and $1.9 million,respectively.  For the six months endedJune 30, 2004 and 2003, Ford charged us approximately $2.1 million and $3.9million, respectively.  In 2003, thesepayments began to decrease as we began deploying our own technology in NorthAmerica.

 

**Lucent**

 

In August 2001, we entered into afive-year agreement with Lucent Technologies to manage Lucent’s global tradeoperations 

 

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in the United States.  From August 2001 through August 2004,we expect to generate approximately $25 million in aggregate revenues fromour agreement with Lucent U.S. Subsequently, we expanded our relationship with Lucent by assumingresponsibility for administering and managing Lucent’s global trade operations inother countries in North America, Europe and in Brazil.  For the quarters ended June 30, 2004 and2003, Lucent accounted for 13% and 15%, of total revenues respectively.  For the six months ended June 30, 2004 and2003, Lucent accounted for 13% and 15%, of total revenues, respectively.

 

In August 2004, Lucent will be able toterminate the agreement for convenience with six months notice.  We are in the process of negotiating anextension to the agreement.

 

**Acquisitions**

 

On June 19, 2003, we acquired GE’sinternal U.S. customs import operations. We also entered into a Managed Services agreement under which Vasterawill manage the U.S. customs import operations for five of GE’s U.S. divisionsfor a minimum term of three years.  GEmay terminate this agreement for convenience commencing on July 1, 2006, afterproviding the Company six months’ advance notice.  The results of GE’s internal U.S. customsimport operations have been included in our operations since July 1, 2003,the effective date of the acquisition. In exchange for its internal U.S. customs import operations, GE received$3.0 million in cash and 51,046 shares of our common stock, valued atapproximately $312,000.  The purchaseprice, including transaction costs of approximately $62,000, totaled approximately$3.4 million.

 

**Critical Accounting Policies**

 

We consider our accounting policies relatedto revenue recognition, deferred revenues, internal use software and intangibleassets to be critical to our business operations and the understanding of ourresults of operations.  The impact andassociated risks related to these policies on our business operations arediscussed throughout this Management’s Discussion and Analysis of FinancialCondition and Results of Operations where such policies affect our reported andexpected financial results.  For asummary of significant accounting policies used in the preparation of ourconsolidated financial statements, see the Notes to our Consolidated FinancialStatements in Item 1 of this Report.  Ourpreparation of this Report requires us to make estimates and assumptions thataffect the reported amount of assets and liabilities, disclosure of contingentassets and liabilities at the date of our financial statements, and thereported amounts of revenue and expenses during the reporting period.  We cannot be sure that actual results willnot differ from those estimates.

 

 

***Sourceof Revenues and Revenue Recognition Policy***

 

*Managed Services Revenues*

 

Managed services revenues are derived from agreements that provide fortransaction or services fees based on the performance and delivery of ourManaged Services solutions.  ManagedServices solutions include the processing of our clients’ customs and shipmententries and the classifying of clients’ goods. Managed Services transaction arrangements are often subject to annual orquarterly minimum transaction thresholds and revenues are recognized based onthe lower of the cumulative actual transactions processed using aweighted-average transaction rate or the cumulative amount billable.  For those Managed Services transactionarrangements subject to annual minimums and for those arrangements where theamount billable for interim periods is limited to the pro-rata portion of theannual minimum, transactions processed in excess of the minimum in each periodare not billable, and, therefore, revenue is not recognized until the end ofthe related year.  Certain ManagedServices arrangements are based upon a fixed services fee.  Revenues associated with these arrangementsare recognized ratably over the term of the arrangement and limited to theamounts billable.  In addition, we mayreceive annual gainsharing fees under certain Managed Services arrangementsbased on a percentage of the client’s annual cost savings, as defined in thoseManaged Services arrangements.  Thesegainsharing fees are recognized when they become fixed and determinable.  Managed Services transaction minimums andfixed service fees are typically billed monthly.

 

*Software Revenues*

 

Software revenues consist of term license revenues, perpetual softwarelicense revenues, and transaction-based revenues.  We recognize revenue from the sale ofsoftware products in accordance with Statement of Position (“SOP”) 97-2, *Software Revenue Recognition*.

 

Term license revenues are derived from term software licensearrangements in which our clients license our software products and obtain theright to unspecified enhancements on a when-and-if-available basis, ongoingsupport and content update services. Content updates are significant and frequent.  Revenues are recognized ratably over thecontract term.  Term license arrangementstypically range from three to five years. To the extent we host the software for our customers, the hosting fee isrecognized ratably over the contract period in conjunction with the recognitionof the license fee.  Term license feesare typically 

 

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billed annually, quarterly ormonthly.

 

Perpetual software license revenues are derived from perpetual softwarelicense arrangements and related maintenance contracts.  Maintenance contracts include the right tounspecified enhancements on a when-and-if available basis, ongoing support, andcontent update services.  The contentupdates provided under maintenance arrangements are significant and frequent,and, as a result, revenues from perpetual software license sales are recognizedratably over the estimated economic life of the product.  We have estimated that the life of theproduct is three years, which is consistent with the historical periods betweenmajor upgrades to the functionality and architecture of our products.  Accordingly, we experience a drop-off insoftware revenues related to perpetual licenses at the end of the three-yearamortization period.  Revenues frommaintenance contracts are recognized ratably over the contract term, typicallyone year.  To the extent we host thesoftware for our customers, the hosting fee is recognized ratably over thecontract period in conjunction with the recognition of the license fee.

 

Transaction-based revenues are derived from agreements that provide fortransaction fees based on a client’s usage of our software products.  Revenues from the usage of our softwareproducts are recognized as transactions occur.

 

We recognize revenues from arrangements with resellers beginning whenthe software product is sold to the end user. Any annual transaction minimums not sold by the reseller to the endcustomers are recognized as revenues upon the expiration of the annual minimumperiod.

 

*Services Revenues*

 

Services revenues are derived from implementation, Trade ManagementConsulting, and training services. Services are performed on a time and materials basis or under fixedprice arrangements.  Revenues on time andmaterials contracts are billed and recognized based on fixed billable rates forhours delivered, and revenues on fixed priced contracts are recognized as theservices are performed, using the percentage of completion method of accountingbased on the ratio of costs incurred to total estimated costs to beincurred.  Losses on arrangements arerecognized when known.

 

For multiple-element arrangements where we provide both software andsoftware-related services, we defer the service fee, based on vendor-specificobjective evidence of fair value, and recognize it as the services areperformed.

 

***InternalUse Software***

 

In accordance with Statement of Position 98-1, *Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use*, we capitalize costsassociated with the implementation and integration of our trade managementplatform to our Managed Services operations, related to certain capitalizabletasks including the technical design, system configuration and testing phasesof the integration process.  Judgment isinvolved in determining which development tasks associated with the platformintegration are capitalizable pursuant to SOP 98-1.  These costs are amortized as costs of managedservices revenues over three years, and amortization commences upon thecompletion of the integration to the Vastera platform.

 

***Goodwilland Intangible Assets***

 

In accordance with Statement of Financial Accounting Standard (SFAS)No. 142, *Goodwill and Other IntangibleAssets*, we prepare an annual assessment to test for impairment ofgoodwill.  Our assessment date isDecember 31st of each year. The assessment requires us to compare the carrying value of ourreporting units to their fair values.  Tothe extent the carrying amount of a reporting unit exceeds the fair value, weare required to compare the implied fair value, as defined, of reporting unitgoodwill with the carrying amount to determine the amount of impairment.  The fair value and the implied fair value, asdefined, is determined for the reporting units taking into consideration manyfactors, such as current performance, future projections, and marketconditions.

 

In accordance with SFAS No. 144, *Accountingfor Impairment for or Disposal of Long-Lived Assets*, purchasedintangibles subject to amortization, are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of anasset to the estimated undiscounted future cash flows expected to be generatedby the asset.  If the carrying amount ofan asset exceeds its estimated future cash flows, an impairment charge isrecognized by the amount by which the carrying amount of the asset exceeds thefair value of the asset.  The estimatedundiscounted future cash flows of an asset takes into consideration manyfactors, such as current performance, future projections, and marketconditions.

 

**Management’s Disclosure of Non-GAAP Financial Measures**

 

From time to time, management makes publicdisclosures, other than in our SEC filings on Form 10-Q or Form 10-K,of certain financial measures such as pro forma earnings (loss) and EBITDA, asadjusted (as defined below), that are not considered GAAP financial measures.  On July 22, 2004, we issued an earningspress release and included it as an exhibit to a Form 8-K we filed 

 

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with the SEC the same day.  This press release contained reconciliationsof pro forma earnings (loss) and EBITDA, as adjusted, to our reported net loss.

 

Management believes that pro forma earnings(loss) is a useful supplement to GAAP financial measures as it measures ouroperating performance and liquidity for the reporting period because itexcludes certain charges associated with past events that are not related tocurrent operations or that are not relevant to current operations and will notbe in the foreseeable future.  Because wehave such a significant balance of net operating losses that we will be able tocarry forward and apply against future U.S. tax liabilities, we exclude incometaxes from the calculation of pro forma earnings (loss).  Although we do pay income taxes on a portionof the revenues we generate, the aggregate amount of such payments is notmaterial in relation to our net operating losses.  Until such time as we generate income fromoperations and have fully applied our net operating losses to future taxliabilities, which we do not expect to occur during the foreseeable future, webelieve that income taxes will not be a relevant element of our operatingperformance.  The excluded intangibleamortization expense and impairment of goodwill and intangibles are associatedwith identifiable intangible assets from prior acquisitions.  The excluded stock-based compensation expensepertains to deferred non-cash compensation charges recorded in connection withour initial public offering of common stock and from prior acquisitions.

 

EBITDA, as adjusted, excludes expenses related to amortization ofintangible assets, restructuring charges, impairment of goodwill andintangibles, stock-based compensation, income taxes, depreciation, amortizationof revenue discounts related to customer contracts and amortization ofcapitalized internal-use software costs, and other income, net.  Management uses EBITDA, as adjusted, tomeasure and evaluate our operating performance and liquidity, because itreflects the resources available from the reporting period’s operations foroperating and strategic opportunities. These opportunities include investing in the business, meeting financingobligations, making strategic acquisitions, and paying other cashobligations.  Therefore, managementbelieves EBITDA, as adjusted, is an appropriate measure by which to evaluateour operating performance and liquidity.

 

Pro forma earning (loss) and EBITDA, as adjusted, however, should beconsidered in addition to, and not as a substitute for or as being superior to,operating net losses, cash flows, or other measures of financial performanceprepared in accordance with U.S. GAAP.

 

**Comparison of the Quarter Ended June 30, 2004 to the Quarter Ended June30, 2003**

 

***Revenues***

 

| ** **       | ** **                              | ** **         | ** **            | **Increase (Decrease)** | ** ** | **Future Expected  % of  Total Revenues** | ** **             |
|------------------|-----------------------------------------|--------------------|-----------------------|-------------------------|------------|-------------------------------------------|------------------------|
| ** **       | **For the Three Months Ended June 30,** | ** **         |
| ** **       | **2004**                                | ** **         | **2003**              | ** **              |
| ** **       | **Amount**                              | ** **         | **Percent of  Total** | ** **              | **Amount** | ** **                                | **Percent of   Total** | ** ** |
| ** **       | ** **                              | **(in thousands)** | ** **            | ** **              | ** ** | **(in thousands)**                        | ** **             | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
|             |                                    |               |                  |                    |       |                                      |                   |   |   |   |   |   |   |   |   |
| Managed services |                                    | $                  | 13,970                |                    | 66         | %                                         | $                      | 13,644 |   | 63 | % | $ | 326 |   | 2 | % | 65-70 | % |
| Software         |                                    | 2,436              |                  | 11                      |       | 2,885                                     |                   | 14 |   | (449 | ) | (16 | ) | 10-15 |   |
| Services         |                                    | 4,790              |                  | 23                      |       | 4,995                                     |                   | 23 |   | (205 | ) | (4 | ) | 15-20 |   |
| Total revenues   |                                    | $                  | 21,196                |                    | 100        | %                                         | $                      | 21,524 |   | 100 | % | $ | (328 | ) | (2 | )% |   |   |

 

***Managed servicesrevenues.*** We derive managed services revenues from agreements that provide for transactionor service fees based on our performance of Managed Services.

 

The increase in managed services revenues for the three months endedJune 30, 2004 from the three months ended June 30, 2003 primarily resulted fromthe following:

 

•                  Revenue from ournew contract with GE, which began on July 1, 2003;

•                  Other newbusiness revenue from customer contracts signed in 2003 and the first half of2004; offset by

•                  A reduction inrevenue from the effect of a few contract transaction minimum step-downs in2003 because, in some of our transaction-based managed service contracts, theminimum number of guaranteed transactions declines over time.  To the extent the minimum volumes step-downover time and the customer transaction volumes are below the minimum, our revenuesdecrease over that time period.

 

Our top five Managed Services customers accounted for 90% and 94% ofour managed services revenues in the quarters ended June 30, 2004 and 2003,respectively.  Our non-US managedservices revenues increased to $4 million in the second quarter of 2004 fromapproximately $3.7 million recognized in the second quarter of 2003.  This increase resulted from new customercontracts in Europe.  The favorableeffect on revenues of changes in foreign currency exchange rates between thequarters ended June 30, 2003 and 2004 was approximately $55,000.  We expect non-US managed services revenues tocontinue to increase as a percentage of

 

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managed services revenues inthe future as we grow our international business.

 

In 2004, we expect revenues on a few of our customer contracts todecrease due to reductions in the base minimum fees associated with thestep-down in the minimum number of transactions in those contracts.  We estimate between approximately$2.0 million and $3.0 million of reduced revenues from thesecontracts in 2004.  Additionally, revenuederived from large customer contracts may change as we renew these contracts.  If we fail to maintain or expand the scope ofservices provided under these contracts, our revenues from these contracts willdecrease.

 

***Software revenues.***  Software revenues consist of term licenserevenues, perpetual software license revenues, maintenance revenues, andtransaction-based revenues.

 

The decrease in revenues resulted primarily from the expiration of a$2.5 million annual license fee from a Japanese customer, the drop-off of fullyrecognized revenue from perpetual licenses sold in prior years, and maintenancecancellations.  These declines werepartially offset by an increase in software revenues from new customers.  Our top five software customers accounted for21% and 38% of our total software revenues during the three months ended June30, 2004 and 2003, respectively.

 

We expect 2004 software revenues to decrease compared to 2003 becausewe do not expect new business to offset the expiration of the $2.5 millionper year license fee from a Japanese customer and the drop-off of revenues fromperpetual licenses.

 

***Services revenues.***  We derive services revenues from theimplementation of software for our customers, management consulting, andtraining services.

 

Our services revenues fluctuate from quarter to quarter based on manyfactors, such as demand by our customers, the number of billable days in aquarter, utilization, and the number of new software contracts executed inrecent quarters.  Historically, less than30% of our services revenues have been derived from implementation servicesperformed in connection with new software license sales.  The decrease in revenues resulted from lessproject work from our current installed base and implementation servicesperformed for a few customers in the second quarter of 2004 that were deferredbecause we concluded the fees were not fixed or uncertainty existed regardingthe collectibility of the fees.  Thisdecrease was partially offset by an increase in revenue from our TradeManagement Consulting business.

 

Our five largest services customers accounted for 59% of our servicesrevenues for both quarters ended June 30, 2004 and 2003.

 

In 2004, we expect services revenues to decrease slightly due to lessproject work with several customers.

 

***Cost of Revenues***

 

| ** **             | ** ** | **For the Three Months Ended June 30,** | ** ** | ** **                             | ** ** |
|------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **             | ** ** | **2004**                                | ** ** | **2003**                               | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Amount**                              | ** ** | **Percent of  Segment  Revenues** | ** ** | **Amount** | ** ** | **Percent of  Segment  Revenues** | ** ** | **Increase (Decrease)** | ** ** |
| ** **             | ** ** | **(in thousands)**                      | ** ** | ** **                             | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
|                   |       |                                    |       |                                   |       |   |   |   |   |   |   |   |   |
| Managed services       |       | $                                       | 8,082      |                                   | 58         | % | $ | 7,499 |   | 55 | % | $ | 583 |   | 8 | % |
| Software               |       | 694                                     |       | 28                                     |       | 712 |   | 25 |   | (18 | ) | (3 | ) |
| Services               |       | 3,587                                   |       | 75                                     |       | 3,637 |   | 73 |   | (50 | )  | (1 | )  |
| Total cost of revenues |       | $                                       | 12,363     |                                   | 58         |   | $ | 11,848 |   | 55 |   | $ | 515 |   | 4 |   |

 

**Cost of managed services revenues.**  Cost of managed services revenues consist ofsalaries and related expenses, reimbursed expenses to Ford for our ManagedServices organization and amortization of capitalized internal use softwarecosts related to implementation and integration of our trade managementplatform to our Managed Services operation.

 

The cost increase in absolute dollars and as a percentage of managedservices revenues was largely due to the additional investment we have made inour Managed Services business and several new contracts with lower profitmargins than our earlier contracts and the effect on costs of changes inexchange rates between the quarters. These costs were partially offset by efficiencies we achieved in ourU.S. operations as we migrated from Ford’s technology systems to our own.  We expect the cost of managed servicesrevenues as a percentage of managed services revenues to increase in theforeseeable future due to the additional investment we are making in ourmanaged services business.  Over time, weexpect to realize benefits from the additional investment we are making in ourManaged Service business.

 

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**Cost of software revenues.**  Cost of software revenues includes royaltiesowed to third parties for technology products integrated into our softwareproducts as well as the cost of salaries and related expenses for our softwarecustomer support organization.

 

The increase as a percentage of software revenues results from areduction in our software revenues.  Weexpect the cost of software revenues as a percentage of software revenues to berelatively constant in the foreseeable future.

 

**Cost of services revenues.**  Cost of services revenues includes the costof salaries and related expenses for implementation, management consulting andtraining services provided to clients, as well as the cost of third parties wecontract with to provide either implementation services or trade managementconsulting to our clients.

 

From quarter to quarter as customer demand fluctuates, the cost ofservices revenues will fluctuate based on actions we take to align ourpersonnel capacity with demand, such as changes in our use of subcontractors,delays or accelerations of hiring personnel and the temporary deployment ofresources to or from other business segments. Cost of services revenues is down slightly over prior year as our numberof personnel and other resource costs are down.

 

We expect the cost of services to fluctuate relative to servicesrevenues in 2004, but remain relatively consistent on a percentage of servicesrevenues basis for the year.

 

 

***OperatingExpenses***

 

| ** **                 | ** ** | **For the Three Months Ended June 30,** | ** ** | ** **                      | ** ** |
|----------------------------|------------|-----------------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **2004**                                | ** ** | **2003**                        | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Amount**                              | ** ** | **Percent of  Total  Revenues** | ** ** | **Amount** | ** ** | **Percent of  Total  Revenues** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                 | ** ** | **(in thousands)**                      | ** ** | ** **                      | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
|                       |       |                                    |       |                            |       |   |   |   |   |   |   |   |   |
| Sales and marketing        |       | $                                       | 2,474      |                            | 12         | % | $ | 2,302 |   | 11 | % | $ | 172 |   | 7 | % |
| Research and development   |       | 3,126                                   |       | 15                              |       | 2,999 |   | 14 |   | 127 |   | 4 |   |
| General and administrative |       | 2,980                                   |       | 14                              |       | 2,733 |   | 13 |   | 247 |   | 9 |   |
| Depreciation               |       | 1,376                                   |       | 6                               |       | 1,263 |   | 6 |   | 113 |   | 9 |   |
|                            |            |                                         |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |

 

**Sales and marketing.**  Sales and marketing expense consists primarilyof salaries and commissions earned by sales and marketing personnel, publicrelations, trade shows and travel expenses related to both promotional eventsand direct sales efforts.

 

The increase in sales and marketing expense resulted from an increase inpersonnel expense, marketing programs, bad debt expense and severance costsrelated to our former Vice President of Sales and Marketing.  We expect sales and marketing expense toincrease in absolute dollars as we hire additional sales personnel and investin marketing programs.

 

**Research and development.**  Research and development expense consistsprimarily of salaries, benefits, and equipment for personnel who develop andsupport software for external sale and use in our Managed Services business.

 

The increase in research and development costs was primarily from costsassociated with the use of technology consultants, which were not incurred inthe prior period.  We anticipate researchand development expense to remain constant in absolute dollars in 2004.

 

**General and administrative.**  General and administrative expense consistsprimarily of salaries, benefits, outside accounting, legal, insurance fees andrelated costs for executive, finance, legal, human resources, administrativeand information services personnel.

 

The increase in general and administrative expense resulted from anincrease in corporate insurance costs and an increase in the number ofaccounting and finance staff and work related to Sarbanes-Oxleycompliance.  We expect general and administrativeexpense to increase slightly when we further expand our operations in Europeand Asia.

 

**Depreciation.**  The increase resulted from the depreciationof fixed assets we purchased to build the technology infrastructure needed tosupport our business.  Most of these newassets were acquired to build out our data center.  We expect our depreciation expense tocontinue increasing in absolute dollars in 2004 as we continue to invest in ourinfrastructure.

 

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| ** **                      | ** ** | **For the Three Months Ended June 30,** | ** ** | ** **                          | ** ** | ** **         | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|--------------------|------------|
| ** **                      | ** ** | **2004**                                | ** ** | **2003**                            | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Amount**                              | ** ** | **Percent of  Total  Revenue** | ** ** | **Amount**         | ** ** | **Percent of  Total  Revenue** | ** ** | **Decrease** | ** ** |
| ** **                      | ** ** | **(in thousands)**                      | ** ** | ** **                          | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
|                            |       |                                    |       |                                |       |               |       |   |   |   |   |   |   |
| Intangible amortization expense |       | $                                       | 247        |                                | 1          | %                  | $          | 707 |   | 3 | % | $ | (460 | ) | (65 | )% |
| Stock-based compensation        |       | —                                  |       | —                              |       | 275                |       | 1 |   | (275 | ) | (100 | ) |
|                                 |            |                                         |            |                                     |            |                    |            |  |  |  |  |  |  |  |  |  |

 

**Intangible amortization expense.**  During the fourth quarter of 2003, werecognized impairment charges of approximately $6.1 million related tointangible assets.  As a result,amortization expense has decreased significantly in 2004.

 

**Stock-based compensation.**  Our stock based compensation resulted fromoptions issued to employees prior to our initial public offering in 2000 withexercise prices less than fair value and from options issued to employees inconnection with our acquisition of Speedchain in 2001.  There was no stock based compensation duringthe quarter ended June 30, 2004 as prior amounts were amortized over therelated vesting period.

 

***Other Income(Expenses) and Income Taxes***

 

| ** **                   | ** ** | **For the Three Months Ended June 30,** | ** ** | ** **         | ** ** |
|------------------------------|------------|-----------------------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **2004**                                | ** ** | **2003**           | ** ** | **Increase (Decrease)** | ** ** |
| ** **                   | ** ** | **(in thousands)**                      | ** ** | **(in thousands)** | ** ** | **(in thousands)** | ** ** | ** ** |   |
|                         |       |                                    |       |               |       |   |   |   |   |
| Other income (expenses), net |       | $                                       | 88         |               | $          | 148 |   | $ | (60 | ) | (41 | )% |
| Income taxes                 |       | (146                                    | )          | (157)              |       | 11 |   | 7 |   |
|                              |            |                                         |            |                    |            |  |  |  |  |  |  |  |

 

**Other income (expenses), net.**  Other income (expenses), net fluctuates basedon the amount of cash balances available for investment, borrowings under ourlines of credit, interest and other expenses related to our equipment borrowings,and any realized gains and losses on investments.  The decrease resulted primarily from lowerinvestment interest rates offset by foreign currency exchange gains.

 

**Income taxes.**  For the three months ended June 30, 2004 and2003, our income tax provision was comprised of federal, state, and foreigntaxes.  The federal tax provisionrepresents alternative minimum tax that resulted from certain limitationsplaced on the utilization net operating losses under the alternative minimumtax system.  The state tax provisionconsists primarily of the Single Business Tax assessed in Michigan and othermiscellaneous franchise taxes.  We haverecorded a valuation allowance for the full amount of our net deferred taxassets, including the credit for the alternative minimum tax, as a result ofthe uncertainty surrounding the timing of the realization of these future taxbenefits.  The decrease in income taxexpense resulted primarily from lower withholding taxes in the quarter than inprior year.  Income-based withholdingtaxes are derived from services provided to customers in certain geographiesoutside of the United States.

 

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**Comparison of the Six Months Ended June 30, 2004 to the Six MonthsEnded June 30, 2003**

 

***Revenues***

 

| ** **       | ** ** | **For the Six Months Ended June 30,** | ** ** | ** **            | ** ** | ** **         | ** ** |
|------------------|------------|---------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **       | ** ** | **2004**                              | ** ** | **2003**              | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **       | ** ** | **Amount**                            | ** ** | **Percent of  Total** | ** ** | **Amount**         | ** ** | **Percent of  Total** | ** ** | **Increase (Decrease)** | ** ** |
| ** **       | ** ** | **(in thousands)**                    | ** ** | ** **            | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
|             |       |                                  |       |                  |       |               |       |   |   |   |   |   |   |
| Managed services |       | $                                     | 28,180     |                  | 67         | %                  | $          | 27,259 |   | 64 | % | $ | 921 |   | 3 | % |
| Software         |       | 4,705                                 |       | 11                    |       | 5,616              |       | 13 |   | (911 | ) | (16 | ) |
| Services         |       | 9,232                                 |       | 22                    |       | 9,593              |       | 23 |   | (361 | ) | (4 | ) |
| Total revenues   |       | $                                     | 42,117     |                  | 100        | %                  | $          | 42,468 |   | 100 | % | $ | (351 | ) | (1 | )% |

 

 

***Managed servicesrevenues.***

 

The increase in managed services revenuesfrom the six months ended June 30, 2004 to the six months ended June 30, 2003primarily resulted from the following:

 

•                  Revenue from ournew contract with GE, which began on July 1, 2003;

•                  Highernonrecurring project-based work in the first quarter of 2004;

•                  Other newbusiness revenue from customer contracts signed in 2003; primarily offset by

•                  A reduction inrevenue from the effect of a few contract transaction minimum step-downs in2003 because, in some of our transaction-based managed service contracts, theminimum number of guaranteed transactions declines over time.  To the extent the minimum volumes step-downover time and the customer transaction volumes are below the minimum, ourrevenues decrease over that time period.

 

Our top five Managed Services customers accounted for 89% and 94% ofour managed services revenues in the six months ended June 30, 2004 and 2003,respectively.  Our non-US managedservices revenues increased to $7.9 million in the six months ended June 30,2004 from approximately $6.9 million recognized in the six months ended June30, 2003.  This increase resulted fromnew customer contracts in Europe.  Thefavorable effect on revenues of changes in foreign currency exchange ratesbetween the six months ended June 30, 2003 and 2004 was approximately $431,000of managed service revenues.  We expectnon-US managed services revenues to continue to increase as a percentage ofmanaged services revenues in the future.

 

***Software revenues.***

 

The decrease in revenues resulted primarily from the expiration of a$2.5 million annual license fee from a Japanese customer, the drop-off of fullyrecognized revenue from perpetual licenses sold in prior years, and maintenancecancellations.  These declines werepartially offset by an increase in software revenues from new customers.  Our top five software customers accounted for21% and 39% of our total software revenues during the six months ended June 30,2004 and 2003, respectively.

 

***Services revenues.***

 

Our services revenues fluctuate from quarter to quarter based on manyfactors, such as demand by our customers, the number of billable days in aquarter, utilization, and the number of new software contracts executed inrecent quarters.  Historically, less than30% of our services revenues have been derived from implementation servicesperformed in connection with new software license sales.  The decrease in revenues resulted from lessproject work from our current install base and implementation services performedfor a few customers in the first six months of 2004 that were deferred becausewe concluded the fees were not fixed or uncertainty existed regarding thecollectibility of the fees.  Thisdecrease was partially offset by an increase in revenue from our TradeManagement Consulting business.

 

Our five largest services customers accounted for 54% and 55% of ourservices revenues in the six months ended June 30, 2004 and 2003, respectively.

 

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***Cost of Revenues***

 

| ** **             | ** ** | **For the Six Months Ended June 30,** | ** ** | ** **                             | ** ** | ** **         | ** ** |
|------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|--------------------|------------|
| ** **             | ** ** | **2004**                              | ** ** | **2003**                               | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Amount**                            | ** ** | **Percent of  Segment  Revenues** | ** ** | **Amount**         | ** ** | **Percent of  Segment  Revenues** | ** ** | **Increase (Decrease)** | ** ** |
| ** **             | ** ** | **(in thousands)**                    | ** ** | ** **                             | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
|                   |       |                                  |       |                                   |       |               |       |   |   |   |   |   |   |
| Managed services       |       | $                                     | 16,154     |                                   | 57         | %                  | $          | 14,935 |   | 55 | % | $ | 1,219 |   | 8 | % |
| Software               |       | 1,358                                 |       | 29                                     |       | 1,394              |       | 25 |   | (36 | ) | (3 | ) |
| Services               |       | 6,994                                 |       | 76                                     |       | 7,006              |       | 73 |   | (12 | )  | — |   |
| Total cost of revenues |       | $                                     | 24,506     |                                   | 58         |               | $          | 23,335 |   | 55 |   | $ | 1,171 |   | 5 |   |

 

 

**Cost of managed services revenues.**

 

The cost increase in absolute dollars and as a percentage of managedservices revenues was largely due to the additional investment we have made inour Managed Service business and several new contracts with lower profitmargins than our earlier contracts and the effect on costs of changes inexchange rates between the quarters. These costs were partially offset by efficiencies we achieved in ourU.S. operations as we migrated from Ford’s technology systems to our own.

 

**Cost of software revenues.**

 

The increase as a percentage of software revenues results from areduction in our software revenues.

 

**Cost of services revenues.**

 

From quarter to quarter as customer demand fluctuates, the cost ofservices revenues will fluctuate based on actions we take to align ourpersonnel capacity with demand, such as changes in our use of subcontractors,delays or accelerations of hiring personnel and the temporary deployment ofresources to or from other business segments. Cost of services revenues is relatively flat with prior year as ournumber of personnel and other resource costs are consistent period to period.

 

 

***OperatingExpenses***

 

| ** **                 | ** ** | **For the Six Months Ended June 30,** | ** ** | ** **                      | ** ** | ** **         | ** ** |
|----------------------------|------------|---------------------------------------|------------|---------------------------------|------------|--------------------|------------|
| ** **                 | ** ** | **2004**                              | ** ** | **2003**                        | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Amount**                            | ** ** | **Percent of  Total  Revenues** | ** ** | **Amount**         | ** ** | **Percent of  Total  Revenues** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                 | ** ** | **(in thousands)**                    | ** ** | ** **                      | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
|                       |       |                                  |       |                            |       |               |       |   |   |   |   |   |   |
| Sales and marketing        |       | $                                     | 4,930      |                            | 12         | %                  | $          | 4,546 |   | 11 | % | $ | 384 |   | 8 | % |
| Research and development   |       | 6,024                                 |       | 14                              |       | 6,036              |       | 14 |   | (12 | ) | — |   |
| General and administrative |       | 5,777                                 |       | 14                              |       | 5,473              |       | 13 |   | 304 |   | 6 |   |
| Depreciation               |       | 2,712                                 |       | 6                               |       | 2,564              |       | 6 |   | 148 |   | 6 |   |
|                            |            |                                       |            |                                 |            |                    |            |  |  |  |  |  |  |  |  |  |

 

 

**Sales and marketing.**

 

The increase in sales and marketing expense primarily resulted from anincrease in bad debt expense and severance costs related to our former VicePresident of Sales and Marketing.  Costsassociated with marketing programs and personnel were also higher when comparedto the same period in the prior year.

 

**Research and development.**

 

The decrease in research and development costs was primarily from adecrease in headcount, partially offset by costs associated with the use oftechnology consultants.

 

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**General and administrative.**

 

The increase in general and administrative expense resulted from anincrease in corporate insurance costs and an increase in the number ofaccounting and finance staff and work related to Sarbanes-Oxley compliance.

 

**Depreciation.**  The increase resulted from the depreciationof fixed assets we purchased to build the technology infrastructure needed tosupport our business.  Most of these newassets were acquired to build out our data center.

 
| ** **                      | ** ** | **For the Six Months Ended June 30,** | ** ** | ** **                          | ** ** | ** **         | ** ** |
|---------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|--------------------|------------|
| ** **                      | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Amount**                            | ** ** | **Percent of  Total  Revenue** | ** ** | **Amount**         | ** ** | **Percent of  Total  Revenue** | ** ** | **Decrease** | ** ** |
| ** **                      | ** ** | **(in thousands)**                    | ** ** | ** **                          | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intangible amortization expense |       | $                                     | 477        |                                | 1          | %                  | $          | 1,387 |   | 3 | % | $ | (910 | ) | (66 | )% |
| Stock-based compensation        |       | 46                                    |       | —                              |       | 645                |       | 2 |   | (599 | ) | (93 | ) |
|                                 |            |                                       |            |                                     |            |                    |            |  |  |  |  |  |  |  |  |  |

 

**Intangible amortization expense.**  During the fourth quarter of 2003, werecognized impairment charges of approximately $6.1 million related tointangible assets.  As a result,amortization expense has decreased significantly in 2004.

 

**Stock-based compensation.**  Our stock based compensation resulted fromoptions issued to employees prior to our initial public offering in 2000 withexercise prices less than fair value and from options issued to employees inconnection with our acquisition of Speedchain in 2001.  The Company records stock based compensationon an accelerated basis.  Because we havenot issued options below market value in the past six months or acquiredoptions in connection with an acquisition since the Speedchain acquisition, theexpense incurred during the six months ended June 30, 2004 was lower than theexpense incurred during the six months ended June 30, 2003.  The deferred compensation balance was zero asof June 30, 2004.

 

***Other Income(Expenses) and Income Taxes***

 
| ** **                   | ** ** | **For the Six Months Ended June  30,** | ** ** | ** **         | ** ** | ** **              | ** ** |
|------------------------------|------------|----------------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                   | ** ** | **2004**                               | ** ** | **2003**           | ** ** | **Increase (Decrease)** | ** ** |
| ** **                   | ** ** | **(in thousands)**                     | ** ** | **(in thousands)** | ** ** | **(in thousands****)**  | ** ** | ** ** | ** ** |
|                         |       |                                   |       |               |       |                    |       |   |   |
| Other income (expenses), net |       | $                                      | 196        |               | $          | 336                     |       | $ | (140 | ) | (42 | )% |
| Income taxes                 |       | (228                                   | )          | (308               | )          | 80                      |       | (26 | ) |
|                              |            |                                        |            |                    |            |                         |            |  |  |  |  |  |

 

**Other income (expenses), net.**  Other income (expenses), net fluctuates basedon the amount of cash balances available for investment, borrowings under ourlines of credit, interest and other expenses related to our equipmentborrowings, and any realized gains and losses on investments.  The decrease resulted primarily from lowerinvestment interest rates offset by foreign currency exchange gains.

 

**Income taxes.**  For the six months ended June 30, 2004 and2003, our income tax provision was comprised of federal, state, and foreigntaxes.  The federal tax provisionrepresents alternative minimum tax that resulted from certain limitationsplaced on the utilization net operating losses under the alternative minimumtax system.  The state tax provisionconsists primarily of the Single Business Tax assessed in Michigan and other miscellaneousfranchise taxes.  We have recorded avaluation allowance for the full amount of our net deferred tax assets,including the credit for the alternative minimum tax, as a result of theuncertainty surrounding the timing of the realization of these future taxbenefits.  The decrease in income taxexpense resulted primarily from lower withholding taxes in the quarter than inprior year.  Income-based withholdingtaxes are derived from services provided to customers in certain geographiesoutside of the United States.

 

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**Liquidity and Capital Resources**

 

***Obligations***

 

*Lines of Credit*

 

We have a term loan, a secured revolving line of credit (Line ofCredit), and an equipment line of credit (Equipment Line of Credit) withComerica Bank.

 

We paid the remaining term loan balance of approximately $502,000during the second quarter of 2004.  Thebalance under the term loan was zero and approximately $1.0 million as of June30, 2004 and December 31, 2003, respectively.

 

We may borrow up to $10 million under the revolving line ofcredit, with a $2.5 million sub-limit for the issuance of letters ofcredit.  Advances under the revolvingline of credit are limited to the lesser of $10 million or 80% of eligibleaccounts receivable, as defined in the loan agreement.  The revolving line of credit bears interestat the bank’s prime rate (4.25% as of June 30, 2004) and matures inJuly 2004.  There was no outstandingbalance under the revolving line of credit as of June 30, 2004 andDecember 31, 2003.

 

In the first and third quarters of 2003, we borrowed approximately$614,000 and $488,000, respectively against the equipment line of credit.  The availability under the Equipment Line ofCredit expired in July 2003. Commencing on July 31, 2003,

interest and principal began to be payable in monthly installments onall borrowings made under the equipment line of credit, which matures in fullon July 30, 2005.  The outstandingbalance and current portion of balance under the Equipment Line of Credit wasapproximately $552,000 and $490,000 as of June 30, 2004, respectively and$796,000 and $490,000, respectively as of December 31, 2003.  The Equipment Line of Credit has twointerest-only payment periods and bears interest at the bank’s prime rate plus50 basis points (4.75% as of June 30, 2004).

 

The terms of the revolving line of credit and equipment line of creditrequire us to comply with several financial covenants, including restrictionsand limitations on future indebtedness, sale of assets and material changes inour business.  Through June 30, 2004, wewere in compliance with these covenants.

 

In July 2004, we commenced renegotiation ofour existing Line of Credit for $10 million, with a $2.5 million sub-limit forthe issuance of letters of credit, and a new equipment term loan for $5 millionwith Comerica Bank.  The renewed Line ofCredit will mature in July 2006 and the new equipment term loan will maturethree years from the date of the general equipment or software purchases.  The terms of the renewed Line of Credit, newequipment term loan, and existing Equipment Line of Credit require us to complywith several financial covenants, including restrictions and limitations onfuture indebtedness, sale of assets and material changes in our business.

 

*Leases*

 

We have various capital leases with 36-month to 48-month repaymentperiods.  In March 2003, we obtaineda new equipment leasing arrangement with a vendor for approximately$886,000.  Amounts borrowed are due over36 months.  Total capital leaseobligations outstanding as of June 30, 2004 and December 31, 2003, wereapproximately $537,000 and $764,000, respectively.

 

We lease various equipment and office space under operating leaseagreements expiring at various dates through 2013.  In addition to base rent, we are responsiblefor certain taxes, utilities, and maintenance costs.

 

*Guarantees*

 

In some of our software license arrangements, we have agreed toindemnify customers for any damages they sustain from a claim for intellectualproperty infringement.  Additionally,subject to specified contractual limitations on amount, under our ManagedServices agreements, we have agreed to indemnify our customers for any damagesthey sustain from our performance of Managed Services in a non-compliantmanner.  Although we do not believe thatour products infringe the intellectual property rights of any third party orthat we are performing services in a non-compliant manner, we cannot estimateour maximum liability exposure, because of the inherent uncertainty associatedwith any such claims and the varying nature of the indemnification levels towhich we have agreed.

 

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***Cash Flows***

 
| ** **                                                                       | ** ** | **For the six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                       | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| ** **                                                                       | ** ** | **(in thousands)**                    | ** ** | **(in thousands)** | ** ** |
|                                                                             |       |                                  |       |   |   |
| Cash and cash equivalents and short-term  investments, end of period             |       | $                                     | 56,920     |   | $ | 51,636 |   |
| Cash and cash equivalents and short-term  investments, beginning of period       |       | 56,448                                |       | 56,957 |   |
| Net increase (decrease) in cash and cash  equivalents and short-term investments |       | $                                     | 472        |   | $ | (5,321 | ) |

 

The net increase in cash and cash equivalents and short-terminvestments for the six months ended June 30, 2004 is primarily due to thefollowing:

 

•                                       Improvedworking capital;

•                                       Approximately$2.3 million of capital expenditures; and

•                                       Approximately$502,000 paid towards our Line of Credit.

 

The net decrease in cash and cash equivalentsand short-term investments for the six months ended June 30, 2003 is primarilydue to the following:

 

•                                       $3million paid for acquisition of subsidiary;

•                                       Significantreduction in accounts payable and accrued expenses; and

•                                       Approximately$610,000 borrowings from credit facility during the period.

 

 

##### ***Future Cash Investment Needs***

 

We intend to continue investing in the expansion of our business, particularlyto build out our global platform and infrastructure.  As discussed in our overview, we intend toincrease annual spending on operating expenses by $2.0 million to$3.0 million in 2004.  Additionally,we anticipate spending more on our Managed Services operations in 2004 than wedid in 2003.  Our future liquidity andcapital requirements will depend on numerous factors, including:

 

•              The costs and timing of expansionof our sales and marketing activities;

 

•              The costs and timing of expansionof our operating capabilities;

 

•              The costs and timing of ourproduct development efforts and the success of those development efforts;

 

•              The extent to which our existingand new products and services gain market acceptance;

 

•              The level and timing of our revenues;

 

•              The costs involved in maintainingand enforcing our intellectual property rights; and

 

•              Available borrowings under line ofcredit and capital lease arrangements.

 

Accordingly, until we generate and sustainprofits from our operations to fund these investments fully, our cash, cashequivalents, and short-term investments are likely to continue to decline.  In addition, we may use cash resources tofund acquisitions of complementary businesses and technologies.  We believe that our current cash resourceswill be sufficient to meet our working capital and capital requirements for atleast the next 12 months. Thereafter, we may find it necessary to obtain additional equity or debtfinancing.  In the event that we needadditional financing, we may not be able to raise it on terms acceptable to us,if at all.

 

**Risks Relating to Our Business**

 

*Before deciding to invest in our Company orto maintain or increase your investment, you should consider carefully therisks described below, in addition to the other information contained in thisreport and in our other filings with the SEC, including our subsequent reportson Forms 10-K, 10-Q and 8-K.  The risksand uncertainties described below are not the only ones facing our*

 

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*Company. Additional risks and uncertainties not currently known to us or that wecurrently deem immaterial may also affect our business operations.  If any of these risks actually occurs, ourbusiness, financial condition or results of operations could be seriouslyharmed.  In that event, the market pricefor our common stock could decline and you may lose all or part of yourinvestment.*

 

**We have a history of losses and expect toincur losses in the near future.**

 

We incurred net losses of approximately$71.2 million, $11.4 million, $45.8 million, $35.8 million,and $10.5 million in 2003, 2002, 2001, 2000, and 1999, respectively.  Our accumulated deficit as of June 30, 2004was approximately $256 million.  Webelieve that the success of our business depends on our ability to increaserevenues and to manage our operating expenses. If our revenues fail to grow at anticipated rates or our operatingexpenses are not properly managed, we may not be able to achieve or maintainprofitability, which would increase the possibility that the value of yourinvestment will decline.  Although wegenerated positive cash flows from operations in the first half of 2004, inpart because we reduced operating expenses, we cannot assure you that we cancontinue to generate positive cash flows, especially if our revenues do notincrease.  As of June 30, 2004, we hadcash and short-term investments of $56.9 million.  This is likely to be insufficient to sustainour operations over the long-term if we do not generate positive cash flow fromoperations over time.

 

**Our Managed Services business model isunproven, and our inability to provide Managed Services successfully toexisting and future clients would substantially reduce our revenues, increaseour costs, hurt our reputation in our industry, and adversely affect ourbusiness.**

 

The long-term success of our Managed Servicesbusiness is predicated on our ability to leverage our investment in ourtechnology and processes to lower our per transaction costs to the lowest levelpossible.  As a critical element of ourstrategy, we intend to continue providing Managed Services to our current andfuture clients.  These services rangefrom providing operational management for a single global trade process tomanaging a client’s entire worldwide trade operation.  We expect the revenues we receive fromproviding Managed Services to our current and future clients will continue torepresent the largest portion of our total revenues.  If we are unsuccessful in effectivelylowering our costs of delivery to acceptable levels, we may be unable toachieve a level of gross margin necessary to achieve and sustainprofitability.  Additionally, if we areunable to perform our obligations under our agreements with Ford, LucentTechnologies or Nortel Networks or to provide Managed Services successfully toour other clients, we would experience a significant reduction in our revenues,increases in our costs, and damage to our reputation, which would adverselyaffect our business and results of operations.

 

**Our revenues are concentrated among a fewcustomers.  Therefore, our businesssuccess is dependent on our maintaining good relationships with thesecustomers.**

 

In 2003, 2002, and 2001, we derivedapproximately 64%, 59%, and 67%, respectively, of our total revenues from ourtop five customers.  During the secondquarters of 2004 and 2003, we derived approximately 63% and 65%, respectively,of our total revenues from our top five customers.  During the six months ended June 30, 2004 and2003, we derived approximately 63% and 66%, respectively, of our total revenuesfrom our top five customers.  For thequarters ended June 30, 2004 and 2003, Ford accounted for 30% and 31%, of totalrevenues respectively.  For the sixmonths ended June 30, 2004 and 2003, Ford accounted for 31% and 30% of totalrevenues, respectively.  For the quartersended June 30, 2004 and 2003, Lucent accounted for 13% and 15%, of totalrevenues respectively.  For the sixmonths ended June 30, 2004 and 2003, Lucent accounted for 13% and 15% of totalrevenues, respectively.  We expect thiscustomer concentration to exist for the foreseeable future.  We had no other customer that accounted forgreater than 10% of our revenues for the periods noted.  As we continue to expand our relationshipswith existing Managed Services customers and if we continue to sign largecontracts with new customers, each such relationship will be of addedsignificance to us.  Additionally, if weare unable to sign contracts that generate significant revenues, this heavyconcentration of customers will persist, which could cause us to become evenmore dependent on each of our existing large customers.

 

We also expect to continue to derive asignificant portion of our total revenues from Ford, Lucent, and other largecustomers for at least the next several years. Some of our agreements permit a customer to terminate for convenienceafter a specified period of time.  Wecannot assure you that we will be able to maintain or renew theseagreements.  In July 2004, VisteonCorporation notified us that it will not renew its agreement for ManagedServices when it expires on December 31, 2004. If any other significantagreements do not renew, our results of operations and financial conditionwould be adversely affected.  If we failto maintain or expand the scope of services provided under these contracts, ourrevenues from these contracts will decrease. If we fail to close a significant amount of new business in the secondhalf of 2004, our revenues in 2005 will decrease when compared to 2004.  If we also fail to reduce the expenses of ourbusiness to match lower revenues, our net losses may increase and our cashflows could be negatively impacted.

 

**Our inability to renew existing ManagedServices contracts on substantially similar terms may cause revenues to declinewhich would have an adverse affect our business.**

 

Generally, our Managed Services agreementscontain a specified time period during which our customers have guaranteed

 

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minimum fixedlevels of revenues to us.  As these timeperiods expire, our customers have, and can be expected to continue, indicatedtheir intent to negotiate new terms for the future.  Our inability to renew such contracts onfinancial terms substantially similar to the existing terms will cause ourrevenues to decline and may adversely affect our business.

 

**Some of our customers have been evolving orotherwise changing their business models. As these customers change their business models, their volumerequirements and level of service required from us may decline, and adverselyaffect our business.**

 

During the past few years, some of ourclients have changed their business models significantly by outsourcing variousbusiness functions or using contract manufacturers.  For example, in 2004, Nortel Networksannounced that it intends to outsource its manufacturing operations toInternational Ltd.  The effects of suchchanges in our customers’ business models may include a reduction in transactionvolumes, as importing and exporting of goods and parts may now occur throughthird party contract manufacturers and outsourcing companies.  If our customers’ transaction volumes declinesignificantly and we are unable to add the third-party contract manufacturersand outsourcing companies as customers, our revenues will decline, which wouldhave an adverse impact on our business.

 

**Any restriction on our ability to access aforeign country’s rules and regulations that we incorporate into our GlobalContent cost-effectively and legally, or any failure to update our GlobalContent timely to include changes in such rules and regulations, may compromisethe effectiveness of our solutions and adversely impact our customerrelationships and revenues.**

 

The success of our Global Trade Managementsolutions depends on our ability to obtain or access the complex rules andregulations published by foreign governments governing a particular country’simport and export of goods.  Thefoundation of our solutions, Global Content, is subject to rapid change at theinitiative of foreign governments based on factors beyond our control.  Any changes in a country’s rules andregulations relating to global trade that we are unable to include in ourGlobal Content library may result in dissatisfied clients and possiblelitigation.  Moreover, to the extent aforeign government restricts our access to its rules and regulations, charges afee for such access or grants proprietary rights to such information to one ormore of our competitors, our solutions may not be useful to, or cost efficientfor, our current and future clients and our revenues could decrease.

 

**Fluctuations in our operating results and thecomposition of our revenues, compared to the expectations of market analysts andinvestors, may cause the price of our common stock to decline.**

 

Our operating results have varied in the past and could fluctuatesignificantly in the future.  We expectthat our operating results will continue to vary in the future, based on anumber of factors, including:

 

•                                          Thepossible loss of a significant customer;

 

•                                          Thepossible renegotiation of contract terms with one or more significantcustomers;

 

•                                          Fluctuationsin the demand for our products and services;

 

•                                          Ourability, and the associated timing, to convert our customers to our technologyplatform;

 

•                                          Competitionin our industry;

 

•                                          Inabilityto deliver compliant solutions;

 

•                                          Changesin trade regulations;

 

•                                          Variabilityin the mix of our managed services, software, and consulting revenues; and

 

•                                          Timingof new solution introductions and enhancements to our TradeSphere andTradePrism.com solutions.

 

Several of these factors are outside ourcontrol.  Due to the foregoing factors,our annual or quarterly results of operations may not meet the expectations ofsecurities analysts and investors, which is likely to cause the price of ourcommon stock to decline.

 

**We have a new seniormanagement team that may not be able to develop and execute upon a successfulbusiness strategy.**

 

During the past 24 months, we have hiredthree new people into our executive management team and we replaced the

 

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individual overseeing our Managed Servicesoperations.  This new management team isresponsible for developing a plan to significantly increase sales, improvingproduct quality, gaining market acceptance of our Managed Services offerings,and expanding our global operations.  Ourmanagement team must develop and execute upon a sound and appropriate strategyto grow revenues and achieve significant profitability.  If the new management team is unable todevelop a sound and appropriate strategy, or if it is unable to execute uponsuch a strategy, our business will be adversely affected.

 

**We may be unable to attract and retain keypersonnel, which would adversely affect our ability to develop and manage ourbusiness effectively.**

 

Our future performance will depend largely onthe efforts and abilities of our senior executives, key technical, professionalservices, sales and marketing and managerial personnel.  This dependence is extremely important to ourbusiness because personal relationships are a critical element of obtaining andmaintaining clients.  Also, we aredependent upon our technical personnel to enhance our technology platforms sothat our business remains competitive. Our success will depend on our ability to attract and retain these keyemployees in the future.  The market for suchindividuals is extremely competitive, and we may not find qualified replacementsfor personnel who leave us.  The loss of,or the inability to attract, any one or more of our key personnel may harm ourability to develop and manage our business effectively.

 

**Our international operations and plannedexpansion expose us to business risks that could limit the effectiveness of ourgrowth strategy, cause our operating results to suffer, and put some of ourinvested capital at risk of loss.**

 

We intend to continue to expand our currentinternational operations substantially and enter new internationalmarkets.  This expansion will requiresignificant management attention and financial resources to translatesuccessfully our software products into various languages, to developcompliance expertise relating to regulatory agencies in more countries and todevelop direct and indirect international sales and support channels.  We face a number of risks associated withconducting our business internationally that could negatively affect ouroperating results, including:

 

•                                          Languagebarriers, conflicting international business practices and other difficultiesrelated to the management and administration of a global business;

 

•                                          Longersales cycles associated with educating foreign clients about the benefits ofour products and services;

 

•                                          Currencyfluctuations and exchange rates;

 

•                                          Difficultyin repatriating cash from some foreign jurisdictions;

 

•                                          Longercollection time from foreign clients;

 

•                                          Multiple,and possibly overlapping, tax structures and the burdens of complying with awide variety of foreign laws;

 

•                                          Theneed to consider characteristics unique to technology systems usedinternationally; and

 

•                                          Economicor political instability in some international markets.

 

We may not succeed in our efforts or we may experience delays in theexecution of our plan to enter new international markets, establish, maintainor increase international demand for our solutions or expand our internationaloperations.  Any of these difficultiesmay harm our growth strategy and could cause our operating results to suffer.

 

**As we expand globally, we may establishoperations in countries that become politically or economically unstable, whichmay put the capital we have invested in these operations at a risk of loss andcause our business to be adversely affected.**

 

We intend to continue expanding ouroperations and serving our existing clients internationally.  As we do so, we may establish operations incountries that become politically or economically unstable.  If a country in which we commence operationsbecomes politically or economically unstable, the money and resources we haveinvested to establish such operations may be put at risk of loss, and if suchmoney and resources are lost, our business may be adversely affected.

 

**Our software products and Managed Servicesofferings are complex.  During the salescycle these offerings must be described and articulated to several individualsacross a customer’s organization before a final purchasing decision is made.  Because of the significant number of peoplewith whom we must interact and the complexity of our software and ManagedServices offerings, our sales cycle is lengthy and variable in nature, whichmakes it difficult for us to predict when or if sales will occur.**

 

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**Therefore, we may experience an unexpectedshortfall in sales.**

 

Due to the inherent complexities associatedwith global trade and the myriad of rules and regulations governing globaltrade, our software and Managed Services solutions are very complex.  Additionally, many prospects face regulatorycompliance issues of which they are unaware prior to us performing any duediligence.  Because of the complexity ofour software and Managed Services offerings, and the regulatory issues manyprospects face during the sales cycle, our personnel must conduct in depthdiscussions and provide detailed explanations to several individuals across anorganization.  These people are oftenmembers of the finance, purchasing, customs, information technology, and legaldepartments of an organization. Moreover, these individuals typically view the purchase of our solutionsas an important, but not core decision. As a result, they generally evaluate our solutions and determine theirimpact on existing infrastructure over a lengthy period of time.  Because we must interact with, and educate somany distinct individuals during the sales cycle, revenues forecasted from aspecific client for a particular quarter may be delayed to anotherquarter.  Consequently, we may experiencean unexpected shortfall in sales, which could adversely affect our operatingresults.

 

**Any loss of our licensed third-partytechnology may result in increased costs of, or delays in, providing oursolutions, which would harm our operating results.**

 

We license technology from several companieson a non-exclusive basis that we have integrated into our TradeSphere productsuite.  This technology includesdevelopment tools and facilities from IBM (WebSphere and MQ Series) and Forte,which was acquired by Sun Microsystems. Our license with Sun Microsystems expires on December 31, 2005, andour license with IBM expires on June 30, 2006.  If we cannot renew these technology licenses,we likely would face delays in the licensing of our TradeSphere products untilequivalent technology, if any, can be identified, licensed and integrated,which would adversely affect our operating results.

 

**If we interpret and analyze incorrectly thevarious laws and regulations contained in our Global Content or we perform ourManaged Services in a non-compliant manner, we may face costly liabilityclaims.**

 

The foundation of our software solutions andManaged Services, Global Content, is a rules-based application that providescomprehensive management of government trade regulations and programs that mustbe acquired, interpreted, and updated by our in-country trade experts.  Because of the legalistic and complex natureof Global Content, our inability to interpret and analyze accurately the rulesand regulations upon which our Global Content is based may expose us toliability claims from our clients in connection with our current products andfuture products.  Additionally, ourManaged Services customers view us as global trade experts.  If we perform our services in a manner thatdoes not comply with legal or regulatory requirements, our clients could facesevere penalties and they would seek recompense from us to make themwhole.  Any provisions in our agreementswith our clients designed to limit our exposure to potential product orservices liability claims may not be adequate to protect us from suchclaims.  A claim of product liability ora claim that our performance of Managed Services in a non-compliant mannerbrought against us successfully could harm our financial condition.  Even if unsuccessful, any claims could resultin costly litigation and divert management’s attention and resources.  Additionally, the effective implementation ofour products may depend upon the successful operation of third-party licensedproducts in conjunction with our products and, therefore, any undetected errorsin these licensed products may prevent the implementation or impair thefunctionality of our products, delay new product introductions, and harm ourreputation.

 

**The market for our Global Trade ManagementManaged Services and software offerings is a nascent one and the ultimatemarket size is difficult to quantify.  Ifcompanies fail to adopt our offerings, our business will be adversely affected.**

 

For most companies, Global Trade Managementis a critical but non-core business function. Because the market for third-party Global Trade Management is a nascentone, many companies may be reluctant or unwilling to utilize a third-partyservice provider to manage their global trade, and will retain these functionsin-house.  If companies fail to adoptmanaged service offerings, our business will be adversely affected.

** **

**We are encountering competition from significantly larger companiesthat possess both greater financial resources and name recognition than wepossess.**

** **

Although we believe our solutions arecurrently competitive, the market in which we operate is characterized by earlyadopters and is rapidly evolving.  We maynot be able to maintain our competitive position against current and potentialcompetitors, especially those with significantly greater financial resources,name recognition, and other resources, such as international brokers, freightforwarders, logistics companies, and ERP software companies.

 

**We may be unable to protect our proprietaryrights adequately, which could result in their unauthorized use by ourcompetitors and have an adverse impact on our revenues.**

 

Our success depends on our ability to protectour proprietary rights.  We relyprimarily on:

 

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•                  Confidentialityagreements with employees and third parties;

 

•                  Protectivecontractual provisions such as those contained in license agreements withconsultants, vendors, and clients, although we have not signed such agreementsin every case; and

•                  Copyright, tradesecret, and trademark laws.

 

Despite our efforts to protect ourproprietary rights, unauthorized parties may copy aspects of our products andobtain and use information we regard as proprietary.  Other parties may breach confidentialityagreements or other protective contracts. We may not become aware of these breaches or have adequate remediesavailable.  We may need to litigate claimsagainst third parties who infringe our intellectual property rights, which couldbe costly, time-consuming, and would divert management’s attention andresources.

 

**We may have to defend against intellectualproperty infringement claims, which could be expensive, and if we areunsuccessful, could result in substantial monetary liability and disrupt ourbusiness.**

 

We cannot be certain that our solutions donot or will not infringe valid patents, copyrights, trademarks, or otherintellectual property rights held by third parties, inside and outside theU.S.  As a result, we may be subject tolegal proceedings and claims from time to time relating to the intellectualproperty of others in the ordinary course of our business.

 

We may incur substantial expenses indefending against any third-party infringement claims, regardless of their merit.  Successful infringement claims against us mayresult in substantial monetary liability, may divert management’s attentionfrom our core business, and may disrupt our business.  In addition, if we are unsuccessful indefending such claims, we may need to obtain a license to the technology, whichmay not be available on acceptable terms or at all.

 

**Any future acquisitions may be difficult to integrate and disruptive toour operations.  We may not realize theexpected benefits from any such acquisitions, and if we cannot address thechallenges presented by acquisitions, our operating results may be harmed.**

** **

In the past, we have acquired businesses toexpand our operations or market presence, and we intend to continue ourexpansion by acquiring or investing in companies, assets or technologies thatcomplement our business and offer opportunities for growth.  These transactions involve many risks andchallenges that we might not successfully overcome, including:

 

•                                          Difficultiesin assimilating technologies, products, personnel, and operations;

 

•                                          Disruptionof our ongoing business and diversion of management’s attention from otherbusiness concerns;

 

•                                          Risksof entering markets in which we have no or limited prior experience;

 

•                                          Issuancesof equity securities that may dilute your ownership interest in our commonstock;

 

•                                          Cashpayments to, or the assumption of debt or other liabilities of, the companieswe acquire; and

 

•                                          Write-offsrelated to goodwill and other intangible assets and other adverse accountingconsequences.

 

**Your ability to influence corporate mattersmay be limited because our officers, directors, and affiliates will be able tocontrol, and Ford will be able to influence, matters requiring stockholderapproval and these parties may have interests that differ from yours.**

 

As of June 30, 2004, our officers, directors,and affiliated entities, together with Ford, beneficially owned approximately45% of the outstanding shares of our common stock.  This concentration of ownership may delay,deter, or prevent acts that would result in a change of control, which in turncould reduce the market price of our common stock.  Accordingly, these stockholders collectivelymay be able to control all matters requiring stockholder approval and, thereby,our management and affairs.  Fordbeneficially owns approximately 19% of the outstanding shares of our commonstock.  As the single largest stockholderof Vastera, Ford may exercise significant influence over corporate actsrequiring stockholder approval, including a merger or sale of Vastera.  Also, so long as Ford holds at least 5% ofour common stock, it has the right to appoint a non-voting observer to ourboard of directors.  Our officers,directors, and affiliated entities, together with Ford, may have interests thatdiffer from your interests, and their decisions may negatively impact ourfuture success..

 

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**Item 3:**   Qualitative and Quantitative DisclosuresAbout Market Risk

 

We develop solutions in the United States andmarket them in North America, and to a lesser extent, in Europe, Latin America,and the Asia-Pacific region.  Ourfinancial results could be affected by factors such as changes in foreigncurrency exchange rates or weak economic conditions in foreign markets.  With most of our sales being generated inU.S. dollars, a strengthening of the dollar could make our products lesscompetitive in foreign markets.  Wecurrently do not use financial instruments to hedge the operating expenses ofour foreign subsidiaries.  We intend toassess the need to utilize financial instruments to hedge currency exposures onan ongoing basis.

 

Amounts outstanding under our securedrevolving line of credit arrangement expose us to interest rate risk if theprime rate increases.  We hadapproximately $552,000 in variable rate debt as of June 30, 2004.  Our interest income is sensitive to changesin U.S. interest rates, particularly since the majority of our investments arein short-term instruments.  Due to theshort-term nature of our investments, we believe that there is no material riskexposure.  We do not hold or issuederivative securities, derivative commodity instruments, or other financialinstruments for trading purposes. Therefore, no quantitative tabular disclosures are required.

 

**Item 4:**   Controls and Procedures

 

An evaluation was carried out under thesupervision and with the participation of management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures (as defined inRules 13a-14 and 15d-14 under the Securities Exchange Act of 1934).  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that, as of the end ofthe period covered by this report, those disclosure controls and procedureswere adequate to ensure that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed,summarized, and reported, within the time periods specified in the Commission’srules and forms.

 

There have been no changes in our internalcontrols over financial reporting that occurred during the second quarter of2004 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

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# **PART II - OTHER INFORMATION**

 

## **Item 1:                   LegalProceedings**

 

We are periodically a party to disputesarising from normal business activities. In our opinion, resolution of these matters will not have a materiallyadverse effect upon our financial condition or our future operating results.

 

On March 14, 2001, Expeditors International of Washington, Inc.and Expeditors Tradewin, L.L.C. (collectively “Expeditors”) filed suit againstus in the United States District Court for the Eastern District of Michigan,Southern Division primarily alleging that we misappropriated certain ofExpeditors’ trade secrets in connection with our acquisition of Ford’s customsoperations, by utilizing systems and business processes that Expeditorsassisted in developing for Ford and through our employee hiring practices.  In connection with our acquisition of Ford’scustoms operations, Ford agreed to indemnify us for intellectual propertyinfringement claims, and Ford is currently indemnifying us in connection withthis litigation.  Although Ford isobligated to indemnify us of claims of intellectual property infringementarising from the property we acquired from it, Ford is not obligated toindemnify us for legal fees arising from any claims that pertained solely toour acts, upon which certain of the claims asserted in this matter were based.Trial in this matter commenced on July 15, 2004.  On August 4, 2004, the jury found in favor ofVastera.

 

In some of our software license arrangements, we have agreed toindemnify customers for any damages they sustain from a claim for intellectualproperty infringement.  Additionally,subject to specified contractual limitations on amount, under our ManagedServices agreements, we have agreed to indemnify our customers for any damagesthey sustain from our performance of Managed Services in a non-compliantmanner.  Although we do not believe thatour products infringe the intellectual property rights of any third party orthat we are performing services in a non-compliant manner, we cannot estimateour maximum liability exposure, because of the inherent uncertainty associatedwith any such claims and the varying nature of the indemnification levels towhich we have agreed.

 

## **Item 2:                   Changesin Securities and Use of Proceeds**

 

None.

 

## **Item 3:                   DefaultsUpon Senior Securities**

 

None.

 

## **Item 4:                   Submissionof Matters to a Vote of Security Holders**

 

Our Annual Meeting of Stockholders was held on May 5, 2004.  At this meeting, the following individualswere re-elected to the Board of Directors:

 
| **Terms expiring in 2007** | ** ** | **Affirmative  Votes** | ** ** | **Votes  Withheld** | ** ** |
|----------------------------|------------|------------------------|------------|---------------------|------------|
| Richard H. Kimball         |       | 39,463,962             |       | 128,171             |       |
| Richard A. Lefebvre        |       | 39,471,780             |       | 120,353             |       |
| Walter C. Arzonetti        |       | 39,501,613             |       | 90,520              |       |

 

The following additional proposal was approved at our Annual Meeting ofStockholders:

 
| ** **                                                                                                                          | ** ** | **Affirmative  Votes** | ** ** | **Negative  Votes** | ** ** | **Abstentions** | ** ** | **Broker  Non-Votes** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------|------------|-----------------|------------|-----------------------|------------|
|                                                                                                                                |       |                   |       |                |       |            |       |                  |       |
| Ratification of the selection of KPMG LLP  as the Company’s independent auditors for the fiscal year ending December 31,  2004 |       | 39,452,946             |       | 137,187             |       | 2,000           |       | —                |       |

 

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## **Item 5:**                   Other Information

 

None.

 

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## **Item 6:**                   Exhibits and Reports on Form8-K

 
| The following exhibits are included herein: |
|---------------------------------------------|
|                                        |   |   |
| (a)                                         |   | Exhibits. |
|                                        |   |   |
| 31.1                                        |   | Certification Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002, by the President and Chief Executive Officer,  dated August 6, 2004. |
|                                        |   |   |
| 31.2                                        |   | Certification Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002, by the Chief Financial Officer, dated August 6,  2004. |
|                                        |   |   |
| 32.1                                        |   | Certification Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, by the President and Chief Executive Officer,  dated August 6, 2004. |
|                                        |   |   |
| 32.2                                        |   | Certification Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, by the Chief Financial Officer, dated August 6,  2004. |
|                                        |   |   |
| (b)                                         |   | Reports on Form 8-K. |

 

On April 22, 2004, we filed a Form 8-Kfurnishing a press release that announced our financial results for the threemonths ended March 31, 2004 and presenting certain other information.

 

**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized in Dulles,Virginia on August 6, 2004.

 
|   | VASTERA, INC. |
|--------|---------------|
|   |          |   |
|   | By:           | /s/ Maria Henry |   |
|   |          | Maria Henry, |
|   |          | Chief Financial Officer  (Principal Financial Officer) |
|   |          |   |
|   | By:           | /s/ Kevin M. Boyce |   |
|   |          | Kevin M. Boyce, |
|   |          | Vice President, Finance and  Corporate Controller  (Principal Accounting Officer) |

 

**EXHIBITS**

 
| 31.1   |   | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by the  President and Chief Executive Officer, dated August 6, 2004. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                    |
| 31.2   |   | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by the Chief  Financial Officer, dated August 6, 2004.               |
|   |   |                                                                                                                                                                                                    |
| 32.1   |   | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the  President and Chief Executive Officer, dated August 6, 2004. |
|   |   |                                                                                                                                                                                                    |
| 32.2   |   | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief  Financial Officer, dated August 6, 2004.               |

 

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