**UNITED STATESSECURITIES 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 September 30, 2003** |
|                                         |   |                                                                                         |
| **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 Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling 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 ýNo o

 

As of November 7, 2003, there were 41,719,300 shares of theregistrant’s common 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****:****          Financial Statements**

 

**VASTERA, INC. AND SUBSIDIARIES**

** **

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

** **

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

 
|                                                                                                                      |   | **September 30,  2003** |    | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|------------------------|--------|
|                                                                                                                      |   | **(Unaudited)**         |    |                   |   |
| **Assets**                                                                                                                |   |                    |    |                   |   |
| Current assets:                                                                                                           |   |                    |    |                   |   |
| Cash and cash equivalents                                                                                                 |   | $                       | 20,394  |                   | $      | 23,696 |   |
| Short-term investments                                                                                                    |   | 32,656                  |    | 33,261                 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $1,019 and $948, respectively                             |   | 19,665                  |    | 18,409                 |   |
| Prepaid expenses and other current assets                                                                                 |   | 3,750                   |    | 2,535                  |   |
| Total current assets                                                                                                      |   | 76,465                  |    | 77,901                 |   |
| Property and equipment, net                                                                                               |   | 11,105                  |    | 11,934                 |   |
| Intangible assets, net                                                                                                    |   | 8,751                   |    | 9,098                  |   |
| Goodwill                                                                                                                  |   | 67,929                  |    | 65,657                 |   |
| Deposits and other assets                                                                                                 |   | 1,526                   |    | 974                    |   |
|                                                                                                                      |   |                    |    |                   |   |
| Total assets                                                                                                              |   | $                       | 165,776 |                   | $      | 165,564 |   |
|                                                                                                                      |   |                    |    |                   |   |
| **Liabilities and  Stockholders’ Equity**                                                                            |   |                    |    |                   |   |
| Current liabilities:                                                                                                      |   |                    |    |                   |   |
| Line of credit and capital lease  obligations, current                                                                    |   | $                       | 2,358   |                   | $      | 2,150 |   |
| Accounts payable                                                                                                          |   | 1,066                   |    | 4,277                  |   |
| Accrued expenses                                                                                                          |   | 4,645                   |    | 6,937                  |   |
| Accrued compensation and benefits                                                                                         |   | 3,414                   |    | 1,543                  |   |
| Deferred revenue, current                                                                                                 |   | 10,323                  |    | 9,446                  |   |
| Total current liabilities                                                                                                 |   | 21,806                  |    | 24,353                 |   |
| Long-term liabilities:                                                                                                    |   |                    |    |                   |   |
| Line of credit and capital lease  obligations, net of current portion                                                     |   | 866                     |    | 1,078                  |   |
| Deferred revenue, net of current portion                                                                                  |   | 1,575                   |    | 2,476                  |   |
| Total liabilities                                                                                                         |   | 24,247                  |    | 27,907                 |   |
| Commitments and contingencies (See Note 6)                                                                                |   |                    |    |                   |   |
|                                                                                                                      |   |                    |    |                   |   |
| Stockholders’ equity:                                                                                                |   |                    |    |                   |   |
| Common stock, $0.01 par value; 100,000  shares authorized; 41,505 and 40,490 shares issued and outstanding,  respectively |   | 415                     |    | 405                    |   |
| Additional paid-in capital                                                                                                |   | 326,459                 |    | 323,010                |   |
| Accumulated other comprehensive loss                                                                                      |   | (1,082                  | )       | (2,280                 | )      |
| Deferred compensation                                                                                                     |   | (154                    | )       | (988                   | )      |
| Accumulated deficit                                                                                                       |   | (184,109                | )       | (182,490               | )      |
|                                                                                                                      |   |                    |    |                   |   |
| Total stockholders’ equity                                                                                           |   | 141,529                 |    | 137,657                |   |
| Total liabilities and stockholders’ equity                                                                           |   | $                       | 165,776 |                   | $      | 165,564 |   |

 

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

 

3

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**VASTERA, INC. AND SUBSIDIARIES**

** **

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

** **

**(UNAUDITED)**

** **

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

 
|                                        |   | **Three Months Ended****September 30,** |   | **Nine Months Ended****September 30,** |   |
|---------------------------------------------|--------|-----------------------------------------|--------|----------------------------------------|--------|
|                                        |   | **2003**                                |   | **2002**                               |   | **2003** |   | **2002** |   |
| **Revenues:**                               |   |                                    |   |                                   |   |   |   |   |   |
| Managed services revenues                   |   | $                                       | 14,084 |                                   | $      | 10,961 |   | $ | 41,343 |   | $ | 32,935 |   |
| Software revenues                           |   | 2,936                                   |   | 2,967                                  |   | 8,552 |   | 9,595 |   |
| Services revenues                           |   | 4,675                                   |   | 5,328                                  |   | 14,268 |   | 14,119 |   |
| Total revenues                              |   | 21,695                                  |   | 19,256                                 |   | 64,163 |   | 56,649 |   |
|                                        |   |                                    |   |                                   |   |   |   |   |   |
| **Cost of revenues:**                       |   |                                    |   |                                   |   |   |   |   |   |
| Cost of managed services revenues           |   | 7,553                                   |   | 6,536                                  |   | 22,488 |   | 17,324 |   |
| Cost of software revenues                   |   | 716                                     |   | 668                                    |   | 2,110 |   | 1,871 |   |
| Cost of services revenues                   |   | 3,421                                   |   | 3,758                                  |   | 10,427 |   | 10,426 |   |
|                                        |   |                                    |   |                                   |   |   |   |   |   |
| **Operating expenses:**                     |   |                                    |   |                                   |   |   |   |   |   |
| Sales and marketing                         |   | 2,290                                   |   | 2,627                                  |   | 6,836 |   | 9,270 |   |
| Research and development                    |   | 2,954                                   |   | 3,102                                  |   | 8,990 |   | 10,543 |   |
| General and administrative                  |   | 2,663                                   |   | 2,623                                  |   | 8,136 |   | 7,485 |   |
| Depreciation                                |   | 1,281                                   |   | 1,289                                  |   | 3,845 |   | 3,353 |   |
| Intangible amortization expense             |   | 719                                     |   | 717                                    |   | 2,106 |   | 1,910 |   |
| Restructuring                               |   | —                                  |   | 1,634                                  |   | — |   | 3,610 |   |
| Stock-based compensation                    |   | 189                                     |   | 585                                    |   | 834 |   | 2,147 |   |
| Total operating expenses                    |   | 10,096                                  |   | 12,577                                 |   | 30,747 |   | 38,318 |   |
|                                        |   |                                    |   |                                   |   |   |   |   |   |
| Loss from operations                        |   | (91                                     | )      | (4,283                                 | )      | (1,609 | ) | (11,290 | ) |
| Other income, net                           |   | 112                                     |   | 192                                    |   | 448 |   | 725 |   |
| Income (loss) before income taxes           |   | 21                                      |   | (4,091                                 | )      | (1,161 | ) | (10,565 | ) |
| Income taxes                                |   | (150                                    | )      | (103                                   | )      | (458 | ) | (285 | ) |
|                                        |   |                                    |   |                                   |   |   |   |   |   |
| Net loss                                    |   | $                                       | (129   | )                                      | $      | (4,194 | ) | $ | (1,619 | ) | $ | (10,850 | ) |
|                                        |   |                                    |   |                                   |   |   |   |   |   |
| Basic and diluted net loss per common share |   | $                                       | (0.00  | )                                      | $      | (0.10 | ) | $ | (0.04 | ) | $ | (0.27 | ) |
|                                        |   |                                    |   |                                   |   |   |   |   |   |
| Weighted-average common shares outstanding  |   | 41,374                                  |   | 40,246                                 |   | 40,944 |   | 39,883 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

4

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**VASTERA, INC. AND SUBSIDIARIES**

** **

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

** **

**(UNAUDITED)**

** **

**(In thousands)**

 
|                                                                                                    |   | **Nine Months Ended  September 30,** |    |
|---------------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                                                    |   | **2003**                             |    | **2002** |   |
| **Cash flows from  operating activities:**                                                              |   |                                 |    |   |   |
| Net loss                                                                                                |   | $                                    | (1,619  | ) | $ | (10,850 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:                            |   |                                 |    |   |   |
| Stock-based compensation                                                                                |   | 834                                  |    | 2,147 |   |
| Depreciation and intangible amortization  expense                                                       |   | 5,951                                |    | 5,263 |   |
| Provision for allowance for doubtful  accounts                                                          |   | 171                                  |    | 117 |   |
| Amortization of revenue discounts related  to customer contracts                                        |   | 235                                  |    | 225 |   |
| Amortization of capitalized internal-use  software costs                                                |   | 335                                  |    | — |   |
| Changes in operating assets and liabilities:                                                            |   |                                 |    |   |   |
| Accounts receivable                                                                                     |   | (1,056                               | )       | (2,242 | ) |
| Prepaid expenses and other current assets                                                               |   | (1,067                               | )       | (403 | ) |
| Deposits and other assets                                                                               |   | (602                                 | )       | (555 | ) |
| Accounts payable and accrued expenses                                                                   |   | (5,856                               | )       | 5,087 |   |
| Accrued compensation and benefits                                                                       |   | 1,833                                |    | (3,250 | ) |
| Deferred revenue                                                                                        |   | (112                                 | )  | 1,491 |   |
| Net cash used in operating activities                                                                   |   | (953                                 | )       | (2,970 | ) |
|                                                                                                    |   |                                 |    |   |   |
| **Cash flows from  investing activities:**                                                              |   |                                 |    |   |   |
| Acquisition of subsidiaries                                                                             |   | (3,000                               | )       | (5,682 | ) |
| Net sales of short-term investments                                                                     |   | 457                                  |    | 30,208 |   |
| Acquisition of property and equipment                                                                   |   | (2,208                               | )       | (6,427 | ) |
| Net cash (used in) provided by investing  activities                                                    |   | (4,751                               | )       | 18,099 |   |
|                                                                                                    |   |                                 |    |   |   |
| **Cash flows from  financing activities:**                                                              |   |                                 |    |   |   |
| Proceeds from the exercise of stock options  and issuance of stock for the employee stock purchase plan |   | 3,147                                |    | 3,310 |   |
| Principal payments on long-term debt                                                                    |   | (2,027                               | )       | (2,172 | ) |
| Proceeds from equipment line of credit                                                                  |   | 1,102                                |    | — |   |
| Net cash provided by financing activities                                                               |   | 2,222                                |    | 1,138 |   |
| Effect of foreign currency exchange rate  changes on cash and cash equivalents                          |   | 180                                  |    | (174 | ) |
| Net increase (decrease) in cash and cash  equivalents                                                   |   | (3,302                               | )       | 16,093 |   |
| Cash and cash equivalents, beginning of  period                                                         |   | 23,696                               |    | 10,982 |   |
| Cash and cash equivalents, end of period                                                                |   | $                                    | 20,394  |   | $ | 27,075 |   |

 

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

 

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**VASTERA, INC. AND SUBSIDIARIES**

** **

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

** **

**(Unaudited)**

 

**1.****                                      Basisof Presentation and Nature of Business:**

** **

Theaccompanying unaudited condensed consolidated financial statements of Vastera,Inc. and its subsidiaries (“Vastera” the “Company,” “we,” or “us”) have beenprepared on the same basis as audited financial statements and include alladjustments, including all normal recurring adjustments that are necessary fora fair presentation of the financial condition, results of operations, and cashflows for the interim periods presented. The results of operations for theinterim periods presented are not necessarily indicative of the results to beexpected for any subsequent quarter or for the entire year ending December 31,2003. All significant intercompany balances and transactions have beeneliminated in consolidation. Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to theSecurities and Exchange Commission’s (the “SEC”) rules and regulations. TheCompany’s interim financial statements should be read in conjunction with theCompany’s audited consolidated financial statements and notes thereto, as filedwith the SEC with the Company’s Annual Report on Form 10-K and otherreports filed with the SEC.

 

Vastera is aleading provider of solutions for Global Trade Management and was incorporatedin Virginia in November 1991 under the name Export SoftwareInternational, Inc. The Company reincorporated in Delaware in July 1996and changed its name to Vastera, Inc. in June 1997. The Company’sofferings include a library of global trade content, web-based softwaresolutions, trade management consulting, and managed services. Managed servicesrange in nature from management of a specific global trade function toproviding complete management of a client’s global trade operations. TheCompany has operations in the United States, Belgium, Brazil, Canada, France,Germany, Ireland, Japan, Mexico, the Netherlands, Poland, Spain, and the UnitedKingdom.

 

The Company’soperations are subject to certain risks and uncertainties, including amongothers, uncertainties relating to product development, rapidly changingtechnology, current and potential competitors with greater financial, technological,production, and marketing resources, the potential loss of significantcustomers, dependence on key management personnel, limited protection ofintellectual property and proprietary rights, uncertainty of futureprofitability, exposure to risks related to conducting businessinternationally, and possible fluctuations in financial results.

 

**2.****                                      Summaryof Significant Accounting Policies:**

 

**Useof Estimates**

 

Thepreparation of the condensed consolidated financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosures of contingent assets and liabilitiesas of the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates. Estimates that are most susceptible to change are theCompany’s estimates of collections of accounts receivable and the estimatedlives and the realization of its intangible assets and internal use software.

 

**RevenueRecognition**

 

The Company’srevenues consist of managed services revenues, software revenues, and servicesrevenues.

 

*Managed Services Revenues*

 

Managedservices revenues are derived from agreements that provide for transaction orservices fees based on the Company performing and delivering its managedservices solutions. Managed services solutions include the processing of aclient’s customs entries and the classifying of a clients’ goods. Managedservices transaction arrangements are often subject to annual or quarterlyminimum transaction thresholds, and revenues are recognized based on the lowerof the cumulative actual transactions processed during the period using aweighted-average transaction rate or the cumulative amounts billable. For thosemanaged services transaction arrangements subject to annual minimums and forthose arrangements where the amount billable for interim periods is limited tothe pro rata portion of the annual minimum, transactions processed in excess ofthe minimum in each period are not billable, and, therefore, revenue is notrecognized until the end of the related year. Certain managed servicesarrangements are based upon a fixed services fee. Revenues associated withthese arrangements are recognized ratably over the term of the arrangement andlimited to the amounts billable. In addition, Vastera may receive annualgainsharing fees under certain managed services arrangements based

 

6

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on a percentage of the client’sannual cost savings, as defined in those managed services arrangements. Thesegainsharing fees are recognized when they become fixed and determinable.

 

*Software Revenues*

 

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

 

Term licenserevenues are derived from term software license arrangements in which theCompany’s clients license its software products and obtain the right tounspecified enhancements on a when-and-if-available basis and ongoing supportand content update services. Content updates are significant and frequent.Revenues are recognized ratably over the contract term. Term licensearrangements typically range from three to five years. To the extent theCompany hosts the software for its customers, the hosting fee is recognizedratably over the contract period in conjunction with the recognition of thelicense fee.

 

Perpetualsoftware license revenues are derived from perpetual software licensearrangements and related maintenance contracts. Maintenance contracts includethe right to unspecified enhancements on a when-and-if available basis, ongoingsupport, and content update services. The content updates provided undermaintenance arrangements are significant and frequent, and, as a result, revenuesfrom perpetual software license sales are recognized ratably over the estimatedeconomic life of the product. The Company has estimated that the life of theproduct is three years, which is consistent with the historical periods betweenmajor upgrades to the functionality and architecture of its products. Revenuesfrom maintenance contracts are recognized ratably over the contract term, whichis typically one year. To the extent the Company hosts the software for itscustomers, the hosting fee is recognized ratably over the contract period inconjunction with the recognition of the license fee.

 

Transaction-basedrevenues are derived from arrangements that provide for transaction fees basedon a client’s usage of the Company’s software products. Revenues from the usageof its software products are recognized as transactions occur.

 

The Companyrecognizes revenues from arrangements with resellers beginning when thesoftware product is sold to the end user. Any annual transaction minimumsrequired of the reseller but not sold by the reseller to end customers arerecognized as revenues upon the expiration of the annual minimum period.

 

*Services Revenues*

 

Servicesrevenues are derived from implementation, management consulting, and trainingservices. Services are performed on a time and materials basis or under fixedprice arrangements. Revenues on time and materials contracts are recognizedbased on fixed billable rates for hours delivered, and revenues on fixed pricedcontracts are recognized as the services are performed or using the percentageof completion method of accounting based on the ratio of costs incurred tototal estimated costs to be incurred. Losses on arrangements are recognizedwhen known.

 

Formultiple-element arrangements where the Company provides both software andsoftware-related services, the Company defers the service fee, based onvendor-specific objective evidence of fair value, and recognizes it as theservices are performed.

 

**DeferredRevenues**

 

Deferredrevenues include amounts paid by clients for revenues that have not beenrecognized and generally result from billed, but deferred term and perpetuallicense revenues and services not yet performed. Deferred revenues arerecognized on a monthly basis over the term of the agreement, the remainingeconomic life of the product, or when the services are performed.

 

**Costof Revenues**

 

Cost ofrevenues includes the cost of managed services revenues, the cost of softwarerevenues, and the cost of services revenues.

 

Cost ofmanaged services revenues consists of the cost of salaries and related expensesfor the Company’s managed services organization, including payments to Ford forour use of Ford’s facilities, the cost of leased employees, and the maintenanceand expenses related to the acquired technology, as well as the amortization ofcapitalized internal use software costs related to the implementation andintegration of the Company’s trade management platform to the managed servicesoperation.

 

Cost ofsoftware revenues includes royalties owed to third parties for technologyproducts integrated into the Company’s software products as well as the cost ofsalaries and related expenses for the technical support organization.

 

7

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Cost ofservices revenues includes the cost of salaries and related expenses forimplementation, management consulting and training services provided to clientsas well as the cost of third parties contracted to provide either applicationconsulting or implementation services to the Company’s clients.

 

**InternalUse Software**

 

In accordancewith SOP 98-1, *Accounting for the Costs ofComputer Software Developed or Obtained for Internal Use*, theCompany capitalizes costs associated with the implementation and integration ofits trade management platform to its managed services operations, related tocertain capitalizable tasks including the technical design, systemconfiguration, and testing phases of the integration process. The Companycapitalized approximately $111,000 and $463,000 in the third quarters of 2003and 2002, respectively, and $395,000 and $1.3 million in the nine months endedSeptember 30, 2003 and 2002, respectively. These costs are amortized as costsof managed services revenues over three years, and amortization commences uponthe completion of the integration to the Vastera platform. The Company beganamortizing these costs in the fourth quarter of 2002. Total amortizationexpense in the three months and nine months ended September 30, 2003 wasapproximately $115,000 and $335,000, respectively. Net capitalized costs on thebalance sheets as of September 30, 2003 and December 31, 2002 wereapproximately $1.6 million and $1.5 million, respectively.

 

**Concentrationsof Credit Risk**

 

Financialinstruments that potentially subject the Company to concentrations of creditrisk consist primarily of cash equivalents, short-term investments, andaccounts receivable. The Company limits the amount of investment exposure inany one financial instrument and does not have any foreign currencyinvestments. The Company sells products and services to customers acrossseveral industries throughout the world without requiring collateral. However,the Company routinely assesses the financial strength of its customers andmaintains allowances for anticipated losses.

 

As ofSeptember 30, 2003 and December 31, 2002, Ford Motor Company accounted for26% and 16%, respectively, of total accounts receivable. Lucent Technologiesaccounted for 10% and 19% of total accounts receivable as of September 30, 2003and December 31, 2002, respectively.

 

**NetLoss Per Common Share**

 

Basic net lossper common share is computed by dividing net loss applicable to commonstockholders by the weighted-average number of common shares outstanding forthe 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 September 30, 2003 andDecember 31, 2002, options to purchase approximately 8,221,000 and4,776,000 shares of common stock were outstanding, 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 aresult, the basic and diluted loss per share amounts are identical.

 

**ComprehensiveIncome (Loss)**

 

As ofSeptember 30, 2003 and December 31, 2002, accumulated other comprehensiveincome (loss) includes unrealized gains and losses on investments and foreigncurrency translation adjustments. As of September 30, 2003, accumulated netunrealized gains on investments available for sale was approximately $32,000and the accumulated foreign currency translation adjustment was a loss ofapproximately $1.1 million. The comprehensive loss for the nine monthsended September 30, 2003 and 2002, was $421,000 and $13.6 million,respectively.

 

**Goodwilland Intangible Assets**

 

Goodwillrepresents the excess of costs over fair value of assets of businessesacquired. The Company adopted the provisions of SFAS No. 142, Goodwill andOther Intangible Assets, as of January 1, 2002. Goodwill and intangibleassets acquired in a purchase business combination and determined to have anindefinite useful life are not amortized, but instead tested for impairment atleast annually in accordance with the provisions of SFAS No. 142. SFASNo. 142 also requires that intangible assets with estimable useful livesbe amortized over their respective estimated useful lives to their estimatedresidual values, and reviewed for impairment in accordance with SFASNo. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

 

OnJanuary 1, 2002, in accordance with SFAS No. 141, the Companyreclassified its assembled workforce intangible assets to goodwill. Prior toJanuary 1, 2002, assembled workforce intangibles were amortized on astraight-line basis over two or three years. The value assigned to theassembled workforce in the acquisition of Ford’s global customs operation wasallocated to each country in which the Company acquired Ford’s global customsoperations, based upon the number of employees in that country. Prior toJanuary

 

8

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1, 2002, the relatedamortization was being recorded over three years from the date the Companyassumed Ford’s customs operations in that country.

 

All otherintangible assets are amortized on a straight-line basis over their expectedeconomic life, generally one to five years. The value assigned to the Fordcontract in connection with the Ford acquisition is being amortized as adiscount to revenue over the minimum term of the contract. Beginning July 1,2003, the amount allocated to the GE contract and customer relationshipacquired in the acquisition of GE’s internal US customs operations is beingamortized as a discount to revenue over five years, the estimated useful lifeof the asset.

 

**StockOptions**

 

The Companyhas adopted the disclosure requirements of SFAS No. 123, Accounting forStock-Based Compensation. The Company applies Accounting Principles Board(“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and relatedinterpretations in accounting for its stock option plans. Under theintrinsic-value method prescribed in APB No. 25, compensation expense isrecorded on the date of grant only if the current market price of theunderlying stock exceeds the exercise price. No options granted during thefirst three quarters of 2003 and 2002 were granted with exercise prices thatwere less than the current market price. Had compensation expense for theCompany’s 1996 Plan, 2000 Plan and Employee Stock Purchase Plan been determinedbased on the fair value at the grant dates for awards under these plansconsistent with the method of SFAS No. 123, the Company’s net loss would havebeen increased to the pro forma amounts indicated below (in thousands, exceptper share data).

 

 
|                                                                                                |   | **Three Months Ended****September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|--------------------------------------|--------|
|                                                                                                |   | **2003**                                |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                                                                                |   |                                    |   |                                 |   |   |   |   |   |
| Net loss, as reported                                                                               |   | $                                       | (129   | )                                    | $      | (4,194 | ) | $ | (1,619 | ) | $ | (10,850 | ) |
| Add: stock-based compensation included in  net loss, net of tax                                     |   | 189                                     |   | 585                                  |   | 834 |   | 2,147 |   |
| Deduct: stock-based compensation determined  under the fair value method for all awards, net of tax |   | (1,870                                  | )      | (3,223                               | )      | (13,510 | ) | (12,162 | ) |
| Pro forma net loss                                                                                  |   | $                                       | (1,810 | )                                    | $      | (6,832 | ) | $ | (14,295 | ) | $ | (20,865 | ) |
| Pro forma net loss per share                                                                        |   | $                                       | (0.04  | )                                    | $      | (0.17 | ) | $ | (0.35 | ) | $ | (0.52 | ) |

 

**IncomeTaxes**

 

Deferred taxesare recorded utilizing the asset and liability method as prescribed by SFASNo. 109, *Accounting for Income Taxes*,whereby deferred tax assets are recognized for deductible temporary differencesand operating loss and tax credit carryforwards and deferred tax liabilitiesare recognized for taxable temporary differences. Temporary differences are thedifferences between the reported amounts of assets and liabilities and theirassociated tax bases. Deferred tax assets and liabilities are adjusted for theeffects of changes in tax laws and rates on the date of enactment. Deferred taxassets are reduced by a valuation allowance when, in the opinion of management,it is more likely than not that some portion or all of the deferred tax assetswill not be realized.

 

For the firstthree quarters of 2003 and 2002, the tax provision was comprised of state andforeign taxes. No provision for federal income taxes has been recorded for thefirst three quarters of 2003 and 2002, due to accumulated net operating lossesexperienced by the Company. The Company has recorded a valuation allowance forthe full amount of its net deferred tax assets because of the uncertaintysurrounding the timing of the realization of these future tax benefits.

 

**RecentAccounting Pronouncements**

 

In July 2003,the Emerging Issues Task Force issued a final consensus on EITF Issue No. 03-5,*Applicability of AICPA Statement of Position97-2, Software Revenue Recognition, to Non-Software Deliverables in anArrangement Containing More-Than-Incidental Software*.  This consensus is effective immediately anddiscusses the criteria for determining whether non-software deliverables insoftware arrangements are considered to be software-related and, therefore,included within the scope of SOP 97-2. The adoption of EITF 03-5 did not have a material effect on theCompany’s financial statements.

 

**3.****                                      Restructuring**

 

The Companyrecorded approximately $2.0 million and $1.6 million of restructuringcosts, respectively, during the second and third quarters of 2002. The Companyreduced its restructuring reserve during the fourth quarter of 2002 byapproximately

 

9

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$274,000, based on differencesbetween actual costs incurred compared to their original estimates. Costsassociated with the termination of employees totaled approximately$1.1 million. Costs associated with the closing of redundant facilities,the cancellation of certain contracts, and other non-personnel related actionstotaled approximately $2.2 million.

 

As ofDecember 31, 2002, the balance of the restructuring reserve wasapproximately $1.3 million. The Company paid approximately $137,000 ofthese costs in the third quarter of 2003 and $714,000 in the nine months endedSeptember 30, 2003. As of September 30, 2003, the balance of the restructuringreserve was approximately $665,000. The Company expects to pay out theremainder of the restructuring reserve in 2003 and 2004.

 

**4.****                                      Acquisitions**

 

**2003Acquisition**

 

On June 19,2003, the Company acquired General Electric Company’s (“GE”) internal U.S.customs operations. The Company also entered into a managed services agreementunder which Vastera will manage the U.S. customs operations for five of GE’s USdivisions for a minimum term of 3 years. The purchase method of accounting hasbeen applied to this acquisition, and accordingly, the results of GE’s internalUS customs operations are included in the Company’s operations beginning July1, 2003, the effective date of the acquisition.

 

In exchangefor its internal US customs operations, GE received $3.0 million in cash and51,046 shares of the Company’s common stock valued at approximately $312,000.The purchase price, including transaction costs of approximately $62,000, hasbeen preliminarily allocated based on fair values as follows:

 

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

 

Beginning July1, 2003, the amount allocated to the acquired technology and know-howintangible is being amortized on a straight-line basis over five years, theestimated useful life of the asset. Beginning July 1, 2003, the amountallocated to the GE contract and customer relationship is being amortized as adiscount to revenue over five years, the estimated useful life of the asset.

 

**2002Acquisitions**

 

In the firstquarter of 2002, the Company acquired companies in Mexico, Canada, and Brazil.The shares of common stock issued by the Company in connection with each ofthese acquisitions were valued at the average of the closing prices for thethree days before and the three days after the date each acquisition’sdefinitive terms were finalized.

 

OnJanuary 3, 2002, the Company entered into a definitive agreement toacquire Prisma Tecnologia Computacional, S.A. de C.V. (“Prisma”) for approximately$5.3 million. Prisma was a provider of Global Trade Management solutionsin Mexico. The Company consummated this transaction on February 1, 2002and paid approximately $2.5 million in cash, issued approximately 150,000shares of its common stock, valued at approximately $2.4 million, and paidapproximately $400,000 in transaction and issuance costs.

 

OnFebruary 12, 2002, the Company acquired Imanet, an Ontario corporation forapproximately $2.5 million. Imanet was a provider of Global TradeManagement solutions in Canada. The Company paid $850,000 in cash, issuedapproximately 90,000 shares of its common stock, valued at approximately$1.4 million, and paid approximately $300,000 in transaction and issuancecosts.

 

OnMarch 8, 2002, the Company acquired Bergen Informatica Ltda(“Bergen”) for approximately $6.4 million. Bergen was a provider of GlobalTrade Management solutions in Brazil. The Company paid $2.4 million incash, issued approximately 223,000 shares of its common stock, valued atapproximately $3.1 million, and incurred approximately $900,000 intransaction and issuance costs, including the issuance of 10,000 shares ofcommon stock valued at approximately $71,000 to an investment advisor.

 

The followingunaudited pro forma information has been prepared as if the 2002 acquisitionshad occurred as of January 1, 2001(in thousands, except per share data).

 

10

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|                                               |   | **Pro Forma for the  Nine Months Ended  September 30, 2002** |   | **Pro Forma for the  Year Ended  December 31, 2001** |   |
|----------------------------------------------------|--------|--------------------------------------------------------------|--------|------------------------------------------------------|--------|
|                                               |   | **(unaudited)**                                              |   | **(unaudited)**                                      |   |
| Total revenues                                     |   | $                                                            | 57,276 |                                                 | $      | 69,715 |   |
| Net loss                                           |   | (11,169                                                      | )      | (48,704                                              | )      |
| Pro forma basic and diluted loss per common  share |   | (0.28                                                        | )      | (1.28                                                | )      |
|                                                    |        |                                                              |        |                                                      |        |  |  |

 

The unauditedpro forma information is not necessarily indicative of the results ofoperations that would have occurred had the acquisition been made at thebeginning of the periods presented or the future results of the combinedoperations.

 

**5.****                                      Long-TermDebt:**

 

**Lineof Credit**

 

InJuly 2002, the Company refinanced $3.9 million of outstanding debtunder its former credit facility with a new facility from Comerica Bank. Theterm loan matures in June 2004 and bears interest at the bank’s prime rateplus 50 basis points (4.50% as of September 30, 2003). The balance outstandingunder the term loan was approximately $1.5 million as of September 30,2003. The Company also obtained a secured revolving line of credit (“Line ofCredit”) and an equipment line of credit (“Equipment Line of Credit”) withComerica Bank.

 

The Companymay borrow up to $10.0 million under the Line of Credit, with a$2.5 million sub-limit for the issuance of letters of credit. Advancesunder the Line of Credit are limited to the lesser of $10 million or 80%of eligible accounts receivable, as defined in the loan agreement. The Line ofCredit bears interest at the bank’s prime rate (4.00% as of September 30, 2003). The Line of Credit matures inJuly 2004. There was no outstanding balance under the Line of Credit as ofSeptember 30, 2003.

 

The Companymay borrow up to $5.0 million under the Equipment Line of Credit, whichbears interest at the bank’s prime rate plus 50 basis points (4.50% as ofSeptember 30, 2003). The Equipment Line of Credit had two interest only paymentperiods, one that ended on January 30, 2003 and one that ended on July 30,2003.  Commencing on July 31, 2003,interest and principal payments are due on all borrowings made under theEquipment Line of Credit, which matures in full on July 30, 2005. In the firstand third quarters of 2003, the Company borrowed approximately $614,000 and$488,000, respectively, against the Equipment Line of Credit. The outstandingbalance under the Equipment Line of Credit was approximately $918,000 as ofSeptember 30, 2003.

 

The terms ofthe Line of Credit and Equipment Line of Credit require the Company to complywith certain financial covenants, including, restrictions and limitations onfuture indebtedness, sales of assets and material changes in the business. Thefinancial covenants include a minimum modified quick ratio, as defined in theloan agreement, of 2.0 to 1.0 and a maximum ratio of total liabilities totangible net worth of 1.5 to 1.0. Under the most restrictive of the financialcovenants, the Company’s quarterly pro forma income (loss), as defined, cannotexceed zero. Through September 30, 2003, the Company was in compliance withthese covenants.

 

Pro formaincome (loss) is defined in the loan agreement as net income, plus interestexpense, taxes, non-cash charges (including depreciation, amortization, stock-basedcompensation, research and development related charges and one-timerestructuring charges), and cash restructuring charges (not to exceed$5.0 million in the aggregate), less interest income and any one-time ornon-recurring revenue.

 

The total amountsborrowed under the Company’s Line of Credit and Equipment Line of Credit as ofSeptember 30, 2003 was approximately $2.4 million, of which approximately $2.0million is due within the next 12 months.

 

**CapitalLease Obligations**

 

In the firstquarter of 2003, the Company obtained a new equipment leasing arrangement witha vendor and during 2003 has borrowed approximately $921,000. Amounts borrowedare payable over 36 months. Total capital lease obligations outstanding as ofSeptember 30, 2003, were approximately $798,000, of which approximately$361,000 is due within the next 12 months.

 

**6.****                                      Commitmentsand Contingencies:**

 

The Company isperiodically a party to disputes arising from normal business activities. Inthe opinion of management, resolution of these matters will not have amaterially adverse effect upon the financial condition or future operatingresults of the Company.

 

On March 14,2001, Expeditors International of Washington, Inc. and Expeditors Tradewin,L.L.C. (collectively “Expeditors”) filed suit against the Company in the UnitedStates District Court for the Eastern District of Michigan, Southern

 

11

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Division primarily allegingthat the Company misappropriated certain of Expeditors’ trade secrets inconnection 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 toindemnify the Company of claims of intellectual property infringement arisingfrom the property Vastera acquired from it, Ford is not obligated to indemnifythe Company for damages and legal fees arising from claims pertaining solely toVastera’s acts, upon which certain of the claims asserted in this matter havebeen based.

 

In certain of its softwarelicense arrangements, the Company has agreed to indemnify customers fordamages, if any, they might incur as a result of a claim brought forintellectual property infringement. The Company is unable to estimate themaximum exposure of such indemnifications due to the inherent uncertainty andthe varying nature of the contractual terms.

 

**7.****                                      SegmentInformation:**

 

The Companyhas three reportable operating segments: managed services, software, and services.The managed services segment generates revenues from managed servicestransaction and service arrangements. The software segment generates revenuesfrom term license, perpetual license, and transaction license agreements of itsGlobal Trade Management solutions. The services segment generates revenues bycharging its customers for implementation, management consulting and trainingservices.

 

The Companyevaluates the performance of each segment based on revenues and gross profit.The Company’s unallocated costs include corporate and other costs not allocatedto the segments for management’s reporting purposes.

 

The followingtable summarizes the Company’s three segments (in thousands): 

 
|                       |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|----------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                       |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                       |   | **(unaudited)**                       |   | **(unaudited)**                      |   | **(unaudited)** |   | **(unaudited)** |   |
| Revenues:                  |   |                                  |   |                                 |   |   |   |   |   |
| Managed services           |   | $                                     | 14,084 |                                 | $      | 10,961 |   | $ | 41,343 |   | $ | 32,935 |   |
| Software                   |   | 2,936                                 |   | 2,967                                |   | 8,552 |   | 9,595 |   |
| Services                   |   | 4,675                                 |   | 5,328                                |   | 14,268 |   | 14,119 |   |
| Total revenues             |   | 21,695                                |   | 19,256                               |   | 64,163 |   | 56,649 |   |
|                       |   |                                  |   |                                 |   |   |   |   |   |
| Gross Profit:              |   |                                  |   |                                 |   |   |   |   |   |
| Managed services           |   | 6,531                                 |   | 4,425                                |   | 18,855 |   | 15,611 |   |
| Software                   |   | 2,220                                 |   | 2,299                                |   | 6,442 |   | 7,724 |   |
| Services                   |   | 1,254                                 |   | 1,570                                |   | 3,841 |   | 3,693 |   |
| Gross profit               |   | 10,005                                |   | 8,294                                |   | 29,138 |   | 27,028 |   |
|                       |   |                                  |   |                                 |   |   |   |   |   |
| Net loss:                  |   |                                  |   |                                 |   |   |   |   |   |
| Unallocated expense        |   | (10,096                               | )      | (12,577                              | )      | (30,747 | ) | (38,318 | ) |
| Interest income            |   | 158                                   |   | 328                                  |   | 591 |   | 1,099 |   |
| Interest and other expense |   | (46                                   | )      | (136                                 | )      | (143 | ) | (374 | ) |
| Income tax                 |   | (150                                  | )      | (103                                 | )      | (458 | ) | (285 | ) |
| Net loss                   |   | $                                     | (129   | )                                    | $      | (4,194 | ) | $ | (1,619 | ) | $ | (10,850 | ) |

 

**GeographicInformation**

 

The Companysells its products and services through its offices in the United States,Brazil, Canada, Mexico, Germany, Japan, and the United Kingdom. Informationregarding revenues and long-lived assets attributable to the United States andto all foreign countries is stated below. The geographic classification ofproduct and services revenues was based upon the location of the customer.  Vastera’s product and services revenues weregenerated in the following geographic regions (in thousands): 

 
|                        |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                        |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                        |   | **(unaudited)**                       |   | **(unaudited)**                      |   | **(unaudited)** |   | **(unaudited)** |   |
| United States               |   | $                                     | 15,970 |                                 | $      | 15,391 |   | $ | 47,720 |   | $ | 46,442 |   |
| Other North America         |   | 2,547                                 |   | 2,263                                |   | 7,253 |   | 6,389 |   |
| Europe                      |   | 1,876                                 |   | 562                                  |   | 5,705 |   | 1,044 |   |
| Other international regions |   | 1,302                                 |   | 1,040                                |   | 3,485 |   | 2,774 |   |
| Total revenues              |   | $                                     | 21,695 |                                 | $      | 19,256 |   | $ | 64,163 |   | $ | 56,649 |   |

 

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The Company’stangible long-lived assets were located as follows (in thousands): 

 
|                          |   | **September 30,  2003** |   | **December 31,  2002** |   |
|-------------------------------|--------|-------------------------|--------|------------------------|--------|
|                          |   | **(unaudited)**         |   |                   |   |
| United States                 |   | $                       | 9,948  |                   | $      | 10,729 |   |
| Other North America           |   | 845                     |   | 839                    |   |
| Europe                        |   | 219                     |   | 278                    |   |
| Other international locations |   | 93                      |   | 88                     |   |
| Total long-lived assets       |   | $                       | 11,105 |                   | $      | 11,934 |   |

 

**SignificantCustomers**

 

For thequarters ended September 30, 2003 and 2002, Ford accounted for 30% and 25% oftotal revenues, respectively. For the nine months ended September 30, 2003 and2002, Ford accounted for 30% and 32% of total revenues, respectively. For thequarter and nine months ended September 30, 2003, Lucent Technologies accountedfor 14% and 15% of total revenues, respectively. For the quarter endedSeptember 30, 2002, Lucent Technologies accounted for 15% of total revenues.There were no other customers that accounted for greater than 10% of theCompany’s revenues for the quarters or nine months ended September 30, 2003 and2002. For the quarters ended September 30, 2003 and 2002, the Company derivedapproximately 65% and 61%, respectively, of total revenues from its top fivecustomers. For the nine months ended September 30, 2003 and 2002, the Companyderived approximately 66% and 61%, respectively, of total revenues from its topfive customers.

 

**8.****                                      Transactionswith Ford Motor Company:**

 

OnAugust 29, 2000, the Company acquired Ford’s global customs operations andmerged Ford’s global customs operations into its managed services operations.Ford received 8,000,000 shares of the Company’s common stock valued atapproximately $79.2 million in consideration at the time of thetransaction. As of September 30, 2003, Ford owned 8,000,000 shares, orapproximately 19.4% of the Company’s common stock.

 

InAugust 2000, the Company also entered into a managed services agreementunder which Vastera manages Ford’s global trade operations. InJanuary 2001 and March 2001, the Company entered into a managedservices agreements with Ford Mexico and Ford Canada, respectively. InNovember 2002, the Company entered into a managed services agreement withFord Europe to manage Ford’s global trade operations in the United Kingdom,Spain, Belgium, and Germany. The agreements with Ford initially had minimumterms of four years, and each may continue for a total of ten years.

 

InFebruary 2002, the Company amended its agreement with Ford U.S. to providefor quarterly minimum transaction levels in lieu of annual minimum transactionlevels. By amending the agreement in this manner, the Company was able to billFord on a quarterly basis for the transactions processed in excess of theminimum levels. In connection with the amendment, the Company agreed to reduceFord’s U.S. aggregate annual minimum revenue guarantee from $11.6 millionto $11.0 million. For the nine months ended September 30, 2002, theCompany derived approximately $2.5 million, respectively, in revenues relatedto transactions in excess of the quarterly minimum.

 

InJuly 2002, the Company further amended its agreement with Ford U.S. toprovide for billing Ford at a fixed annual rate of $11.8 million for theremaining life of the agreement, beginning January 1, 2003. By amendingthe agreement in this manner, the Company bills Ford a fixed annual service feeinstead of on a per transaction processed basis. In connection with thisamendment, the Company and Ford agreed that the Company would bill Ford$4.9 million ratably over the remainder of 2002.

 

For thequarters ended September 30, 2003 and 2002, Ford accounted for 30% and 25% oftotal revenues, respectively. For the nine months ended September 30, 2003 and2002, Ford accounted for 30% and 32% of total revenues, respectively. As ofSeptember 30, 2003 and December 31, 2002, Ford owed the Company approximately$5.0 million and $3.0 million, or 26% and 16%, of the Company’s totalaccounts receivable, respectively.

 

The Companyreimburses Ford for expenses incurred by Ford for the Company’s use of Ford’sfacilities, the costs of leased employees, and the maintenance and expensesrelated to the acquired technology. For the quarters ended September 30, 2003and 2002, the Company paid Ford approximately $1.2 million, and$1.4 million, respectively. For the nine months ended September 30, 2003 and2002, the Company paid Ford approximately $5.1 million and $4.0 million,respectively. These payments increased beginning in December 2002 when theCompany assumed responsibility for managing Ford’s operations in Europe.  However, the 

 

13

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Company expects payments todecrease in the future as the Company leverages its existing facilities andemployees and deploys its own technology.

 

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

 

InOctober 2002, the Company offered each employee an opportunity to cancelcertain of their stock options (the “Options Exchange”) in exchange for theright to receive a future stock option grant for the same number of shares sixmonths and one day from the date of cancellation with a strike price equal to themarket price on the new grant date. Options to purchase approximately 3.8million shares were cancelled pursuant to the Options Exchange. In April 2003,the Company issued replacement options to employees to purchase approximately3.6 million shares of common stock at an exercise price of $4.06 per share inexchange for the options previously canceled. The vesting schedule of thecanceled options remained in effect for the replacement options. The Companydeferred the issuance of annual option grants to employees during thissix-month period and accordingly, in April 2003, the Company issued additionaloptions to purchase 930,000 shares of common stock to these employees at anexercise price of $4.06 per share. As of September 30, 2003, options to purchaseapproximately 8,221,000 shares of common stock were outstanding.

 

The Companyapplies APB Opinion No. 25, Accounting for Stock Issued to Employees, andrelated interpretations in accounting for it stock option plan. The Companyrecorded deferred compensation cost of approximately $6.4 million in thelast nine months of 1999 and approximately $13.4 million in the first ninemonths of 2000. On March 29, 2001, the Company also recorded approximately$465,000 of deferred compensation in connection with the issuance of options toacquire 64,000 shares of its common stock in exchange for the unvestedSpeedchain stock options it assumed in the related business combination. Thesedeferred compensation amounts represent the aggregate difference between theexercise price and the fair value for accounting purposes of the underlyingshares of common stock at the date of grant. This amount is included as acomponent of stockholders’ equity and is being amortized on an acceleratedbasis over the applicable vesting period. Stock-based compensation, which hasbeen separately identified in the accompanying condensed consolidated statementof operations, has not been included in costs of revenues, sales and marketing,research and development, and general and administrative expense as indicatedbelow (in thousands):

 
|                              |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                              |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                              |   | **(unaudited)**                       |   | **(unaudited)**                      |   | **(unaudited)** |   | **(unaudited)** |   |
| Cost of managed services revenues |   | $                                     | 5      |                                 | $      | 16 |   | $ | 23 |   | $ | 60 |   |
| Cost of software revenues         |   | 1                                     |   | 3                                    |   | 4 |   | 10 |   |
| Cost of services revenues         |   | 26                                    |   | 82                                   |   | 117 |   | 300 |   |
| Sales and marketing               |   | 76                                    |   | 235                                  |   | 334 |   | 862 |   |
| Research and development          |   | 18                                    |   | 57                                   |   | 81 |   | 209 |   |
| General and administrative        |   | 63                                    |   | 192                                  |   | 275 |   | 706 |   |
| Total stock-based compensation    |   | $                                     | 189    |                                 | $      | 585 |   | $ | 834 |   | $ | 2,147 |   |

 

**10.****                               SupplementalInformation:**

 

**CashFlow Information**

# ** **

Cash paid forinterest was approximately $120,000 and $391,000 for the nine months endedSeptember 30, 2003 and 2002, respectively. Noncash activities were as follows (in thousands):

 
|                                                                                                                    |   | **Nine Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                    |   | **2003**                             |   | **2002** |   |
|                                                                                                                    |   | **(unaudited)**                      |   |   |   |
| Increase in capital lease obligations                                                                                   |   | $                                    | 921    |   | $ | 1,243 |   |
| Issuance of common stock and stock options  in acquisitions                                                             |   | 312                                  |   | 6,933 |   |
| Assumed liabilities, transaction costs and  other, net of tangible assets and deferred revenue acquired in acquisitions |   | (214                                 | )      | 2,143 |   |
|                                                                                                                         |        |                                      |        |  |  |  |  |

 

**11.****                               SubsequentEvents:**

 

On November 5,2003, Mark J. Ferrer resigned as President and Chief Executive Officer and theCompany appointed Timothy A. Davenport.

 

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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. Our actual results could differmaterially from those anticipated in such forward—looking statements due tovarious factors, including, but not limited to, those set forth under “RisksRelating to our Business” and elsewhere in this Report and contained in ourannual report on Form 10-K filed with the SEC.

 

Some of thestatements we make in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and elsewhere in this Report constituteforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). These statements involveknown and unknown risks, uncertainties and other factors that may cause ouractual results, levels of activity, performance or achievements as expressed orimplied by such forward-looking statements not to be achieved fully. Theseforward-looking statements relate to future events and our future financialperformance. In some cases, you can identify forward-looking statements bywords such as “may,” “should,” “expect,” “plan,” “anticipate,” “intend,”“believe,” “estimate,” “predict,” and “continue,” or the negative of such termsor other comparable words. These statements are only predictions and includedrisks and uncertainties particularly those described in this Report under thecaption “Risks Relating to Our Business.” Consequently, our actual results may differ materially from thoseexpressed or implied by these forward-looking statements.

 

**Overview**

 

Vastera is theworldwide leading provider of solutions for Global Trade Management. Vasteraprovides solutions that manage the information flow associated with the crossborder component of an international shipment for its clients, therebyaccelerating the flow of goods through the global supply chain. Global trade isregulated by dynamic, country-specific rules and involves a complex network oftrade participants, including exporters, forwarders, carriers, brokers,importers, financial institutions and customs and regulatory agencies. Sinceour inception, we have continued to develop comprehensive solutions withfeatures, functionality, and services that allow companies to manage thecomplexities of global trade.

 

We provide oursolutions to over 400 clients from our offices in the United States, Belgium,Brazil, Canada, France, Germany, Ireland, Japan, Mexico, the Netherlands,Poland, Spain, and the United Kingdom. Our clients typically acquire softwareor purchase managed services for a division or department. As they expand theutilization of our solutions globally and to their clients, suppliers andbusiness partners, our clients often acquire additional software licenses orexpand managed services arrangements. We currently market our products andservices on a global basis through our direct sales force and other channels,such as strategic alliances and partners. We expect revenues from ourinternational operations to increase as we continue to expand our internationalsales and services organizations. Although our customer base spans severaldiverse industries, a significant portion of our revenues are generated bycustomers in the automotive and high-technology industries.

 

**Relationshipwith Ford Motor Company**

 

InAugust 2000, we entered into an agreement to acquire Ford Motor Company’sglobal customs operations and merged Ford’s global customs operations into ourmanaged services operations. The Ford operations that were merged into usconsisted of Ford personnel and technology utilized by Ford to manage itsinternational trade transactions. By combining our existing technology andintellectual capital with that acquired from Ford, we intend to expand ourmanaged services to companies of varying sizes on a global basis. Ford received8,000,000 shares of our common stock, valued at approximately$79.2 million at the time of the transaction. As of September 30, 2003,Ford owned 8,000,000 shares, or approximately 19.4% of our common stock.

 

InAugust 2000, we also entered into a Global Trade Management servicesagreement under which we manage Ford’s global trade operations. InJanuary 2001 and March 2001, we expanded the Global Trade Managementservices we provide to Ford by assuming responsibility for administering andmanaging Ford’s global trade operations in Mexico and Canada, respectively. InNovember 2002, we further expanded the Global Trade Management services weprovide to Ford by assuming responsibility for administering and managingFord’s global trade operations in the United Kingdom, Germany, Belgium, andSpain (collectively, “Ford Europe”). Our agreements with Ford initially had aminimum term of four years.

 

Theseagreements provide us with a guaranteed, predictable, and recurring revenuestream from Ford. We expect to derive at least $25 million in revenues onan annual basis from our agreements with Ford U.S., Ford Mexico, Ford Canada, andFord Europe. We believe our client relationship with Ford will have asignificant impact on our total revenues and will account for greater than 10%of our revenues for the foreseeable future.

 

For thequarters ended September 30, 2003 and 2002, Ford accounted for 30% and 25% ofour total revenues, respectively. For the nine months ended September 30, 2003and 2002, Ford accounted for 30% and 32% of our total revenues, respectively.As of

 

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September 30, 2003 and December31, 2002, Ford owed us approximately $5.0 million and $3.0 million,or 26% and 16%, of our total accounts receivable, respectively.

 

InFebruary 2002, we amended our agreement with Ford U.S. to provide forquarterly minimum transaction levels in lieu of annual minimum transactionlevels. By amending the agreement in this manner, we were able to bill on aquarterly basis the transactions processed in excess of the minimum levels. Inconnection with the amendment, we agreed to reduce Ford’s U.S. aggregate annualminimum revenue guarantee from $11.6 million to $11.0 million. Forthe nine months ended September 30, 2002, we derived approximately $2.5 millionin revenues related to transactions in excess of the quarterly minimum.

 

InJuly 2002, we further amended our agreement with Ford U.S. to provide thatwe bill Ford U.S. at a fixed annual service fee rate of $11.8 million forthe remaining life of the agreement. By amending the agreement in this manner,we bill Ford U.S. a fixed annual service fee instead of on a per transactionprocessed basis. In connection with this amendment, Ford U.S. agreed that wewould bill Ford U.S. $4.9 million ratably over the remainder of 2002.

 

**Acquisitions**

 

On June 19,2003, we acquired GE’s internal U.S. customs operations. We also entered into amanaged services agreement under which Vastera will manage the U.S. customsoperations for five of GE’s US divisions for a minimum term of three years. Thepurchase method of accounting has been applied to this acquisition, andaccordingly, the results of GE’s internal US customs operations have beenincluded in our operations since July 1, 2003, the effective date of theacquisition. In exchange for its internal US customs operations, GE received$3.0 million in cash and 51,046 shares of our common stock, valued atapproximately $312,000. The purchase price, including transaction costs ofapproximately $62,000, totaled approximately $3.4 million.

 

In the firstquarter of 2002, we executed on our strategy of expanding our global presenceto enhance our competitive position worldwide and our ability to serve andsupport our clients. As part of this strategy, we acquired companies in Mexico,Canada, and Brazil. The shares of common stock we issued were valued at theaverage of the closing prices for the three days before and the three daysafter the date each acquisition’s definitive terms were finalized.

 

OnJanuary 3, 2002, we entered into a definitive agreement to acquire PrismaTecnologia Computacional, S.A. de C.V. (“Prisma”) for approximately$5.3 million. Prisma was a provider of Global Trade Management solutionsin Mexico. We consummated this transaction on February 1, 2002 and paidapproximately $2.5 million in cash, issued approximately 150,000 shares ofour common stock, valued at approximately $2.4 million, and paidapproximately $400,000 in transaction and issuance costs.

 

OnFebruary 12, 2002, we acquired Imanet, an Ontario corporation, forapproximately $2.5 million. Imanet was a provider of Global Trade Managementsolutions in Canada. We paid $850,000 in cash, issued approximately 90,000shares of our common stock, valued at approximately $1.4 million, and paidapproximately $300,000 in transaction and issuance costs.

 

OnMarch 8, 2002, we acquired Bergen Informatica Ltda. (“Bergen”) forapproximately $6.4 million. Bergen was a provider of Global TradeManagement solutions in Brazil. We paid $2.4 million in cash, issuedapproximately 223,000 shares of our common stock, valued at approximately $3.1 million,and incurred approximately $900,000 in transaction and issuance costs,including the issuance 10,000 shares of common stock valued at approximately$71,000 to an investment advisor.

 

All of theseacquisitions were accounted for under the purchase method of accounting. Theexcess of the consideration over the fair value of the acquired assets andliabilities and identified intangibles was accounted for as goodwill. Werecorded in the aggregate approximately $10.8 million and$4.0 million of identified intangibles and goodwill, respectively, in 2002in connection with the Prisma, Imanet, and Bergen acquisitions.

 

**CriticalAccounting Policies**

 

We considerour accounting policies related to revenue recognition, deferred revenues,internal use software and intangible assets to be critical to our businessoperations and the understanding of our results 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 a summary of significant accounting policiesused in the preparation of our consolidated financial statements, see the Notesto our Consolidated Financial Statements in Item 1 of this Report. Ourpreparation of this Report requires us to make estimates and assumptions thataffect the reported amount of assets and liabilities, disclosure of contingentassets and liabilities at the date of our financial statements, and thereported amounts of revenue and expenses during the reporting period. We cannotbe sure that actual results will not differ from those estimates.

 

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***Source of Revenues and Revenue RecognitionPolicy***

 

*Managed Services Revenues*

 

Managedservices revenues are derived from agreements that provide for transaction orservices fees based on the performance and delivery of our managed servicessolutions. Managed services solutions include the processing of our clients’customs entries and the classifying of clients’ 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 during the period using aweighted-average transaction rate or the amount billable for the period. Forthose managed services transaction arrangements subject to annual minimums andfor those arrangements where the amount billable for interim periods is limitedto the pro-rata portion of the annual minimum, transactions processed in excessof the minimum in each period are not billable, and, therefore, revenue is notrecognized until the end of the related year. Certain managed servicesarrangements are based upon a fixed services fee. Revenues associated withthese arrangements are recognized ratably over the term of the arrangement andlimited to the amounts billable. In addition, we may receive annual gainsharingfees under certain managed services arrangements based on a percentage of theclient’s annual cost savings, as defined in those managed servicesarrangements. These gainsharing fees are recognized when they become fixed anddeterminable. Managed services transaction minimums and fixed service fees aretypically billed monthly.

 

*Software Revenues*

 

Softwarerevenues consist of term license revenues, perpetual software license revenues,and transaction-based revenues. We recognize revenue from the sale of softwareproducts in accordance with Statement of Position (“SOP”) 97-2, SoftwareRevenue Recognition.

 

Term licenserevenues are derived from term software license arrangements in which ourclients license our software products and obtain the right to unspecifiedenhancements on a when-and-if-available basis and ongoing support and contentupdate services. Content updates are significant and frequent. Revenues arerecognized ratably over the contract term. Term license arrangements typicallyrange from three to five years. 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. Term license fees aretypically billed annually, quarterly or monthly.

 

Perpetualsoftware license revenues are derived from perpetual software licensearrangements and related maintenance contracts. Maintenance contracts includethe right to unspecified enhancements on a when-and-if available basis, ongoingsupport, and content update services. The content updates provided undermaintenance arrangements are significant and frequent, and, as a result,revenues from perpetual software license sales are recognized ratably over theestimated 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. Revenuesfrom maintenance contracts are recognized ratably over the contract term,typically one year. To the extent we host the software for our customers, thehosting fee is recognized ratably over the contract period in conjunction withthe recognition of the license fee.

 

Transaction-basedrevenues are derived from agreements that provide for transaction fees based ona client’s usage of our software products. Revenues from the usage of itssoftware products are recognized as transactions occur.

 

We recognizerevenues from arrangements with resellers beginning when the software productis sold to the end user. Any annual minimums required of the reseller but notsold by the reseller to end customers are recognized as revenues upon theexpiration of the annual minimum period.

 

*Services Revenues*

 

Servicesrevenues are derived from implementation, management consulting and trainingservices. Services are performed on a time and materials basis or under fixedprice arrangements. Revenues on time and materials contracts are recognizedbased on fixed billable rates for hours delivered, and revenues on fixed pricedcontracts are recognized as the services are performed, using the percentage ofcompletion method of accounting based on the ratio of costs incurred to totalestimated costs to be incurred. Losses on arrangements are recognized whenknown.

 

Formultiple-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.

 

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**DeferredRevenues**

 

Deferredrevenues include amounts paid by clients for revenues that have not beenrecognized and generally result from billed, but deferred term and perpetuallicense revenues and services not yet performed. Deferred revenues arerecognized on a monthly basis over the term of the agreement, the remainingeconomic life of the product, or when the services are performed. As wecontinue to increase our term license and transaction-based revenues relativeto our perpetual licenses, we expect our deferred revenues to fluctuate sinceterm license and transaction-based customers are billed and paid ratably(usually either annually, monthly or quarterly). We do not consider deferredrevenue to be an indicator of over all future revenues.

 

**InternalUse Software**

 

In accordancewith Statement of Position 98-1, *Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use*,we capitalize costs associated with the implementation and integration of ourtrade management platform to our managed services operations, related tocertain capitalizable tasks including the technical design, systemconfiguration and testing phases of the integration process. Judgment isinvolved in determining which development tasks associated with the platformintegration are capitalizable pursuant to SOP 98-1. We capitalizedapproximately $111,000 and $463,000 in the third quarters of 2003 and 2002,respectively, and $395,000 and $1.3 million in the nine months ended September30, 2003 and 2002, respectively. These costs are amortized as costs of managedservices revenues over three years, and amortization commences upon thecompletion of the integration to the Vastera platform. We began amortizingthese costs in the fourth quarter of 2002. Total amortization expense in thethree months and nine months ended September 30, 2003 was approximately$115,000 and $335,000, respectively. Net capitalized costs on the balancesheets as of September 30, 2003 and December 31, 2002 were approximately$1.6 million and $1.5 million, respectively.

 

**Goodwilland Intangible Assets**

 

As ofSeptember 30, 2003, we had recorded goodwill and intangible assets ofapproximately $76.7 million related to our acquisitions.

 

Goodwill representsthe excess of costs over the fair value of assets of businesses acquired. Weadopted the provisions of SFAS No. 142, Goodwill and Other IntangibleAssets, as of January 1, 2002. Goodwill and intangible assets acquired ina purchase business combination and determined to have an indefinite usefullife are not amortized, but instead tested for impairment at least annually inaccordance with the provisions of SFAS No. 142. SFAS No. 142 alsorequires that intangible assets with estimable useful lives be amortized overtheir respective estimated useful lives to their estimated residual values, andreviewed for impairment in accordance with SFAS No. 144, Accounting forImpairment or Disposal of Long-Lived Assets.

 

As ofJanuary 1, 2002, we had unamortized goodwill of approximately$62.2 million. Prior to January 1, 2002, goodwill was amortized on astraight-line basis over its expected economic life, generally four or fiveyears, and assessed for recoverability by determining whether the amortizationof the goodwill balance over its remaining life could be recovered through theundiscounted future operating cash flows of the acquired operation.

 

OnJanuary 1, 2002, in accordance with SFAS No. 141, we reclassified ourassembled workforce intangible assets to goodwill. Prior to January 1,2002, assembled workforce intangibles were amortized on a straight-line basisover two or three years. The value assigned to the assembled workforce in theacquisition of Ford’s global customs operation was allocated to each country inwhich we acquired Ford’s global customs operations, based upon the number ofemployees in that country. Prior to January 1, 2002, the related amortizationwas to be recorded over three years from the date we assumed Ford’s customsoperations in that country.

 

All otheridentifiable intangible assets are amortized on a straight-line basis overtheir expected economic lives, generally one to five years. The value assignedto the Ford contract is being amortized as a discount to revenue over the minimumterm of the contract. Beginning July 1, 2003, the amount allocated to the GEcontract and customer relationship acquired in the acquisition of GE’s internalUS customs operations is being amortized as a discount to revenue over fiveyears, the estimated useful life of the asset. Beginning July 1, 2003, theamount allocated to the acquired technology and know-how intangible acquired inthe acquisition of GE’s internal US customs operations is being amortized on astraight-line basis over five years, the estimated useful life of the asset. Inthe aggregate, amortization of intangible assets for the quarters endedSeptember 30, 2003 and 2002 was approximately $719,000 and $717,000,respectively, and $2.1 million and $1.9 million for the nine months ended September30, 2003 and 2002, respectively. In the aggregate, amortization of theseidentified intangibles is expected to be approximately $2.8 million,$2.6 million, $1.2 million, $1.2 million, $885,000 and $100,000in 2003, 2004, 2005, 2006, 2007, and 2008, respectively.

 

Therecoverability and useful lives of our intangible assets are based on estimatesand are susceptible to change. Although we believe our intangible assets willbe recoverable, changes in the economy, the business in which we operate and ourown relative

 

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performance could change theassumptions used to evaluate intangible asset recoverability. We continue tomonitor these assumptions and their effect on the estimated recoverability.

 

**Management’sDisclosure of Non-GAAP Financial Measures**

 

From time totime, management makes public disclosures, other than through our financialfilings on Form 10-Q or Form 10-K, of certain financial measures such aspro forma earnings (loss) and EBITDA, as adjusted (as defined below), that arenot considered GAAP financial measures. On October 23, 2003, we issued anearnings press release that was furnished as an exhibit to a Form 8-K filedwith the SEC the same day. This press release contains reconciliations of proforma earnings (loss) and EBITDA, as adjusted, to net loss.

 

Managementbelieves that pro forma earnings (loss) is a useful way to measure ouroperating performance and liquidity, because it reflects more accurately ouroperating performance for the reporting period by excluding those chargesassociated with past events that are not related to current operations or, inthe case of income taxes, amounts that are not used to measure operatingperformance but rather are derived from it. The excluded intangibleamortization expense is associated with identifiable intangible assets fromacquisitions. The excluded stock-based compensation expense pertains todeferred non-cash compensation charges recorded in connection with the initialpublic offering of our shares of common stock and from acquisitions.

 

EBITDA, asadjusted, excludes expenses related to intangible amortization, restructuringcharges, stock-based compensation, income taxes, depreciation, amortization ofrevenue discounts related to customer contracts and amortization of capitalizedinternal-use software costs, and other income, net. Management uses EBITDA, asadjusted, to measure and evaluate our operating performance and liquidity,because it reflects the resources available from the reporting period’soperations for operating and strategic opportunities including, among others,investing in the business, meeting financing obligations, making strategicacquisitions, and paying other cash obligations. Therefore, management believesEBITDA, as adjusted, is an appropriate measure by which to evaluate ouroperating performance and liquidity. These financial measures, however, shouldbe considered in addition to, 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. generally accepted accounting principles.

 

**Comparisonof the Quarter Ended September 30, 2003 to the Quarter Ended September 30, 2002**

 

*Revenues*

 

**Total revenues. **Total revenues increased 13% toapproximately $21.7 million for the quarter ended September 30, 2003 fromapproximately $19.3 million for the quarter ended September 30, 2002.

 

**Managed services revenues.**  Managed services revenues increased 28% toapproximately $14.1 million for the quarter ended September 30, 2003 fromapproximately $11.0 million for the quarter ended September 30, 2002. Weattribute this increase to the continued growth in our automotive and high-techmanaged services client base and expansion of our responsibilities withexisting customers, primarily Ford, Lucent, Nortel, and General Electric.Revenues derived from our managed services agreements accounted for 65% of ourtotal revenues for the quarter ended September 30, 2003, compared to 57% of ourtotal revenues for the quarter ended September 30, 2002. We expect managedservices revenues to account for approximately 65% to 70% of our total revenuesfor the foreseeable future.

 

**Software revenues.**  Software revenues decreased 1% toapproximately $2.9 million for the quarter ended September 30, 2003 fromapproximately $3.0 million for the quarter ended September 30, 2002. Weattribute this decrease to the conversion of a customer to managed services,the drop-off of revenue related to perpetual licenses sold in prior years, andmaintenance cancellations. Revenues derived from our software agreementsaccounted for 14% of our total revenues for the quarter ended September 30,2003, compared to 15% of our total revenues for the quarter ended September 30,2002. We expect software revenues to account for approximately 10% to 15% ofour total revenues for the foreseeable future.

 

**Services revenues.**  Services revenues decreased 12% toapproximately $4.7 million for the quarter ended September 30, 2003 fromapproximately $5.3 million for the quarter ended September 30, 2002. Weattribute this decrease to the variability in the demand for our services fromour customer base caused by changes in our mix of deals and related scope ofservices.  Services revenues accounted for21% and 28% of our total revenues for the quarters ended September 30, 2003 and2002, respectively. We expect services revenues to account for approximately20% to 25% of our total revenues for the foreseeable future.

 

*Cost of Revenues*

 

**Cost of managed services revenues.**  Cost of managed services revenues consistsof the cost of salaries and related expenses for our managed servicesorganization, including payments to Ford for our use of Ford’s facilities, thecosts of leased employees, and

 

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the maintenance of, andexpenses related to, the acquired technology as well as the amortization ofcapitalized internal use software costs related to the implementation andintegration of our trade management platform to our managed services operation.

 

Cost ofmanaged services revenues increased 16% to approximately $7.6 million forthe quarter ended September 30, 2003 from approximately $6.5 million forthe quarter ended September 30, 2002. This increase was largely due to thegrowth of our managed services operations to support our growing client baseand our European expansion. Cost of managed services revenues as a percentageof managed services revenues was 54% for the quarter ended September 30, 2003and 60% for the quarter ended September 30, 2002. This decrease as a percentageof managed services revenues resulted from the productivity improvementsderived and efficiencies achieved from prior investments we made in our supportinfrastructure, the leveraging of personnel in the performance of our managedservices agreements, and the reduction in expenses we paid to Ford. As we enterinto large multi-year managed services agreements in new industry sectors ornew geographic regions that may require significant investments in the relatedinfrastructure, the costs associated with these managed services agreements maybe greater in the initial year than in the later years when we realizeproductivity improvements from these infrastructure investments. Accordingly, weexpect that our cost of managed services revenues may fluctuate on a quarterlyor annual basis as a percentage of managed services revenues.

 

**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 technicalsupport organization.

 

Cost ofsoftware revenues increased 7% to approximately $716,000 for the quarter endedSeptember 30, 2003 from approximately $668,000 for the quarter endedSeptember 30, 2002. This increase was largely due to our investment in ourclient support infrastructure. Cost of software revenues as a percentage ofsoftware revenues was 24% for the quarter ended September 30, 2003, compared to23% for the quarter ended September 30, 2002. This increase as a percentage ofsoftware revenues results from our additional investment in our client supportinfrastructure to support our product offerings, and from the decline in oursoftware revenues. We expect the cost of software revenues as a percentage ofsoftware revenues to remain relatively stable for the foreseeable future, butthis percentage may fluctuate on a quarterly or annual basis.

 

**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 application consulting or implementationservices to our clients.

 

Cost ofservices revenues decreased 9% to approximately $3.4 million for the quarterended September 30, 2003 from approximately $3.8 million for the quarter endedSeptember 30, 2002. This decrease was largely due to the reduction in laborcosts associated with the variability of our services work. Cost of servicesrevenues as a percentage of services revenues was 73% and 71% for the quartersended September 30, 2003 and 2002, respectively. This increase was consistentwith the 12% decrease in revenue and only a 9% decrease in costs. As theservices revenue fluctuates, the cost of services fluctuates, but to a lessordegree due to the fact that certain costs are fixed. We expect the cost ofservices revenues as a percentage of services revenues to be approximately 70%to 75% on an annual basis, but this percentage may fluctuate outside this rangeon a quarterly basis.

 

*Operating Expenses*

 

**Sales and marketing.**  Sales and marketing expense consistsprimarily of salaries, commissions and bonuses earned by sales and marketingpersonnel, as well as sales training events, public relations, advertising,trade shows and travel expenses related to both promotional events and directsales efforts.

 

Sales andmarketing expense decreased 13% to approximately $2.3 million for thequarter ended September 30, 2003 from approximately $2.6 million for thequarter ended September 30, 2002. This decrease was primarily due to areduction in personnel and promotional expenses. Sales and marketing expensesrepresented 11% of our total revenues for the quarter ended September 30, 2003and 14% for the quarter ended September 30, 2002. We anticipate that sales andmarketing expenses will remain relatively stable as a percentage of totalrevenues for the foreseeable future.

 

**Research and development.**  Research and development expense consistsprimarily of salaries, benefits, and equipment for software developers, qualityassurance personnel, program managers, and technical writers.

 

Research anddevelopment expense decreased 5% to approximately $3.0 million for thequarter ended September 30, 2003 from approximately $3.1 million for thequarter ended September 30, 2002. This decrease was primarily due to thetransfer of some of our research and development activities to geographies withlower costs of labor, a reduction in personnel, and a reduction in the numberof internal and contract software developers and quality assurance personnelneeded to support our product development and testing activities. Research anddevelopment expenses represented 14% of our total revenues for the quarterended September 30, 2003 and 16% for the quarter ended September 30, 2002. Webelieve that we must continue to invest in research and development in order

 

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to develop new products andservices. Nevertheless, we anticipate that research and development expenseswill continue to decrease as a percentage of total revenues for the foreseeablefuture.

 

**General and administrative.**  General and administrative expense consistsprimarily of salaries, benefits, and related costs for executive, finance,administrative, and information services personnel.

 

General andadministrative expense increased 2% to approximately $2.7 million for thequarter ended September 30, 2003 from approximately $2.6 million for thequarter ended September 30, 2002. This increase resulted from the addition ofpersonnel to support the growth of our business, legal, and professional feesrelating to managing both our domestic affairs and our international expansion,and increased costs associated with the new public company regulations. Generaland administrative expenses represented 12% and 14% of our total revenues forthe quarters ended September 30, 2003 and 2002, respectively. We believe ourgeneral and administrative expenses will decrease as a percentage of totalrevenues but will remain relatively consistent in absolute dollars whencompared to the quarter ended September 30, 2003.

 

**Depreciation.**  Depreciation expense of approximately$1.3 million was nearly constant for the quarters ended September 30, 2003and 2002. We believe our depreciation expense will increase in absolute dollaramounts as we continue to invest in our infrastructure.

 

**Intangible amortization expense.**  Intangible amortization expense ofapproximately $700,000 was nearly constant for the quarters ended September 30,2003 and 2002. We attribute this to an increase from the additional intangibleassets acquired in our acquisition of GE’s internal U.S customs operationsduring the second quarter of 2003, offset by a decrease in fluctuations inforeign currency rates and the related translations into US dollars.

 

**Restructuring.**  The Company recorded approximately$2.0 million and $1.6 million of restructuring costs, respectively,during the second and third quarters of 2002. The Company reduced itsrestructuring reserve during the fourth quarter of 2002 by approximately$274,000, based on differences between actual costs incurred compared to theiroriginal estimates. Costs associated with the termination of employees totaledapproximately $1.1 million. Costs associated with the closing of redundantfacilities, the cancellation of certain contracts, and other non-personnelrelated actions totaled approximately $2.2 million. As ofDecember 31, 2002, the balance of the restructuring reserve wasapproximately $1.3 million. The Company paid approximately $137,000 ofthese costs in the third quarter of 2003 and $714,000 in the nine months endedSeptember 30, 2003. As of September 30, 2003, the balance of the restructuringreserve was approximately $665,000. The Company expects to pay out theremainder of the restructuring reserve in 2003 and 2004.

 

**Stock-based compensation.**  We recorded deferred compensation ofapproximately $6.4 million in the last nine months of 1999 andapproximately $13.1 million in 2000. These amounts represent the aggregatedifference between the exercise price and the fair value for accountingpurposes of the underlying common stock at the date of grant. On March 29,2001, we recorded $465,000 of deferred compensation in connection with theunvested stock options that were assumed in connection with the Speedchainacquisition. These amounts are included as a component of stockholders’ equityand are being amortized on an accelerated basis over the applicable vestingperiod. For the quarters ended September 30, 2003 and 2002, we amortizedapproximately $189,000 and $585,000, respectively, of deferred compensation. Weexpect to amortize deferred compensation of approximately $941,000 and $45,000for the years ending December 31, 2003 and 2004, respectively. The amountof stock option compensation expense to be recorded in future periods coulddecrease if options for which accrued but unvested compensation has beenrecorded are forfeited.

 

InOctober 2002, we offered each employee an opportunity to cancel certain oftheir stock options (the “Options Exchange”) in exchange for the right toreceive a future stock option grant for the same number of shares six monthsand one day from the date of cancellation with a strike price equal to themarket price on the new grant date. Options to purchase approximately 3.8million shares were cancelled pursuant to the Options Exchange. In April 2003,we issued replacement options to employees to purchase approximately 3.6million shares of common stock at an exercise price of $4.06 per share inexchange for the options previously canceled. The vesting schedule of thecanceled options remained in effect for the replacement options. We deferredthe issuance of annual option grants to employees during this six-month period,and accordingly, in April 2003, we issued additional options to purchase930,000 shares of common stock to these employees at an exercise price of $4.06per share. As of September 30, 2003, options to purchase approximately8,221,000 shares of common stock were outstanding.

 

**Other income (expenses), net.**  Other income (expenses), net fluctuates,based primarily on the amount of cash balances available for investment,borrowings under our lines of credit, interest and other expenses related toour equipment borrowings, and realized gains and losses on investments. Otherincome (expenses), net decreased to approximately $112,000 for the quarterended September 30, 2003 from approximately $192,000 for the quarter endedSeptember 30, 2002. This decrease resulted from lower prevailing interest ratesand lower cash and investment balances.

 

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**Income taxes.**  For the quarters ended September 30, 2003and 2002, our tax provision was comprised of state and foreign taxes primarilyrepresented by income-based withholding taxes incurred from foreign servicesrevenue and the disallowance of net operating loss carryforwards in certainstates where we conduct business. No provision for federal income taxes hasbeen recorded for the quarters ended September 30, 2003 or 2002 due to ouraccumulated net operating losses. We have recorded a valuation allowance forthe full amount of our net deferred tax assets as a result of the uncertaintysurrounding the realization of these future tax benefits.

 

As of December31, 2002, we had net operating loss carry-forwards for federal tax purposes ofapproximately $67.8 million. These loss carry-forwards are available toreduce future taxable income and begin to expire in 2011. Under provisions ofthe Internal Revenue Code, certain substantial changes in our ownership haveoccurred, and as a result, our future utilization of these net operating losscarryforwards that we accumulated prior to the change in ownership will besubject to annual limitations. We have also generated foreign net operatinglosses of approximately $16.1 million that are available for carryforward.We may generate additional net operating loss carry-forwards in the future.

 

**Comparisonof the Nine Months Ended September 30, 2003 to the Nine Months Ended September30, 2002**

 

*Revenues*

 

**Total revenues.**  Total revenues increased 13% toapproximately $64.2 million for the nine months ended September 30, 2003from approximately $56.6 million for the nine months ended September 30,2002.

 

**Managed services revenues.**  Managed services revenues increased 26% toapproximately $41.3 million for the nine months ended September 30, 2003from approximately $32.9 million for the nine months ended September 30,2002. For the nine months ended September 30, 2002, we derived approximately$2.5 million in revenue under our Ford U.S. global managed services agreementrelated to transactions in excess of the quarterly minimums. In July 2002,we amended our agreement with Ford U.S. to provide for billing Ford at a fixedannual rate instead of on a per transaction processed basis. Therefore, excesstransactions are no longer billable. Excluding the $2.5 million revenue relatedto excess transaction billings to Ford for the nine months ended September 30,2002, managed services revenue increased for the nine months ended September30, 2003 by 36% from the nine months ended September 30, 2002. We attributethis increase to the continued growth in our automotive and high-tech managedservices client base and expansion of our responsibilities with existingcustomers, primarily Ford, Lucent, Nortel, and General Electric. Revenues derivedfrom our managed services agreements accounted for 64% of our total revenuesfor the nine months ended September 30, 2003, compared to 58% of our totalrevenues for the nine months ended September 30, 2002. We expect managedservices revenues to account for approximately 65% to 70% of our total revenuesfor the foreseeable future.

 

**Software revenues.**  Software revenues decreased 11% toapproximately $8.6 million for the nine months ended September 30, 2003from approximately $9.6 million for the nine months ended September 30, 2002.We attribute this decrease to the conversion of software customers to managedservices, the drop-off of revenue related to perpetual licenses sold in prioryears, and maintenance cancellations. Revenues derived from our software agreements accounted for 13% of ourtotal revenues for the nine months ended September 30, 2003, compared to 17% ofour total revenues for the nine months ended September 30, 2002. We expectsoftware revenues to account for approximately 10% to 15% of our total revenuesfor the foreseeable future.

 

**Services revenues.**  Services revenues increased 1% toapproximately $14.3 million for the nine months ended September 30, 2003from approximately $14.1 million for the nine months ended September 30, 2002.  Services revenues accounted for 22% and 25%of our total revenues for both the nine months ended September 30, 2003 and2002, respectively. We expect services revenues to account for approximately20% to 25% of our total revenues for the foreseeable future.

 

*Cost of Revenues*

 

**Cost of managed services revenues.**  Cost of managed services revenues increased30% to approximately $22.5 million for the nine months ended September 30,2003 from approximately $17.3 million for the nine months ended September30, 2002. This increase was largely due to the growth of our managed servicesoperations to support our growing client base and our European expansion. Costof managed services revenues as a percentage of managed services revenues was54% for the nine months ended September 30, 2003 and 53% for the nine monthsended September 30, 2002. This increase as a percentage of managed servicesrevenues resulted from the additional personnel and infrastructure costsrelated to our European expansion and the $2.5 million of non-recurring revenuerelated to the excess transaction billing to Ford for the nine months endedSeptember 30, 2002. Over time, we expect to realize productivity improvementsfrom our investment in our support infrastructure and the leveraging ofpersonnel in the performance of our managed services agreements. As we enterinto large multi-year managed services agreements in new industry sectors ornew geographic regions that may require significant investments in the relatedinfrastructure, the costs associated with these managed services agreements maybe greater in the initial year than in the later years when we realizeproductivity improvements from these infrastructure investments. Accordingly,we expect that our cost of managed services revenues may fluctuate on aquarterly or annual basis as a percentage of managed services revenues.

 

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**Cost of software revenues.**  Cost of software revenues increased 13% toapproximately $2.1 million for the nine months ended September 30, 2003 fromapproximately $1.9 million for the nine months ended September 30, 2002.This increase was largely due to our investment in our client supportinfrastructure. Cost of software revenues as a percentage of software revenueswas 25% for the nine months ended September 30, 2003, compared to 19% for thenine months ended September 30, 2002. This increase as a percentage of softwarerevenues results from our additional investment in our client supportinfrastructure to support our new product offerings, as well as a reduction inour software revenues. We expect the cost of software revenues as a percentageof software revenues to remain consistent in absolute dollars for theforeseeable future, but this percentage may fluctuate in any given quarter oryear.

 

**Cost of services revenues.**  Cost of services revenues were approximately$10.4 million for the nine months ended September 30, 2003 and 2002. This isconsistent with the small change in services revenue from period to period.  Cost of services revenues as a percentage ofservices revenues was 73% and 74% for the nine months ended September 30, 2003and 2002, respectively. We expect the cost of services revenues as a percentageof services revenues to be approximately 70% to 75% on an annual basis, butthis percentage may fluctuate outside this range in any given quarter or year.

 

*Operating Expenses*

 

**Sales and marketing.**  Sales and marketing expense decreased 26% toapproximately $6.8 million for the nine months ended September 30, 2003from approximately $9.3 million for the nine months ended September 30,2002. This decrease was primarily due to a reduction in personnel andpromotional expenses. Sales and marketing expenses represented 11% of our totalrevenues for the nine months ended September 30, 2003 and 16% for the ninemonths ended September 30, 2002. We anticipate that sales and marketingexpenses will remain relatively stable as a percentage of total revenues forthe foreseeable future.

 

**Research and development.**  Research and development expense decreased15% to approximately $9.0 million for the nine months ended September 30,2003 from approximately $10.5 million for the nine months ended September30, 2002. This decrease was primarily due to the transfer of some of our researchand development activities to geographies with lower costs of labor, areduction in personnel, and a reduction in the number of internal and contractsoftware developers and quality assurance personnel needed to support ourproduct development and testing activities. Research and development expensesrepresented 14% of our total revenues for the nine months ended September 30,2003 and 19% for the nine months ended September 30, 2002. We believe that wemust continue to invest in research and development in order to develop newproducts and services. Nevertheless, we anticipate that research anddevelopment expenses will continue to decrease as a percentage of totalrevenues for the foreseeable future.

 

**General and administrative.**Generaland administrative expense increased 9% to approximately $8.1 million for thenine months ended September 30, 2003 from approximately $7.5 million forthe nine months ended September 30, 2002. This increase resulted from theaddition of personnel and technology infrastructure to support the growth ofour business, legal and professional fees relating to managing both ourdomestic affairs and international expansion, and increased costs associatedwith the new public company regulations. General and administrative expensesrepresented 13% of our total revenues for both the quarters ended September 30,2003 and 2002. We believe our general and administrative expenses will decreaseas a percentage of total revenues but will remain relatively consistent inabsolute dollars when compared to the nine months ended September 30, 2003.

 

**Depreciation.**  Depreciation expense increased 15% toapproximately $3.8 million for the nine months ended September 30, 2003from approximately $3.4 million for the nine months ended September 30, 2002.This increase resulted from the depreciation of fixed assets purchased to buildthe infrastructure needed to support the growth of our business. We believe ourdepreciation expense will increase in absolute dollar amounts as we continue toinvest our infrastructure.

 

**Intangible amortization expense.**  Intangible amortization expense increased10% to approximately $2.1 million for the nine months ended September 30, 2003from approximately $1.9 million for the nine months ended September 30, 2002.This increase resulted from the full period effect of the amortization from theidentified intangible assets acquired in the three acquisitions completed inthe first quarter of 2002, the additional amortization from the identifiedintangible assets acquired from GE in the second quarter of 2003, offsetslightly by a decrease in fluctuations in foreign currency rates and therelated translations into US dollars.

 

**Restructuring.**  The Company recorded approximately$2.0 million and $1.6 million of restructuring costs, respectively,during the second and third quarters of 2002. The Company reduced itsrestructuring reserve during the fourth quarter of 2002 by approximately$274,000, based on differences between actual costs incurred compared to theiroriginal estimates. Costs associated with the termination of employees totaledapproximately $1.1 million. Costs associated with the closing of redundantfacilities, the cancellation of certain contracts, and other non-personnelrelated actions totaled approximately $2.2 million. As ofDecember 31, 2002, the balance of the restructuring reserve wasapproximately $1.3 million. The Company paid approximately $137,000 ofthese costs in the third quarter of 2003 and $714,000 in the nine months endedSeptember 30, 2003. As of September 30, 2003, the balance of the restructuringreserve was approximately $665,000. The Company expects to pay out theremainder of the restructuring reserve in 2003 and 2004.

 

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**Stock-based compensation.**  We recorded deferred compensation ofapproximately $6.4 million in the last nine months of 1999 andapproximately $13.1 million in 2000. These amounts represent the aggregatedifference between the exercise price and the fair value for accounting purposesof the underlying common stock at the date of grant. On March 29, 2001, werecorded $465,000 of deferred compensation in connection with the unvestedstock options that were assumed in connection with the Speedchain acquisition.These amounts are included as a component of stockholders’ equity and are beingamortized on an accelerated basis over the applicable vesting period. For thenine months ended September 30, 2003 and 2002, we amortized approximately$834,000 and $2.1 million, respectively, of deferred compensation. We expect toamortize deferred compensation of approximately $941,000 and $45,000 for theyears ending December 31, 2003 and 2004, respectively. The amount of stockoption compensation expense to be recorded in future periods could decrease ifoptions for which accrued but unvested compensation has been recorded areforfeited.

 

InOctober 2002, we offered each employee an opportunity to cancel certain oftheir stock options (the “Options Exchange”) in exchange for the right toreceive a future stock option grant for the same number of shares six monthsand one day from the date of cancellation with a strike price equal to themarket price on the new grant date. Options to purchase approximately 3.8million shares were cancelled pursuant to the Options Exchange. In April 2003,we issued replacement options to employees to purchase approximately 3.6million shares of common stock at an exercise price of $4.06 per share inexchange for the options previously canceled. The vesting schedule of thecanceled options remained in effect for the replacement options. We deferredthe issuance of annual option grants to employees during this six-month period,and accordingly, in April 2003, we issued additional options to purchase930,000 shares of common stock to these employees at an exercise price of $4.06per share. As of September 30, 2003, options to purchase approximately8,221,000 shares of common stock were outstanding.

 

**Other income (expenses), net.**  Other income (expenses), net fluctuates, basedon the amount of cash balances available for investment, borrowings under ourlines of credit, interest and other expenses related to our equipmentborrowings, and realized gains and losses on investments. Other income(expenses), net decreased to approximately $448,000 for the nine months endedSeptember 30, 2003 from approximately $725,000 for the nine months endedSeptember 30, 2002. This decrease resulted from lower prevailing interest ratesand lower cash and investment balances.

 

**Income taxes.**  For the nine months ended September 30, 2003and 2002, our tax provision was comprised of state and foreign taxes. For thenine months ended September 30, 2003, our tax provision was greater than inprevious periods due to income-based withholding taxes incurred from foreignservices revenue and the disallowance of net operating loss carryforwards incertain states where we conduct business. No provision for federal income taxeshas been recorded for the nine months ended September 30, 2003 or 2002 due to ouraccumulated net operating losses. We have recorded a valuation allowance forthe full amount of our net deferred tax assets because of the uncertaintysurrounding the realization of these future tax benefits.

 

As of December31, 2002, we had net operating loss carry-forwards for federal tax purposes ofapproximately $67.8 million. These loss carry-forwards are available toreduce future taxable income and begin to expire in 2011. Under provisions ofthe Internal Revenue Code, certain substantial changes in our ownership haveoccurred, and as a result, our future utilization of these net operating losscarryforwards that we accumulated prior to the change in ownership will besubject to annual limitations. We have also generated foreign net operatinglosses of approximately $16.1 million that are available for carryforward.We may generate additional net operating loss carry-forwards in the future.

 

**Liquidityand Capital Resources**

 

We had cashand cash equivalents and short-term investments of $53.1 million as ofSeptember 30, 2003, a decrease of $3.9 million from $57.0 million asof December 31, 2002.

 

InJuly 2002, we refinanced $3.9 million of outstanding debt under ourformer credit facility with a new facility from Comerica Bank. The term loanmatures in June 2004 and bears interest at the bank’s prime rate plus 50basis points (4.50% as of September 30, 2003). The balance outstanding underthe term loan was approximately $1.5 million as of September 30, 2003. Wealso obtained a secured revolving line of credit and an equipment line ofcredit with Comerica Bank.

 

We may borrowup to $10 million under the revolving line of credit, with a$2.5 million sub-limit for the issuance of letters of credit. Advancesunder the revolving line of credit are limited to the lesser of$10 million or 80% of eligible accounts receivable, as defined in the loanagreement. The revolving line of credit bears interest at the bank’s prime rate(4.00% as of September 30, 2003) and matures in July 2004. There was nooutstanding balance under the revolving line of credit as of September 30,2003.

 

We may borrowup to $5 million under the equipment line of credit, which bears interestat the bank’s prime rate plus 50 basis points (4.50% as of September 30, 2003).The equipment line of credit had two interest only payment periods, one thatended on January 30, 2003 and one that ended on July 30, 2003.  Commencing on July 31, 2003, interest andprincipal payments are due on all borrowings made under the equipment line ofcredit, which matures in full on July 30, 2005.. In the first and thirdquarters of 2003, we

 

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borrowed approximately $614,000and $488,000, respectively against the equipment line of credit. Theoutstanding balance under the equipment line of credit was approximately$918,000 as of September 30, 2003.

 

The terms ofthe revolving line of credit and equipment line of credit require us to complywith certain financial covenants, including, restrictions and limitations on futureindebtedness, sale of assets and material changes in our business. Thefinancial covenants include a minimum modified quick ratio, as defined in theloan agreement, of 2.0 to 1.0 and a maximum ratio of total liabilities totangible net worth of 1.5 to 1.0. Under the most restrictive of these financialcovenants, our quarterly pro forma income (loss), as defined, cannot exceedzero. Through September 30, 2003, we were in compliance with these covenantsand expect to be in compliance for at least the next 12 months.

 

Pro formaincome (loss) is defined in the loan agreement as net income, plus interestexpense, taxes, non-cash charges (including depreciation, amortization,stock-based compensation, research and development related charges and one-timerestructuring charges), and cash restructuring charges (not to exceed$5.0 million in the aggregate), less interest income and any one-time ornon-recurring revenue.

 

We havevarious capital leases due over 36-month to 48-month repayment periods that arecollateralized by our intellectual property. In March 2003, we obtained a newequipment leasing arrangement with a vendor for approximately $886,000. Amountsborrowed are due over 36 months. Total capital lease obligations outstanding asof September 30, 2003, were approximately $798,000.

 

We reimburseFord for certain expenses incurred by Ford for our use of Ford’s facilities,the costs of leased employees, and maintenance and expenses related to theacquired technology. We expect to pay approximately $420,000 in fees to Fordeach month for reimbursement of these expenses. For the quarters endedSeptember 30, 2003 and 2002, we paid Ford approximately $1.2 million and$1.4 million, respectively. For the nine months ended September 30, 2003and 2002, we paid Ford approximately $5.1 million and $4.0 million,respectively. These payments increased beginning in December 2002, when weassumed responsibility for managing Ford’s operations in Europe. However, weexpect payments to decrease in the future as we leverage our existingfacilities and employees and deploy our own technology.

 

Net cash usedin operating activities totaled approximately $1.0 million for the nine monthsended September 30, 2003, compared to $3.0 million for the nine months endedSeptember 30, 2002. Net cash flows used in operating activities reflect the netlosses of approximately $1.6 million and $10.9 million for the nine monthsended September 30, 2003 and 2002, respectively, were partially offset bynon-cash expenses relating to stock-based compensation, depreciation andintangible amortization expense, the provision for doubtful accounts,amortization of the revenue discounts related to customer contracts, andamortization of capitalized internal-use software costs. In addition, net cashused in operating activities decreased for the nine months ended September 30,2003 due to increases in accounts receivable, prepaid expenses and otherassets, and decreases in accounts payable and accrued expenses and deferredrevenue, partially offset by cash provided by increases in accrued compensationand benefits.

 

Net cash usedin investing activities was approximately $4.8 million for the nine monthsended September 30, 2003 compared to net cash provided by investing activitiesof approximately $18.1 million for the nine months ended September 30, 2002.This change was due to our investing activities that included our acquisitions,additions of property and equipment, and purchases and sales of short-terminvestments. We anticipate that our capital expenditures will remain relativelyconstant in the near term. We may also utilize our cash to acquire othercompanies.

 

Net cashprovided by financing activities was approximately $2.2 million and$1.1 million for the nine months ended September 30, 2003 and 2002,respectively. This change was due to our financing activities that included thenet proceeds from the exercise of employee stock options, issuance of stock forthe employee stock purchase plan, proceeds from our equipment line of creditand principal payments on our debt.

 

We expect topay approximately $2.8 million, $1.8 million, $616,000 and $53,000 on our termloan, equipment line of credit, and capital lease obligations in 2003, 2004,2005, and 2006, respectively. We will fund these commitments through ourcurrent cash resources and our future cash flow from operations.

 

We intend tocontinue investing in the expansion of our business, particularly to build outour global platform and infrastructure. Our future liquidity and capitalrequirements will depend on numerous factors, including:

 

•                  The costs andtiming of expansion of sales and marketing activities;

 

•                  The costs andtiming of expansion of our operating capabilities;

 

•                  The costs andtiming of our product development efforts and the success of these developmentefforts;

 

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•                  The extent towhich our existing and new products and services gain market acceptance;

 

•                  The level andtiming of our revenues;

 

•                  The costsinvolved in maintaining and enforcing our intellectual property rights; and

 

•                  Availableborrowings under line of credit and capital lease arrangements.

 

Accordingly, until we generateenough profit from our operations to fund these investments fully, our cash,cash equivalents, and short-term investments are likely to continue to decline.In addition, we may use cash resources to fund acquisitions of complementarybusinesses and technologies. We believe that our current cash resources will besufficient to meet our working capital and capital requirements for at leastthe next 12 months. Thereafter, we may find it necessary to obtainadditional equity or debt financing. In the event that additional financing isrequired, we may not be able to raise it on terms acceptable to us, if at all.

 

**RecentAccounting Pronouncements**

 

In July 2003,the Emerging Issues Task Force issued a final consensus on EITF Issue No. 03-5,*Applicability of AICPA Statement of Position97-2, Software Revenue Recognition, to Non-Software Deliverables in anArrangement Containing More-Than-Incidental Software*.  This consensus is effective immediately anddiscusses the criteria for determining whether non-software deliverables insoftware arrangements are considered to be software-related and, therefore,included within the scope of SOP 97-2. The adoption of EITF 03-5 did not have amaterial effect on our financial statements.

 

**RisksRelating to Our Business**

 

Beforedeciding to invest in us 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 anduncertainties described below are not the only ones facing us. Additional risksand uncertainties not presently known to us or that we currently deemimmaterial may also affect our business operations. If any of these risksactually occur, our business, financial condition or results of operationscould be seriously harmed. The market price for our common stock could decline,and you may lose all or part of your investment.

 

**Wehave a history of losses and expect to incur losses in the near future.**

 

We incurrednet losses of approximately $11.4 million, $45.8 million,$35.8 million, $10.5 million and $8.3 million in 2002, 2001,2000, 1999, and 1998, respectively. Our accumulated deficit as of September 30,2003 was approximately $184.1 million. We believe that the success of ourbusiness depends on our ability to significantly increase revenue and to limitincreases in our operating expenses. If our revenues fail to grow atanticipated rates or our operating expenses increase without a correspondingincrease in our revenues, or we fail to adjust operating expense levelsappropriately, we may not be able to achieve or maintain profitability, whichwould increase the possibility that the value of your investment will decline.

 

**Ourinability to provide managed services successfully to existing and futureclients would substantially reduce our revenues, increase our costs, hurt ourreputation in our industry, and adversely affect our business.**

 

As a criticalelement of our strategy, we intend to continue providing managed services toour current and future clients. These services range from providing operationalmanagement for a single global trade process to managing a client’s entireworldwide trade operation. We expect that, over time, the revenues we receivefrom providing managed services to our current and future clients will continueto represent the largest portion of our total revenues. Any inability toperform our agreements with Ford, Lucent Technologies and Nortel Networks or toprovide managed services successfully to our other clients would significantlyreduce our revenues, increase our costs, hurt our reputation in our industryand adversely affect our business and results of operations.

 

**Thereexists a significant concentration of our revenues among a few materialcustomers.**

 

In 2002, 2001,and 2000, we derived approximately 59%, 67%, and 38%, respectively, of ourtotal revenues from our top five customers. For the nine months ended September30, 2003 and 2002, we derived approximately 65% and 59%, respectively, of totalrevenues from our top five customers. In 2002, 2001, and 2000, Ford accountedfor 30%, 35%, and 17% of total revenues, respectively. For the nine monthsended September 30, 2003, Ford accounted for 30% of total revenues. In 2002,Lucent Technologies accounted for 11% of total revenues. For the nine monthsended September 30, 2003, Lucent Technologies accounted for 15% of totalrevenues. We expect such customer concentration of revenues to exist for theforeseeable future. There were no other customers that accounted for greaterthan 10% of the Company’s revenue for the periods noted. As we continue toexpand our relationships with existing managed services customers and if wecontinue to sign contracts of a large magnitude with new customers, each such

 

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relationship will be of addedsignificance to us. Additionally, we expect that we will continue to derive asignificant portion of our total revenues from Ford and such other customersfor at least the next several years. Certain of our agreements permit ourcustomers to terminate for convenience after a specified period of time. Wecannot assure you that we will be able to maintain or renew these agreements.If any of these events occur, our results of operations and financial conditionwould be adversely affected.

 

**Certainof our customers operate in industries that have been experiencing greater thannormal difficulties in a declining economy. If the industries of which thesecompanies are a part continue to experience economic difficulties, our businesswould be adversely affected.**

 

During thepast few years, there has been a decline in the economies of the U.S. and othercountries. In addition, some of our customers operate in industries that haveexperienced greater difficulties than the overall economy. If these industriescontinue to experience difficulties, it could adversely affect our business andour ability to collect receivables from these customers.

 

**Anyrestriction on our ability to access cost-effectively and legally a foreigncountry’s rules and regulations that we incorporate into our global tradecontent, Global Content, or any failure to update our Global Content timely toinclude changes in such rules and regulations, may compromise the effectivenessof our solutions and adversely impact our revenues.**

 

The success ofour Global Trade Management solutions for our clients depends on our ability toobtain or access the complex rules and regulations published by foreigngovernments governing a particular country’s import and export of goods. Thefoundation of our solutions, Global Content, is subject to rapid change at theinitiative of foreign governments based on factors beyond our control. Anychanges in a country’s rules and regulations relating to global trade that weare unable to include in our Global Content library may result in dissatisfiedclients and possible litigation. Moreover, to the extent a foreign governmentrestricts our access to its rules and regulations, charges a fee for suchaccess or grants proprietary rights to such information to one or more of ourcompetitors, our solutions may not be useful to, or cost efficient for, ourcurrent and future clients and our revenues could decrease.

 

**Fluctuationsin our operating results and the composition of our revenues, particularlycompared to the expectations of market analysts and investors, may cause theprice of our common stock to decline.**

 

Our operatingresults have varied in the past and could fluctuate significantly in thefuture. We expect that our operating results will continue to vary in thefuture, based on a number of factors, including:

 

•                  The possibleloss of a significant customer;

 

•                  The possiblerenegotiation of contract terms with one or more significant customers;

 

•                  Fluctuations inthe demand for our products and services;

 

•                  Our ability toachieve targeted cost and expense reductions;

 

•                  Our ability, andthe associated timing, to convert our customers on to our technology platform;

 

•                  Price andsolution competition in our industry;

 

•                  Changes in import/exportlaws;

 

•                  Changes ingeneral economic conditions that may adversely affect technology companies inour industry;

 

•                  The timing oforders and our ability to satisfy all contractual obligations in customercontracts;

 

•                  Variability inthe mix of our managed services, software, and consulting revenues; and

 

•                  Timing of newsolution introductions and enhancements to our TradeSphere and TradePrism.comsolutions.

 

Due to theforegoing factors, our annual or quarterly results of operations may not meetthe expectations of securities analysts and investors, which may cause theprice of our common stock to decline.

 

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**Ourability to achieve or maintain profitability will be constrained if we do notmanage our rapid growth effectively.**

 

During thepast three years, we have significantly increased our employee base to meetincreasing demand for our client solutions. As we expand our operations, weexpect to increase the size of our employee base. Our management and operationshave been strained by this growth and will continue to be strained by ouranticipated growth. To compete effectively and to manage future growth, we mustcontinue to improve our financial and management controls, reporting systemsand procedures on a timely basis. We must also expand, train, and manage ouremployee base. If we are not successful in managing our growth, our ability toachieve and maintain profitability may be harmed.

 

**Wemay be unable to attract and retain key personnel, which would adversely affectour ability to develop and manage our business effectively.**

 

Our futureperformance will depend largely on the efforts and abilities of our seniorexecutives, key technical, professional services, sales and marketing andmanagerial personnel. This dependence is extremely important to our businessbecause personal relationships are a critical element of obtaining andmaintaining clients. Our success will depend on our ability to attract andretain these key employees in the future. The employment of our key personnel,including our executives, is at will. The market for such individuals isextremely competitive, and we may not find qualified replacements for personnelwho leave us. The loss of, or the inability to attract, any one or more of ourkey personnel may harm our ability to develop and manage our businesseffectively.

 

**Ifwe are unable to obtain additional capital as needed or obtain additionalcapital on unfavorable terms in the future, our operations and growth strategymay be adversely affected, and the market price for our common stock coulddecline.**

 

Historically,we have financed our operations primarily through the sale of our equitysecurities. As of September 30, 2003, we had cash and cash equivalents ofapproximately $20.4 million plus short-term investments of approximately$32.7 million and an accumulated deficit of approximately$184.1 million. While we believe that our current cash resources will besufficient to meet our working capital needs and finance capital expendituresfor at least the next 12 months, we may need to raise additional debt orequity capital to fund expansion of our operations, to enhance our products andservices, or to acquire or invest in complementary products, services,businesses or technologies. If we raise additional funds through furtherissuances of convertible debt or equity securities, our existing stockholderscould suffer significant dilution, and any new equity securities we issue couldhave rights, preferences, and privileges superior to those of holders of ourcommon stock. Any debt financing secured by us in the future could involverestrictive covenants relating to our capital raising activities and otherfinancial and operational matters, which may make it more difficult for us toobtain additional capital and to pursue business opportunities, includingpotential acquisitions. In addition, we may not be able to obtain additionalfinancing on terms favorable to us, if at all. If adequate funds are notavailable on terms favorable to us, our operations and growth strategy may beadversely affected and the market price for our common stock could decline.

 

**Ourinternational operations and planned expansion expose us to business risks thatcould limit the effectiveness of our growth strategy and cause our operatingresults to suffer.**

 

We intend tocontinue to expand our international operations substantially and enter newinternational markets. This expansion will require significant managementattention and financial resources to translate successfully our softwareproducts into various languages, to develop compliance expertise relating tointernational regulatory agencies and to develop direct and indirectinternational sales and support channels. We face a number of risks associated withconducting our business internationally that could negatively impact ouroperating results, including:

 

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

 

•                  Longer salescycles associated with educating foreign clients about the benefits of ourproducts and services;

 

•                  Currencyfluctuations and exchange rates;

 

•                  Difficulty inrepatriating cash from certain 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 toconsider characteristics unique to technology systems used internationally; and

 

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•                  Economic orpolitical instability in some international markets.

 

We may notsucceed in our efforts or we may experience delays in the execution of our planto enter new international markets, establish, maintain or increaseinternational demand for our solutions or expand our international operations,which may harm our growth strategy and could cause our operating results tosuffer.

 

**Aswe expand globally, we may establish operations in countries that become politicallyor economically unstable, which may put the capital we have invested in suchoperations at a risk of loss and cause our business to be adversely affected.**

 

We intend tocontinue expanding our operations and serving our existing clients internationally.As we do so, we may establish operations in certain countries that may becomepolitically or economically unstable. If a country in which we commenceoperations becomes politically or economically unstable, the money andresources we have invested to establish such operations may be put at risk ofloss, and if such money and resources are lost, our business may be adverselyaffected.

 

**Ourlengthy and variable sales cycle makes it difficult for us to predict when orif sales will occur and, therefore, we may experience an unplanned shortfall inrevenues.**

 

Our solutionshave a lengthy and unpredictable sales cycle that contributes to theuncertainty of our operating results. Clients typically view the purchase ofour solutions as a significant and strategic decision. As a result, clients andpotential clients generally evaluate our solutions and determine their impacton existing infrastructure over a lengthy period of time. Our sales cycle hasaveraged approximately six to nine months for software sales and nine to12 months for managed services agreements, depending on a particularclient’s implementation requirements and whether the client is new or isextending an existing implementation. The license of our software products maybe subject to delays if the client has lengthy internal budgeting, approval,and evaluation processes. Additionally, in the current economic environment,many companies have reduced their budgets for information technology spending.If companies continue reducing their spending on information technology assets,we may be subject to additional delays and corresponding reductions in sales ofour software products. Additionally, we may incur significant selling andmarketing expenses during a client’s evaluation period, including the costs ofdeveloping a full proposal and completing a rapid proof of concept or customdemonstration, before the client engages us. Larger clients may purchase oursolutions as a part of multiple simultaneous purchasing decisions, which mayresult in additional unplanned administrative processing and other delays. Inaddition, any prolonged decline in the demand for technology products andservices could reduce the market for our solutions, making sales moredifficult. If revenues forecasted from a specific client for a particularquarter are not realized or are delayed to another quarter, we may experiencean unplanned shortfall in revenues, which could adversely affect our operatingresults.

 

**Anyloss of our licensed third-party technology may result in increased costs of,or delays in, providing our solutions, which would harm our operating results.**

 

We licensetechnology from several companies on a non-exclusive basis that we haveintegrated into our TradeSphere product suite, including development tools andfacilities from IBM (WebSphere and MQ Series) and Forte, which was acquired bySun Microsystems. Our license with Sun Microsystems expires onDecember 31, 2005, and our license with IBM expires on June 30, 2006.If we cannot renew these technology licenses, we likely would face delays inthe licensing of our TradeSphere products until equivalent technology, if any,is identified, licensed and integrated, which would adversely affect ouroperating results.

 

**Ifwe interpret and analyze incorrectly the various laws and regulations containedin our Global Content, we may face costly liability claims.**

 

The foundationof our software solutions and managed services, Global Content, is arules-based application that provides comprehensive management of governmenttrade regulations and programs that must be acquired, interpreted, and updatedby Vastera’s in-country trade experts. Because of the legalistic and complexnature of Global Content, our inability to interpret and analyze accurately therules and regulations upon which our Global Content is based may expose us toliability claims from our clients in connection with our current products andfuture products. Any provisions in our agreements with our clients designed tolimit our exposure to potential product liability claims and any productliability insurance may not be adequate to protect us from such claims underour agreements. A successful product liability claim brought against us couldharm our financial condition. Even if unsuccessful, any product liability claimcould result in costly litigation and divert management’s attention andresources. In addition, the effective implementation of our products may dependupon the successful operation of third-party licensed products in conjunctionwith our products and, therefore, any undetected errors in these licensedproducts may prevent the implementation or impair the functionality of ourproducts, delay new product introductions, and harm our reputation.

 

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**Themarket for our Global Trade Management managed services offering is a nascentone, and if companies fail to adopt our managed services offerings, ourbusiness will be adversely affected.**

 

For mostcompanies, Global Trade Management is a critical but non-core businessfunction. Because the market for third-party Global Trade Management is anascent one, many companies may be reluctant or unwilling to utilize athird-party service provider to manage their global trade, and will retainthese functions in-house. If companies fail to adopt managed service offerings,our business will be adversely affected.

 

**Wemay be unable to protect our proprietary rights adequately, which could resultin their unauthorized use by our competitors and have an adverse impact on ourrevenues.**

 

Our successdepends on our ability to protect our proprietary rights. We rely primarily on:

 

•                  Confidentialityagreements with employees and third parties;

 

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

 

•                  Copyright, tradesecret, and trademark laws.

 

Despite ourefforts to protect our proprietary rights, unauthorized parties may copyaspects of our products and obtain and use information we regard asproprietary. Other parties may breach confidentiality agreements and otherprotective contracts. We may not become aware of these breaches or haveadequate 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.

** **

**Ourpatent protection strategy is in development currently, and any inadequacy inthe protection of our technology could increase our operating costs.**

** **

We may alsorely on patents to protect our proprietary rights in the future. Any patentstrategy we attempt to implement may not be successful and could harm ourbusiness by disclosing unpatentable trade secrets. The laws that apply to thetypes of patents we may seek are evolving and are subject to change. Wepresently have filed provisional patent applications in the United States.These applications may not result in patents or may take longer than we expectto result in patents. We may also decide not to file patent applications in allthe countries in which we operate or intend to operate. Our decision to do somay inhibit our ability to protect our proprietary rights in those countries. Evenif we are issued patents, we cannot assure you that they will provide us anymeaningful protection or competitive advantage. If we try to enforce ourpatents, third parties may challenge our patents in court or before the UnitedStates Patent and Trademark Office. An unfavorable outcome in any suchproceeding could require us to cease using the technology or to license rightsfrom prevailing third parties. We cannot assure you that any prevailing partywould offer us a license or that we could execute a license on terms that arecommercially acceptable to us, if at all. Developing and enforcing our patentprotection strategy is likely to increase our operating costs.

 

**Wemay have to defend against intellectual property infringement claims, whichcould be expensive, and if we are unsuccessful, could result in substantialmonetary liability and disrupt our business.**

 

We cannot becertain that our solutions do not or will not infringe valid patents,copyrights, trademarks, or other intellectual property rights held by thirdparties, inside and outside the U.S. As a result, we may be subject to legalproceedings and claims from time to time relating to the intellectual propertyof others in the ordinary course of our business.

 

We may incursubstantial expenses in defending against any third-party infringement claims,regardless of their merit. Successful infringement claims against us may resultin substantial monetary liability, may divert management’s attention from ourcore business, and may disrupt our business. In addition, if we areunsuccessful in defending such claims, we may need to obtain a license to thetechnology, which may not be available on acceptable terms or at all.

 

**Anyfuture acquisitions may be difficult to integrate and disruptive to our operations.We may not realize the expected benefits from any such acquisitions, and if wecannot address the challenges presented by acquisitions, our operating resultsmay be harmed.**

 

In the past,we have acquired businesses to expand our operations or market presence, and weintend to continue our expansion by acquiring or investing in companies, assetsor technologies that complement our business and offer opportunities forgrowth. These transactions involve many risks and challenges that we might notsuccessfully overcome, including:

 

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

 

•                  Disruption ofour ongoing business and diversion of management’s attention from otherbusiness concerns;

 

•                  Risks ofentering markets in which we have no or limited prior experience;

 

•                  Issuances ofequity securities that may dilute your ownership interest in our common stock;

 

•                  Cash paymentsto, or the assumption of debt or other liabilities of, the companies weacquire; and

 

•                  Large write-offsrelated to goodwill and other intangible assets and other adverse auditconsequences.

 

**Yourability to influence corporate matters may be limited because our officers,directors, and affiliates will be able to control, and Ford will be able toinfluence, matters requiring stockholder approval and these parties may haveinterests that differ from yours.**

 

As ofSeptember 30, 2003, our officers, directors, and affiliated entities, togetherwith Ford, beneficially owned approximately 57.9% of the outstanding shares ofour common stock. This concentration of ownership may delay, deter, or preventacts that would result in a change of control, which in turn could reduce themarket price of our common stock. Accordingly, these stockholders collectivelymay be able to control all matters requiring stockholder approval and, thereby,our management and affairs. Ford beneficially owns approximately 19.4% of theoutstanding shares of our common stock. As the single largest stockholder ofVastera, Ford may exercise significant influence over corporate acts requiringstockholder approval, including a merger or sale of Vastera. Also, so long asFord holds at least 5% of our common stock, it has the right to appoint anon-voting observer to our board of directors. Our officers, directors, andaffiliated entities, together with Ford, may have interests that differ fromyour interests, and their decisions may negatively impact our future success.

 

**Becauseof provisions in our corporate charter and bylaws, Delaware law and Ford’ssignificant ownership position, other companies may have difficulty acquiringus, even if doing so would benefit our stockholders.**

 

Provisions inour certificate of incorporation, in our bylaws and under Delaware law couldmake it more difficult for other companies to acquire us, even if doing sowould benefit our stockholders. Our certificate of incorporation and bylawscontain the following provisions, among others, which may inhibit an acquisitionof our company by a third party:

 

•                  a staggeredboard of directors, where stockholders elect only a minority of the board eachyear;

 

•                  advancenotification procedures for matters to be brought before stockholder meetings;

 

•                  a limitation onwho may call stockholder meetings; and

 

•                  a prohibition onstockholder action by written consent.

 

We are subjectto provisions of Delaware law that prohibit us from engaging in any businesscombination with any “interested stockholder,” meaning generally a stockholderwho beneficially owns more than 15% of our stock, for a period of three yearsfrom the date this person became an interested stockholder, unless variousconditions are met, such as approval of the transaction by our board. Thiscould have the effect of delaying or preventing a change in control.Additionally, in connection with establishing our strategic relationship withFord, Ford acquired 8,000,000 shares of our common stock. Because of Ford’ssignificant holdings, other companies may be deterred from acquiring us, evenif being acquired would be in the best interest of our other stockholders.

 

**Item 3****:****                          Qualitative and QuantitativeDisclosures About Market Risk**

 

We developsolutions in the United States and market them in North America, and to alesser extent, in Europe, Latin America, and the Asia-Pacific regions of theworld. Our financial results could be affected by factors such as changes inforeign currency exchange rates or weak economic conditions in foreign markets.With most of our sales being generated in U.S. dollars, a strengthening of thedollar could make our products less competitive in foreign markets and requireus to lower our prices.

 

Currently wedo not use financial instruments to hedge operating expenses of our foreignsubsidiaries. We intend to assess the need to utilize financial instruments tohedge currency exposures on an ongoing basis. Amounts outstanding under ourterm loan and equipment line of credit arrangements expose us to interest raterisk if the prime rate increases. We had approximately

 

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$2.4 million in variablerate debt as of September 30, 2003. Our interest income is sensitive to changesin the general level of U.S. interest rates, particularly since the majority ofour investments are in short-term instruments. Due to the short-term nature ofour investments, we believe that we do not face substantial market risk. We donot hold or issue derivative securities, derivative commodity instruments, orother financial instruments for trading purposes. Therefore, no quantitativetabular disclosures are required.

 

**Item 4****:****                          Controls and Procedures**

 

An evaluationwas carried out under the supervision and with the participation of management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-14 and 15d-14 under the SecuritiesExchange Act of 1934). Based upon that evaluation, the Chief Executive Officerand Chief Financial Officer concluded that, as of the end of the period coveredby this report, those disclosure controls and procedures were adequate toensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized, andreported, within the time periods specified in the Commission’s rules andforms.

 

There havebeen no changes in our internal controls over financial reporting that occurredduring the third quarter of 2003 that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

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**PART II****- OTHER INFORMATION**

 

**Item 1:****                          Legal Proceedings**

 

We are periodicallya party to disputes arising from normal business activities. In the opinion ofmanagement, resolution of these matters will not have a materially adverseeffect upon our financial condition or our future operating results.

 

OnMarch 14, 2001, Expeditors International of Washington, Inc. andExpeditors Tradewin, L.L.C. (collectively “Expeditors”) filed suit against usin the United States District Court for the Eastern District of Michigan,Southern Division primarily alleging that we misappropriated certain ofExpeditors’ trade secrets in connection with our acquisition of Ford’s customsoperations, by utilizing systems and business processes that Expeditorsassisted in developing for Ford and through our employee hiring practices. Inconnection with our acquisition of Ford’s customs operations, Ford agreed toindemnify us for intellectual property infringement claims, and Ford iscurrently indemnifying us in connection with this litigation. Although Ford isobligated to indemnify us for claims of intellectual property infringementarising from the property we acquired from it, Ford is not obligated toindemnify us for damages and legal fees arising from claims pertaining solelyto our acts, upon which certain of the claims asserted in this matter have beenbased.

 

**Item 2:****                          Changes in Securities and Use of Proceeds**

 

We issued51,046 shares of common stock in the quarter ended June 30, 2003 in connectionwith our acquisition of GE’s internal US customs operations. In issuing theseshares, we relied on Section 4(2) of the Securities Act and Rule 506 ofRegulation D promulgated thereunder for exemptions from the registrationrequirements of the Securities Act. The entity to which these shares of commonstock were issued to an accredited investor.

 

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

 

None.

 

**Item 4:****                          Submission of Matters to a Vote of Security Holders**

 

None.

 

**Item 5:****                          Other Information**

 

None.

 

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**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 November 12, 2003. |
|                                        |   |   |
| 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 November 12, 2003. |
|                                        |   |   |
| 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 November 12, 2003. |
|                                        |   |   |
| 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 November 12, 2003. |
|                                        |   |   |
| (b)                                         |   | Reports on Form 8-K. |

 

On October 23,2003, we filed a Form 8-K furnishing a press release that announced ourfinancial results for the quarter ended September 30, 2003 and presenting certainother information.

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized in Dulles, Virginia on November 12, 2003.

 
|   | 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 November 12, 2003. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                             |
| 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 November 12, 2003.               |
|   |   |                                                                                                                                                                                             |
| 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 November 12, 2003. |
|   |   |                                                                                                                                                                                             |
| 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 November 12, 2003.               |

 

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