**UNITEDSTATESSECURITIES 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 March 31, 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 May 5, 2004 there were 42,001,465 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 (UNAUDITED)**

 

## **Item 1:**                   FinancialStatements

 

**VASTERA, INC.AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

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

 
|                                                                                                                      |   | **March 31,  2004** |   | **December 31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                                                                                                      |   | **(Unaudited)**          |   |                        |   |
| **Assets**                                                                                                                |   |                     |   |                        |   |
| Current assets:                                                                                                           |   |                     |   |                        |   |
| Cash and cash equivalents                                                                                                 |   | $                        | 16,201 |                        | $      | 16,046 |   |
| Short-term investments                                                                                                    |   | 37,615                   |   | 40,402                      |   |
| Accounts receivable, net of allowance for  doubtful accounts of $1,142 and $994, respectively                             |   | 20,675                   |   | 17,599                      |   |
| Prepaid expenses and other current assets                                                                                 |   | 3,914                    |   | 4,212                       |   |
| Total current assets                                                                                                      |   | 78,405                   |   | 78,259                      |   |
| Property and equipment, net                                                                                               |   | 10,832                   |   | 10,806                      |   |
| Intangible assets, net                                                                                                    |   | 1,546                    |   | 1,863                       |   |
| Goodwill                                                                                                                  |   | 5,044                    |   | 5,044                       |   |
| Deposits and other assets                                                                                                 |   | 1,145                    |   | 1,292                       |   |
|                                                                                                                      |   |                     |   |                        |   |
| Total assets                                                                                                              |   | $                        | 96,972 |                        | $      | 97,264 |   |
|                                                                                                                      |   |                     |   |                        |   |
| **Liabilities and  Stockholders’ Equity**                                                                            |   |                     |   |                        |   |
| Current liabilities:                                                                                                      |   |                     |   |                        |   |
| Line of credit and capital lease  obligations, current                                                                    |   | $                        | 1,302  |                        | $      | 1,867 |   |
| Accounts payable                                                                                                          |   | 853                      |   | 921                         |   |
| Accrued expenses                                                                                                          |   | 6,090                    |   | 5,260                       |   |
| Accrued compensation and benefits                                                                                         |   | 3,244                    |   | 3,452                       |   |
| Deferred revenue, current                                                                                                 |   | 10,981                   |   | 9,451                       |   |
| Total current liabilities                                                                                                 |   | 22,470                   |   | 20,951                      |   |
| Long-term liabilities:                                                                                                    |   |                     |   |                        |   |
| Line of credit and capital lease  obligations, net of current portion                                                     |   | 488                      |   | 698                         |   |
| Deferred revenue, net of current portion                                                                                  |   | 1,999                    |   | 2,393                       |   |
| Total liabilities                                                                                                         |   | 24,957                   |   | 24,042                      |   |
| Commitments and contingencies (See Note 6)                                                                                |   |                     |   |                        |   |
|                                                                                                                      |   |                     |   |                        |   |
| Stockholders’ equity:                                                                                                |   |                     |   |                        |   |
| Common stock, $0.01 par value; 100,000  shares authorized; 41,804 and 41,745 shares issued and outstanding,  respectively |   | 418                      |   | 417                         |   |
| Additional paid-in capital                                                                                                |   | 327,332                  |   | 327,234                     |   |
| Accumulated other comprehensive loss                                                                                      |   | (1,108                   | )      | (715                        | )      |
| Deferred compensation                                                                                                     |   | —                   |   | (46                         | )      |
| Accumulated deficit                                                                                                       |   | (254,627                 | )      | (253,668                    | )      |
|                                                                                                                      |   |                     |   |                        |   |
| Total stockholders’ equity                                                                                           |   | 72,015                   |   | 73,222                      |   |
| Total liabilities and stockholders’ equity                                                                           |   | $                        | 96,972 |                        | $      | 97,264 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

3

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**VASTERA, INC.AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

 

**(UNAUDITED)**

 

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

 
|                                        |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------|--------|-----------------------------------------|--------|
|                                        |   | **2004**                                |   | **2003** |   |
| **Revenues:**                               |   |                                    |   |   |   |
| Managed services revenues                   |   | $                                       | 14,210 |   | $ | 13,615 |   |
| Software revenues                           |   | 2,269                                   |   | 2,731 |   |
| Services revenues                           |   | 4,442                                   |   | 4,598 |   |
| Total revenues                              |   | 20,921                                  |   | 20,944 |   |
|                                        |   |                                    |   |   |   |
| **Cost of revenues:**                       |   |                                    |   |   |   |
| Cost of managed services revenues           |   | 8,072                                   |   | 7,436 |   |
| Cost of software revenues                   |   | 664                                     |   | 682 |   |
| Cost of services revenues                   |   | 3,407                                   |   | 3,369 |   |
|                                        |   |                                    |   |   |   |
| **Operating expenses:**                     |   |                                    |   |   |   |
| Sales and marketing                         |   | 2,456                                   |   | 2,244 |   |
| Research and development                    |   | 2,898                                   |   | 3,037 |   |
| General and administrative                  |   | 2,797                                   |   | 2,740 |   |
| Depreciation                                |   | 1,336                                   |   | 1,301 |   |
| Intangible amortization expense             |   | 230                                     |   | 680 |   |
| Stock-based compensation                    |   | 46                                      |   | 370 |   |
| Total operating expenses                    |   | 9,763                                   |   | 10,372 |   |
|                                        |   |                                    |   |   |   |
| Loss from operations                        |   | (985                                    | )      | (915 | ) |
| Other income, net                           |   | 108                                     |   | 188 |   |
| Loss before income taxes                    |   | (877                                    | )      | (727 | ) |
| Income taxes                                |   | (82                                     | )      | (151 | ) |
|                                        |   |                                    |   |   |   |
| Net loss                                    |   | $                                       | (959   | ) | $ | (878 | ) |
|                                        |   |                                    |   |   |   |
| Basic and diluted net loss per common share |   | $                                       | (0.02  | ) | $ | (0.02 | ) |
|                                        |   |                                    |   |   |   |
| Weighted-average common shares outstanding  |   | 41,772                                  |   | 40,600 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

4

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**VASTERA, INC.AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

 

**(UNAUDITED)**

 

**(In thousands)**

 
|                                                                                                    |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                    |   | **2004**                                |   | **2003** |   |
| **Cash flows from  operating activities:**                                                              |   |                                    |   |   |   |
| Net loss                                                                                                |   | $                                       | (959   | ) | $ | (878 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:                            |   |                                    |   |   |   |
| Stock-based compensation                                                                                |   | 46                                      |   | 370 |   |
| Depreciation and intangible amortization  expense                                                       |   | 1,566                                   |   | 1,981 |   |
| Provision for allowance for doubtful  accounts                                                          |   | 239                                     |   | 96 |   |
| Amortization of revenue discounts related  to customer contracts                                        |   | 85                                      |   | 75 |   |
| Amortization of capitalized internal-use  software costs                                                |   | 226                                     |   | 123 |   |
| Changes in operating assets and  liabilities:                                                           |   |                                    |   |   |   |
| Accounts receivable                                                                                     |   | (3,371                                  | )      | (606 | ) |
| Prepaid expenses and other current assets                                                               |   | 298                                     |   | (105 | ) |
| Deposits and other assets                                                                               |   | 146                                     |   | (540 | ) |
| Accounts payable and accrued expenses                                                                   |   | 767                                     |   | (1,267 | ) |
| Accrued compensation and benefits                                                                       |   | (214                                    | )      | (94 | ) |
| Deferred revenue                                                                                        |   | 1,130                                   |   | 285 |   |
| Net cash used in operating activities                                                                   |   | (41                                     | )      | (560 | ) |
|                                                                                                    |   |                                    |   |   |   |
| **Cash flows from  investing activities:**                                                              |   |                                    |   |   |   |
| Net sales of short-term investments                                                                     |   | 2,705                                   |   | 5,068 |   |
| Acquisition of property and equipment                                                                   |   | (1,588                                  | )      | (1,157 | ) |
| Net cash provided by investing activities                                                               |   | 1,117                                   |   | 3,911 |   |
|                                                                                                    |   |                                    |   |   |   |
| **Cash flows from  financing activities:**                                                              |   |                                    |   |   |   |
| Proceeds from the exercise of stock options  and issuance of stock for the employee stock purchase plan |   | 99                                      |   | 280 |   |
| Principal payments on long-term debt                                                                    |   | (775                                    | )      | (670 | ) |
| Proceeds from equipment line of credit                                                                  |   | —                                  |   | 614 |   |
| Net cash provided by (used in) financing  activities                                                    |   | (676                                    | )      | 224 |   |
| Effect of foreign currency exchange rate  changes on cash and cash equivalents                          |   | (245                                    | )      | 24 |   |
| Net increase in cash and cash equivalents                                                               |   | 155                                     |   | 3,599 |   |
| Cash and cash equivalents, beginning of  period                                                         |   | 16,046                                  |   | 23,696 |   |
| Cash and cash equivalents, end of period                                                                |   | $                                       | 16,201 |   | $ | 27,295 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

5

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**VASTERA, INC.AND SUBSIDIARIES**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**(Unaudited)**

 

### **1.**             Basis of Presentationand 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 specific global trade function to providing completemanagement of a client’s global trade operations.  The Company has operations in the United States, Belgium, Brazil,Canada, 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 keymanagement personnel, limited protection of intellectual property andproprietary rights, uncertainty of future profitability and possiblefluctuations in financial results.

 

### **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 intangibleassets.

 

**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 the processingof the Company’s clients’ customs and shipment entries and the classifying ofclients’ goods.  Managed Servicestransaction arrangements are often subject to annual or quarterly minimumtransaction thresholds and revenues are recognized based on the lower of thecumulative actual transactions processed using a weighted-average transactionrate or the cumulative amount billable for the period.  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 anddeterminable.

 

6

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*Software Revenues*

 

Software revenues consist of term licenserevenues, perpetual software license revenues, and transaction-basedrevenues.  The Company recognizesrevenue from the sale of software products in accordance with Statement ofPosition (“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.  Term license fees are typically billedannually, quarterly or monthly.

 

Perpetual software license revenues arederived from perpetual software license arrangements and related maintenancecontracts.  Maintenance contractsinclude the right to unspecified enhancements on a when-and-if available basis,ongoing support, 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 fromimplementation, 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 are recognized based onfixed billable rates for hours delivered, and revenues on fixed pricedcontracts and are recognized as the services are performed, using thepercentage of completion method of accounting based on the ratio of costsincurred to total estimated costs to be incurred.  Losses on arrangements are recognized when known.

 

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 on amonthly basis over the term of the agreement, the remaining economic life ofthe product, or when the services 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$201,000 and $191,000 of direct labor costs in the first quarters of 2004 and2003, respectively, related to certain capitalizable tasks including the technicaldesign, system configuration and testing phases of the integrationprocess.  Judgment is involved indetermining which development tasks associated with the platform integrationare capitalizable pursuant to SOP 98-1. These costs are amortized as costs of managed services revenues over threeyears and amortization commences upon the completion of the integration to theVastera platform.  Total amortizationexpense in the first quarters of 2004 and 2003 was approximately $226,000 and$123,000, respectively.  Net capitalizedcosts as of March 31, 2004 and December 31, 2003 was approximately$1.7 million.

 

**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 March 31, 2004 andDecember 31, 2003, Ford accounted for 27% and 25%, respectively, of totalaccounts receivable.

 

**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 includes the potential dilutionthat would occur if securities or other contracts to issue common stock wereexercised or converted into common stock. As of March 31, 2004 and December 31, 2003, options topurchase approximately 9,294,000 and 8,436,000 shares of common stock wereoutstanding, respectively.  Due to theanti-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 March 31, 2004 andDecember 31, 2003, accumulated other comprehensive loss includesunrealized gains and losses on investments and foreign currency translationadjustments.  As of March 31, 2004and December 31, 2003, accumulated net unrealized gain on available forsale investments was approximately $25,000 and $107,000, respectively.  As of March 31, 2004 andDecember 31, 2003, accumulated foreign currency translation adjustment wasa loss of approximately $1.1 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 business combinationand determined to have an indefinite useful life are not amortized, but insteadtested for impairment at least annually in accordance with the provisions ofSFAS No. 142.  The Company’sassessment date is December 31 each year. SFAS No. 142 also requires that intangible assets with estimableuseful lives be amortized over their respective estimated useful lives to theirestimated residual values, and reviewed for impairment in accordance with SFASNo. 144, *Accounting for Impairment orDisposal of Long-Lived Assets*.

 

Intangible assets are amortized on astraight-line basis over their expected economic life, generally one to fiveyears.  The value assigned to the Fordand GE contracts in connection with the Ford and GE acquisitions are beingamortized as a discount to revenue over the minimum terms of the contracts.

 

**Stock Options**

 

The Company has adopted the disclosurerequirements of SFAS No. 123, *Accountingfor Stock-Based Compensation*. The Company applies Accounting Principles Board (“APB”) OpinionNo. 25, *Accounting for Stock Issued toEmployees*, and related interpretations in accounting for itsPlans.  No options granted during thefirst quarters of 2004 and 2003 were granted with exercise

 

8

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prices that were less than fair value.  The Company had deferred compensationbalances from options issued prior to 2001. The deferred compensation is recognized over the vesting period of therelated options using an accelerated method. The Company recognized compensation expense during the first quarters of2004 and 2003 of approximately $46,000 and $370,000, respectively.  As of March 31, 2004, all deferredcompensation 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  March 31,** |   |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                |   | **2004**                                |   | **2003** |   |
|                                                                                                |   |                                    |   |   |   |
| Net loss applicable to common stockholders,  as reported                                            |   | $                                       | (959   | ) | $ | (878 | ) |
| Add: stock-based compensation included in  net loss, net of tax                                     |   | 46                                      |   | 370 |   |
| Deduct: stock-based compensation determined  under the fair value method for all awards, net of tax |   | (2,873                                  | )      | (2,074 | ) |
| Net loss, pro forma                                                                                 |   | $                                       | (3,786 | ) | $ | (2,582 | ) |
| Pro forma net loss per common share                                                                 |   | $                                       | (0.09  | ) | $ | (0.06 | ) |

 

**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 March 31, 2004 andDecember 31, 2003, the balance of the restructuring reserve wasapproximately $82,000 and $112,000, respectively.  The Company paid approximately $30,000 and $430,000 of these costsin the first quarters of 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 been appliedto this acquisition, and accordingly, the results of GE’s internal US customsoperations are included in the Company’s operations beginning July 1,2003, the effective date of the acquisition.

 

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 preliminarily allocated based on fair values as follows (inthousands):

 
|                                  |   | **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  |   |

 

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Beginning July 1, 2003, the amount allocatedto the acquired technology and know-how intangible is being amortized on astraight-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 term loan matures in June 2004 andbears interest at the bank’s prime rate plus 50 basis points (4.5% as ofMarch 31, 2004).  The balance underthe term loan was approximately $502,000 and $1.0 million as of March 31,2004 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 millionor 80% of eligible accounts receivable, as defined in the loan agreement.  The Line of Credit bears interest at thebank’s prime rate (4.0% as of March 31, 2004).  The Line of Credit matures in July 2004.  There were no outstanding balances under theLine of Credit as of March 31, 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$674,000 and $490,000 as of March 31, 2004, respectively and $796,000 and$490,000, respectively as of December 31, 2003.  The Equipment Line of Credit has two interest-only paymentperiods and bears interest at the bank’s prime rate plus 50 basis points (4.5%as of March 31, 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.  The financial covenants include a minimum modified quick ratio,as defined in the loan agreement, of 2.0 to 1.0 and a maximum ratio of totalliabilities to tangible net worth of 1.5 to 1.0.  Under the most restrictive of the financial covenants, theCompany’s pro forma income cannot be less than zero for the three months endedMarch 31, 2004 or quarterly thereafter. Pro forma income (loss) is defined in the loan agreement as net income,plus interest expense, taxes, non-cash charges (including depreciation,amortization, stock-based compensation, research and development relatedcharges and one-time restructuring charges), and cash restructuring charges(not to exceed $5.0 million in the aggregate), less interest income andany one-time or non-recurring revenue. Through March 31, 2004, the Company was in compliance with thecovenants of the Company’s credit facility.

 

**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.  Asof March 31, 2004 and December 31, 2003, capital lease obligationsoutstanding were approximately $614,000 and $764,000, respectively.  Approximately $310,000 and $372,000 of thecapital lease obligation balance was current as of March 31, 2004 andDecember 31, 2003, respectively. Property and equipment includes approximately $925,000 of equipmentunder capital lease arrangements at March 31, 2004 and December 31,2003.  Related accumulated depreciationwas approximately $324,000 and $247,000 at March 31, 2004 andDecember 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 rateof approximately 6.5%.

 

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

 

The Company is periodically a party todisputes arising from normal business activities.  In the opinion of management, resolution of these matters willnot have a materially adverse effect upon the financial condition or futureoperating results of the Company.

 

10

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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 damagesand legal fees arising from claims pertaining solely to the Company’s acts,upon which certain of the claims asserted in this matter have been based.

 

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 onamount, under our Managed Services agreements, the Company has agreed toindemnify its customers for any damages they sustain from the Company’sperformance of Managed Services in a non-compliant manner.  Although management does not believe thatthe Company’s products infringe the intellectual property rights of any thirdparty or that it is performing services in a non-compliant manner, the Companycannot estimate our maximum liability exposure, because of the inherentuncertainty associated with any such claims and the varying nature of theindemnification levels to which the Company has agreed.

 

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

 

The Company has three reportable operatingsegments: managed services, software, and services.  The managed services segment generates revenues from managedservices transaction and service arrangements. The software segment generates revenues from term license, perpetuallicense, and transaction license agreements of its Global Trade Managementsolutions.  The services segmentgenerates revenues by charging its customers for implementation, managementconsulting 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.

 

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

 
|                       |   | **Three  Months Ended  March 31,** |   |
|----------------------------|--------|-----------------------------------------|--------|
|                       |   | **2004**                                |   | **2003** |   |
|                       |   | **(unaudited)**                         |   | **(unaudited)** |   |
| Revenues:                  |   |                                    |   |   |   |
| Managed services           |   | $                                       | 14,210 |   | $ | 13,615 |   |
| Software                   |   | 2,269                                   |   | 2,731 |   |
| Services                   |   | 4,442                                   |   | 4,598 |   |
| Total revenues             |   | 20,921                                  |   | 20,944 |   |
|                       |   |                                    |   |   |   |
| Gross Profit:              |   |                                    |   |   |   |
| Managed services           |   | 6,138                                   |   | 6,179 |   |
| Software                   |   | 1,605                                   |   | 2,049 |   |
| Services                   |   | 1,035                                   |   | 1,229 |   |
| Gross profit               |   | 8,778                                   |   | 9,457 |   |
|                       |   |                                    |   |   |   |
| Net loss:                  |   |                                    |   |   |   |
| Unallocated expense        |   | (9,763                                  | )      | (10,372 | ) |
| Interest income            |   | 148                                     |   | 229 |   |
| Interest and other expense |   | (40                                     | )      | (41 | ) |
| Income tax                 |   | (82                                     | )      | (151 | ) |
| Net loss                   |   | $                                       | (959   | ) | $ | (878 | ) |

 

11

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**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  March 31,** |   |
|-----------------------------|--------|-----------------------------------------|--------|
|                        |   | **2004**                                |   | **2003** |   |
|                        |   | **(unaudited)**                         |   | **(unaudited)** |   |
| United States               |   | $                                       | 16,089 |   | $ | 15,937 |   |
| Other North America         |   | 2,266                                   |   | 2,097 |   |
| Europe                      |   | 2,209                                   |   | 1,776 |   |
| Other international regions |   | 357                                     |   | 1,134 |   |
| Total revenues              |   | $                                       | 20,921 |   | $ | 20,944 |   |

 

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

 
|                          |   | **March 31,  2004** |   | **December 31,  2003** |   |
|-------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                          |   | **(unaudited)**          |   |                        |   |
| United States                 |   | $                        | 9,690  |                        | $      | 9,590 |   |
| Other North America           |   | 766                      |   | 826                         |   |
| Europe                        |   | 186                      |   | 202                         |   |
| Other international locations |   | 190                      |   | 188                         |   |
| Total long-lived assets       |   | $                        | 10,832 |                        | $      | 10,806 |   |

 

**Significant Customers**

 

During the first quarters of 2004 and 2003,the Company derived approximately 64% and 66%, respectively, of its totalrevenues from the Company’s top five customers.  For the quarters ended March 31, 2004 and 2003, Fordaccounted for 31% and 30%, of total revenues respectively.  For the quarters ended March 31, 2004and 2003, Lucent accounted for 13% and 15%, of total revenues respectively.

 

### **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 the Company’s common stock valuedat approximately $79.2 million in consideration at the time of thetransaction.  As of March 31, 2004,Ford owned 8,000,000 shares or approximately 19% of the 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 yearsand each may continue for a total of ten years.  The agreements with Ford have initially had minimum terms of fouryears and each may continue for a total of ten 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.

 

For the quarters ended March 31, 2004and 2003, Ford accounted for 31% and 30%, of total revenues respectively.  As of March 31, 2004 andDecember 31, 2003, Ford accounted for 27% and 25%, respectively, of totalaccounts receivable.

 

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 March 31, 2004and 2003, the Company paid Ford approximately $1.1 million, and$2.0 million, respectively.  In2003, these payments began to decrease as the Company began deploying its owntechnology in North America.

 

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### **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 canceled options remained ineffect for the replacement options.  TheCompany deferred the issuance of annual option grants to employees during thissix-month period and accordingly, in April 2003, the Company issuedadditional options to purchase 930,000 shares of common stock to theseemployees at an exercise price of $4.06 per share.

 

The Company applies APB Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations inaccounting for it stock option plan. The Company 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 amountsrepresent the aggregate difference between the exercise price and the fairvalue for accounting purposes of the underlying shares of common stock at thedate of grant.  This amount is includedas a component 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  March 31,** |   |
|-----------------------------------|--------|----------------------------------------|--------|
|                              |   | **2004**                               |   | **2003** |   |
|                              |   | **(unaudited)**                        |   | **(unaudited)** |   |
| Cost of managed services revenues |   | $                                      | 1      |   | $ | 10 |   |
| Cost of software revenues         |   | —                                 |   | 2 |   |
| Cost of services revenues         |   | 6                                      |   | 52 |   |
| Sales and marketing               |   | 19                                     |   | 148 |   |
| Research and development          |   | 4                                      |   | 36 |   |
| General and administrative        |   | 16                                     |   | 122 |   |
| Total stock-based compensation    |   | $                                      | 46     |   | $ | 370 |   |

 

### **10.**          SupplementalInformation:

 

# **Cash Flow Information**

 

Cash paid for interest was approximately$28,000 and $43,000 for the three months ended March 31, 2004 and 2003,respectively.  Noncash activities wereas follows (in thousands):

 
|                                  |   | **Three Months Ended  March 31,** |   |
|---------------------------------------|--------|----------------------------------------|--------|
|                                  |   | **2004**                               |   | **2003** |   |
|                                  |   | **(unaudited)**                        |   | **(unaudited)** |   |
| Increase in capital lease obligations |   | $                                      | — |   | $ | 866 |   |
|                                       |        |                                        |        |  |  |  |  |

 

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## **Item 2**:   Management’s Discussion andAnalysis of Financial Condition and Results of Operations

 

*The followingdiscussion and analysis of our financial condition and results of operationsshould be read in conjunction with our condensed consolidated financialstatements and related notes appearing elsewhere in this Report, which aredeemed to be incorporated into this section. Some of the statements we make in “Management’s Discussion and Analysisof Financial Condition and Results of Operations” and elsewhere in this Reportconstitute forward-looking statements within the meaning of Section 21E ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These statements involve known and unknownrisks, uncertainties and other factors that may cause our actual results,levels of activity, performance or achievements as expressed or implied by suchforward-looking statements not to be achieved fully.  These forward-looking statements relate to future events and ourfuture financial performance.  In somecases, 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 comparablewords.  These statements are onlypredictions and included risks and uncertainties particularly those describedin this Report under 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 international market.  We have three major product and servicesofferings, which are: TradeSphere Solutions; Trade Management Consulting; andManaged Services.  The foundation uponwhich our product and services offerings are based is our collection ofproprietary processes, data, rules, and regulations, which we call our GlobalTrade 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 Managementsolutions.  **TradeSphere Solutions** is our suite of software solutions thathelps manage critical trade processes, and provides visibility into shipmentand carrier performance.  **Trade Management Consulting** is ourconsulting services offering that applies our global trade expertise and ourproprietary methodologies.  Ourconsulting services range from performing opportunity and complianceassessments to implementing detailed strategic analyses designed to improve aclient’s global trade practices.  **Managed Services** is our business processoutsourcing offering through which we combine our Global Trade Content, tradeexpertise, and technology to improve client regulatory compliance and reducetransaction processing costs.  We offerManaged Services to address all or a portion of a client’s global tradeoperations, ranging from one or more specific global trade functions toproviding a complete suite of Managed Services.

 

The potential market into which we offer our productsand services is an expansive one.  Ourproduct and services offerings, however, are new to their targetedaudience.  While our offerings arecritical to a company’s remaining compliant with import and export rules andregulations, generally our offerings are not core to the business needs of acompany.  This can often mean that thedecision as to whether to purchase one of our solutions is predicated more onexpected cost savings to be achieved by an entity than it is upon enhancedcompliance.  In 2001 and 2002, our salescycle averaged approximately six to nine months for software sales and nine to12 months for Managed Services sales. In 2003, however, we experienced a lengthening of these cycle times.

 

During 2003 and the first quarter of 2004, weexperienced a significant slowing in the rate of growth of our revenues.  This slowing in growth rates reflects theimpact of extended average sales cycle coupled with sales of Managed Servicesand software at lower than expected levels. Total revenues during 2003 and the first quarter of 2004 demonstratedonly modest growth, especially when compared to the revenue growth rates weexperienced in 2001 and 2002.  Totalsales of Managed Services and software for 2003 and the first quarter of 2004were lower than planned and considerably lower than what we achieved in theprior three years.  We expect that ourrevenues will remain at or below our 2003 revenue level until such time as wecan accelerate the rate of our sales growth.

 

In 2003, we implemented several expensereduction activities to help offset the lack of aggregate revenue growth andachieve profitability targets.  Weexpected that these cost reduction actions would be short in duration.  Moreover, we expected to return tonormalized spending levels once new sales reached established targets.  We did not, however, achieve our anticipatedsales and, accordingly, the desired outcome was not achieved.  The expense reduction actions taken in 2003have slowed our progress in sales and marketing, product development andManaged Services operations.  To satisfycustomer expectations for product quality better, to serve our Managed Servicescustomers better, and to re-invest in sales and marketing, and re-invigorateour revenue growth, we 

 

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expect to increase spending on operating expenses by $2.0 millionto $3.0 million in 2004, a portion of which occurred in the first quarterof 2004.  Additionally, we anticipatespending more on our Managed Services operations in 2004 than we did in 2003and in the first quarter 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 may require significant investments in therelated infrastructure, the costs associated with these Managed Servicesagreements are greater in the initial year, and in certain circumstances exceedthe revenue recognized in the initial year, than in the later years, when werealize productivity improvements from these infrastructure investments.

 

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 services lines andconsolidating and reorganizing our geographic locations and will continue doingso through 2004.  In doing so, weanticipate incurring costs associated with exiting contractual relationshipsand terminating personnel.  Althoughmanagement does not currently believe such costs will be material, we cannotyet quantify them or the effects these actions may have on future revenues.

 

**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 common stock valued atapproximately $79.2 million in consideration at the time of the transaction.  As of March 31, 2004, Ford owned 8,000,000shares 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, and Germany.  The agreements with Ford have initially hadminimum terms of four years and each may continue for a total of tenyears.  Our agreement with Ford U.S.provides for billing Ford at a fixed annual rate of $11.8 million for theremaining life of the agreement, beginning January 1, 2003.

 

For the quarters ended March 31, 2004and 2003, Ford accounted for 31% and 30%, of total revenues respectively.  As of March 31, 2004 andDecember 31, 2003, Ford accounted for 27% and 25%, respectively, of totalaccounts receivable.

 

We reimburse Ford for expenses incurred by Fordfor the use of its facilities, the costs of leased employees, and themaintenance and expenses related to the acquired technology.  For the quarters ended March 31, 2004and 2003, we paid Ford approximately $1.1 million, and $2.0 million,respectively.  In 2003, these paymentsbegan to decrease as we began deploying our own technology in North America.

 

**Lucent**

 

In August 2001, we entered into afive-year agreement with Lucent Technologies to manage Lucent’s global tradeoperations in the United States.  FromAugust 2001 through August 2004, we expect to generate approximately$25 million in aggregate revenues from our agreement with Lucent U.S.  Subsequently, we expanded our relationshipwith Lucent by assuming responsibility for administering and managing Lucent’sglobal trade operations in other countries in North America, Europe and inBrazil.  For the quarters endedMarch 31, 2004 and 2003, Lucent accounted for 13% and 15%, of totalrevenues respectively.

 

In August 2004, Lucent will be able toterminate the agreement for convenience with six months notice.  We anticipate negotiating an extension tothe agreement prior to that date.

 

**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.  Theresults of GE’s internal U.S. customs import operations have been included inour operations since July 1, 2003, the effective date of theacquisition.  In exchange for itsinternal U.S. customs import operations, GE received $3.0 million in cashand 51,046 shares of our common stock, valued at approximately $312,000.  The purchase price, including transactioncosts of approximately $62,000, totaled approximately $3.4 million.

 

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**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. Our preparation of this Report requires us to make estimates andassumptions that affect the reported amount of assets and liabilities,disclosure of contingent assets and liabilities at the date of our financialstatements, and the reported amounts of revenue and expenses during thereporting period.  We cannot be surethat actual results will not differ from those estimates.

 

We consider our accounting policies relatedto revenue recognition, internal use software, and goodwill 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 Note 2 of the Notes to ourCondensed Consolidated Financial Statements. Our preparation of this report requires us to make estimates andassumptions that affect the reported amount of assets and liabilities,disclosure of contingent assets and liabilities at the date of our financialstatements, and the reported amounts of revenue and expenses during thereporting period.  We cannot be certainthat actual results will not 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 transaction arrangementssubject to annual minimums and for those arrangements where the amount billablefor interim periods is limited to the pro-rata portion of the annual minimum,transactions processed in excess of the minimum in each period are notbillable, and, therefore, revenue is not recognized until the end of therelated year.  Certain Managed Servicesarrangements are based upon a fixed services fee.  Revenues associated with these arrangements are recognizedratably over the term of the arrangement and limited to the amountsbillable.  In addition, we may receiveannual gainsharing fees under certain Managed Services arrangements based on apercentage of the client’s annual cost savings, as defined in those ManagedServices 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 of software products inaccordance 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 the contract term.  Term license arrangements typically rangefrom three to five years.  To the extentwe host the software for our customers, the hosting fee is recognized ratablyover the contract period in conjunction with the recognition of the licensefee.  Term license fees are typicallybilled annually, quarterly or monthly.

 

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

 

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licenses at the end of the three-year amortization period.  Revenues from maintenance contracts arerecognized ratably over the contract term, typically one year.  To the extent we host the software for ourcustomers, the hosting fee is recognized ratably over the contract period inconjunction 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 timeand materials contracts are recognized based on fixed billable rates for hoursdelivered, 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 managed services revenuesover three years, and amortization commences upon the completion of theintegration 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. To the extent the carrying amount of a reporting unit exceeds the fairvalue, we are required to compare the implied fair value, as defined, ofreporting unit goodwill with the carrying amount to determine the amount ofimpairment.  The fair value and theimplied fair value, as defined, is determined for the reporting units takinginto consideration many factors, such as current performance, futureprojections, and market conditions.

 

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 an assetmay not be recoverable.  Recoverabilityis measured by a comparison of the carrying amount of an asset to the estimatedundiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceedsits estimated future cash flows, an impairment charge is recognized by theamount by which the carrying amount of the asset exceeds the fair value of theasset.  The estimated undiscountedfuture cash flows of an asset takes into consideration many factors, such ascurrent performance, future projections, and market conditions.

 

**Management’s Disclosure of Non-GAAP FinancialMeasures**

 

From time to time, management makes public disclosures, other than inour SEC filings on Form 10-Q or Form 10-K, of certain financialmeasures such as pro forma earnings (loss) and EBITDA, as adjusted (as definedbelow), that are not considered GAAP financial measures.  On April 22, 2004, we issued anearnings press release and included it as an exhibit to a Form 8-K wefiled with the SEC the same day.  Thispress release contained reconciliations of pro forma earnings (loss) andEBITDA, as adjusted, to our reported net loss.

 

Management believes that pro forma earnings (loss) is a usefulsupplement to GAAP financial measures as it measures our operating performanceand liquidity for the reporting period because it excludes those chargesassociated with past events that are not related to current operations or thatare not relevant to current operations and will not be in the foreseeablefuture.  Because we have such asignificant balance of net operating losses that we will be able to carryforward and apply against future U.S. tax liabilities, we 

 

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exclude income taxes from the calculation of pro forma earnings(loss).  Although we do pay income taxeson a portion of the revenues we generate, the aggregate amount of such paymentsis not material 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 compensationexpense pertains to deferred non-cash compensation charges recorded inconnection with our initial public offering of common stock and from prioracquisitions.

 

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, to measureand evaluate our operating performance and liquidity, because it reflects theresources available from the reporting period’s operations for operating andstrategic opportunities.  Theseopportunities include investing in the business, meeting financing obligations,making strategic acquisitions, and paying other cash obligations.  Therefore, management believes EBITDA, asadjusted, is an appropriate measure by which to evaluate our operatingperformance 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 EndedMarch 31, 2004 to the Quarter Ended March 31, 2003**

 

***Revenues***

 
|             |   | **For the  Three Months Ended March 31,** |   |                  |   |                |   | **Future  Expected**  |   |
|------------------|--------|------------------------------------------------|--------|-----------------------|--------|---------------------|--------|-----------------------|--------|
|             |   | **2004**                                       |   | **2003**              |   |                |   |                  |   | **% of** |   |
|             |   | **Amount**                                     |   | **Percent of  Total** |   | **Amount**          |   | **Percent of  Total** |   | **Increase  (Decrease)** |   | **Total  Revenues** |   |
|             |   | **(in  thousands)**                            |   |                  |   | **(in  thousands)** |   |                  |   | **(in thousands)** |   |   |   |   |   |
|             |   |                                           |   |                  |   |                |   |                  |   |   |   |   |   |   |   |
| Managed services |   | $                                              | 14,210 |                  | 68     | %                   | $      | 13,615                |   | 65 | % | $ | 595 |   | 4 | % | 65-70 | % |
| Software         |   | 2,269                                          |   | 11                    |   | 2,731               |   | 13                    |   | (462 | ) | (17 | ) | 10-15 |   |
| Services         |   | 4,442                                          |   | 21                    |   | 4,598               |   | 22                    |   | (156 | ) | (3 | ) | 15-20 |   |
| Total revenues   |   | $                                              | 20,921 |                  | 100    | %                   | $      | 20,944                |   | 100 | % | $ | (23 | ) | 0 | % |   |   |

 

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

 

The increase in managed services revenues from the three months endedMarch 31, 2003 to the three months ended March 31, 2004 primarilyresulted from the following:

 

•      Revenue fromour new contract with GE, which began on July 1, 2003.

•      Other newbusiness revenue from customer contracts signed in 2003.

•      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.

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

 

Our top five Managed Services customers accounted for 88% and 94% ofour managed services revenues in the quarters ended March 31, 2004 and2003, respectively.  Our non-US managedservices revenues increased to $4.0 million in the first quarter of 2004from approximately $3.3 million recognized in the first quarter of 2003.  This increase resulted from new customercontracts in Europe.  The favorableeffect on revenues of changes in exchange rates between the quarters endedMarch 31, 2003 and 2004 was approximately 2% of managed servicerevenues.  We expect non-US managedservices revenues to continue to increase as a percentage of managed servicesrevenues in the future.

 

In 2004, we expect revenues on a few of our customer contracts todecrease due to reductions in the base minimum fees associated with the step-downin the minimum number of transactions in those contracts.  We estimate between approximately

 

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$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 thesecontracts.  If we fail to maintain orexpand the scope of services provided under these contracts, our revenues fromthese contracts will decrease.

 

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

 

The decrease in revenues resulted from the expiration of a $2.5 millionannual license fee from a Japanese customer, the drop-off of fully recognizedrevenue 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 accountedfor 20% and 38% of our total software revenues during the three months endedMarch 31, 2004 and 2003, respectively.

 

We expect 2004 software revenues to decrease because we do not expectnew business to offset the expiration of the $2.5 million per year licensefee from a Japanese customer and the drop-off of revenues from perpetuallicenses.

 

***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, lessthan 30% of our services revenues have been derived from implementationservices performed in connection with new software license sales.  The decrease in revenues resulted fromimplementation services performed for a few customers in the first quarter of2004 that were deferred because we concluded the fees were not fixed oruncertainty existed regarding the collectibility of the fees.

 

Our five largest services customers accounted for 51% and 55% of ourservices revenues in three months ended March 31, 2004 and 2003,respectively.

 

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

 

***Cost of Revenues***

 
|                   |   | **For the  Three Months Ended March 31,** |   |                                   |   |                |   |
|------------------------|--------|------------------------------------------------|--------|----------------------------------------|--------|---------------------|--------|
|                   |   | **2004**                                       |   | **2003**                               |   |                |   |   |   |
|                   |   | **Amount**                                     |   | **Percent of  Segment  Revenues** |   | **Amount**          |   | **Percent of  Segment  Revenues** |   | **Increase  (Decrease)** |   |
|                   |   | **(in  thousands)**                            |   |                                   |   | **(in  thousands)** |   |   |   | **(in  thousands)** |   |   |   |
|                   |   |                                           |   |                                   |   |                |   |   |   |   |   |   |   |
| Managed services       |   | $                                              | 8,072  |                                   | 57     | %                   | $      | 7,436 |   | 55 | % | $ | 636 |   | 9 | % |
| Software               |   | 664                                            |   | 29                                     |   | 682                 |   | 25 |   | (18 | ) | (3 | ) |
| Services               |   | 3,407                                          |   | 77                                     |   | 3,369               |   | 73 |   | 38 |   | 1 |   |
| Total cost of revenues |   | $                                              | 12,143 |                                   | 58     |                | $      | 11,487 |   | 55 |   | $ | 656 |   | 6 |   |

 

**Cost of managed services revenues.**  Cost of managed services revenues consist ofsalaries and related expenses for our Managed Services organization andamortization of capitalized internal use software costs related toimplementation and integration of our trade management platform to our ManagedServices operation.

 

The cost increase in absolute dollars and as a percentage of managedservices revenues was largely due to 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.**  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.

 

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**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 relatively flat with prior year as ournumber of personnel and other resource costs are consistent period to period.

 

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 March 31,** |   |                            |   |                |   |
|----------------------------|--------|------------------------------------------------|--------|---------------------------------|--------|---------------------|--------|
|                       |   | **2004**                                       |   | **2003**                        |   |                |   |   |   |
|                       |   | **Amount**                                     |   | **Percent of  Total  Revenues** |   | **Amount**          |   | **Percent of  Total  Revenues** |   | **Increase  (Decrease)** |   |
|                       |   | **(in  thousands)**                            |   |                            |   | **(in  thousands)** |   |   |   | **(in thousands)** |   |   |   |
|                       |   |                                           |   |                            |   |                |   |   |   |   |   |   |   |
| Sales and marketing        |   | $                                              | 2,456  |                            | 12     | %                   | $      | 2,244 |   | 11 | % | $ | 212 |   | 9 | % |
| Research and development   |   | 2,898                                          |   | 14                              |   | 3,037               |   | 15 |   | (139 | ) | (5 | ) |
| General and administrative |   | 2,797                                          |   | 13                              |   | 2,740               |   | 13 |   | 57 |   | 2 |   |
| Depreciation               |   | 1,336                                          |   | 6                               |   | 1,301               |   | 6 |   | 35 |   | 3 |   |
|                            |        |                                                |        |                                 |        |                     |        |  |  |  |  |  |  |  |  |  |

 

**Sales and marketing.**  Sales and marketing expense consistsprimarily of salaries and commissions earned by sales and marketing personnel,public relations, trade shows and travel expenses related to both promotionalevents and direct sales efforts.

 

The increase in sales and marketing expense resulted from an increasein bad debt expense and severance costs related to our former Vice President ofSales and Marketing.  We expect salesand marketing expense to increase in absolute dollars as we hire additionalsales personnel and invest in 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 decrease in research and development costs was primarily fromcost-reduction actions we took, principally personnel reductions to lowersalaries and travel costs, partially offset by new spending.  These actions included a reduction inpersonnel and the transfer of some of our research and development activitiesto locations with lower labor costs.  Weanticipate research and development expense to increase in absolute dollars in2004 as we make additional investments in our technology development.

 

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

 

General and administrative expense was relatively constant.  We expect general and administrative expenseto increase slightly when we further expand our operations in Europe and Asia.

 

**Depreciation.**  The increase resulted from the depreciationof fixed assets we purchased to build the technology infrastructure needed tosupport growth of our business.  Most ofthese new assets 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 March 31,** |   |                                |   |                |   |
|---------------------------------|--------|------------------------------------------------|--------|-------------------------------------|--------|---------------------|--------|
|                            |   | **2004**                                       |   | **2003**                            |   |                |   |   |   |
|                            |   | **Amount**                                     |   | **Percent of  Total  Revenue** |   | **Amount**          |   | **Percent of  Total  Revenue** |   | **Decrease** |   |
|                            |   | **(in  thousands)**                            |   |                                |   | **(in  thousands)** |   |   |   | **(in  thousands)** |   |   |   |
|                            |   |                                           |   |                                |   |                |   |   |   |   |   |   |   |
| Intangible amortization expense |   | $                                              | 230    |                                | 1      | %                   | $      | 680 |   | 3 | % | $ | (450 | ) | (66 | )% |
| Stock-based compensation        |   | 46                                             |   | —                              |   | 370                 |   | 2 |   | (324 | ) | (88 | ) |
|                                 |        |                                                |        |                                     |        |                     |        |  |  |  |  |  |  |  |  |  |

 

**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.  Because we record stock based compensationon an accelerated basis, the expense incurred during the quarter endedMarch 31, 2004 was lower than the expense incurred during the quarterended March 31, 2003.  The deferredcompensation balance was zero as of March 31, 2004.

 

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

 
|                         |   | **For the  Three Months Ended March 31,** |   |               |   |
|------------------------------|--------|------------------------------------------------|--------|--------------------|--------|
|                         |   | **2004**                                       |   | **2003**           |   | **Increase  (Decrease)** |   |
|                         |   | **(in thousands)**                             |   | **(in thousands)** |   | **(in thousands)** |   |   |   |
|                         |   |                                           |   |               |   |   |   |   |   |
| Other income (expenses), net |   | $                                              | 108    |               | $      | 188 |   | $ | (80 | ) | (43 | )% |
| Income taxes                 |   | (82                                            | )      | (151               | )      | 69 |   | (46 | ) |
|                              |        |                                                |        |                    |        |  |  |  |  |  |  |  |

 

**Other income (expenses), net.**  Other income (expenses), net fluctuatesbased on the amount of cash balances available for investment, borrowings underour lines of credit, interest and other expenses related to our equipmentborrowings, and any realized gains and losses on investments.  The decrease resulted primarily from lowercash available for investment and lower borrowings under our credit facility.

 

**Income taxes.**  For the three months ended March 31,2004 and 2003, our income tax provision was comprised of federal, state, andforeign taxes.  We have recorded avaluation allowance for the full amount of our net deferred tax assets as aresult of the uncertainty surrounding the timing of the realization of thesefuture tax benefits.  The decrease inincome tax expense resulted 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.

 

**Liquidity and Capital Resources**

 

***Obligations***

 

*Lines of Credit*

 

We have a term loan, a secured revolving line of credit, and anequipment line of credit with Comerica Bank. The term loan matures in June 2004 and bears interest at the bank’sprime rate plus 50 basis points (4.5% as of March 31, 2004).  The balance outstanding under the term loanwas approximately $502,000 and $1.0 million as of March 31, 2004 andDecember 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 (4.0% as of March 31, 2004) and matures inJuly 2004.  There was nooutstanding balance under the revolving line of credit as of March 31,2004 and December 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,

 

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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 $674,000 and $490,000 as of March 31, 2004, respectively and$796,000 and $490,000, respectively as of December 31, 2003.  The Equipment Line of Credit has two interest-onlypayment periods and bears interest at the bank’s prime rate plus 50 basispoints (4.5% as of March 31, 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.  The financial covenantsinclude a minimum modified quick ratio, as defined in the loan agreement, of2.0 to 1.0 and a maximum ratio of total liabilities to tangible net worth of1.5 to 1.0.  Under the most restrictiveof these financial covenants, our quarterly pro forma income (loss), asdefined, cannot be less than zero.  Proforma income (loss) is defined in the loan agreement as net income, plusinterest expense, taxes, non-cash charges (including depreciation,amortization, stock-based compensation, impairment charges, research anddevelopment related charges and one-time restructuring charges), and cashrestructuring charges (not to exceed $5.0 million in the aggregate), lessinterest income and any one-time or non-recurring revenue.  Through March 31, 2004, we were incompliance with these covenants and expect to be in compliance for at least thenext 12 months.

 

We expect to obtain a new credit facility to replace the current onethat expires in July 2004.

 

*Leases*

 

We have various capital leases with 36-month to 48-month repaymentperiods.  In March 2003, weobtained a new equipment leasing arrangement with a vendor for approximately$886,000.  Amounts borrowed are due over36 months.  Total capital leaseobligations outstanding as of March 31, 2004 and December 31, 2003,were approximately $614,000 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 responsible for 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.

 

***Cash Flows***

 
|                                                                        |   | **For the  Three Months Ended March 31,** |   |
|-----------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                        |   | **2004**                                       |   | **2003** |   |
|                                                                        |   | **(in  thousands)**                            |   | **(in  thousands)** |   |
|                                                                        |   |                                           |   |   |   |
| Cash and cash equivalents and short-term  investments, end of quarter       |   | $                                              | 53,816 |   | $ | 55,535 |   |
| Cash and cash equivalents and short-term  investments, beginning of quarter |   | 56,448                                         |   | 56,957 |   |
| Net decrease in cash and cash equivalents  and short-term investments       |   | $                                              | (2,632 | ) | $ | (1,422 | ) |

 

The net decrease in cash and cash equivalents and short-terminvestments is primarily due to the following:

 

**•**              Increased capital expenditures;

 

**•**              Lower cash payments for restructuringactivities;

 

**•**              Less cash used in operations; and

 

**•**              Lower borrowings from credit facility.

 

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

 

We intend to continue investing in the expansion of our business,particularly to 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 Servicesoperations in 2004 than we did in 2003. Our future liquidity and capital requirements will depend on numerousfactors, including:

 

•              The costs and timingof expansion of our sales and marketing activities;

 

•              The costs and timingof expansion of our operating capabilities;

 

•              The costs and timingof our product development efforts and the success of those developmentefforts;

 

•              The extent to whichour existing and new products and services gain market acceptance;

 

•              The level and timingof our revenues;

 

•              The costs involvedin maintaining and enforcing our intellectual property rights; and

 

•              Available borrowingsunder line of credit and capital lease arrangements.

 

Accordingly, until we generate and sustain profits from our operationsto fund these investments fully, our cash, cash equivalents, and short-terminvestments are likely to continue to decline. In addition, we may use cash resources to fund acquisitions ofcomplementary businesses and technologies. We believe that our current cash resources will be sufficient to meetour working capital and capital requirements for at least the next12 months.  Thereafter, we may findit necessary to obtain additional equity or debt financing.  In the event that we need additionalfinancing, we may not be able to raise it on terms acceptable to us, if at all.

 

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**Risks Relating to Our Business**

 

*Before deciding toinvest in our Company or to maintain or increase your investment, you shouldconsider carefully the risks described below, in addition to the otherinformation contained in this report and in our other filings with the SEC,including our subsequent reports on Forms 10-K, 10-Q and 8-K.  The risks and uncertainties described beloware not the only ones facing our 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 March 31,2004 was approximately $254.6 million. We believe that the success of our business depends on our ability toincrease revenues and to manage our operating expenses.  If our revenues fail to grow at anticipatedrates or our operating expenses are not properly managed, we may not be able toachieve or maintain profitability, which would increase the possibility thatthe value of your investment will decline. Although we generated positive cash flows from operations in 2003, 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 March 31, 2004, wehad cash and short-term investments of $53.8 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 ourManaged Services business is predicated on our ability to leverage ourinvestment in our technology and processes to lower our per transaction coststo the lowest level possible.  As acritical element of our strategy, we intend to continue providing ManagedServices to our current and future clients. These services range from providing operational management for a singleglobal trade process to managing 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 effectively lowering our costs ofdelivery to acceptable levels, we may be unable to achieve a level of grossmargin necessary to achieve and sustain profitability.  Additionally, if we are unable to performour obligations under our agreements with Ford, Lucent Technologies or NortelNetworks or to provide Managed Services successfully to our other clients, wewould experience a significant reduction in our revenues, increases in ourcosts, and damage to our reputation, which would adversely affect our businessand results of operations.

 

**Our revenues are concentrated among a fewcustomers.  Therefore, our business successis dependent on our maintaining good relationships with these customers.**

 

In 2003, 2002, and 2001, wederived approximately 64%, 59%, and 67%, respectively, of our total revenuesfrom our top five customers.  During thefirst quarters of 2004 and 2003, we derived approximately 64% and 66%,respectively, of our total revenues from our top five customers.  For the quarters ended March 31, 2004and 2003, Ford accounted for 31% and 30%, of total revenues respectively.  For the quarters ended March 31, 2004 and2003, Lucent accounted for 13% and 15%, of total revenues respectively.  We expect this customer concentration toexist for the foreseeable future.  Wehad no other customer that accounted for greater than 10% of our revenues forthe periods noted.  As we continue toexpand our relationships with existing Managed Services customers and if wecontinue to sign large contracts with new customers, each such relationshipwill be of added significance to us. Additionally, if we are unable to sign contracts that generatesignificant revenues, this heavy concentration of customers will persist, whichcould cause us to become even more dependent on each of our existing largecustomers.  We also expect to continueto derive a significant portion of our total revenues from Ford, Lucent andother top five customers making up the concentration for at least the nextseveral years.  Some of our agreementspermit a customer to terminate for convenience after a specified period oftime.  We cannot assure you that we willbe able to maintain or renew these agreements. If any of these events occur, our results of operations and financialcondition would be adversely affected.

 

**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 agreements contain a specified timeperiod during which our customers have guaranteed minimum fixed levels ofrevenues to us.  As these time periodsexpire, our customers have, and can be expected to continue, indicated

 

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their 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 our clients have changed their business models significantly byoutsourcing various business functions and using contract manufacturers.  The effects of such changes in ourcustomers’ business models may include a reduction in transaction volumes, asimporting and exporting of goods and parts may now occur through third partycontract manufacturers and outsourcing companies.  If our customers’ transaction volumes decline significantly andwe are unable to add the third-party contract manufacturers and outsourcingcompanies as customers, our revenues will decline, which would have an adverseimpact 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 GlobalTrade Management solutions depends on our ability to obtain or access thecomplex rules and regulations published by foreign governments governing aparticular country’s import and export of goods.  The foundation of our solutions, Global Content, is subject torapid change at the initiative of foreign governments based on factors beyondour control.  Any changes in a country’srules and regulations relating to global trade that we are unable to include inour Global 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 analystsand investors, 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 significant customers;

 

•              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 our control.  Due to the foregoing factors, our annual orquarterly results of operations may not meet the expectations of securitiesanalysts and investors, which is likely to cause the price of our common stockto decline.

 

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

 

During the past21 months, we have hired three new people into our executive managementteam and we replaced the 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. Our management team must develop and execute upon a sound andappropriate strategy to grow revenues and achieve significantprofitability.  If the new managementteam is unable to develop a sound and appropriate strategy, or if it is unableto execute upon such a strategy, our business will be adversely affected.

 

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

 

Our future performance willdepend largely on the efforts and abilities of our senior executives, keytechnical, professional services, sales and marketing and managerialpersonnel.  This dependence is extremelyimportant to our business because personal relationships are a critical elementof obtaining and maintaining clients. Also, we are dependent upon our technical personnel to enhance ourtechnology platforms so that our business remains competitive.  Our success will depend on our ability toattract and retain these key employees in the future.  The market for such individuals is extremely competitive, and wemay not find qualified replacements for personnel who leave us.  The loss of, or the inability to attract,any one or more of our key personnel may harm our ability to develop and manageour 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 toexpand our current international operations substantially and enter newinternational markets.  This expansionwill require significant 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:

 

•              Language barriers,conflicting international business practices and other difficulties related tothe management and administration of a global business;

 

•              Longer sales cyclesassociated with educating foreign clients about the benefits of our productsand services;

 

•              Currencyfluctuations and exchange rates;

 

•              Difficulty inrepatriating cash from some foreign jurisdictions;

 

•              Longer collectiontime from foreign clients;

 

•              Multiple, andpossibly overlapping, tax structures and the burdens of complying with a widevariety of foreign laws;

 

•              The need to considercharacteristics unique to technology systems used internationally; and

 

•              Economic orpolitical 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 continueexpanding our operations 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 ismade.  Because of the significant numberof people with whom we must interact and the complexity of our software andManaged Services offerings, our sales cycle is lengthy and variable in nature,which makes it difficult for us to predict when or if sales will occur.  Therefore, we may experience an unexpectedshortfall in sales.**

 

Due to the inherentcomplexities associated with global trade and the myriad of rules andregulations governing global trade, our software and Managed Services solutionsare very complex.  Additionally, manyprospects face regulatory compliance issues of which

 

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they are unaware prior to us performing anydue diligence.  Because of the complexityof our 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 educateso many distinct individuals during the sales cycle, revenues forecasted from aspecific client for a particular quarter may be delayed to anotherquarter.  Consequently, we mayexperience an unexpected shortfall in sales, which could adversely affect ouroperating results.

 

**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 fromseveral companies on a non-exclusive basis that we have integrated into ourTradeSphere product suite.  Thistechnology includes development tools and facilities from IBM (WebSphere and MQSeries) and Forte, which was acquired by Sun Microsystems.  Our license with Sun Microsystems expires onDecember 31, 2005, and our license with IBM expires on June 30,2006.  If we cannot renew thesetechnology licenses, we likely would face delays in the licensing of ourTradeSphere products until equivalent 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 oursoftware solutions and Managed Services, Global Content, is a rules-basedapplication that provides comprehensive management of government traderegulations and programs that must be acquired, interpreted, and updated by ourin-country trade experts.  Because of thelegalistic and complex nature of Global Content, our inability to interpret andanalyze accurately the rules and regulations upon which our Global Content isbased may expose us to liability claims from our clients in connection with ourcurrent products and future products. Additionally, our Managed Services customers view us as global tradeexperts.  If we perform our services ina manner that does not comply with legal or regulatory requirements, ourclients could face severe penalties and they would seek recompense from us tomake them whole.  Any provisions in ouragreements with our clients designed to limit our exposure to potential productor services 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 couldresult in costly litigation and divert management’s attention and resources.  Additionally, the effective implementationof our products may depend upon the successful operation of third-partylicensed products in conjunction with our products and, therefore, anyundetected errors in these licensed products may prevent the implementation orimpair the functionality of our products, delay new product introductions, andharm our reputation.

 

**The market for our Global Trade ManagementManaged Services and software offerings is a nascent one, and if companies failto adopt our offerings, our business will be adversely affected.**

 

For most companies, GlobalTrade Management is a critical but non-core business function.  Because the market for third-party GlobalTrade Management is a nascent one, many companies may be reluctant or unwillingto utilize a third-party service provider to manage their global trade, andwill retain these functions in-house. If companies fail to adopt managed service offerings, our business willbe adversely affected.

 

**We are encounteringcompetition from significantly larger companies that possess both greaterfinancial resources and name recognition than we possess.**

** **

Although we believe oursolutions are currently competitive, the market in which we operate ischaracterized by early adopters and is rapidly evolving.  We may not be able to maintain ourcompetitive position against current and potential competitors, especiallythose with significantly greater financial resources, name recognition, andother resources, such as international brokers, freight forwarders, andlogistics 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 rely primarilyon:

 

•      Confidentialityagreements with employees and third parties;

 

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

•      Copyright,trade secret, 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 confidentiality agreements or otherprotective contracts.  We may not becomeaware of these breaches or have adequate remedies available.  We may need to litigate claims against thirdparties who infringe our intellectual property rights, which could be costly,time-consuming, and would divert management’s attention and resources.

 

**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 thatour solutions do not or will not infringe valid patents, copyrights,trademarks, or other intellectual property rights held by third parties, insideand outside the U.S.  As a result, wemay be subject to legal proceedings and claims from time to time relating tothe intellectual property of others in the ordinary course of our business.

 

We may incur substantial expenses indefending against any third-party infringement claims, regardless of theirmerit.  Successful infringement claimsagainst us may result in substantial monetary liability, may divertmanagement’s attention from our core business, and may disrupt our business.  In addition, if we are unsuccessful in defendingsuch claims, we may need to obtain a license to the technology, which may notbe available on acceptable terms or at all.

 

**Any future acquisitions maybe difficult to integrate and disruptive to our operations.  We may not realize the expected benefitsfrom any such acquisitions, and if we cannot address the challenges presentedby acquisitions, our operating results may be harmed.**

** **

In the past, we haveacquired businesses to expand our operations or market presence, and we intendto continue our expansion by acquiring or investing in companies, assets ortechnologies that complement our business and offer opportunities forgrowth.  These transactions involve manyrisks and challenges that we might not successfully overcome, including:

 

•              Difficulties inassimilating technologies, products, personnel, and operations;

 

•              Disruption of ourongoing business and diversion of management’s attention from other businessconcerns;

 

•              Risks of enteringmarkets in which we have no or limited prior experience;

 

•              Issuances of equitysecurities that may dilute your ownership interest in our common stock;

 

•              Cash payments to, orthe assumption of debt or other liabilities of, the companies we acquire; and

 

•              Write-offs relatedto 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 March 31, 2004,our officers, directors, and affiliated entities, together with Ford,beneficially owned approximately 45% of the outstanding shares of our commonstock.  This concentration of ownershipmay delay, deter, or prevent acts that would result in a change of control,which in turn could 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 largeststockholder of Vastera, Ford may exercise significant influence over corporateacts requiring stockholder approval, including a merger or sale ofVastera.  Also, so long as Ford holds atleast 5% of our common stock, it has the right to appoint a non-voting observerto our board of directors.  Ourofficers, directors, and affiliated entities, together with Ford, may haveinterests that differ from your interests, and their decisions may negativelyimpact our future success.

 

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**Item 3**:   Qualitative and Quantitative Disclosures AboutMarket 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 $1.2 million in variable rate debt as of March 31,2004.  Our interest income is sensitiveto changes in U.S. interest rates, particularly since the majority of ourinvestments are in short-term instruments. Due to the short-term nature of our investments, we believe that thereis no material risk exposure.  We do nothold or issue derivative securities, derivative commodity instruments, or otherfinancial instruments 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 Chief ExecutiveOfficer and Chief Financial Officer concluded that, as of the end of the periodcovered by this report, those disclosure controls and procedures were adequateto ensure that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized,and reported, within the time periods specified in the Commission’s rules andforms.

 

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

 

# **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, ExpeditorsInternational of Washington, Inc. and Expeditors Tradewin, L.L.C. (collectively“Expeditors”) filed suit against us in the United States District Court for theEastern District of Michigan, Southern Division primarily alleging that wemisappropriated certain of Expeditors’ trade secrets in connection with ouracquisition of Ford’s customs operations, by utilizing systems and businessprocesses that Expeditors assisted in developing for Ford and through ouremployee hiring practices. In connection with our acquisition of Ford’s customsoperations, Ford agreed to indemnify us for intellectual property infringementclaims, and Ford is currently indemnifying us in connection with thislitigation.  Although Ford is obligatedto indemnify us of claims of intellectual property infringement arising fromthe property we acquired from it, Ford is not obligated to indemnify us fordamages and legal fees arising from claims pertaining solely to our acts, uponwhich certain of the claims asserted in this matter have been based.

 

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:**                   Changes in Securities and Use ofProceeds

 

None.

 

## **Item 3:**                   Defaults Upon Senior Securities

 

None.

 

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## **Item 4:**                   Submission of Matters to a Vote ofSecurity Holders

 

None.

 

## **Item 5:**                   OtherInformation

 

None.

 

## **Item 6:**                   Exhibits and Reports on Form 8-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 May 10, 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 May 10,  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 May 10, 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 May 10,  2004. |
|   |                                        |   |
|   | (b)                                         | Reports on Form 8-K. |

 

On January 29, 2004, we filed a Form 8-Kfurnishing a press release that announced our financial results for the yearended December 31, 2003 and presenting certain other information.

 

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**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 May 10, 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) |
|        |               |  |  |  |

 

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**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 May 10, 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 May 10, 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 May 10, 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 May 10, 2004.               |

 

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