**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**ý****  ****ANNUAL REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THEFISCAL YEAR ENDED DECEMBER 31, 2004**

 

**o****  ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commissionfile number 000-29793**

 

**ARTEMIS INTERNATIONAL SOLUTIONSCORPORATION**

(Exact name of Registrant asspecified in its charter)

 
| **Delaware**                                                                                               | ** ** | **13-4023714**                           |
|------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|
| (State of Incorporation)                                                                                   |       | (I.R.S. Employer  Identification Number) |
|                                                                                                       |       |                                     |
| **4041  MacArthur Boulevard, Suite 401, Newport Beach, CA 92660**                                          |
| (Address of principal  executive offices, including zip code)                                              |
|                                                                                                       |       |                                     |
| **(949)  660-6500**                                                                                        |
| (Registrant’s telephone,  including area code)                                                        |
|                                                                                                       |       |                                     |
| Securities registered  pursuant to Section 12(b) of the Act: **NONE**                                 |
|                                                                                                       |       |                                     |
| Securities registered  pursuant to Section 12(g) of the Act: **Common  Stock, $.001 par value**  |

 

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Indicate by check mark whether the Registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes  ý    No  o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of the Registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes  o    No  ý

 

The aggregate market value of the Registrant’soutstanding common stock held by non-affiliates of the Registrant on June 30,2004 was approximately $4.6 million.  There were 10,537,898 shares ofcommon stock outstanding as of March 11, 2005.

 

 

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**ARTEMISINTERNATIONAL SOLUTIONS CORP.**

**AnnualReport on Form 10-K**

**For theYear Ended December 31, 2004**

 

**TABLE OFCONTENTS**

 
| **Part I**                                     |
|------------------------------------------------|
|                                           |   |   |
| Item 1.                                        | Business |   |
|                                           |   |   |
| Item 2.                                        | Properties |   |
|                                           |   |   |
| Item 3.                                        | Legal Proceedings |   |
|                                           |   |   |
| Item 4.                                        | Submission of Matters to a Vote of Security  Holders |   |
| ** **                                     | ** ** | ** ** |
| **Part II**                                    |
|                                           |   |   |
| Item 5.                                        | Market for Registrant’s Common Equity, and  Related Stockholder Matters. |   |
|                                           |   |   |
| Item 6.                                        | Selected Financial Data. |   |
|                                           |   |   |
| Item 7.                                        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations. |   |
|                                           |   |   |
| Item 7a.                                       | Quantitative and Qualitative Disclosures  about Market Risk. |   |
|                                           |   |   |
| Item 8.                                        | Financial Statements and Supplementary Data |   |
|                                           |   |   |
| Item 9.                                        | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure |   |
|                                           |   |   |
| Item 9A.                                       | Controls and Procedures |   |
| ** **                                     | ** ** | ** ** |
| **Part III**                                   |
|                                           |   |   |
| Item 10.                                       | Directors and Executive Officers of the  Registrant |   |
|                                           |   |   |
| Item 11.                                       | Executive Compensation |   |
|                                           |   |   |
| Item 12.                                       | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters |   |
|                                           |   |   |
| Item 13.                                       | Certain Relationships and Related  Transactions |   |
|                                           |   |   |
| Item 14.                                       | Principal Accountant Fees and Services |   |
|                                           |   |   |
| **Part  IV**                                   |
|                                           |   |   |
| Item 15.                                       | Exhibits and Financial Statement Schedules |   |
|                                           |   |   |
| **EXHIBIT INDEX**                              |   |
|                                           |   |   |
| **SIGNATURES**                                 | ** ** |
| ** **                                     | ** ** | ** ** |
| **INDEX TO CONSOLIDATED FINANCIAL STATEMENTS** | ** ** |

 

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*This Report on Form 10-K containsforward-looking statements that involve risks and uncertainties.  Actualevents and results could differ materially from those anticipated in theseforward-looking statements as a result of certain factors.  See Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations - SafeHarbor Statement.”*

 

**PART I**

 

**Item 1.  Business.**

 

ArtemisInternational Solutions Corporation, a Delaware Corporation, including itssubsidiaries (“Artemis”, “We”, or the “Company”), is one of the world’s leadingproviders of Investment Planning and Control TM (“IP& C”) software and services. Since 1976, we have been helping organizationsimprove their performance through portfolio, project and resource management.

 

We provide a comprehensive set of Investment Planning and Controlsolutions designed to helporganizations execute their strategies through effective project portfoliomanagement. These solutions combine our flagship product Artemis 7 with verticalizedsolutions-oriented consulting services to address the needs of both private andpublic sector organizations in the areas of:

 

•                  InformationTechnology (“IT”) Management and Governance

•                  New ProductDevelopment and Launch

•                  StrategicAsset Optimization

•                  Aerospace andDefense Program Management

•                  PublicInvestment Management

 

Our Investment Planning andControl solutions cover the full investment lifecycle, from selection andprioritization based on strategy and operational goals, to reiterative budgetingand resource allocation, to project execution and performance measurement,including value and benefit assessment. Our customers rely on us to provide them with a solution to bettermanage their IT investments, develop new products such as pharmaceuticals,promote business efficiency through better alignment and allocation ofresources in governmental agencies, maintain nuclear power stations, and managedefense programs.

 

The solutionsare deployed in a phased approach using SM2, the Artemis Solution ManagementMethodologyTM designed to accelerate return on investment (“ROI”)and minimize implementation risks.

 

More than 400 companiesrepresenting 600,000 users in 44 different countries have licensed Artemissolutions in a broad range of industries, including: Chicago MercantileExchange, Exelon Energy, AMI Semiconductor, Nokia, France Telecom,Lockheed Martin, Telecom Italia, Toshiba, MoneyGram and USAA.

 

Our corporate offices are located at 4041MacArthur Boulevard, Suite 401, Newport Beach, CA 92660 and our telephonenumber at that address is (949) 660-6500.

 

**Industry Overview**

 

Private andpublic sector organizations are under growing pressure to deliver more withless, and improve the alignment of their investments with evolving objectivesin an increasingly competitive market characterized by tighter margins, shorterproduct lifecycles, economic and political uncertainty, and more stringentregulatory controls and compliance criteria.

 

Across allindustry sectors, 2004 has confirmed the urgent need to improve the processesfor selecting, budgeting, prioritizing and executing investments in order tooptimize corporate resources, improve business performance and ensurevisibility throughout the process.

 

Similar issuesexist in all areas of the business including IT, Research and Development andAsset Lifecycle Management:

•                  Increasing visibility and alignmentof the investment portfolio with evolving business strategy

•                  Making objective, value-basedinvestment selections

•                  Maintaining agility in theallocation of funds and resources to reflect changing priorities

•                  Aligning investment planning andexecution to ensure business benefits achievement and value delivery

•                  Minimizing unnecessary costs byearly identification of investments that bring insufficient value 

•                  Enabling effective governance overboth strategy and execution

•                  Ensuring regulatory compliancethrough standard methods and processes

 

Theserequirements make Portfolio and Value Management one of the most powerfulcombinations for improved business performance.

 

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•                  **Within ITorganizations**accordingto the META GROUP, Portfolio Management (PfM) has become the premier IT/businesscommunication tool for optimizing IT investment. Through 2007, more than 70% offirms will combine IT portfolio management, IT value management, enterprisearchitecture and business relationship management as critical integrated ITorganizational practices. Similar trends are reported by the Gartner Group.

 

•                  **Within R&Dorganizations**according to AMR Research, only 31% of companies surveyed acknowledged havingstrategic and financial control over their investments in new productdevelopment and launch. Others have been advised to implement portfoliomanagement to ensure the most important projects in the pipeline are properlyresourced and executed. Gartner Group similarly forecasts that from 2004 to2010, global 1000 manufacturers will increase their investment in portfoliomanagement by a factor of 10 to improve research and development (“R&D”)performance (60% probability).

 

Most organizations have beentrying to solve the above issues using in-house tools, desktop software andpoint solutions, without being able to leverage the benefits associated with acomprehensive and dynamic view of the investment portfolio through its fulllife-cycle, and involving all stakeholders throughout the organization.

 

## **OurSolutions**

## ** **

Our solutionshelp translate strategy into measurable results by providing a permanent,comprehensive view of the investment portfolio, agility to respond to change,detailed performance analysis, support for rapid objective decision making, andtimely communication to stakeholders.

 

Theyincorporate a fully integrated set of top-down and bottom-up processes enablingall stakeholders to concentrate on the key business decisions related to theirinvestments and projects without getting caught-up in the details: fromselection and prioritization based on strategy and operational goals, toreiterative budgeting and resource allocation, to project execution andperformance measurement, including value and benefit assessment.

 

Our solutions are designed todeliver value throughout the full investment life-cycle to all stake-holders:Chief Information Officer, CFO, R&D managers, line of businessmanagers, project and resources managers, knowledge workers, customersand partners. Unlike other systems, our solutions are completelyintegrated to offer a real connection between the different processes includingdemand management, portfolio and budgeting management, execution management,benefit measurement and delivery control.

 

The web-basedsoftware underlying our solutions is accessible through any browser, and isscalable for tens of thousands of users. Multiple language and currency supportensures seamless integration, consolidation and analysis of all investments forour global customers.

 

## **Strategy**

## ** **

Our strategy isto become the leading provider of Investment Planning and Control solutions forlarge private and public sector organizations.

 

Our planincludes the following key components:

 

•                  Continue to show leadership infunctionality not only in IT Management but in other investment intensivebusinesses areas such as R&D or strategic asset management.

•                  Increase the leverage created by ourextensive international presence to improve our sales in growing and emergingregions

•                  Add more strategic partnerships toincrease our access to the market and the value delivered to customers

•                  Cultivate customer intimacy to enhanceimplementation service quality and build more industry best practices into oursolutions

 

## **Products**

## ** **

**Artemis 7**, the software product underlying our InvestmentPlanning and Control solutions, was first introduced in December 2001under the name Portfolio Director. Version 6.0 was released in November 2004,extending the capabilities of the previous version by adding:

 

•                  Performance-based budgetingcapabilities

•                  Microsoft Excel reporting usingleading edge web-based technology

•                  Bi-directional interface withMicrosoft Project®

•                  Full bottom-up cost and benefitsconsolidation

 

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The Company expects torelease Artemis 7, version 6.1 in June/July 2005 further extending thecapabilities by adding:

 

•                  Work-flow driven idea and requestmanagement

•                  Advanced Planning and Scheduling asan alternative to Microsoft Project usage

•                  Improved time reporting features

•                  Support of IBM DB2 UniversalDatabase

 

Artemis 7 incorporatesa fully integrated set of top-down and bottom-up collaborative processes:

 

***Investment Portfolio Management***

•                  Collect demands

•                  Define, classify, prioritizeinvestments

•                  Model andsimulate alternative investment strategies

•                  Recordinvestment risks and issues

•                  Regularlyreview investment performance and communicate status to stakeholders

 

***Performance Based Budgeting***

•                  Financial management of multi-yearinvestments

•                  Dynamic linkage of budgets tostrategy

•                  Manage fund requests, arbitrationand allocation process

•                  Maintainvisibility of budgeting and resource allocation decisions

•                  Manage full cost of investments

 

***Execution Management***

•                  Manage projects and work

•                  Allocate and optimize resources

•                  Manage deliverables

•                  Track time

•                  Manage risk and issues

•                  Assess results

 

This integrated set of processes is supported by horizontalcapabilities :

 

### ***Dashboards & Analytics***

### ** **

Acomprehensive set of standard dashboards and unlimited analytical capabilitieson investment portfolio management, budget and cost control, benefitmeasurements, resource usage and project management.

 

Inaddition to multiple scorecards and other on-line key performance indicators,the product offers sophisticated web-based integration with MicrosoftExcel.  An unlimited number of Excelbased reports can be created through pre-defined templates and fully integratedin each user environment while respecting data security requirements. Thesoftware also facilitates use of other third party Business Intelligence toolsby providing access to a set of ready to use reporting data tables.

 

#### ***Work Flow Management***

#### * *

The productuses investment and project management methodology templates to provideintegrated workflow control and stage gate capabilities.  These governance templates contain the steps,milestones and stakeholders involved in the lifecycle approval and fundingprocess for each investment or project including review, approval andauthorization steps.  The applicationuses workflows to prompt identified stakeholders to formally review and approvedifferent milestones and stages throughout the lifecycle of investments,programs and projects.

 

Triggers can send alertswithin the Artemis 7 platform or via email to defined investment projectstakeholders, providing instant notification of critical issues for review andapproval.

 

***Collaboration***

 

The product provides acomprehensive collaborative capability, allowing stakeholders and contributorsto store and share information.  Theintegrated document management capability allows documents and data to be linkeddirectly to the target investment, project or work items, while the discussionarea provides an informal process for threaded comments and

 

5

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notes.  Risksare more easily monitored and controlled through the shared Risks and IssuesRegister.  Users may subscribe tospecific documents receiving updates through email and home page alerting.

 

***Integration Management***

 

Artemis7 is an extensible solution, allowing integration with existing systems and thecapacity to extend standard system functionality through Custom Plug-ins,Application Program Interface (“API”) and Extensible Markup Language (“XML”)capabilities.

 

Artemis7 allows configurable access levels based on role and rights granted that allowusers to access the various processes and features of the solution based ontheir individual needs.  This approach byprocess favors phased implementations, allowing the organization to start witha 25 user system initially focused on portfolio and budget optimization, thenexpanding to ten of thousands of users leveraging all the business processessupported by the solution.

 

**Artemis Views,**a web and client server product designed to manageproject based work in organizations with well-established project managementpractices, comprises a series of core modules including:  Project Management, Advanced Planning andResourcing, Earned Value Management, Time Reporting, and Project Analytics.

 

##### **Technologyand Architecture**

##### ** **

The technologyunderlying our solutions offers a highly scalable and configurable environmenton a web-based architecture designed to support distributed environments.

 

**Multi-Platform**

 

Builtin J2EE (the most established Java programming language), the applicationsupports the majority of popular platforms and environments, allowing organizationsto leverage their existing investment in deployed technologies.

 

**Security**

 

Rolebased access security ensures that authorized users are presented with anintuitive, easy to navigate interface that provides only the informationappropriate to their role.

 

**Internationalization**

 

Designedfor global deployment using multiple currencies, the application providesmulti-language support including DBCS (Double Byte Character Set) and isavailable today in English, French, German, Spanish, Italian, Russian, Dutch,Japanese, Chinese and Korean.

 

**Integration**

 

Artemis7 is a fully extensible solution, allowing integration with existing systemsand the capacity to extend standard system functionality.  Custom Plug-ins enable event drivenextensions, while our API provides for more complex integrations andextensions.  In addition, the applicationprovides a complete XML schematic to aid custom data transfer.

 

**Expansion and Strategic Alliances**

 

From a salesperspective, Artemis will seek to continue to consolidate its leadershipthroughout Europe and Japan, while increasing sales in North America. Artemishas established a program for growth in the Japanese market, and willselectively extend its presence in emerging markets such as China andAustralia.  To support our growth withinspecific industry market segments, we have established strategic alliances witha number of specialized consulting companies and system integrators.  These include, BearingPoint, IBM Global Services,Unilog, Fujitsu Consulting, DMR Conseil (Quebec).  Our technology focused alliances includecompanies such as IBM Corporation, Oracle Corporation, Microsoft Corporation,Cognos, BEA Systems, Citrix Systems and Sun Microsystems.

 

##### **Sellingand Marketing**

##### ** **

We market our solutionsthrough our own direct sales organizations in the United States, the UnitedKingdom, France, Finland, Germany, Italy, Japan and Singapore. Additionally,our joint venture and distributor network provides sales and servicecapabilities in other European countries, Australia, Asia Pacific and LatinAmerica.

 

6

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We also support our growth within specific markets through consultingpartnerships that enhance our total offering by providing an integratedsolution deployment and systems integration capability

 

Our overall marketing strategy is to continueto position our Investment Planning and Control offering as the leadingsolution in the market. An IP&C solution that provides a managementframework for the optimization of the complete set of investments of a givenorganization during their full lifecycle, from value assessment to benefitrealization.

 

##### **Customers**

##### ** **

Artemisprovides mission-critical software solutions to hundreds of organizationsworldwide. The below list demonstrates the diverse geographical and industrycoverage we have recently established with our solutions.

 

**Financial Services:**** **AIG Insurance, Allianz-AGF, AXA LifeInsurance, BNP Paribas, Casino, Chicago Mercantile Exchange, Crédit Agricole,Crédit Lyonnais, La Poste, Traveler’s Express, USAA, Promina Group Insurance.

 

**Manufacturing:******ActelionPharmaceutical Ltd, AMI Semiconductor, Cummins, Hitachi, McData Corporation,Olympus Corporation, Philips Medical Systems, Sara lee Branded Apparel, SonyCorporation, Trigem Computers, Unomedical.

 

**Public Sector:** Bordeaux District Council,Brisbaine City Council, UK Metropolitan Police, French UNEDIC, UK RegionalDevelopment Agencies, Singapore Immigration & Checkpoint Authority, ItalianMinistry of Economy & Finance.

 

**Telecommunications:**ChinaTelecom Shanghai, France Telecom, Wind Spa, Indonesia PT Telecom, NokiaCorporation, Telecom Italia, Telenor, T-Systems, Vodafone.

 

**Energy :**ExelonNuclear, Exelon Energy Delivery, GE Oil& Gas, Osaka Gas, Total.

 

**Aerospace & Defense Program :**AlcatelSpace, BAE Systems, Bath Iron Works, Eurofighter, Lockheed Martin SpaceSystems.

 

To date, more than 400 companies representing 600,000 users havelicensed our software solutions.

 

**Intellectual Property**

 

Our proprietary products arenot protected by patents. However, to protect our intellectual property rights,we license our software products and require our customers to enter intolicense agreements that impose restrictions on their ability to utilize thesoftware or transfer it to other users. Additionally, we seek to avoiddisclosure of our trade secrets through a number of means, including, but notlimited to, requiring those persons with access to our proprietary informationto execute confidentiality agreements with us and restricting access to oursource code. In addition, we protect our software, documentation, templates andother written materials under trademark, trade secret and copyright laws. Evenwith all of these efforts, there can be no assurance that such precautions willprovide meaningful protection from competition or that competitors will notindependently be able to develop similar technology. If, in the future,litigation is necessary to enforce our intellectual property rights, to protectour trade secrets, and/or to determine the validity and scope of theproprietary rights of others, such litigation could result in substantial costsand diversion of resources and could have a material adverse effect on ourbusiness, operating results and/or financial condition. As a result, we may beunable, for financial or other reasons, to enforce our rights under the variousintellectual property laws as described above.

 

In addition, the laws of certain foreigncountries (particularly in Asia) in which our products are or may be licensedmay not protect our products and intellectual property rights to the sameextent as laws of the United States. Patent protection within the World TradeOrganization appears to permit substantial discretion to member countries. Anotable example is China’s voidance of Pfizer’s Viagra patent, which wasawarded by that country in September 2001.

 

We believe that our products do not infringeupon any valid existing proprietary rights of third parties.

 

**Competition**

 

Withdemonstrated market growth in the Project Portfolio Management software space,we expect positive trends for the application software market in general.  We also expect the intensity of existingcompetition to increase, particularly in the US and the UK.

 

We believeother parts of the world, such as Japan and Continental Europe, to be moresheltered from competitive pressure due to our long established presence,understanding of local market needs, and existing partnerships.

 

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Our products competewith a variety of business application software and with in-house developmentsbased on Microsoft Office developments or other programming languages.

 

Competitioncomes mainly from pure project portfolio software vendors, IT Management suitesand some Enterprise Resource Planning (“ERP”) modules that can initially appearattractive to customers who have implemented the ERPs for other businessprocesses.

 

Competitionvaries according to the different markets we address with our solutions:

 

•                  IT Management and Governance withvendors such as Niku, Mercury Interactive and Compuware

•                  New Product Development with vendorssuch as IDE, Sopheon, SAP and MatrixOne

•                  Aerospace and Defense Programmanagement with vendors such as Primavera, Welcom, Microsoft, SAP and Oracle

 

We expect to continue to compete veryfavorably on a global basis due to our solution capabilities and inbuiltintelligence, together with our ability to leverage our international presenceand local market intimacy.

 

**Research and Development**

 

We incurred research anddevelopment expenses of approximately $7.7 million, $8.2 million and $7.9million, respectively for the years ended December 31, 2004, 2003 and2002.  Research and development expensesconsist primarily of salaries and related costs associated with the developmentof our products.

 

In early 2004, we changedthe leadership of our product development organization and consolidated ourProduct Management, Development and Tier II Support functions under a singlestructure, Product Operations. In late 2004 we reduced the number of resourcesemployed in our Newport Beach development center. This restructuring of ourProduct Operations cost base was made in the light of Artemis licensing andhaving the option to acquire the rights to a best-of-breed scheduling tool forArtemis 7 rather than developing it in-house. In addition, this decision hasallowed us to accelerate our plan to enlarge our offshore development team;thereby increasing new product feature throughput and achieving a higher levelof customer responsiveness. We have therefore increased offshore resources bothin the development and quality assurance areas. This will have the immediatebenefit of allowing us to deliver a major new functional module whollydeveloped by this offshore team in June/July 2005.

 

As we proceed through theyear depending on our financial condition, we will continue to add additionalresources to this offshore facility, initially to provide further coverage inthe area of the Tier II support function. This will help us underpin the growthforecasted by our Asian, Chinese and Japanese distribution channels byproviding support coverage geographically closer to their own time zones.

 

We believe that continuedinvestment in research and development is critical to attaining our strategicobjectives and, as a result, we expect that spending on research anddevelopment in 2005 will remain flat except for cost savings resulting from therestructuring activities described above. Already this restructuring exercisehas allowed Artemis to increase its core development capacity while retainingsome of the cost savings from the actions described above.

 

Our plan is toincrease our R&D output to strengthen our leadership in the geographicalmarkets and/or industries we are targeting. Major new releases will increaseour ability to support additional business processes and user types, increasingour footprint in the customer’s organizations.

 

R&D effortsare performed in our facilities in the US and the UK with significantadditional capacity from our partner company based in India.

 

In fiscal2004, our R&D efforts focused primarily on our IP&C Artemis 7 basedsolutions and to a lesser extent on Artemis Views.

 

**Services and Support**

 

Drawing on the consolidatedexperience of a global network of consultants specialized in the definition anddeployment of processes and systems to support enterprise investment planningand control, we have developed a structured Solution Management Methodology (sm2). This modular, phased approach enables reductionin deployment time thereby delivering moreimmediate benefits, accelerating ROI, and minimizing the risks frequentlyassociated with the deployment of enterprise solutions. We regularly partnerwith consulting organizations and system integrators to increase the valuedelivered to our clients.

 

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We offer a worldwide support network andcomplementary systems that ensure timely and quality responses to clientrequests. From all our offices worldwide, we provide both telephone andWeb-based support as well as guidance on how to best use our solutions, and toresolve issues encounteredduring installation, deployment, and day-to-day usage of our products.

 

**Employees**

 

As of December 31, 2004,Artemis directly employed approximately 325 persons on a worldwide basis; 67 inthe United States of America, 211 in Europe, 31 in Japan, and 16 in Asia. Ouremployees are not represented by labor unions or collective bargainingagreements, except as may be required by the laws of certain foreignjurisdictions.  We have not experiencedany work stoppages anywhere, and consider our relations with our employeesworldwide to be good.

 

**Financial Information aboutGeographic Areas**

 

Our revenue is segmented by geographicregion and is based upon management responsibility for such operations. The following table presents information about the Company’s revenue (net ofeliminations) by geographic area for each of the three years in the periodended December 31, 2004.

 
| ** **     | ** ** | **For the years ended  December 31,** | ** ** |
|----------------|------------|--------------------------------------------|------------|
| ** **     | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **     | ** ** | **(in thousands)**                         | ** ** |
| Americas       |       | $                                          | 12,039     |   | $ | 15,642 |   | $ | 28,074 |   |
| EMEA (1)       |       | 33,744                                     |       | 34,423 |   | 32,640 |   |
| Japan          |       | 5,196                                      |       | 6,073 |   | 6,335 |   |
| Asia           |       | 1,466                                      |       | 1,153 |   | 1,615 |   |
| Total  revenue |       | $                                          | 52,445     |   | $ | 57,291 |   | $ | 68,664 |   |

 

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(1) Europe, Middle East and Africa

 

**Available Information**

 

We file annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K and proxy andinformation statements and amendments to reports filed or furnished pursuant toSections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended.The public may read and copy these materials at the SEC’s Public Reference Roomat 450 Fifth Street, NW, Washington, D.C. 20549. The public may obtaininformation on the operation of the public reference room by calling the SEC at1-800-SEC-0330. The SEC also maintains a website (http://www.sec.gov) thatcontains reports, proxy and information statements and other corporate informationregarding our Company and other companies that file materials with the SECelectronically. Our corporate headquarters are located at 4041 MacArthur Blvd.,Suite 401, Newport Beach, California, 92660. Our phone number at that addressis (949) 660-6500.

 

###### **Item 2.  Properties**

###### ** **

Artemis leases all of itsUnited States and international facilities pursuant to leases that expire froma month-to-month basis to January 31, 2010.  In addition, the Company maintains facilitiesin various other locations across the United States, Europe and Asia. TheCompany’s facilities comprise a total of 23,000 square feet in the UnitedStates and 56,000 square feet in Europe and Asia. We believe our currentfacilities are sufficient for our needs.

 

##### **Item3.  Legal Proceedings**

##### ** **

The Company is party to a number of legal claimsarising in the ordinary course of its business. The Company believes the ultimate resolution of these claims will nothave a material adverse effect on its financial position, results of operationsor cash flows.  See Note 16 -Contingencies/Litigations of the notes to the consolidated financial statementsfor information regarding legal proceedings.

 

**Item 4.  Submission of Matters to a Vote ofSecurity Holders**

 

On November 30, 2004, the AnnualMeeting of Stockholders of Artemis International Solutions Corporation was held(“Annual Meeting”).  The Annual Meetinginvolved the election of directors to the Company’s Board.  Four directors were voted on and elected bythe Stockholders:  Joseph Liemandt, DavidCairns, Steve Yager and Mike Murphy.  Mr.Liemandt received 10,635,652 votes in the affirmative, while 5,714 votes werewithheld.  Mr. Cairns received 10,635,639votes in the affirmative, while 5,727 votes

 

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werewithheld.  Mr. Yager received 10,635,646votes in the affirmative, while 5,720 votes were withheld.  Mr. Murphy received 10,635,649 votes in theaffirmative, while 5,717 votes were withheld. Three individuals continued as directors after the Annual Meeting andwere not voted upon:  Olle Odman, PekkaPere and Bengt Älgevik.

 

In addition to the election of directors, fivematters were voted upon and approved by the Company’s stockholders at theAnnual Meeting.  The first such matterwas a resolution to amend the Company’s Amended and Restated Certificate ofIncorporation.  The amendment reduced thenumber of shares of Common Stock that the Company may issue from500,000,000 to 50,000,000, thereby reducing the total number of shares of allclasses of capital stock that the Company may issue from 525,000,000 to75,000,000 (including 25,000,000 shares of authorized preferred stock).  This resolution passed, with 10,633,727 votesin the affirmative.  The number of votescast against the resolution was 7,073, with 566 abstentions and no broker nonvotes.

 

The secondadditional matter was another resolution to amend the Company’s Amended and Restated Certificate ofIncorporation, effectively implementing the “20% Rule” of NasdaqMarketplace Rule 4350.  The 20% Ruleimposes certain requirements upon the Company before it can enter into aprivate transaction involving the sale, issuance or potential issuance by theCompany of common stock (or securities convertible or exercisable into commonstock) equal to 20% or more of the common stock or 20% or more of the votingpower outstanding before the issuance. (Further details on this resolution and the 20% Rule can be reviewed inthe Definitive Proxy Statement pertaining to the Annual Meeting, filed by theCompany with the SEC on October 25, 2004.) This resolution also passed,with 10,635,832 votes in the affirmative. The number of votes cast against the resolution was 3,709, with 1,825abstentions and no broker nonvotes.

 

The third additional matter was a resolution toapprove an amendment to and restatement of the 2000 Non-Employee DirectorsStock Option Plan (“Non-Employee Director Plan”).  The primary revisions to the Non-EmployeeDirector Plan effectuated by the amendment included, (i) replenishing the planwith additional options authorized for issuance under the plan, (ii) providinga specific grant to newly elected directors, and (iii) providing for anautomatic, annual grant for continuing directors.  (Further details on this resolution and theamendment to and restatement of the Non-Employee Director Plan can be reviewedin the Definitive Proxy Statement pertaining to the Annual Meeting, filed bythe Company with the SEC on October 25, 2004.)  This resolution also passed, with 10,622,864votes in the affirmative.  The number ofvotes cast against the resolution was 17,584, with 917 abstentions and onebroker nonvote.

 

The fourth additional matter was a resolution toapprove an amendment to and restatement of the 2000 Stock OptionPlan.  The primary revision to the 2000Stock Option Plan effectuated by the amendment was a replenishing of the planwith additional options that are authorized for issuance under the plan.  Specifically, (i) the initial number ofshares of common stock reserved for issuance under the plan increased from300,000 shares to 2,000,000 shares, and (ii) the maximum number of shares ofcommon stock reserved for issuance under the plan increased from 1,200,000shares to 5,000,000 shares, after accounting for the five percent reload thatis available each year immediately preceding December 31st.  (Further details on this resolution and theamendment to and restatement of the 2000 Stock Option Plan can be reviewed inthe Definitive Proxy Statement pertaining to the Annual Meeting, filed by theCompany with the SEC on October 25, 2004.) This resolution also passed, with 10,346,412 votes in theaffirmative.  The number of votes castagainst the resolution was 294,164, with 790 abstentions and no broker nonvotes.

 

The fifth matterwas a resolution to ratify the selection by the Board of Squar, Milner, Reehl& Williamson LLP as the Company’s independent registered public accountingfirm for the year ending December 31, 2004.  This resolution also passed, with 10,638,902votes in the affirmative.  The number ofvotes cast against the resolution was 1,900, with 564 abstentions and no brokernonvotes.

 

**Part II**

 

**Item 5.  Market for Registrant’s Common Equityand Related Stockholder Matters**

 

Our common stock is quotedon the Over-the-Counter Nasdaq Bulletin Board (“OTCBB”) administered by Nasdaq.  From April 4, 2000 until June 28,2001, our common stock was listed on the Nasdaq National Market under thesymbol “OPUS”.  Since June 29, 2001, our common stock has been quotedon the OTCBB, whereby effective November 25, 2001, the trading symbol on theOTCBB was changed to “AISC”.  Subsequent to the Company’s one fortwenty-five reverse stock split on February 7, 2003, the trading symbolwas changed to “AMSI”.  All informationregarding common stock, stock options, warrants and related per share amountshas been restated within this annual report to reflect the February 7,2003 reverse stock split.

 

Rules 15g-1 through 15g-9promulgated under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”, common referred to as the “penny stock rule”), impose sales practice anddisclosure requirements on certain broker-dealers who engage in certaintransactions involving a “penny stock”. Subject to certain exceptions, a penny stock generally includes anynon-Nasdaq equity security that has a market price of less than $5.00 pershare.  The market price of our commonstock on the OTCBB during the fourteen months ended Feburary 28, 2005 hasranged between a high of $3.25 and a low of $1.35 per share, and our commonstock is thus deemed to be penny stock for purposes of the Exchange Act.  The additional sales practice and disclosurerequirements imposed upon broker-dealers may discourage them from effectingtransactions in our common stock, which could

 

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severely impair the liquidity of our stock in thesecondary market.

 

At March 11, 2005, thenumber of stockholders of record was approximately 715 (excluding beneficialowners and any shares held in street name or by nominees).  The followingtable sets forth the quarterly high and low sales prices based on bidquotations per share, as retroactively adjusted for the aforementioned reversestock split.

 
| ** **                             | ** ** | **Artemis International  Solutions Corp** | ** ** |
|----------------------------------------|------------|-------------------------------------------|------------|
| ** **                             | ** ** | **High**                                  | ** ** | **Low** | ** ** |
| **YEAR ENDED DECEMBER 31,  2004** | ** ** | ** **                                | ** ** | ** ** | ** ** |
| First  Quarter                         |       | $                                         | 2.00       |   | $ | 1.35 |   |
| Second  Quarter                        |       | 3.15                                      |       | 1.35 |   |
| Third  Quarter                         |       | 2.50                                      |       | 1.90 |   |
| Fourth  Quarter                        |       | 3.20                                      |       | 1.90 |   |
| **YEAR  ENDED DECEMBER 31, 2003** | ** ** | ** **                                | ** ** | ** ** | ** ** |
| First  Quarter                         |       | $                                         | 2.20       |   | $ | 1.00 |   |
| Second  Quarter                        |       | 2.05                                      |       | 1.35 |   |
| Third  Quarter                         |       | 2.45                                      |       | 1.50 |   |
| Fourth Quarter                         |       | 2.00                                      |       | 1.35 |   |

 

On March 11, 2005, thelast sales price of our common stock was $2.75 per share.  

 

The above over-the-countermarket quotations reflect inter-dealer prices, without retail mark-up,mark-down or commission, and may not necessarily represent actual transactions.

 

The following table providesinformation about the Company’s common stock that may be issued upon theexercise of options under all of our existing equity compensation plans as of December 31,2004.  See Notes 1 and 15 to the Company’s consolidated financialstatements included elsewhere herein for additional information.

 
| **Plan category**                                       | ** ** | **Number of shares  of common stock  to be issued upon  exercise of  outstanding  options** | ** ** | **Weighted average  exercise price of  outstanding  options** | ** ** | **Number of shares of  common stock  remaining available  for future issuance  under equity  compensation plans  (excluding shares in  the first column)** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | ** **                                                                                  | ** ** | ** **                                                    | ** ** | ** **                                                                                                                                                 | ** ** |
| Equity  compensation plans approved by shareholders     |       | 1,764,516                                                                                   |       | $                                                             | 11.71      |                                                                                                                                                       | 1,637,141  |   |
|                                                    |       |                                                                                        |       |                                                          |       |                                                                                                                                                       |       |
| Equity  compensation plans not approved by shareholders |       | 47,071                                                                                      |       | $                                                             | 249.60     |                                                                                                                                                       | —     |   |
| Total                                                   |       | 1,811,587                                                                                   |       | $                                                             | 17.88      |                                                                                                                                                       | 1,637,141  |   |

 

**Dividend Policy**

 

We do not anticipate payingcash dividends in the foreseeable future. We currently intend to retain futureearnings, if any, to finance operations and the expansion of our business. Anyfuture determination to pay cash dividends will be at the discretion of ourBoard of Directors and will be dependent upon our financial condition,operating results, capital requirements, general business conditions,restrictions imposed by financing arrangements, legal and regulatoryrestrictions on the payment of dividends and other factors that our Board ofDirectors deems relevant.

 

In August 2003, theCompany obtained a revolving credit facility with Laurus Master Fund Ltd. (“Laurus”).Under the Security Agreement executed in connection with the revolving creditfacility, the Company may not directly or indirectly declare, pay or make anydividend or distribution on any class of its stock, except for indebtednesssubordinated to Laurus.

 

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On June 16,2004, the Company completed a private placement of $9.0 million of convertiblepreferred stock (the “Series A Preferred Stock”).  So long as at least 30% of the Series APreferred Stock is outstanding, the Company cannot, directly or indirectly,redeem, declare or pay any cash dividend or other distribution on the commonstock without the prior express written consent of the holders of at least amajority of the Series A Preferred Stock.

 

**Stock Options**

 

The Company has grantedoptions to purchase the Company’s Common Stock under various plans to employeesand directors.  All stock option plans are administered by theCompensation Committee of the Board of Directors, which determines the terms ofthe options granted, including the exercise price, the number of shares subjectto option, and the vesting period.  Options generally vest over terms ofthree to five years and have a maximum life of ten years.

 

The stock option plansadopted by Opus360 prior to the consummation of the share exchange agreementbetween Proha PLC and Opus360 (“the Share Exchange Transactions”) in 2001, andthe related stock options continue in full force and effect.  Even thoughLegacy Artemis was the acquirer for accounting purposes in the Share ExchangeTransactions, Opus360 as a legal entity survived the consummation of suchtransaction. Options granted under Opus 360 plans are redeemable in the commonstock of Artemis. Following is a description of the Company’s non-stockholderapproved stock option plans.

 

•                  The Company assumed non-qualified stockoptions granted to certain key former employees of Opus360.  46,983 of these stock options with anexercise price of $250 are outstanding and exercisable as of December 31,2004.  The options are exercisable until February 2010.

 

•                  The Company also assumed non-qualified stockoptions granted to other employees of Opus360 who became Artemis employeesafter the Share Exchange Transactions.  At December 31, 2004, 88 ofthe options with a weighted average exercise price of $34.25 remainedoutstanding.

 

**Recent Sales of Unregistered Securities**

 

Set forthbelow is information regarding securities sold by the Company from January 2002to date which were not registered under the Securities Act of 1933, as amended(“the Securities Act”).  We believe thateach transaction was exempt from the registration requirements of theSecurities Act pursuant to Section 4(2) thereof and/or Regulation D promulgatedthereunder as transactions not involving a public offering, based on theprivate nature of the transactions and the financial sophistication of thepurchasers, all of whom had access to complete information concerning theCompany and acquired the securities for investment and not with a view to thedistribution thereof.

 
| **Security Type**                                | ** ** | **Name of Security Holder**         | ** ** | **Date Issued** | ** ** | **No of Shares** | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|-----------------|------------|------------------|------------|
| Debt  convertible into common stock and warrants |       | Laurus  Master Fund, Ltd.           |       | 8/14/2003*      |       | 847,646          | (a)        |
| Preferred  stock & warrants                  |       | Emancipation  Capital LP            |       | 6/16/2004       |       | 1,652,284        |       |
| Preferred  stock & warrants                  |       | Samuelson  Investment, Inc.         |       | 6/16/2004       |       | 1,376,904        |       |
| Preferred  stock & warrants                  |       | Philip  Hempleman                   |       | 6/16/2004       |       | 550,761          |       |
| Preferred  stock & warrants                  |       | Porridge,  LLC                      |       | 6/16/2004       |       | 550,761          |       |
| Preferred  stock & warrants                  |       | Potomac  Capital Partners, LP       |       | 6/16/2004       |       | 421,332          |       |
| Preferred  stock & warrants                  |       | Potomac  Capital International Ltd  |       | 6/16/2004       |       | 140,444          |       |
| Preferred  stock & warrants                  |       | Pleaides  Investment Partners R, LP |       | 6/16/2004       |       | 264,366          |       |

 

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* As amended on July 30, 2004 (See Note6 to the Company’s consolidated financial statements included elsewhere hereinfor additional information.).

 

(a)          The securities sold in these transactionswere the convertible note payable and the related warrant.  The number of common shares noted above representsthe maximum which may be issued.  As describedin the aforementioned Note to the Company’s consolidated financial statements,the Laurus Master Fund, Ltd. beneficial ownership of the Company’s common stockis contractually limited to 2.5% of the outstanding shares.

 

The aggregate selling price, the conversionterms of the preferred stock, the terms of exercise of the related warrants,and the use of net proceeds received in the above June 16, 2004transactions are disclosed in Note 14 to the Company’s consolidated financialstatements included elsewhere herein.

 

As more fully described in Notes 6 and 14 tothe aforementioned financial statements, the common stock underlying theconvertible

 

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note payable to Laurus, the convertiblepreferred stock transactions listed above, and the warrants issued in suchtransactions were subsequently registered with the SEC.

 

**Item 6.  Selected Financial Data**

 

The following selectedconsolidated financial data should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe consolidated financial statements and notes thereto included elsewhere inthis report.  The selected consolidated financial data are derived fromour audited consolidated financial statements, which have been preparedassuming that the Company will continue as a going concern.  As disclosedin Note 1 to the financial statements, the Company has incurred substantialrecurring losses from operations and may incur losses in the future. These and other factors as described in Note 1 raise substantial doubt aboutthe Company’s ability to continue as a going concern.

 
| ** **                                             | ** ** | **Year Ended December 31,**           | ** ** | **Nine Months  Ended  December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                             | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2002** | ** ** | **2001** | ** ** | **2000(a)(b)(c)** | ** ** |
| ** **                                             | ** ** | **(in thousands, except per share  data)** | ** ** |
| **Summary  of operations data:**                       |       |                                       |       |                                      |       |   |   |   |   |   |   |
| Revenues                                               |       | $                                          | 52,445     |                                      | $          | 57,291 |   | $ | 68,664 |   | $ | 67,646 |   | $ | 34,822 |   |
| Operating  (loss)                                      |       | (9,553                                     | )          | (8,092                                    | )          | (3,746 | ) | (66,483 | ) | (11,398 | ) |
| Net (loss)                                             |       | (9,685                                     | )          | (7,891                                    | )          | (3,948 | ) | (59,764 | ) | (10,797 | ) |
| Basic and diluted  loss per common share               |       | (0.97                                      | )          | (0.79                                     | )          | (0.40 | ) | (6.78 | ) | (1.40 | ) |
| Shares used  in computing loss per  common share  |       | 9,988                                      |       | 9,965                                     |       | 9,965 |   | 8,816 |   | 7,689 |   |
|                                                   |       |                                       |       |                                      |       |   |   |   |   |   |   |
| **Balance  sheet data:**                               |       |                                       |       |                                      |       |   |   |   |   |   |   |
| Cash and  cash equivalents                             |       | 3,720                                      |       | 2,593                                     |       | 7,766 |   | 5,081 |   | 3,200 |   |
| Working  capital deficiency                            |       | (3,420                                     | )          | (9,016                                    | )          | (4,964 | ) | (5,432 | ) | (2,823 | ) |
| Total assets                                           |       | 22,320                                     |       | 28,358                                    |       | 39,005 |   | 38,570 |   | 103,488 |   |
| Long-term  debt, including amounts due within one year |       | 1,939                                      |       | 676                                       |       | 1,185 |   | 2,618 |   | 5,546 |   |
| Total  stockholders’ equity (deficit)             |       | (5,805                                     | )          | (3,173                                    | )          | 4,721 |   | 9,582 |   | 60,905 |   |
|                                                        |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)          On August 24,2000 Proha purchased all of the outstanding common stock of Legacy Artemis. Thepurchase was structured as a share exchange whereby Proha issued shares of itspublicly traded common stock to Legacy Artemis’ equity holders in exchange forall of Legacy Artemis’ common stock. As a result of the transaction LegacyArtemis recorded goodwill of approximately $30.7 million.  LegacyArtemis also recorded approximately $32.3 million of identifiableintangible assets and an expense of $2.3 million attributed to in-processresearch and development.

 

(b)         Duringthe nine months ended December 31, 2000, Legacy Artemis paid a cashdividend of $140,000. No other dividends were declared or paid since LegacyArtemis’s inception.

 

(c)          Theindependent auditor’s report relating to the nine months ended December 31,2000 is not included herein.

 

**Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

The following discusses thefinancial condition and results of operations of Artemis and should be read inconjunction with the consolidated financial statements and notes theretoincluded elsewhere in this report.

 

**Safe Harbor Statement**

 

The Management’s Discussionand Analysis and other portions of this report include “forward-looking”statements (versus historical facts) within the meaning of Section 27A ofthe Securities Act and Section 21E of the Exchange Act that are subject torisks and uncertainties that could cause actual results to differ materiallyfrom those described.  Although we believe our expectations that areexpressed in these forward-looking statements are reasonable, we cannot promisethat our expectations will turn out to be correct.  Our actual resultscould be materially different from and worse than our expectations. Withrespect to forward-looking statements, the Company invokes the protectionafforded by the Private Securities Litigation Reform Act of 1995.

 

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**Overview**

 

Artemis is one of the world’s leadingproviders of investment planning and control software and services. Since 1976we have been helping organizations improve their performance through portfolio,project and resource management. Improved performance requires continuousalignment of investments with strategic business goals, consequently theability to effectively select, plan, budget and control investment projectsbecomes the key for optimizing corporate resources. We believe this creates aneven greater requirement for integrated investment planning and control solutionsto support the needs of value creation, visibility, governance and compliance.

 

The Company has a 29-year history ofsuccessfully delivering enterprise and project management solutions to Global2000 customers with the most extensive portfolio, project and resourcemanagement needs. Companies trust Artemis’ software to manage their business-criticalprocesses. Customers use our software in such key areas as (i) ITmanagement and governance (ii) developing and launching new products suchas pharmaceuticals, (iii) helping governmental agencies promote businessefficiency through better alignment and allocation of resources, (iv)optimizing strategic assets in utilities and (v) managing key aerospaceand defense programs.

 

***CriticalAccounting Policies***

 

Our discussion and analysis of our financialcondition and results of operations are based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. On an ongoing basis, we evaluate ourestimates, including those related to revenue recognition, the valuation oflong-lived and intangible assets and the amortization of intangible assets. Webase our estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults may materially differ from these estimates under different assumptionsor conditions. We believe the following critical accounting policies affect ourmore significant judgments and estimates used in preparation of ourconsolidated financial statements:

 

•                  Revenuerecognition;

 

•                  Valuationof long-lived and intangible assets;

 

•                  Amortizationof intangible assets;

 

•                  Valuationof deferred tax assets; and

 

•                  Estimationof the allowance for doubtful accounts receivable.

 

*Revenue recognition*

 

The Company has adopted Statement ofPosition, or SOP 97-2, *Software RevenueRecognition*, as amended, which generally requires revenue earned onsoftware arrangements involving multiple elements to be allocated to eachelement based on the relative fair market values of each of the elements. Theestimated fair value of an element is based on vendor-specific objectiveevidence (“VSOE”).  Software licenserevenue allocated to a software product is recognized upon delivery of theproduct, or deferred and recognized in future periods to the extent that anarrangement includes one or more elements that are to be delivered at a futuredate and for which VSOE has not been established. Maintenance and supportrevenue is recognized ratably over the maintenance term. First-year maintenancetypically is sold with the related software license and renewed on an annualbasis thereafter. Estimated fair values of ongoing maintenance and supportobligations are based on separate sales of renewals to other customers or uponrenewal rates quoted in the contracts. For such arrangements with multipleelements, we allocate revenue to each component of the arrangement based on theestimated fair value of the undelivered elements. Fair value of services, suchas consulting or training, is based upon separate sales of these services. TheCompany at times may enter into multiple-customer contracts in which theCompany allocates revenue based on the number of specified users at eachcustomer, and recognizes revenue upon customer acceptance and satisfying theother applicable conditions of the above described accounting policy.

 

Services revenue is recognized as the serviceis performed assuming that sufficient evidence exists to estimate the fairvalue of the services. Consulting and training services are billed based oncontractual hourly rates and revenues are recognized as the services are

 

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performed. Consulting services primarily consist of implementationservices related to the installation of the Company’s products which do notrequire significant customization to or modification of the underlying softwarecode.

 

Significant management judgments andestimates must be made in connection with determination of the revenue to berecognized in any accounting period. If we made different judgments or utilizeddifferent estimates for any period, material differences in the amount and/ortiming of revenue recognized could result.

 

*Valuation oflong-lived and intangible assets*

 

The Company’s business combinations wereaccounted for using the purchase method of accounting. In connection with the2001 reverse acquisition of Opus360, the adoption of Statement of FinancialAccounting Standards (“SFAS”) No. 141, *BusinessCombinations* resulted in the allocation of negative goodwill in theamount of approximately $10.5 million as a direct reduction of certainacquired Opus360 non-current assets. At December 31, 2001, the Companyrecorded an impairment charge which resulted in the complete write-off ofgoodwill and a partial write-off of its identifiable intangible assets.  (The intangible assets described in thepreceding sentence were recorded in conjunction with the push-down to theCompany’s consolidated financial statements of Proha’s acquisition of all ofLegacy Artemis’ outstanding common stock in August 2000). As a result ofthe complete write off of goodwill at December 31, 2001, the adoption ofSFAS No. 144 *Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of*,had no impact on the amortization expense during 2002.

 

In accordance with SFAS No. 144, weassess intangible assets and other long-lived assets for recoverabilitywhenever events or changes in circumstances indicate that their carrying valuemay not be recoverable through the estimated undiscounted future cash flows resultingfrom the use of the assets. If we determine that the carrying value of any suchassets may not be recoverable, we measure impairment by using the projecteddiscounted cash-flow method in accordance with SFAS No. 144.

 

*Amortization ofintangible assets*

 

Intangible assets at December 31, 2004consist of acquired customer bases. Customer bases acquired directly are valuedat cost, which approximates estimated fair value at the time of purchase. Thecosts assigned to intangible assets are being amortized on a straight-linebasis over the estimated useful life of the assets, which is fortytwo months from January 1, 2002.

 

*Valuation ofdeferred tax assets*

 

The Company records an estimated valuationallowance on its significant deferred tax assets when, based on the weight ofavailable evidence (including the scheduled reversal of deferred taxliabilities, projected future taxable income or loss, and tax-planningstrategies), it is more likely than not that some or all of the tax benefitwill not be realized.

 

*Allowance fordoubtful accounts receivable*

 

We establish our allowance for doubtfulaccounts receivable based on our qualitative and quantitative review of creditprofiles of our customers, contractual terms and conditions, current economictrends and historical payment, return and discount experience. We reassess theallowance for doubtful accounts each period. If we made different judgments orutilized different estimates for any period, material differences in the amountand/or timing of such allowance could result.

 

**Significant Recent AccountingPronouncements**

 

In January 2003, the FinancialAccounting Standards Board (the “FASB”) issued FASB Interpretation (“FIN”)No. 46, “Consolidation of Variable Interest Entities, an Interpretation ofARB No. 51.” The primary objectives of FIN No. 46 are to provideguidance on the identification of entities for which control is achievedthrough means other than voting rights (variable interest entities, or “VIEs”),and how to determine when and which business enterprise should consolidate theVIE. This new model for consolidation applies to an entity for which either:(a) the equity investors do not have a controlling financial interest; or(b) the equity investment at risk is insufficient to finance that entity’sactivities without receiving additional subordinated financial support fromother parties. In addition, FIN No. 46 requires that both the primarybeneficiary and all other enterprises with a significant variable interest in aVIE make additional disclosures. As amended in December 2003, theeffective dates of FIN No. 46 for public entities that are not smallbusiness issuers are as follows: (a) For interests in special-purposeentities: the first period ended after December 15, 2003; and (b) Forall other types of VIEs: the first period ended after March 15, 2004.Management has determined that the Company does not have any VIEs, and there isno impact on its consolidated financial statements.

 

In April 2003, the FASB issued SFASNo. 149, “Amendments of Statement 133 on Derivative Instruments andHedging Activities,” which amends and clarifies financial accounting andreporting for derivative instruments, including certain derivative instrumentsembedded in other contracts and for hedging activities under SFAS No. 133.This pronouncement is effective for contracts

 

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entered into or modified after June 30, 2003 (with certainexceptions), and for hedging relationships designated after June 30, 2003.The adoption of SFAS No. 149 did not have a material impact on the Company’sconsolidated financial statements.

 

In May 2003, the FASB issued SFASNo. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.” SFAS No. 150 establishesstandards for how a company classifies and measures certain financialinstruments with characteristics of both liabilities and equity, and iseffective for public companies as follows: (i) in November 2003, theFASB issued FASB Staff Position (“FSP”) FAS 150-03 (“FSP 150-3”), whichdefers indefinitely (a) the measurement and classification guidance ofSFAS No. 150 for all mandatorily redeemable non-controlling interests in(and issued by) limited-life consolidated subsidiaries, and (b) SFAS No. 150’smeasurement guidance for other types of mandatorily redeemable non-controllinginterests, provided they were created before November 5, 2003;(ii) for financial instruments entered into or modified after May 31,2003 that are outside the scope of FSP 150-3; and (iii) otherwise, at thebeginning of the first interim period beginning after June 15, 2003. TheCompany adopted SFAS No. 150 on the aforementioned effective dates. Theadoption of this pronouncement did not have a material impact on the Company’sresults of operations or financial condition.

 

In December 2003, the FASB issued arevision of SFAS No. 132, *Employers’Disclosures about Pensions and Other Postretirement Benefits*. Thispronouncement (“SFAS No. 132-R”) expands employers’ disclosures aboutpension plans and other post-retirement benefits, but does not change themeasurement or recognition of such plans required by SFAS No. 87,No. 88. or No. 106. SFAS No. 132-R retains the existingdisclosure requirements of SFAS No. 132, and requires certain additionaldisclosures about defined benefit post-retirement plans. The defined benefitpension plan of the Company’s United Kingdom subsidiary is the Company’s onlydefined benefit post-retirement plan. Except as described in the followingsentence, SFAS No. 132-R is effective for foreign pension plans for fiscalyears ending after June 15, 2004; after the effective date, restatementfor some of the new disclosures is required for earlier annual periods. Some ofthe interim-period disclosures mandated by SFAS No. 132-R (such as thecomponents of net periodic benefit cost, and certain key assumptions) areeffective for foreign pension plans for quarters beginning after December 15,2003; other interim-period disclosures will not be required for the Companyuntil the first quarter of 2005. The interim-period disclosure requirementswhich became effective on January 1, 2004 and December 31, 2004 wereadopted by the Company on those dates. The Company is presently evaluating theother effects of SFAS No. 132-R on its financial statement disclosures.

 

In December 2004, the FASB issued SFASNo. 123-R which replaces SFAS No. 123, *Accounting for Stock-Based Compensation*, and supersedesAccounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*.As originally issued, SFAS No. 123 established as preferable a fair-value-basedmethod of accounting for share-based payment transactions with employees.However, that pronouncement permitted entities to continue applying theintrinsic-value-based model of APB Opinion 25, provided that the financialstatements disclosed the pro forma net income or loss based on the fair-valuemethod.  The Company is required to applySFAS No. 123-R as of the first interim reporting period that begins after June 15,2005. Thus, the Company’s consolidated financial statements will reflect anexpense for (a) all share-based compensation arrangements granted after June 30,2005 and for any such arrangements that are modified, cancelled, or repurchasedafter that date, and (b) the portion of previous share-based awards forwhich the requisite service has not been rendered as of that date, based on thegrant-date estimated fair value of those awards.

 

Other recent accounting pronouncements issuedby the FASB (including its Emerging Issues Task Force), the American Instituteof Certified Public Accountants and the Securities and Exchange Commission (the“SEC”), did not or are not believed by management to have a material impact onthe Company’s present or future consolidated financial statements.

 

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**Results of Operations**

 

The following table setsforth the unaudited percentage of total revenues represented by certain itemsin our consolidated statements of operations for the periods indicated:

 
| ** **                                               | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **2004**                         | ** ** | **% of  Revenue** | ** ** | **2003** | ** ** | **% of  Revenue** | ** ** | **2002** | ** ** | **% of  Revenue** | ** ** |
| ** **                                               | ** ** | **(in millions)**                | ** ** |
| Revenue:                                                 |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Software                                                 |       | $                                | 13.1       |   | 25 |   | $ | 13.3 |   | 23 |   | $ | 15.1 |   | 22 |   |
| Support                                                  |       | 17.2                             |       | 33 |   | 16.6 |   | 29 |   | 15.7 |   | 23 |   |
| Services                                                 |       | 22.2                             |       | 42 |   | 27.4 |   | 48 |   | 37.9 |   | 55 |   |
|                                                     |       | 52.5                             |       | 100 |   | 57.3 |   | 100 |   | 68.7 |   | 100 |   |
|                                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Cost of  revenue:                                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Software                                                 |       | 0.2                              |       | — |   | 0.7 |   | 1 |   | 1.7 |   | 2 |   |
| Support                                                  |       | 5.7                              |       | 11 |   | 5.1 |   | 9 |   | 6.4 |   | 9 |   |
| Services                                                 |       | 17.6                             |       | 34 |   | 20.3 |   | 35 |   | 24.6 |   | 36 |   |
|                                                     |       | 23.5                             |       | 45 |   | 26.1 |   | 45 |   | 32.7 |   | 47 |   |
|                                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Gross margin                                             |       | 29.0                             |       | 55 |   | 31.2 |   | 55 |   | 36.0 |   | 53 |   |
|                                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Operating  expenses                                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Selling and  marketing                                   |       | 14.3                             |       | 27 |   | 15.9 |   | 28 |   | 12.5 |   | 18 |   |
| Research and  development                                |       | 7.7                              |       | 15 |   | 8.2 |   | 14 |   | 7.9 |   | 11 |   |
| General and  administrative                              |       | 8.7                              |       | 17 |   | 11.1 |   | 19 |   | 15.2 |   | 22 |   |
| Amortization  expense                                    |       | 4.1                              |       | 8 |   | 4.1 |   | 7 |   | 4.1 |   | 6 |   |
| Impairment  charge                                       |       | 0.9                              |       | 2 |   | — |   | — |   | — |   | — |   |
| Restructuring  charges                                   |       | 2.7                              |       | 5 |   | — |   | — |   | — |   | — |   |
|                                                     |       | 38.4                             |       | 73 |   | 39.3 |   | 68 |   | 39.7 |   | 57 |   |
|                                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Operating  loss                                          |       | (9.4                             | )          | (18 | ) | (8.1 | ) | (13 | ) | (3.7 | ) | (4 | ) |
|                                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Non  operating (income) expense                          |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Interest  expense, net                                   |       | 0.5                              |       | 1 |   | 0.2 |   | — |   | 0.2 |   | — |   |
| Equity in  net (income) loss of unconsolidated affilates |       | (0.1                             | )          | — |   | 0.3 |   | 1 |   | 0.4 |   | 1 |   |
| Gain on sale  of subsidiaries and investee               |       | —                           |       | — |   | (0.4 | ) | (1 | ) | (1.0 | ) | (1 | ) |
| Other  (income) expense, net                             |       | (0.1                             | )          | — |   | 0.1 |   | — |   | 0.5 |   | 1 |   |
| Foreign  exchange gain                                   |       | (0.4                             | )          | (1 | ) | (0.7 | ) | (1 | ) | (0.4 | ) | (1 | ) |
| Non  operating income, net                               |       | (0.1                             | )          | — |   | (0.5 | ) | (1 | ) | (0.3 | ) | — |   |
|                                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Income tax  expense                                      |       | 0.2                              |       | — |   | 0.3 |   | 1 |   | 0.5 |   | 1 |   |
| Net loss                                                 |       | $                                | (9.7       | ) | (19 | ) | $ | (7.9 | ) | (13 | ) | $ | (3.9 | ) | (5 | ) |

 

17

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**2004compared to 2003**

 

**Revenue**

 

*SoftwareRevenue*

 

Software revenue representsfees earned for granting customers licenses to use our software products. Software revenue decreased $0.2 million or 2% to $13.1 million during 2004 from$13.3 million during 2003.  Softwarerevenue represents 25% and 23% of total revenue for the years ended December 31,2004 and 2003, respectively. Software revenue from our flagship product,Artemis 7, which is the main platform for our investment planning and controlsolutions, increased to 40% of total software revenue in 2004, up from 31% in2003. Excluding a large multi-million dollar transaction recorded in the UK ofwhich approximately $1.6 million was recorded in 2003, software revenue forArtemis 7 increased by 107% year-over-year. In November 2004, we releasedArtemis 7, Version 6.0, extending its functionality and capabilities. This hasin part led to higher sales in the last month of the year compared to theprevious year.  The increase in softwarerevenue in the US by $0.9 million or 32%, and our subsidiaries in Finland, up$0.5 million or 31%, Germany, up $0.5 million or 75%, and France, up $0.2million or 9%, were more than offset by a decrease in software revenue in ourUK subsidiary, down $2.4 million or 83%.

 

*SupportRevenue*

 

Support revenue consists offees for providing software updates and technical support for our softwareproducts.  Support revenue increased $0.6 million or 4% to $17.2 millionduring 2004 from $16.6 million during 2003.  This increase in supportrevenue was due to increases in revenues generated by our foreign subsidiaries,such as Finland, up $0.4 million or 24%, as well as Japan, Italy, France andthe UK, all up $0.1 million. This was partially offset by a decrease in supportrevenue in the US by $0.3 million or 6%. The Company continues to emphasizecultivating the existing customer base and focusing on customer satisfaction.

 

*ServicesRevenue*

 

Services revenue consists offees for consulting and training generated by our personnel and throughsubcontracted third-party arrangements.  Services revenue decreased $ 5.2million or 19% to $22.2 million during 2004 from $27.4 million during2003.  Of the total decline in services revenue year-over-year, $4.1million or 79% is related to consulting services provided in the US. Thedecrease in service revenue is in part a result of the completion of severallarge consulting assignments with two large US customers. These two customersgenerated $2.6 million in 2004 compared to $5.0 million in 2003. Decreases inservices revenue in our subsidiaries in Japan, down $1.1 million or 34%,Germany, down $0.7 million or 48%, and the UK, down $0.4 million or 8%, wereonly partially offset by increases in Italy, up $0.9 million or 21%, and Asia,up $0.2 million or 51%. The level of services revenue in our various operationswas impacted by the timing and size of software sales and the lower level ofconsulting services related to our software sales of Artemis 7.

 

*DeferredRevenue*

 

Thebalance of deferred revenue decreased $2.2 million to $5.0 million at December 31,2004 from $7.2 million at December 31, 2003.  The shift in deferredrevenue is a result of the timing of our support billings and relatedcollections.

 

**Cost ofRevenue**

 

Cost of revenue consistsprimarily of salaries and commissions paid to employees and third-partyexpenses principally related to consulting, software maintenance services andtraining services.  To a lesser extent, cost of revenue includes royaltypayments to third parties.  Total cost of revenue decreased $2.5 millionor 10% to $23.5 million during 2004 from $26.0 million during 2003.  Costof revenue as a percentage of total revenue was substantially the same during2004 and 2003 at 45%. The decrease in cost of revenue for software salesreflects the shift in product mix towards Artemis 7 software for which we havenot incurred third-party royalties in 2003 and 2004. The majority of the costof revenue is directly related to our support and service revenue.

 

**GrossMargin**

 

Gross margin as a percentageof total revenue remained substantially the same during 2004 and 2003 at 55%.This was achieved through a shift in mix toward software and support revenue,whereby such revenue as a percentage of total revenue increased to 58% in 2004from 52% in the previous year. In addition, the gross margin on softwarerevenue increased to 98% in 2004 from 95% in 2003, which was offset bydecreases in gross margin on support and consulting services revenue. The grossmargin percentage for services revenue decreased in 2004 as a result of thedecline in services revenue and the relatively fixed cost base of our internalconsultancy practice. During 2004, management has taken actions to reduce thiscost by decreasing the number of internal consultants, while still keeping theskill set required for our implementation services in house.

 

18

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**OperatingExpenses**

 

*Sellingand marketing expenses*

 

Selling and marketingexpenses consist primarily of personnel related costs of our direct sales forceand marketing staff and the cost of third party marketing programs, includingadvertising, trade shows, promotional materials and customer conferences. Selling and marketing expenses decreased $1.6 million or 10% to $14.3 millionduring 2004, from $15.9 million during 2003. The decrease was primarilydue to a reduction in headcount and a concerted effort to match discretionarymarketing expenses with the expected revenue stream.

 

*Researchand development*

 

Research anddevelopment expenses consist primarily of salaries and related costs associatedwith the development of our products. These expenses decreased $0.5 million or 5% to $7.7 million during 2004from $8.2 million during 2003.

 

In early 2004, we changedthe leadership of our product development organization and consolidated ourProduct Management, Development and Tier II Support functions under a singlestructure, Product Operations. In late 2004 we reduced the number of resourcesemployed in our Newport Beach development center. This restructuring of ourProduct Operations cost base was made in light of Artemis licensing and havingthe option to acquire the rights to a best-of-breed scheduling tool for Artemis7 rather than developing it in-house. In addition, this decision has allowed usto accelerate our plan to enlarge our offshore development team; therebyincreasing new product feature throughput and achieving a higher level ofcustomer responsiveness. We have therefore increased offshore resources both inthe development and quality assurance areas. This will have the immediatebenefit of allowing us to deliver a major new functional module whollydeveloped by this offshore team in June/July 2005.

 

As we proceed through theyear depending on our financial condition, we will continue to add additionalresources to this offshore facility, initially to provide further coverage inthe area of the Tier II support function. This will help us underpin the growthforecasted by our Asian, Chinese and Japanese distribution channels by providingsupport coverage geographically closer to their own time zones.

 

Our plan is toincrease our R&D output to strengthen our leadership in the geographicalmarkets and/or industries we are targeting. Major new releases will increaseour ability to support additional business processes and user types, increasingour footprint in the customer ‘s organizations.

 

*Generaland administrative*

 

General and administrativeexpenses consist primarily of salaries, wages and related costs for generalcorporate functions, including executive, legal, accounting, human resourcesand information systems. General and administrative expenses decreased $2.4million or 22% to $8.7 million during 2004, from $11.1 million during 2003. Thedecrease is primarily a result of the restructuring actions taken during theyear as well as efforts to reduce discretionary spending.

 

*Amortizationexpense*

 

Amortization expenserepresents the financial statement effect of amortizing intangible assetsrecorded in conjunction with the push-down to the Company’s consolidatedfinancial statements of Proha’s purchase of Legacy Artemis in August 2000. These assets are being amortized on a straight-line basis over the remaininglife of forty two months commencing January 1, 2002. Amortization expensewas the same for the years ended December 31, 2004 and 2003.

 

*Impairmentcharge*

 

SFAS No. 144, *Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of*, requires impairment losses to be recordedon long-lived assets used in operations, including goodwill, when indicators ofimpairment are present and the undiscounted future cash flows estimated to begenerated by those assets are less than the assets’ carrying value. If suchassets are impaired, the impairment to be recognized is measured by the amountby which the carrying amount of the asset exceeds the estimated fair marketvalue of the assets. Assets to be disposed of are reported at the lower of thecarrying value or fair market value, less cost to sell.

 

During the fourth quarter of 2004, theCompany evaluated the carrying values of its intangible assets. As a result, animpairment charge of $0.9 million has been recorded in the year ended December 31,2004.  Using discounted cash flowprojections of expected returns from these assets, the Company determined thatthe intangible asset related to certain technology should be fully impaired.

 

19

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*Restructuring charge*

 

The Company’s restructuring charges are comprisedprimarily of: (i) severance pay (including related payroll taxes) andassociated one-time employee termination costs related to the reduction of theCompany’s workforce; (ii) relocation costs resulting from organizationalrealignments; and (iii) professional fees incurred to improve the competitiveposition of the Company.  The Company accounts for the costs associatedwith exiting an activity, including costs associated with the reduction of theCompany’s workforce, in accordance with SFAS No. 146 *Accountingfor Costs Associated with Exit or Disposal Activities*.

 

As part of the restructuringactions carried out during the year ended December 31, 2004, the Companyhas reduced its workforce by a total of seventy one employees, from 396 to 325(which includes scheduled terminations and voluntary resignations) orapproximately 18% of its workforce.  The restructuring charge of $2.7million in 2004 has affected corporate positions and certain operationalpositions in the Americas, EMEA and the Asia/Japan segments in the approximateamounts of $1.0 million, $1.4 million and $0.4 million, respectively. This follows a similar reduction (8% of the workforce) in the last quarter of2003, whereby these reductions were based on discretionary restructuringactions.  Approximately $0.9 million of the total restructuring charge isincluded in current liabilities in the accompanying December 31, 2004consolidated balance sheet.  See thetabular presentations in Note 18 to the Company’s consolidated financialstatements included elsewhere herein for additional information.

 

Inherent in the estimationof the costs related to the Company’s restructuring efforts are assessmentsrelated to the most likely expected outcome of the significant actions toaccomplish the restructuring. Changing business conditions may affect theassumptions related to the timing and/or extent of the Company’s restructuringactivities. The Company reviews the status of restructuring activities on aquarterly basis and, if appropriate, records changes to its restructuringobligations based on management’s most current estimates.

 

**Non-operating (income) expenses,net**

 

Non-operatingincome/expenses consist of (i) net interest expense, (ii) equity in the netincome or loss of unconsolidated affiliates, (iii) foreign exchange gains, (iv)other (income) expense and (v) gain on sale of subsidiaries and investee. The Company had net non-operating income of less than $0.1 million during 2004compared to net non-operating income of $0.5 million during 2003.

 

The Company accounts forcertain investments in other companies under the equity method ofaccounting.  The Company recorded equity in net income of unconsolidatedaffiliates of $0.1 million in 2004 and net loss of unconsolidated affiliates of$0.3 million and $0.4 million in 2003 and 2002, respectively.

 

In October 2003, theCompany entered into an asset purchase agreement for the sale of its SoftwareProductivity Research (“SPR”) operations. Total consideration for the sale of SPR was $0.4 million.

 

Changes in the rate ofexchange for British Pound Sterling to the United States dollar resulted inforeign exchange income of $1.0 million and $0.9 million in 2004 and 2003,respectively.

 

**Changes in Foreign CurrencyExchange Rates**

 

The effect of changes inforeign currency exchange rates for the year ended December 31, 2004compared to 2003 was an increase in revenues and a reduction in operating lossof approximately $4.6 million and $0.3 million, respectively.

 

**Provision for Income Taxes**

 

The Company recorded incometax expense of approximately $0.2 million and $0.3 million for the years ended December 31,2004 and 2003, respectively.  The income tax expense on the pre-tax lossof approximately $9.5 million and $7.6 million for the years ended December 31,2004 and 2003, respectively, is principally the result of foreign income tax onthe Company’s profitable non-US subsidiaries.

 

20

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**2003compared to 2002**

 

**Revenue**

 

*SoftwareRevenue*

 

Software revenue representsfees earned for granting customers licenses to use our software products. Software revenue decreased $1.8 million or 12% to $13.3 million during 2003from $15.1 million during 2002.  Thedecrease in software sales of $1.1 million in the US and $.7 million in Germanywas due, in part, to spending constraints imposed on capital expenditures byour existing customer base.  However, weare seeing an increase in customer funding for projects previously planned.  In addition, with the additionalfunctionality of Artemis 7 (formerly Portfolio Director) and the Views 7release, we are able to meet the needs of our clients on a much wider range,thus speeding up the sales cycle. Therefore, management expects an increase in software sales in 2004.

 

*SupportRevenue*

 

Support revenue consists offees for providing software updates and technical support for our softwareproducts.  Support revenue increased $0.9 million or 6% to $16.6 millionduring 2003 from $15.7 million during 2002.  This increase in supportrevenue was due to a steady increase in revenues generated by our foreignsubsidiaries such as a: 30% increase in Germany, 9% increase in Italy, 19%increase in Finland and a 47% increase in Asia. The increase in support revenues in these countries was partially offsetby a decrease in support revenue in the US by 8%.  The Company has also put a renewed emphasison cultivating the existing customer base by focusing on customer satisfaction.

 

*ServicesRevenue*

 

Services revenue consists offees for consulting and training generated by our personnel and throughsubcontracted third-party arrangements.  Services revenue decreased $ 10.5million or 28% to $27.4 million during 2003 from $37.9 million during2002.  The decrease in service revenue is a direct result of the nearcompletion of two very large consulting assignments at two large clients thathad licensed products in prior periods. These two clients generated $16 million in service revenue in 2002compared to $5 million in 2003.

 

*DeferredRevenue*

 

The balance of deferredrevenue decreased $0.8 million to $7.2 million at December 31, 2003 from$8.0 million at December 31, 2002.  The decrease is due to the following:

 

1.               Liability for prepaid consulting and supportservices totaling $1.0 million was released by one U.S. customer.  Therefore, the Company was able to recognizeall of the deferred revenue in the third quarter of 2003.

 

2.               The prepaid software and services totaling$0.5 million by a UK customer in 2002 was released in 2003 after the serviceswere rendered and the software criterion was accepted.  This lowered the deferred revenue balance.

 

3.               A few large supported customers, whorenewed in December 2003, increased the deferred revenue by $0.3 million.

 

**Cost ofRevenue**

 

Cost of revenue consistsprimarily of salaries and commissions paid to employees and third-partyexpenses principally related to consulting, software maintenance services andtraining services.  To a lesser extent, cost of revenue includes royaltypayments to third parties.  The majority of these costs of revenue aredirectly related to our support and service revenue.  Total cost ofrevenue decreased $6.7 million or 20% to $26.0 million during 2003 from $32.7million during 2002.  Cost of revenue as a percentage of total revenuedecreased to 45% during 2003 from 47% during 2002 primarily because the Companylicensed a higher proportion of products with low or no associated royaltycosts and due to more efficient use of staff in delivering services.  Also contributing to the decrease was thatthird party consultants were used less, reflective of the lower service revenuebase.

 

**GrossMargin**

 

The primary reasons for theincreased gross margin percentage on total revenue are improved efficiencies inthe support organization and a reduction in third-party royalties through theshift in product mix towards Artemis 7. This was partially offset by a decreasein gross margin on services revenue due to a sharp decline in services revenuein 2003 compared to 2002.  Thislowered the utilization rate of internal consultants and reduced the retentionof higher-margin external consultants.

 

21

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**OperatingExpenses**

 

*Sellingand marketing expenses*

 

Selling and marketingexpenses consist primarily of personnel related costs of our direct sales forceand marketing staff and the cost of third party marketing programs, includingadvertising, trade shows, promotional materials and customer conferences. Selling and marketing expenses increased $3.4 million or 27% to $15.9 millionduring 2003, from $12.5 million during 2002.  During 2002, managementreduced discretionary selling and marketing expenses in response to forecasts,which predicted that a challenging economy would cause our customers to delayspending on enterprise wide technology deployments.  In the latter part of2002 management predicted a gradual recovery in the market for software. In response to this and to support the introduction of our Portfolio solutionproducts, management increased the Company’s marketing efforts.    In addition,during 2003 the Company realigned its marketing organization. Part of thischange included the creation of a new Solutions Marketing Team, which focuseson key vertical markets to help provide more relevant and complete businesssolutions to customers.  The increasealso in part, reflects a change in the classification of some key executivesalaries and related expenses in accordance with a change in job emphasis fromadministration to selling and marketing (please also see *General and administrative*below).

 

*Researchand development*

 

Research and development expenses consist primarily ofsalaries and related costs associated with the development of ourproducts.  These expenses increased $0.3million or 3.6% to $8.2 million during 2003 from $7.9 million during 2002.  This increase is primarily due to increasedsalaries and minor increases in travel expenses as we endeavor to bring ourcustomers further into the product delivery process.  In early 2004, we changed the leadership ofour product development organization and consolidated our Product Management,Development and Tier II Support functions under a single structure, ProductOperations.  Our restructuring will alsoinclude a relocation of our California development facility to less costlypremises.  The main purposes of ourrestructuring activity were threefold: (1) to align resources with thestrategic goal of unifying and further integrating interrelated products; (2)to add to our development capacity a variable component for adaptation todynamic conditions; and (3) to bring our development processes closer to ourcustomers, fully committing to a customer-centric model for solutionsdevelopment.

 

Specificcustomer-centric methodological modifications for research and development havecontinued to include the shortening of internal software development cycles, aniterative planning and testing practice, and movement of the featureprioritization process out of development and closer to customers.

 

We believe that continuedinvestment in research and development is critical to attaining our strategicobjectives and, as a result, we expect that spending on research anddevelopment in 2004 will remain flat except for cost savings resulting from therestructuring activities described above. Our primary focus for 2004 is to continue the process of evolving ourdevelopment methodology and to invest in product functionality in the followingthree ways:  (1) adding significant newcapability; (2) integrating key new architectural features and technology; and(3) bringing our suite of interrelated products together into a unifiedsolution.

 

*Generaland administrative*

 

General and administrativeexpenses consist primarily of salaries, wages and related costs for generalcorporate functions, including executive, legal, accounting, human resourcesand information systems. General and administrative expenses decreased $4.1million or 26% to $11.1 million during 2003, from $15.2 million during 2002.

 

The decrease was primarilydue to the following (i) a decrease in insurance fees due to a reduction incoverage,  (ii) a reduction in office space occupied, including theclosure of our Exton, Pennsylvania facility in 2002, (iii) the elimination ofpayments on former OPUS360 lease agreements through expiration or settlement,(iv) the elimination of commitments under long-term phone service contracts dueto settlement, (v) a change in the classification of some key executivesalaries and related expense in accordance with a change in job emphasis fromadministration to selling and marketing and (vi) the elimination of salariespaid to duplicative OPUS360 personnel who left Artemis in 2002.

 

*Amortizationexpense*

 

Amortization expenserepresents the financial statement effect of amortizing intangible assets recordedin conjunction with the push-down to the Company’s consolidated financialstatements of Proha’s purchase of Legacy Artemis in August 2000. These assets are being amortized on a straight-line basis over the estimatedremaining life of forty two months commencing January 1, 2002.Amortization expense remained the same during 2003 at $4.1 million.

 

**Non-operating (income) expenses,net**

 

Non-operatingincome/expenses consist of (i) net interest expense, (ii) equity in net lossesof unconsolidated affiliates,

 

22

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(iii) foreign exchange gains, (iv) other (income)expense and (v) gain on sale of subsidiaries and investee.  The Companyearned net non-operating income of approximately $0.5 and $0.3 million during2003 and 2002, respectively.

 

The Company accounts forcertain investments in other companies under the equity method ofaccounting.  The Company recorded equity in net loss of unconsolidatedaffiliates of $0.3 million and $0.4 million in 2003 and 2002, respectively.

 

In November 2002, theCompany sold its 19.9% interest in Accountor Oy to an unrelated party.  InDecember 2002, the Company sold its interest in ABC Technologies – Franceto an unrelated party.  Other income for the year ended December 31,2002 includes pretax gains of $0.7 million and $0.3 million on the sales of ourinterests in Accountor Oy and ABC Technologies – France, respectively.

 

In October 2003, theCompany entered into an asset purchase agreement for the sale of its SoftwareProductivity Research (“SPR”) operations. Total consideration for the sale of SPR was $0.4 million.

 

Changes in the rate ofexchange for British Pound Sterling to the United States dollar resulted inforeign exchange income of $0.9 million and $0.5 million in 2003 and 2002,respectively.

 

**Changes in Foreign CurrencyExchange Rates**

 

The effect of changes inforeign currency exchange rates for the year ended December 31, 2003compared to 2002 was an increase in revenues and a reduction in operating lossof approximately $5.5 million and $0.1 million, respectively.

 

**Provision for Income Taxes**

 

The Company recorded incometax expense of approximately $0.3 million and $0.5 million for the years ended December 31,2003 and 2002, respectively.  The income tax expense on the pre-tax lossof approximately $7.6  million and$3.5  million for the years ended December 31,2003 and 2002, respectively, is principally the result of foreign income tax onthe Company’s profitable non-US subsidiaries.

 

##### **Liquidity and Capital Resources**

##### ** **

#### *Cash flows for the year ended December 31, 2004 and 2003*

#### * *

At December 31,2004 we had cash of $3.7 million compared to $2.6 million at December 31,2003.

 

Our operating activities used approximately$8.3 million in cash during the year ended December 31, 2004.  Our net loss of $9.7 million was themajor component that reduced operating cash flow. A net decrease in accountspayable and other liabilities of $3.9 million and a decrease in deferredrevenues of $2.2 million further reduced operating cash flow. The effects ofthese items on cash were offset by factors such as (i) a decrease in tradeaccounts receivable of $1.6 million, (ii) non-cash expenses of$4.6 million in depreciation and amortization related to our fixed assetsand identifiable intangible assets, (iii) a decrease in prepaid expensesand other assets of $0.4 million and (iv) a non-cash expense of $0.9million for impairment charges related to intangible assets.

 

Our financing activities provided$10.2 million during the year ended December 31, 2004. During thefirst quarter of 2004 our wholly-owned subsidiary in Finland, Artemis FinlandOy (“Artemis Finland”), entered into a loan agreement with a financialinstitution in the amount of approximately $3.1 million. In January 2005,Proha effectively replaced the financial institution as the creditor and agreedwith Artemis Finland on a payment schedule. Management expects that the loanwill be repaid in full by the end of March 2005. During the second quarterof 2004, we completed the sale of convertible preferred stock resulting in netproceeds of approximately $8.6 million, of which $2.2 million wasused to reduce the amount owed under the Laurus Facility, which is discussed inNote 6 to the Company’s consolidated financial statements included elsewhereherein.  As a result, the Company has a$1.5 million convertible note payable to Laurus, which becomes due August 26,2006. At December 31, 2004, we had over advance capabilities of$3.5 million based on the Laurus Facility as well as unused creditfacilities through several of our subsidiaries.

 

*Liquidity and Going Concern Considerations*

 

The Company’s continued existence isdependent upon several factors including the Company’s ability to sell andsuccessfully implement its software solutions.

 

23

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A summary of the Company’s future contractualobligations and commercial commitments as of December 31, 2004 is asfollows:

 
| ** **                                       | ** ** | **Total**          | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More than  5 years** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|-----------------------|------------|----------------|------------|----------------|------------|------------------------|------------|
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| Long-term  debt Obligations                      |       | $                  | 1,939      |                  | $          | 21             |       | $              | 1,517      |                   | $          | 15 |   | $ | 386 |   |
| Operating  Lease Obligations                     |       | 8,897              |       | 3,492                 |       | 4,582          |       | 823            |       | —                 |       |
| Accrued  Pension and other long-term liabilities |       | 4,465              |       | —                |       | —         |       | —         |       | 4,465                  |       |
|                                             |       | $                  | 15,301     |                  | $          | 3,513          |       | $              | 6,099      |                   | $          | 838 |   | $ | 4,851 |   |

 

The Company’s principal sources of liquidityare cash and cash equivalents, our expected cash flows from operations and ourlines of credit.  Cash requirementsthrough the end of fiscal year 2005 are primarily to fund operations at approximatelythe same levels as fiscal year 2004 not including the restructuring actions asdescribed further below.  In the future,we may need to raise additional funds through public and/or private financings,or other arrangements to fund operations, strengthen our global presence or forpotential acquisitions, if any.  Suchadditional equity financing may be dilutive to our existing stockholders.  Our capital requirements depend on numerousfactors, including the rate of market acceptance of our products and services,our ability to service customers, our ability to maintain and expand ourcustomer base, the level of resources required to maintain or expand ourmarketing and sales organization, research and development activities and otherfactors.  The Company cannot be assuredthat any financings or other arrangements will be available in amounts or onterms acceptable to the Company or at all, and any new financings or otherarrangements could place operating or other restrictions on the Company.  Our inability to raise additional capitalconsequently could seriously harm the growth of our business and results ofoperations.

 

Our near and long-term operating strategiesfocus on promoting our new and existing solution offerings to increase revenueand cash flow while better positioning the Company to compete under currentmarket conditions.

 

In addition to securing the $5.0 millioncredit facility with Laurus in 2003, we have also taken steps to reduce anddefer discretionary spending to more closely match expenses with actual andprojected revenues.  We initiated certaindiscretionary actions beginning in late 2002 to streamline the Company’soperations and focus on our core expertise in enterprise portfolio and projectmanagement. This entailed reducing the work force and selling off certain non-coreassets. During 2004, following the change in management, a number of non-discretionaryrestructuring actions were taken to further reduce the cost base of theCompany. The objective of those actions is to assure an improvement inoperating margin on a moving forward basis. The target was to rebalance the revenue mix of the Company toward highersoftware license and support revenues, as well as to simplify and reduce the globalinfrastructure.

 

On June 16, 2004 (the “Closing Date”),we completed a private placement of $9.0 million of unregisteredconvertible preferred stock. In connection with the private placement, theCompany issued an aggregate of 4,090,909 shares of convertible preferred stockto certain accredited investors (the “Series A Holders”), priced at $2.20per share, each of which is convertible into one share of common stock.  In addition, the Company issued to theSeries A Holders (i) five-year warrants to purchase an aggregate of409,090 shares of common stock at an exercise price of $2.64 per share thatvested and became exercisable on the issuance date and (ii) 210-daywarrants (the “Additional Warrants”) (a) that are exercisable only in theevent that the Six Month Price (as defined below) is less than $2.20 and(b) to purchase a variable number of shares of common stock at $.01 pershare based upon the Six Month Price. The number of issuable shares wasdetermined by the “Six Month Price” which is defined as the greater of $1.75 orthe lowest average closing price of the common stock of the Company for any 15consecutive day period during the six-month period immediately following theClosing Date. As of December 15, 2004, the Six Month price was $1.98 pershare, which resulted in the issuance of 456,853 Additional Warrants to theSeries A Holders.  Proceeds from thefinancing are being used for (i) working capital, (ii) the repaymentof debt, and (iii) to strengthen the Company’s balance sheet.$2.2 million of the net proceeds were transferred on behalf of Artemisdirectly to Laurus to pay certain over-advances due at the Closing Date.

 

Subsequent toDecember 31, 2004, the Company has paid a total of approximately $ 2.5 millionto Proha (our parent company) in connection with the Artemis Finland loan,which is summarized above and more fully described in Note 12 to the Company’sconsolidated financial statements included elsewhere herein.  The final installment payment on such loan(approximately $838,000 based on the March 15, 2005 exchange rate) is due onMarch 31, 2005.

 

In March 2005, we settled a dispute withCompuware Corporation (“Compuware”) related to a joint venture between oursubsidiary in France and Changepoint Corporation (which was acquired byCompuware in May 2004.).  As a result, wewill receive approximately $1.2 million in cash by March 31, 2005, whichwill be used for working capital purposes.

 

We have experienced net losses in each of thethree years in the period ended December 31, 2004.  At December 31, 2004, we reported anaccumulated deficit of approximately $92.7 million and our currentliabilities exceeded current assets by approximately $3.4 million.  Our independent public accountants haveincluded a going concern paragraph in their audit report on the Company’s December 31,2004 consolidated financial statements which have been prepared assuming thatthe Company will continue as a going concern (based upon management’s plansdiscussed above), which contemplates, among other things, the realization ofassets and satisfaction of liabilities in the ordinary course of business.  Accordingly, the consolidated financialstatements included elsewhere herein

 

24

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do not include any adjustments related to the recoverability andclassification of asset carrying amounts or the amount and classification ofliabilities that might result, should the Company be unable to continue as agoing concern.

 

**Impact ofInflation**

 

In 2004, approximately 77%of our total revenues and 56% of our total operating expenses weregenerated/incurred by our foreign subsidiaries. Revenues and expenses in theseforeign markets are currently translated using historical and weighted-averagecurrency exchange rates; therefore a weakening United States dollar would havea positive impact whereas a strengthening United States dollar would have anadverse impact on translations of currency from our foreign operations.

 

**Off-Balance Sheet Arrangements**

 

We have no off-balance sheetarrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

 

**Item 7a.****  ****Qualitative and Quantitative Disclosure About MarketRisk**

 

At December 31, 2004,the majority of our cash balances were held primarily in the form of short-term highly liquid investment grade money market funds of major financialinstitutions.  Due to the short-term nature of our investments and thefact that they are marked to market daily, we believe that we are not subjectto any material interest or market rate risks.

 

The Company utilizes linesof credit to fund operational cash needs.  The Company’s outstandingbalance under its line of credit at December 31, 2004 was approximately$1.5 million.  The weighted average interest rate for the Company’s linesof credit during 2004 was 5.0%. We do not believe that we have materialinterest rate risk; however, some of our lines of credit have variable interestrates which are based on commonly used bank indices. We do not believe animmediate 10% increase or decrease in interest rate would have a materialeffect on our consolidated financial position.

 

We conduct a significantportion of our business in currencies other than the United States dollar.  For the year ended December 31, 2004,approximately 77% of our revenues and approximately 56% of our operatingexpenses were denominated in currencies other than our functional currency, theUnited States dollar.  These foreigncurrencies are primarily Euros, British Pounds, and Japanese Yen.  Changes in the value of major foreigncurrencies relative to the value of the United States dollar could potentiallyadversely affect revenues and operating results.  We do not hedge foreigncurrency exposure.  As a result, we willcontinue to experience foreign currency exchange gains and losses.

 

# **Item8.**  Financial Statementsand Supplementary Data

# ** **

The information required by this item appears in asubsequent section of this Report.  (See Item 15(a)(1) and (2)).

 

**Item 9.****  ****Changes in and Disagreements with Accountants onAccounting and Financial Disclosure**

 

No events occurred that require disclosureunder Item 229.304(b) of Regulation S-K.

 

**Item 9A. Controls and Procedures**

 

**Evaluationof Controls and Procedures**

 

Under the supervision andwith the participation of our management, including our Chief Executive Officer(“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures (as definedin Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of a date within 90days prior to filing the Company’s December 31, 2004 Form 10-K.  Based upon that evaluation, the CEO and CFOconcluded that, as of December 31, 2004, our disclosure controls andprocedures are effective.

 

**Changes inControls and Procedures**

 

There were no significantchanges made in our internal controls over financial reporting during thequarter ended December 31, 2004 that have materially affected or arereasonably likely to materially affect these controls.

 

****Limitations on theEffectiveness of Internal Control****

 

The Company’s management,including the CEO, does not expect that our disclosure controls and proceduresor our internal control over financial reporting will necessarily prevent allfraud and material errors.  An internalcontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met.

 

25

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Further, the design of a control system must reflectthe fact that there are resource constraints, and the benefits of controls mustbe considered relative to their costs. Because of the inherent limitations onall internal control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within theCompany have been detected.  Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake.  Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore people, and/or by management override of the control.  The design of any system of internal controlis also based in part upon certain assumptions about the likelihood of futureevents, and there can be no assurance that any design will succeed in achievingits stated goals under all potential future conditions.  Over time, controls may become inadequatebecause of changes in circumstances, and/or the degree of compliance with thepolicies and procedures may deteriorate. Because of the inherent limitations in a cost-effective internal controlsystem, financial reporting misstatements due to error or fraud may occur andnot be detected on a timely basis.

 

**Part III**

 

**Item 10.    Directors andExecutive Officers of the Registrant**

 

The following table sets forth the names, ages and positions of alldirectors and named executive officers. A summary of the background andexperience of each of these individuals is set forth after the table.

 
| **NAME**           | ** ** | **AGE** | ** ** | **POSITION**                                          | ** ** | **COMMITTEE**                      |
|--------------------|------------|---------|------------|-------------------------------------------------------|------------|------------------------------------|
| Patrick Ternier(1) |       | 48      |       | President and Chief Executive Officer                 |       |                               |
| Robert Stefanovich |       | 40      |       | Executive Vice President and Chief  Financial Officer |       |                               |
| Charles Savoni     |       | 46      |       | Senior Vice President, General Counsel and  Secretary |       |                               |
| Bengt Algevik      |       | 55      |       | Director                                              |       |                               |
| David Cairns       |       | 58      |       | Director                                              |       | Audit and Nominating               |
| Joseph Liemandt    |       | 36      |       | Director                                              |       | Compensation and Nominating        |
| Michael Murphy     |       | 46      |       | Director                                              |       | Audit and Compensation             |
| Olof Odman         |       | 61      |       | Director                                              |       | Audit, Compensation and Nominating |
| Pekka Pere         |       | 46      |       | Director                                              |       |                               |
| Steven Yager       |       | 50      |       | Chairman of the Board of Directors                    |       |                               |

 

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(1)                                  EffectiveJanuary 23, 2004, Patrick Ternier replaced Michael J. Rusert as Presidentand Chief Executive Officer of the Company, who had resigned.

 

MR. TERNIER was named President and ChiefExecutive Officer of the Company on January 23, 2004. He has held severalsenior management positions within the Company since 1985. From 1992 to January 2004,Mr. Ternier was a director for both Artemis International Sarl France andArtemis International GmbH. From 1989 to 1991, he served as the country managerfor Artemis International Sarl France. From 1985 to 1988, he served as theSales and Marketing Manager for Artemis International Sarl France.

 

MR. STEFANOVICH was appointed as ExecutiveVice President and Chief Financial Officer of the Company on September 27,2002. Prior to joining Artemis, he held several senior positions includingChief Financial Officer for a publicly traded medical device company and VicePresident for Administration at Science Applications International Corporation,a Fortune 500 company. Mr. Stefanovich was also a member of the SoftwareAdvisory Group and an Audit Manager with Price Waterhouse LLP (nowPricewaterhouseCoopers) hi-tech practice in San Jose, CA.

 

MR. SAVONI was appointed as Vice President,General Counsel and Secretary of the Company on March 18, 2002. From 1994to 2002, he served as Corporate Attorney, Senior Corporate Attorney andAssistant General Counsel for Canon Computer Systems, Inc.

 

MR. ALGEVIK was elected a director of theCompany on June 16, 2004.  Hiscurrent term as a director is scheduled to expire on, or will renew on the dateof the Annual Shareholders meeting in 2005. Mr. Algevik is the President of Algevik Management AB, a management-consultingfirm, having served in that capacity since September 2000. Prior tofounding Algevik Management AB, he was the CEO of SYSteam AB beginning inMay 1997, comprised of 900 consultants providing IT-based solutions tomid-sized companies. Since 1995, Mr. Algevik has also been a board memberof Swedish public company Jeeves Information System AB.

 

MR. CAIRNS was elected a director of theCompany on November 30, 2004.  Hiscurrent term as a director is scheduled to expire on, or will renew on the dateof the Annual Shareholders meeting in 2007. Mr. Cairns has been the CEO and a board member of Global LogisticsTechnologies Inc., a US headquartered supply-chain software company, sinceApril, 2003. He has also served as non- executive Chairman of PrismTechnologies Ltd., a UK software infrastructure company since 2001.Mr. Cairns was appointed to the board of Shiwana Inc. (a US companyoperating in the software and telecoms sector) in July 2004 and chairs theAudit Committee.

 

MR. LIEMANDT was elected a director of theCompany on June 16, 2004.  Hiscurrent term as a director is scheduled to expire on, or will renew on the dateof the Annual Shareholders meeting in 2007. Mr. Liemandt is the President, CEO, and Chairman of the

 

26

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Board of Directors of Trilogy, Inc. He founded Trilogy, a leadingprovider of industry-specific enterprise software, in 1989. Mr. Liemandtalso holds other management and board positions in various privately heldTrilogy-controlled entities.

 

MR. MURPHY was elected a director of theCompany on March 17, 2003.  Hiscurrent term as a director is scheduled to expire on, or will renew on the dateof the Annual Shareholders meeting in 2006. Mr. Murphy is currently the CEO of InQuira, Inc., havingserved in that capacity since January 2001. Prior to joining InQuira,Mr. Murphy served as an executive at Cambridge Technology Partners (“CTP”),where he ran the Western Region. Mr. Murphy later oversaw the sales,marketing, alliances and partner programs of CTP.

 

MR. ODMAN was elected a director of theCompany in July 2001.  His currentterm as a director is scheduled to expire on, or will renew on the date of theAnnual Shareholders meeting in 2005. Since December 1999, he has been a member of the Board of Directorsof Proha Plc., and is currently Chairman of the Proha Plc Board of Directors.Mr. Odman is also Chairman of the Board of Directors of Swedish publiccompanies Jeeves Information System AB and LightLab AB. In addition,Mr. Odman is Chairman of the Board of Directors of Safran AS, Norway,LightLab Asia Corp, Taiwan, Transaction Network Services AB, Sweden, Cobnet AB,Sweden, Kyssinge Golf AB, Sweden and Golf de Pierpoint, Begium. Mr. Odmanis also a board member of Dovre AS, Norway and Bright Europe AB, Sweden.

 

MR. PERE was elected a director of theCompany in July 2001.  His currentterm as a director is scheduled to expire on, or will renew on the date of theAnnual Shareholders meeting in 2005.  Hehas been President and Chief Executive Officer of Proha Plc since 1984 and isalso the founder of Proha Plc. Mr. Pere is also the Chairman of the Boardof Directors of Federation of the Finnish Information Industries, and is eithera board member or the chairman of several other information technology relatedcompanies. Mr. Pere was Chairman of the Board of Directors of Proha Plcfrom 1984 until 1999, where he has since remained a board member.

 

MR. YAGER was elected as a director of theCompany in July 2001 and was its Chief Executive Officer and Presidentfrom August 2001 to January 2002. His current term as a director is scheduled to expire on, or will renewon the date of the Annual Shareholders meeting in 2006.  On April 14, 2003, Mr. Yager waselected as Chairman of the Board. From March 1, 2002 to the present,Mr. Yager has served as Managing Director, Mergers & Acquisitions,of Gores Technology Group. Prior to joining the Company in August 2001,Mr. Yager served for four years as President and CEO of ArtemisInternational Corporation, which combined with OPUS360 Corporation inJuly 2001 to form Artemis International Solutions Corporation.

 

### **Audit Committee Financial Expert**

### ** **

Under the definition of “independence” inNasdaq Marketplace Rule 4350, the Company currently has a fullyindependent Audit Committee, consisting of Messrs. Odman, Murphy andCairns. In addition, in the opinion of the Company’s board of directors,Mr. Cairns qualifies as an “audit committee financial expert” (as the termis defined by the SEC), and has been so designated.

 

### **Section 16(A) Beneficial Ownership ReportingCompliance**

### ** **

### **Section 16(a) of the Securities Exchange Act of 1934requires the Company’s directors and executive officers and persons whobeneficially own more than ten percent of a registered class of the Company’sequity securities to file with the SEC initial reports of ownership and reportsof changes in ownership of common stock and other equity securities of theCompany. Officers, directors and greater than ten percent beneficial shareholdersare required by SEC regulations to furnish the Company with copies of allSection 16(a) forms they file. To our knowledge, the following persons did filethe required reports pertaining to such year, but these persons did not fileone or more of the reports on a timely basis as required by Section 16(a) ofthe Exchange Act, as identified below.**

 

27

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| **Name and Principal Position**                                                             | ** ** | **Number of  Late  Reports** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| Pekka Halonen/Director(1)                                                                   |       | 1                            |       |
| Amos Barzilay/Director(1)                                                                   |       | 1                            |       |
| Ari Horowitz(1)                                                                             |       | 1                            |       |
| Bengt-Ake Algevik/Director                                                                  |       | 1                            |       |
| Olle Odman/Director                                                                         |       | 1                            |       |
| Pekka Pere/Director                                                                         |       | 1                            |       |
| Michael Murphy/Director                                                                     |       | 1                            |       |
| Steven Yager/Director                                                                       |       | 1                            |       |
| Joseph Liemandt/Director/ beneficial  Stockholder                                           |       | 2                            |       |
| David Cairns                                                                                |       | 2                            |       |
| Patrick Ternier/Officer                                                                     |       | 1                            |       |
| Robert Stefanovich/Officer                                                                  |       | 1                            |       |
| Charles Savoni/Officer                                                                      |       | 1                            |       |
| Emancipation Capital, LP/ 10% Stockholder                                                   |       | 1                            |       |
| Emancipation Capital, LLC/ beneficial Stockholder                                           |       | 1                            |       |
| Charles Frumberg / beneficial Stockholder                                                   |       | 1                            |       |
| Trilogy Capital Holdings Corporation / 10% Stockholder  (f/k/a Samuelson Investments, Inc.) |       | 2                            |       |
| Trilogy, Inc./ beneficial Stockholder                                                       |       | 2                            |       |

 

There were noknown consummated marketplace transactions nor any known failures to file arequired Form during the most recent fiscal year involving the officers,directors, and/or 10% beneficial Stockholder, as identified above.

 

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(1) No longerserving on the Board of Directors, as of November 30, 2004

 

***Code of Ethics***

*** ***

The Company has adopted a Code of Ethics forits “Senior Financial Officers” (the Company’s principal executive officer,principal financial officer, principal accounting officer or controller, andothers performing similar functions), as well as a Code of Business Conduct andEthics for all its employees. The Company shall, without charge, provide to anyperson, upon request, a copy of its Code of Ethics for Senior FinancialOfficers. All such requests should be mailed to: Artemis InternationalSolutions Corporation, 4041 MacArthur Blvd., Suite 401, Newport Beach, CA92660, Attention: Robert Stefanovich, EVP/CFO.

 

As required by SEC rules, the Company willreport within five business days the nature of any change or waiver of its Codeof Ethics for Senior Financial Officers.

 

**Item 11.****   ****Executive Compensation**

 

**COMPENSATION OF EXECUTIVE OFFICERS AND OTHER INFORMATION**

 

The following table sets forth for each ofthe Company’s last three completed fiscal years, the compensation of theCompany’s President and Chief Executive Officer (“CEO”) as of December 31,2004, the compensation of the Company’s former President/CEO, and the two mosthighly compensated executive officers other than the CEO whose salary was atleast $100,000 as of the same fiscal year end (collectively, the “NamedExecutive Officers”). As defined by the SEC’s rules, no other person was a “mosthighly compensated executive officer” of the Company at December 31, 2004or during the year then ended.

 

28

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**SummaryCompensation Table**

 
| ** **                      | ** ** | ** **               | ** ** | **LONG  TERM COMPENSATION**        | ** ** |
|---------------------------------|------------|--------------------------|------------|------------------------------------|------------|
| ** **                      | ** ** | ** **               | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | **AWARDS** | ** ** | **PAYOUTS** | ** ** |
| **Name and Principal Position** | ** ** | **ANNUAL  COMPENSATION** | ** ** | **Restricted  Stock Awards   ($)** | ** ** | **Number  of Securities Underlying Options   (#)** | ** ** | **Long-Term  Incentive Plan Payouts  ($)** | ** ** | **All  Other Compensation   ($)** | ** ** |
| **Year**                        | ** ** | **Salary   ($)**         | ** ** | **Bonus   ($) (6)**                | ** ** | **Other  Annual Compensation   ($)** |
|                            |       |                     |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Patrick Ternier,                |       | 2004                     |       |                               | 255,000    |   |   | 19,000 |   |   | * | — |   | 250,000 |   | — |   | 26,000 |   |
| President and  Chief            |       | 2003                     |       |                               | —     |   |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Executive Officer  (1)(2)       |       | 2002                     |       |                               | —     |   |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                            |       |                     |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Michael J.  Rusert,             |       | 2004                     |       |                               | 26,000     |   |   | 6,000 |   |   | * | — |   | — |   | — |   | 273,000 |   |
| Former President  and           |       | 2003                     |       |                               | 283,000    |   |   | 25,000 |   |   | * | — |   | — |   | — |   | — |   |
| Chief Executive  Officer (3)    |       | 2002                     |       |                               | 257,000    |   |   | 164,000 |   |   | * | — |   | 250,000 |   | — |   | — |   |
|                            |       |                     |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Robert  Stefanovich,            |       | 2004                     |       |                               | 193,000    |   |   | 7,000 |   | — |   | — |   | 120,000 |   | — |   | 6,000 |   |
| Executive Vice  President,      |       | 2003                     |       |                               | 173,000    |   |   | 9,000 |   | — |   | — |   | — |   | — |   | — |   |
| Chief Financial  Officer (4)    |       | 2002                     |       |                               | 68,000     |   |   | 36,000 |   | — |   | — |   | 20,000 |   | — |   | — |   |
|                            |       |                     |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Charles F.  Savoni,             |       | 2004                     |       |                               | 155,000    |   |   | 4000 |   | — |   | — |   | 35,000 |   | — |   | — |   |
| Senior Vice  President,         |       | 2003                     |       |                               | 148,000    |   |   | 6,000 |   | — |   | — |   | — |   | — |   | — |   |
| General Counsel,  Secretary (5) |       | 2002                     |       |                               | 99,000     |   |   | 32,000 |   | — |   | — |   | 7,000 |   | — |   | — |   |

 

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* The value of personal benefits provided was less than the minimumamount required to be reported.

 

(1)          Mr.Ternier became President and Chief Executive Officer effective January 23,2004.

 

(2)          Mr.Ternier was an employee prior to being appointed President and Chief ExecutiveOfficer. Mr. Ternier’s salaries for 2003 and 2002 were not related to hisduties as an executive officer of the Company. In 2002 Mr. Ternier was granted3,600 options.

 

(3)          Mr.Rusert was appointed to the position of President and Chief Executive Officereffective January 25, 2002. He resigned from the Company effective January 16,2004. The payments under "All Other Compensation" were made pursuantto the Separation Agreement and Mutual Release discussed further below.

 

(4)          Mr.Stefanovich became Chief Financial Officer effective on September 27, 2002.

 

(5)          Mr.Savoni became an executive officer of the Company effective March 18, 2002.

 

(6)          The2004 bonuses for Ternier, Stefanovich and Savoni are subject to approval by theCompensation Committee of the Company’s Board of Directors

 

Pursuant tothe Separation Agreement and Mutual Release that the Company executed with Mr.Rusert effective January 22, 2004, the Company has:  (i) provided Mr. Rusert with severancepayments over twelve months, for a total of $285,000 through January 2005;and (ii) is paying on Mr. Rusert’s behalf the automobile lease payments forfifteen months for a total of $19,000 through April 2005.

 

**OPTION GRANTS IN LAST FISCAL YEAR**

 

The following table sets forth the individual grants of stock options made by the company during the year ended December 31, 2004, to each of the Named Executive Officers:

 

29

 
| ** **             | ** ** | **INDIVIDUAL  GRANTS**                                       | ** ** | ** **                                                           | ** ** |
|------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **NAME**               | ** ** | **NUMBER  OF  SECURITIES  UNDERLYING  OPTIONS  GRANTED (#)** | ** ** | **% OF  TOTAL  OPTIONS  GRANTED TO  EMPLOYEES  IN FISCAL  YEAR (1)** | ** ** | **PER  SHARE  EXERCISE  PRICE  ($/SH)** | ** ** | **EXPIRATION  DATE (2)** | ** ** | **POTENTIAL  REALIZABLE  VALUE AT ASSUMED  ANNUAL RATES OF STOCK  PRICE APPRECIATION FOR  OPTION TERM (3)** | ** ** |
| **5% ($)**             | ** ** | **10% ($)**                                                  |
|                   |       |                                                         |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Patrick Ternier (4)    |       | 250,000                                                      |       | 24.1                                                                 | %          | $ | 1.35 |   | 4/15/2014 |   | $ | 212,252 |   | $ | 537,888 |   |
| Robert Stefanovich (5) |       | 120,000                                                      |       | 11.6                                                                 | %          | 1.35 |   | 4/15/2014 |   | 101,881 |   | 258,186 |   |
| Charles Savoni (6)     |       | 35,000                                                       |       | 3.4                                                                  | %          | 1.35 |   | 4/15/2014 |   | 29,715 |   | 75,304 |   |
|                        |            |                                                              |            |                                                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Based on an aggregate of 1,038,500 options granted to directors and employees of the Company in fiscal year 2004, including the Named Executive Officers.

(2)          Options expire ten years from grant date.

(3)          The potential realizable value is calculated based on the term of the option at its time of grant assuming that the stock price appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised on the last day of its term for the appreciated stock price.  No gain to the option holder is possible unless the stock price increases over the option term.

(4)          Mr. Ternier’s option to purchase 250,000 shares at $1.35, vests one-third on date of grant, one-third on the first anniversary of grant date and the balance on the second anniversary of grant date.

(5)          Mr. Stefanovich’s option to purchase 120,000 shares at $1.35, vests one-third on date of grant, one-third on the first anniversary of grant date and the balance on the second anniversary of grant date.

(6)          Mr. Savoni’s option to purchase 35,000 shares at $1.35, vests one-fourth on date of grant, one-fourth on the first anniversary of grant date, one-fourth on the second anniversary of grant date and the balance on the third anniversary of grant date.  All options which may vest after the grant date are contingent on the Company meeting certain financial performance goals.

 

All options grants presented in the above table have provisions accelerating the vesting in the event of a change in control.

 

**AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR**

**AND FISCAL YEAR-END OPTION VALUES**

 

The following table sets forth information concerning exercises of stock options during the year ended December 31, 2004, by each of the Named Executive Officers and the value of in-the-money unexercised options at December 31, 2004.

 
| **NAME**                           |   | **SHARES   ACQUIRED ON   EXERCISE   (#)** |   | **VALUE   REALIZED   ($)** |   | **NUMBER OF SECURITIES   UNDERLYING UNDEXERCISED   OPTIONS AT FISCAL YEAR END** |   | **VALUE OF UNEXERCISED   IN-THE-MONEY OPTIONS AT   FISCAL YEAR END** |   |
|------------------------------------|--------|-------------------------------------------|--------|----------------------------|--------|---------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|
| **EXERCISABLE/UNEXERCISABLE  (#)** |   | **EXERCISABLE/UNEXERCISABLE  ($) (1)**    |
| ** **                         |   | ** **                                |   | ** **                 |   | ** **                                                                      |   | ** **                                                           |   |
| Patrick Ternier                    |   | 0                                         |   | N/A                        |   | 85,735/167,865                                                                  |   | $153,963/$301,977                                                    |   |
| Michael Rusert                     |   | 0                                         |   | N/A                        |   | 250,000/0                                                                       |   | 412,500/0                                                            |   |
| Robert Stefanovich                 |   | 0                                         |   | N/A                        |   | 53,333/86,667                                                                   |   | 97,333/156,667                                                       |   |
| Charles Savoni                     |   | 0                                         |   | N/A                        |   | 13,417/28,583                                                                   |   | 24,617/51,683                                                        |   |

 

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(1) Value isbased on the fair market value of common stock as of December 31, 2004 ($2.95)minus the exercise price.

 

None of our NamedExecutive Officers exercised any of their stock options during 2004.

 

30

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**Employment Agreements and Change-in-ControlArrangements**

 

On January 23, 2004, the Companyannounced the appointment of Patrick Ternier as President and Chief ExecutiveOfficer. We have an employment agreement with Mr. Ternier, who is currentlyentitled to receive a targeted annual base salary of $285,000 and is eligiblefor a targeted bonus of up to $200,000, subject to the achievement of certainannual performance criteria set by the Compensation Committee (applicable tofiscal year ending December 31, 2005). In addition, Mr. Ternier isentitled to receive an annual car allowance of up to $18,000. If the agreementis terminated for cause, Mr. Ternier is entitled only to receive thatportion of his base salary owed through the date of termination. If events thatconstitute a change in control of the Company occur, or if the agreement isterminated without cause, Mr. Ternier would be entitled, (i) toreceive payment continuation of his base salary for a twelve month period, and(ii) to receive any incentive bonus payment earned but not paid as of thetermination date pro-rated for the quarter in which any such termination wouldtake effect based on the termination date. In addition, all options grantedwhich have not vested at the date of termination would immediately vest. Theagreement also contains certain restrictions on competition. Additionally, theCompany has granted Mr. Ternier in his first year of employment asPresident and Chief Executive an Initial Grant of 250,000 stock options topurchase shares of common stock at an exercise price equal to the fair marketvalue of the common stock as of the grant date. One third of the Initial Grantof options vested on the grant date and the balance vest in equal increments onthe first two anniversaries of the grant date. Commencing in the second year ofhis forementioned employment agreement, Mr. Ternier is eligible to receiveadditional option grants (which may have a a different vesting schedule), basedon meeting certain annual performance criteria as recommended by theCompensation Committee and approved by the Board of Directors.

 

We have an employment agreement withMr. Stefanovich, Executive Vice President and Chief Financial Officer.Mr. Stefanovich is currently entitled to receive an annual base salary of$200,000 and is eligible for an annual bonus of up to $70,000, subject to theachievement of certain annual performance criteria set by the CompensationCommittee (applicable to fiscal year ending December 31, 2005).  In addition, Mr. Stefanovich is entitled toreceive an annual car allowance of up to $15,000.  If the agreement is terminated for cause,Mr. Stefanovich is entitled only to receive that portion of his basesalary owed through the date of termination. If events that constitute a changein control of the Company occur, or if the agreement is terminated withoutcause, Mr. Stefanovich would be entitled, (i) to receive paymentcontinuation of his base salary for a twelve month period, (ii) to receivea continuation of Company provided medical benefits at the same level he wasreceiving prior to termination for the same twelve month period, and(iii) to receive any incentive bonus payment earned but not paid as of thetermination date pro-rated for the quarter in which any such termination wouldtake effect based on the termination date. In addition, all options grantedwhich have not vested at the date of termination would immediately vest. Theagreement also contains certain restrictions on competition. Additionally, theCompany in its sole discretion may grant to Mr. Stefanovich stock optionsto purchase shares of common stock, consistent with the policy pertaining toexecutive officers as recommended by the Compensation Committee and approved bythe Company’s Board of Directors.

 

We have an employment agreement withMr. Savoni, Senior Vice President, General Counsel and Secretary.Mr. Savoni is currently entitled to receive an annual base salary of$155,000 and is eligible for an annual bonus of up to $45,000, subject to theachievement of certain annual performance criteria set by the CompensationCommittee (applicable to fiscal year ending December 31, 2005). If theagreement is terminated for cause, Mr. Savoni is entitled only to receivethat portion of his base salary owed through the date of termination. If eventsthat constitute a change in control of the Company occur, or if the agreementis terminated without cause, Mr. Savoni would be entitled, (i) to alump sum payment equivalent to his base salary for a nine month period, and(ii) to receive any incentive bonus payment earned but not paid as of thetermination date pro-rated for the quarter in which any such termination wouldtake effect based on the termination date. In addition, all options grantedwhich have not vested at the date of termination would immediately vest. Theagreement also contains certain restrictions on competition. Additionally, theCompany in its sole discretion may grant to Mr. Savoni stock options topurchase shares of common stock, consistent with the policy pertaining toexecutive officers as recommended by the Compensation Committee and approved bythe Company’s Board of Directors.

 

**401(k) Plan**

 

The Company has a definedcontribution plan (“the Plan”) which qualifies under Section 401(k) of theInternal Revenue Code of 1986, as amended. The Plan covers all U.S. employeeswho may contribute up to 15% of their annual compensation with a annual maximumof $13,000 for the year 2004.  Employercontributions vest to the participants incrementally over a period of fiveyears. Company contributions to the Plan were $54,000 during the year endedDecember 31, 2004 and zero during the years ended December 31, 2003 and2002.

 

**Compensation of Directors**

 

The Company has granted options to employeesand directors to purchase the Company’s common stock under various plans. Allstock option plans are administered by the Compensation Committee of the Boardof Directors, which determines the terms of the options granted, including theexercise price, the number of shares subject to option, and the vesting period.Options generally vest over terms of three to five years and have a maximumlife of ten years.

 

Effective in 2004, eachNon-Employee Director receives a retainer of $15,000 per year, paid on aquarterly basis, provided that the individual Non-Employee Director attends atleast 60% of the board meetings held during the year. In addition, and alsoeffective in 2004, each Non-Employee Director who is also a member of the AuditCommittee, Compensation Committee, or any

 

31

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other committee as may beestablished by the Board of Directors receives $5,000 per year for membershipon each respective committee, paid on a quarterly basis, provided that theNon-Employee Director attends at least 60% of the applicable committee’smeetings held during the year. The Board of Directors may decide, at itsdiscretion, to defer such cash payments based on the Company’s performance and financialcondition.

 

The Company’s 2000 Non-Employee Directors’Plan (the “Non-Employee Directors Plan”) provides for automatic,non-discretionary grants of up to 300,000 non-qualified stock options toNon-Employee board members. Under the Non-Employee Directors Plan, 144,900 and41,440 options have been granted and cancelled, respectively, and 103,460options remain outstanding at December 31, 2004.  Effective November 30, 2004, theNon-Employee Directors Plan was amended and restated. The amended and restatedNon-Employee Directors Plan provides that each Non-Employee Director who iselected or appointed to the Board after February 24, 2004, shall receive aninitial grant of options to purchase 15,000 shares of our common stock. Foreach Non-Employee Director serving on the Board as of February 24, 2004,he or she received a grant of options on February 24, 2004, to purchase7,500 shares of our common stock, unless the Non-Employee Director was provideda special initial grant greater than 7,500 shares. Thereafter, commencing in2005, each continuing Non-Employee Director shall receive a grant of options onhis or her Board anniversary date to purchase up to 7,500 shares of commonstock. With respect to directors serving on committees, each Non-EmployeeDirector who, on or after February 24, 2004, is elected or appointed as,or was already, a member of the Audit, Compensation and/or the NominatingCommittee, shall receive a grant of options to purchase 3,500 shares of our commonstock for membership on each respective committee. Thereafter, each NonEmployee Director who continues to serve on any such committee upon his or herapplicable committee anniversary date shall be automatically granted an option onsuch anniversary date to purchase up to 3,500 shares of common stock.

 

During the fourth quarter of 2003, theCompany engaged Bengt Algevik to perform certain business consultancy functionsfor which he received consideration, including reimbursement of travel andother expenses, of approximately $200,000. Mr. Algevik completed hisassignment in May 2004 and was appointed as a director of the Companyeffective June 16, 2004.

 

**COMPANYSTOCK PRICE PERFORMANCE**

 

##### **Thefollowing performance graph assumes an investment of $100 on April 7, 2000, andcompares the change to December 31, 2004, in the market prices of the Company’scommon stock with the change in a broad market index (NASDAQ Stock Market –U.S.) and an industry index (S & P Application Software Index). The Companypaid a cash dividend of $140,000 during the nine months ended December 31, 2000and no dividends thereafter.  Theperformance of the indices is shown on a total return (dividend reinvestment)basis. The graph lines merely connect the prices on the dates indicated, and donot reflect fluctuations between those dates.**

 

##### **COMPARISON OF 5 YEARS CUMULATIVE TOTAL RETURNAMONG ARTEMIS INTERNATIONAL SOLUTIONS CORP., THENASDAQ STOCK MARKET (U.S.) INDEX AND THE S & PAPPLICATION SOFTWARE INDEX**

##### ****

 

32

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##### **Item12.    Security Ownership of Certain Beneficial**Ownersand Management and Related Stockholder Matters

##### ** **

V**OTING SECURITIES AND PRINCIPAL HOLDERS THEREOF**

 

The following table sets forth information with respect to beneficial ownership of the Company’s common stock as of January 28, 2005, for (i) each person known by the Company to beneficially own more than 5% of each class; (ii) each director and nominee for director; (iii) each Named Executive Officer; and (iv) all of the Company’s executive officers and directors as a group.  Unless otherwise indicated, the principal address of each of the shareholders below is c/o Artemis International Solutions Corporation, 4041 MacArthur Boulevard, Suite 401, Newport Beach, CA 92660.

 
| **NAME OF BENEFICIAL OWNER**                                      | ** ** | **TOTAL AMOUNT OF  SHARES  BENEFICIALLY  OWNED (1)** | ** ** | **PERCENTAGE OF  COMMON STOCK  BENEFICIALLY  OWNED** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| Proha Plc (2)                                                     |       | 7,977,062                                            |       | 77                                                   | %          |
| Maapallonkuja 1 A                                                 |       |                                                 |       |                                                 |       |
| FIN-02210 Espoo                                                   |       |                                                 |       |                                                 |       |
|                                                              |       |                                                 |       |                                                 |       |
| Emancipation Capital LP (7)                                       |       | 1,678,984                                            |       | 14                                                   | %          |
| Trilogy Capital Holdings Corporation (8)  (10)                    |       | 1,376,904                                            |       | 12                                                   | %          |
| **Directors  and Executive Officers**                             |       |                                                 |       |                                                 |       |
| Bengt-Åke Älgevik (5)                                   |       | 7,500                                                |       |                                                 | *          |
| David Cairns (5)                                                  |       | 7,500                                                |       |                                                 | *          |
| Joseph Liemandt (5) (8) (9)                                       |       | 1,384,404                                            |       |                                                 | *          |
| Michael Murphy (5)                                                |       | 7,500                                                |       |                                                 | *          |
| Olof Odman (3) (4) (5)                                            |       | 480                                                  |       |                                                 | *          |
| Pekka Pere (3) (4) (5)                                            |       | 7,977,542                                            |       |                                                 | *          |
| Charles F. Savoni (5)                                             |       | 13,417                                               |       |                                                 | *          |
| Robert Stefanovich (5)                                            |       | 53,333                                               |       |                                                 | *          |
| Patrick Ternier (4) (5)                                           |       | 85,733                                               |       |                                                 | *          |
| Steven Yager (4) (5)                                              |       | 40,000                                               |       |                                                 | *          |
| All directors and executive officers as a  group (10 persons) (6) |       | 223,443                                              |       | 2                                                    | %          |

 

----

* Less than 1%

 

(1)                                  Exceptas indicated in the footnotes to this table and pursuant to applicablecommunity property laws, the Company believes that the persons named in theabove table have sole voting and investment power with respect to all sharesshown as beneficially owned by them.

 

(2)                                  Basedupon information contained in a Form 13D/A dated November 20, 2001,filed with the SEC by Proha Plc on behalf of itself and related entities, suchentities own 7,977,062 shares of common stock.

 

(3)                                  Thisindividual also serves on the board of directors of Proha Plc.

 

(4)                                  Directoror executive officer disclaims beneficial ownership of 7,977,062 shares held byProha Plc, except to the extent of his stock holding interests in Proha Plc.

 

(5)                                  Includesthe number of shares of common stock that could be acquired withinsixty days of 1/28/05, pursuant to outstanding stock options, as follows:Mr. Odman, 480 shares; Mr. Pere 480 shares; Mr. Liemandt7,500 shares; Mr. Murphy 7,500 shares; Mr. Algevik7,500 shares; Mr. Cairns 7,500 shares; Mr. Yager 40,000shares; Mr. Stefanovich 53,333 shares; Mr. Ternier 85,733 shares;Mr. Savoni 13,417 shares, and of the group 223,443 shares.

 

(6)                                  Theshares beneficially owned by Proha Plc (7,977,062) and Trilogy Capital HoldingsCorporation (1,376,904) are not included in this total as the respectivedirectors disclaimed beneficial ownership per footnotes (4) and (9).

 

33

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(7)                                  Theprincipal address of Emancipation Capital LP, or EC, is 153 East 53rd Street,Suite 26B, New York, NY 10022. Emancipation Capital LLC acts as the generalpartner of EC and has voting and dispostive power over the securities held byEC. The managing member of Emancipation Capital LLC is Mr. Frumberg.Emancipation Capital LLC and Mr. Frumberg disclaim beneficial ownership of thesecurities held by EC, except for their pecuniary interest therein. The totalshares beneficially owned by EC of 1,678,984 includes 136,364 shares of commonstock currently issuable to EC upon exercise of the Initial Warrants that werefully vested and exerciseable on the issuance date and 152,284 shares of commonstock issued upon exercise of the Additional Warrants.

 

(8)                                  TrilogyCapital Holdings Corporation (f/k/a Samuelson Investment Inc.) is wholly ownedby Trilogy, Inc. Mr. Liemandt is Chairman of the Board, President and CEO ofTrilogy, Inc.

 

(9)                                  Directordisclaims beneficial ownership of 1,376,904 shares held by Trilogy CapitalHoldings Corporation (f/k/a Samuelson Investment Inc.)

 

(10)                            Thetotal shares beneficially owned by Trilogy Capital Holdings Corporation (f/k/aSamuelson Investment Inc.) of 1,376,904, includes 113,636 shares of commonstock currently issuable upon exercise of the Initial Warrants that were fullyvested and exerciseable on the issuance date and 126,904 shares of common stockissued upon exercise of the Additional Warrants.

 

**Item 13.    Certain Relationshipsand Related****Transactions**

 

During the fourth quarter of 2003, theCompany engaged Bengt-Ake Algevik to perform certain business consultancyfunctions for which he received consideration, including travel and otherexpenses, of approximately $200,000. Mr. Algevik completed his assignmentin May 2004 and was appointed a director of the Company effectiveJune 16, 2004.

 

At December 31, 2004 and 2003, theCompany had no receivables due from Proha, which, factoring in the common stockconversion rights of the holders of the Series A Preferred Stock arisingfrom the Preferred Series A Financing transaction as described above, ownsapproximately 56% of the Company’s outstanding common stock, post conversion ofthe Series A Preferred Stock.  AtDecember 31, $2004, 2003 and 2002, the Company had other payables to Prohaof $0.3 million, $0.2 million and $0.1 million, respectively.

 

On March 1, 2004, the Company’s wholly-ownedsubsidiary in Finland, Artemis Finland Oy (“Artemis Finland”), entered into aloan agreement with a financial institution in the amount of approximately$3.1 million. The loan was orginally due on March 1, 2006 and accruesinterest at 0.5 percentage points above the 3-month Euribor rate perannum, which is payable on a quarterly basis. The loan was secured by cashcollateral provided by Proha equal to the loan amount and a security interestin all of Artemis Finland’s property and assets. Artemis and Proha executed aletter of commitment, whereby Proha agreed to provide the Company sufficientadvance notice of its intent to demand the return of its collateral from thefinancial institution to give the Company a minimum of 90 days to provideadditional collateral, if necessary, or repay the loan. On October 11,2004, the Company received a notification from Proha declaring its intent todemand the return of the $3.1 million provided to the financialinstitution as collateral. Under this notification, the Company was required torepay the loan by January 10, 2005. On January 11, 2005, ArtemisFinland and Proha informed the financial institution to use the cash collateralprovided by Proha as the method by which Artemis Finland shall be deemed tohave pre-paid the loan in full. Contemporaneously, Artemis Finland entered intoa Payment Schedule Agreement (“Payment Agreement”) with Proha, whereby Prohaeffectively replaced the financial institution as the creditor and ArtemisFinland agreed to pay Proha 2.5 million Euros in three installments(1.25 million Euros by January 17, 2005, 625,000 Euros byFebruary 28, 2005 and 625,000 Euros by March 31, 2005).  The first two installments were paid on thedue date and the Company expects to make the remaining payment according to thePayment Agreement.

 

There are several related party agreements inplace between Artemis Finland and Proha or its subsidiaries and investees asfurther described below:

 

•                  During2002, Artemis Finland incurred $309,000 in fees for certain businessconsulting, legal and accounting services provided by Proha.

 

•                  Additionally,Artemis Finland shares office space with Proha, for which Proha charges ArtemisFinland a share of its office-related costs (“Office Allocation Charge”), suchas rent, utilities, telecommunication costs, office maintenance and certainother business costs based on headcount. The Office Allocation Charge was$431,000, $341,000, and $290,000 for the years ended December 31, 2004, 2003and 2002, respectively.

 

•                  AccountorOy, a provider of accounting and payroll services, which was owned by Proha(80.1%) and Artemis (19.9%) through November 2002 until its sale to anunrelated party, is providing certain bookkeeping, payroll and reportingservices (“Service Charge”) to Artemis Finland. The Service Charge was $0, $80,000 and $82,000 for the years endedDecember 31, 2004, 2003 and 2002, respectively.

 

34

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•                  IntellisoftOy, an application service provider, which is owned by Proha (80.1%) andArtemis (19.9%), is providing certain application hosting and other services toArtemis Finland and its customers (“ASP Services Fee”). The ASP Services Feewas $116,000, $254,000 and $354,000 for the years ended December 31, 2004, 2003and 2002, respectively.

 

•                  DatamarOy, a subsidiary of Proha (90%), is providing certain project management andprogramming services to Artemis Finland (“Management Programming Fee”). TheManagement Programming Fee charged to Artemis Finland was $173,000, $229,000and $340,000 for the years ended December 31, 2004, 2003 and 2002,respectively.

 

•                  TesnetGroup Oy (formerly Intellitest International Oy), a company partially owned byProha (35%), provides certain software testing services to Artemis Finland (“TestingServices”).  These Testing Services were$175,000, $225,000 and $219,000 for the years ended December 31, 2004, 2003 and2002, respectively.

 

•                  ArtemisFinland is a distributor of software products provided by Safran SoftwareSolutions AS (“Safran”), a Norwegian company wholly owned by Proha. The royaltypaid by Artemis Finland to Safran was $29,000, $47,000, and $129,000 for the yearsended December 31, 2004, 2003 and 2002, respectively.

 

•                  ArtemisFinland has provided certain software development services to ProCountorInternational Oy (“ProCountor”), a company majority owned by Proha (63%).  Artemis Finland has charged $0, $0 and$17,000 to ProCountor for such software development services for the yearsended December 31, 2004, 2003 and 2002, respectively.  ProCountor has provided certain softwaredevelopment services to Artemis Finland and charged a fee for use of aweb-based travel and expense claims program of $20,000, $11,000 and $0 for theyears ended December 31, 2004, 2003 and 2002, respectively.

 

•                  ArtemisFinland cooperated with Futura One Oy, a company majority owned by Proha (51%).Artemis Finland has charged $0, $0 and $17,000 to Futura One for softwaredevelopment services for the years ended December 31, 2004, 2003 and 2002,respectively.

 

**Item 14.  Principal Accountant Fees and****Services**

 

The following table presentsfees for professional services rendered by Squar, Milner, Reehl &Williamson LLP (“Squar Milner”) for the annual audit of our consolidatedfinancial statements as of and for the years ended December 31, 2004 and2003 and fees billed for other services rendered by Squar Milner during suchperiods:

 

| ** **         | ** ** | **For the years ended   December 31,** | ** ** |
|--------------------|------------|----------------------------------------|------------|
| ** **         | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| ** **         | ** ** | **(in  thousands)**                    | ** ** |
| Audit fees         |       | $                                      | 330        |   | $ | 566 |   |
| Audit related fees |       | 96                                     |       | — |   |
| Tax fees           |       | 50                                     |       | 46 |   |
| All other fees     |       | 14                                     |       | 1 |   |
|               |       |                                   |       |   |   |
| Total fees         |       | $                                      | 489        |   | $ | 613 |   |

 

Audit feesinclude all billings and out-of-pocket expenses related to; the annual audit,quarterly and annual work related to the review of Forms 10Q, 10K and other SECfilings and the 401K audit.  All amountsfor 2004 listed in the table above are based on agreed upon fees and expenses.All amounts for 2003 listed in the table above are based on the actual fees andexpenses incurred.  Audit relatedexpenses for 2004 relate to the fees incurred in the review of the S-1 filings.  Audit fee incurred in 2003 include $260,000for the 2001 re-adit preformed by Squar Milner.

 

The tax fees relate to the preparation of theCompany’s federal and state income tax returns. All other fees relate to special projects.

 

The Audit Committee hasdetermined that the provision of services to us, other than audit services, iscompatible with Squar Milner maintaining its independence from us.

 

35

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**Policy on Audit CommitteePre-Approval of Audit and Permissible Non-Audit Services of IndependentRegistered Public Accounting Firm**

 

The Audit Committee isresponsible for pre-approving all audit and permitted non-audit services to beperformed for us by our independent registered public accounting firm asoutlined in its Audit Committee charter. Prior to engagement of the independentauditor for each year’s audit, management or the independent registered publicaccounting firm submits to the Audit Committee for approval an aggregaterequest of services expected to be rendered during that year, which the AuditCommittee pre-approves. During the year, circumstances may arise when it maybecome necessary to engage the independent registered public accounting firmfor additional services not contemplated in the original pre-approval. In thoseinstances, the Audit Committee requires specific pre-approval before engagingthe independent registered public accounting firm.  The Audit Committee does not delegate tomanagement its responsibility to pre-approve services performed by theindependent registered public accounting firm.

 

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**Part IV**

 

##### **Item15. Exhibits and Financial**Statement Schedules

##### ** **

**(a)****                                 ****(1) and (2) Documents filedas part of this Report.**

 

1.                    Report ofSquar, Milner, Reehl & Williamson LLP, Independent Registered PublicAccounting Firm.

2.                    ConsolidatedBalance Sheets as of December 31, 2004 and 2003.

3.                    ConsolidatedStatements of Operations for each of the three years in the period endedDecember 31, 2004.

4.                    ConsolidatedStatements of Stockholders’ Equity (Deficit) and Comprehensive Income (Loss)for each of the three years in the period ended December 31, 2004.

5.                    ConsolidatedStatements of Cash Flows for each of the three years in the period endedDecember 31, 2004.

6.                    Notes toConsolidated Financial Statements.

 

**(3) Listing of Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                   |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1.1*               |       | Amended and Restated Certificate of  Incorporation of OPUS360 Corporation.                                                                                        |
| 3.1.2*               |       | Certificate of Amendment to the Amended and  Restated Certificate of Incorporation of OPUS360 Corporation.                                                        |
| 3.1.3                |       | Certificate of Amendment to the Amended and  Restated Certificate of Incorporation of Artemis International Solutions  Corporation(4).                            |
| 3.1.4                |       | Certificate of Designations, Preferences,  and Rights of Series A Convertible Preferred Stock(6)                                                                  |
| 3.1.5                |       | Certificate of Amendment to the Amended and  Restated Certificate of Incorporation of Artemis International Solutions  Corporation.                               |
| 3.2*                 |       | Amended and Restated Bylaws of Artemis  International Solutions Corporation (Incorporated by reference to Exhibit 3.1  to our Form 8-K dated September 13, 2002). |
| 4.1*                 |       | Certificate for Shares.                                                                                                                                           |
| 10.1*                |       | Lease Agreement dated August 10, 1999,  between the Company and Samson Associates, LLC as amended.                                                                |
| 10.2*                |       | Modification and Extension of Lease dated  August 6, 1999, between the Company and Royal Realty Corp.                                                             |
| 10.3*                |       | Employment Agreement dated April 1, 1999,  between the Company and Ari B. Horowitz.                                                                               |
| 10.3.1*              |       | Amendment to Employment Agreement of Ari B.  Horowitz dated September 2, 1999.                                                                                    |
| 10.3.2               |       | Promissory Note of Ari B. Horowitz.(4)                                                                                                                            |
| 10.3.3               |       | Second Amendment to Employment Agreement of  Ari B. Horowitz dated May 1, 2001.(4)                                                                                |
| 10.3.4               |       | Third Amendment to Employment Agreement of  Ari B. Horowitz dated July 31, 2001(4)                                                                                |
| 10.3.5               |       | Fourth Amendment to Employment Agreement of  Ari B. Horowitz dated January 10, 2003.(4)                                                                           |
| 10.5*                |       | Loan and Security Agreement dated May 19,  1999, between Silicon Valley Bank and the Company.                                                                     |
| 10.6*                |       | Loan and Security Agreement dated August  17, 1999, between Silicon Valley Bank and the Company.                                                                  |
| 10.7*                |       | Amended and Restated Registration Rights  Agreement dated March 16, 2000, among the Company and the security holders  parties thereto.                            |
| 10.8*                |       | The Company’s 1998 Stock Option Plan.                                                                                                                        |
| 10.9*                |       | Letter Agreement dated October 15, 1999,  between the Company and J.P. Morgan Corporation.(3)                                                                     |
| 10.10*               |       | Letter Agreement dated November 21, 1999,  between the Company and CareerPath.com, Inc.(3)                                                                        |
| 10.11*               |       | Standard Form of *FreeAgent e.office*services agreement.                                                                                                          |
| 10.12*               |       | Series A Securities Purchase Agreement  dated December 24, 1998, among the Company and the signatories thereto.                                                   |
| 10.13*               |       | Series B Securities Purchase Agreement  dated September 3, 1999, among the Company and the purchasers of the Series B  Convertible Preferred Stock.               |
| 10.14*               |       | Agreement and Plan of Merger dated May 27,  1999, among the Company, The Churchill Benefit Corporation, William Bahr and  Churchill Acquisition Corp.             |
| 10.15*               |       | Agreement and Plan of Merger dated January  30, 2000 among the Company, Opus PM Acquisition Corp., PeopleMover, Inc. and  the other parties thereto.              |
| 10.16*               |       | Agreement and Plan of Merger dated January  19, 2000 among the Company, Ithority Corporation and the other parties  thereto.                                      |
| 10.17*               |       | Asset Purchase Agreement dated as of  January 12, 2000 among Brainstorm Interactive, Inc., the Company and the  other parties thereto.                            |
| 10.18*               |       | Escrow Agreement dated as of February 24,  2000 among the Company, Suntrust Bank, James L. Jonassen and Ali Behnam.                                               |
| 10.19*               |       | Escrow and Pledge Agreement dated as of  January 19, 2000 among SunTrust Bank, the Company and the other parties  thereto.                                        |
| 10.20*               |       | Amended and Restated Employment Agreement  dated February 2, 2000, between the Company and Richard S. Miller.                                                     |
| 10.20.1              |       | First Amendment to Amended and Restated  Employment Agreement, between the Company and Richard Miller dated June 21,  2001.(4)                                    |

 

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| 10.21*  |   | Agreement between The Churchill Benefit  Corporation and Automatic Data Processing.                                                                                                                                        |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22*  |   | Employment Agreement dated February 29,  2000, between the Company and Allen Berger.                                                                                                                                       |
| 10.23*  |   | Strategic Partner Registration Rights Agreement  dated February 7, 2000 between the Company and Lucent Technologies Inc.                                                                                                   |
| 10.24*  |   | The Company’s 2000 Stock Option Plan.                                                                                                                                                                                 |
| 10.24.1 |   | Amended and Restated 2000 Stock Option Plan  (10) .                                                                                                                                                                        |
| 10.25*  |   | The Company’s 2000 Stock Option Plan for  Non-Employee Directors.                                                                                                                                                     |
| 10.25.1 |   | Amended and Restated 2000 Stock Option Plan  for Non-Employee Directors (10).                                                                                                                                              |
| 10.26*  |   | The Company’s 2000 Employee Stock Purchase  Plan.                                                                                                                                                                     |
| 10.27*  |   | Registration Rights Agreement dated  February 24, 2000 between the Company and the Opus PM security holders.                                                                                                               |
| 10.28*  |   | PeopleMover, Inc. 1999 Stock Incentive  Plan.                                                                                                                                                                              |
| 10.29*  |   | Stock Purchase Agreement dated February 28,  2000, between the Company and Dell USA L.P.                                                                                                                                   |
| 10.30*  |   | Form of Strategic Partner Registration  Rights Agreement between the Company and Dell USA L.P.                                                                                                                             |
| 10.33*  |   | Amended and Restated Non-Statutory Option  Agreement dated as of February 2, 2000 by and between the Company and Richard  S. Miller.                                                                                       |
| 10.34A  |   | Amended and Restated Promissory Note of  Richard S. Miller dated November 21, 2000.(4)                                                                                                                                     |
| 10.35*  |   | Pledge Agreement between the Company and  Richard S. Miller.                                                                                                                                                               |
| 10.35A  |   | Amended and Restated Pledge Agreement dated  as of November 21, 2000 between the Company and Richard S. Miller.(4)                                                                                                         |
| 10.36*  |   | Form of Agreement between the Company and  the *FreeAgent e.office*employee.                                                                                                                                               |
| 10.40   |   | Employment Agreement dated June 12, 2000  between the Company and Jeanne Murphy (Incorporated by reference to Exhibit  10.3 to our Quarterly Report on Form 10-Q dated June 30, 2000).(1)                                  |
| 10.40.1 |   | First Amendment to Employment Agreement  dated July 31, 2001, between the Company and Jeanne Murphy.(4)                                                                                                                    |
| 10.41   |   | Employment Agreement dated September 7,  2000 between the Company and Peter Schwartz (Incorporated by reference to  Exhibit 10.1 to our Quarterly Report on Form 10-Q dated December 31 2000).(1)                          |
| 10.41.1 |   | First Amendment to Employment Agreement  dated July 31, 2001, between the Company and Peter Schwartz.(4)                                                                                                                   |
| 10.44   |   | Employment Agreement dated January 25,  2002, between the Company and Michael J. Rusert (Incorporated by reference to  Exhibit 10.44 to our Quarterly Report on Form 10-Q for the Quarterly Period  Ended March 31, 2002). |
| 10.44.1 |   | First Amendment to Employment Agreement  between the Company and Michael J. Rusert dated October 1, 2002.(4)                                                                                                               |
| 10.44.2 |   | Separation Agreement and Mutual Release  between the Company and Michael J. Rusert.(5)                                                                                                                                     |
| 10.45   |   | Employment Agreement dated March 1, 2002,  between the Company and Charles F. Savoni. (Incorporated by reference to  Exhibit 10.45 to our Quarterly Report on Form 10-Q for the Quarterly Period  Ended March 31, 2002).   |
| 10.45.1 |   | First Amendment to Employment Agreement  between the Company and Charles Savoni dated October 4, 2002.(4)                                                                                                                  |
| 10.46   |   | Employment agreement dated January 23,  2004 between the Company and Patrick Ternier.(8)                                                                                                                              |
| 10.48   |   | Employment Agreement dated October 9, 2002,  between the Company and Robert Stefanovich.(4)                                                                                                                                |
| 10.48.1 |   | First Amendment to Employment Agreement  dated October 9, 2002 between the Company and Robert  Stefanovich.(5)                                                                                                             |
| 10.49   |   | Secured Convertible Note dated August 14,  2003 between the Company and Laurus Master Fund, Ltd.(2)                                                                                                                        |
| 10.49.1 |   | Amendment No. 1 to Convertible Note dated  December 2, 2003 between the Company and Laurus Master Fund.(5)                                                                                                                 |
| 10.50   |   | Security Agreement dated August 14, 2003  between the Company and Laurus Master Fund, Ltd.(2)                                                                                                                              |
| 10.50.1 |   | Amendment No. 1 to Security Agreement  dated July 20, 2004, between the Company and Laurus Master Fund.(7)                                                                                                       |
| 10.51   |   | Common Stock Purchase Warrant dated August  14, 2003 between the Company and Laurus Master Fund, Ltd.(2)                                                                                                                   |
| 10.52   |   | Registration Rights Agreement dated August  14, 2003 between the Company and Laurus Master Fund, Ltd.(2)                                                                                                                   |
| 10.52.1 |   | Amendment No. 1 to Registration Rights  Agreement dated July 30, 2004, between the Company and Laurus Master  Fund.(7)                                                                                           |
| 10.53   |   | Securities Purchase Agreement dated June  16, 2004, between the Company and the Buyers.(6)                                                                                                                                 |
| 10.54   |   | Registration Rights Agreement, dated June  16, 2004, between the Company and the Buyers.(6)                                                                                                                                |
| 10.55   |   | Escrow Agreement, dated June 16, 2004,  between the Company, Emancipation Capital LP, and Wachovia Bank.(6)                                                                                                                |
| 10.56   |   | Common Stock Purchase Agreement, dated June  16, 2004.(6)                                                                                                                                                                  |
| 10.57   |   | Common Stock Purchase Agreement, dated June  16, 2004.(6)                                                                                                                                                                  |
| 10.58   |   | Restructuring Agreement dated July 30,  2004, between the Company and Laurus Master Fund.(7)                                                                                                                          |
| 10.59   |   | Secured Convertible Minimum Borrowing Note  dated July 30, 2004, between the Company and Laurus Master  Fund.(7)                                                                                                      |
| 10.60   |   | Secured Revolving Note dated July 30,  2004, between the Company and Laurus Master Fund.(7)                                                                                                                           |
| 10.61   |   | Waiver and Release dated July 30,  2004, between the Company and Laurus Master Fund.(7)                                                                                                                               |
| 10.62   |   | Payment Schedule Agreement, dated as of  January 11, 2005, by and between Artemis Finland Oy and Proha Plc.(9)                                                                                                        |
| 14.1    |   | Code of Business Conduct and Ethics  Policy.(5)                                                                                                                                                                            |
| 14.2    |   | Code of Ethics For Senior Financial Officers.(5)                                                                                                                                                                           |
| 23.1    |   | Consent of Independent Registered Public  Accounting Firm.                                                                                                                                                                 |
| 23.2    |   | Consent of Thelen Reid & Priest LLP  (contained in Exhibit 5.1).                                                                                                                                                  |
| 24.1    |   | Powers of Attorney (included on signature  page).                                                                                                                                                                          |

 

38

----

 

----

*                                         Incorporatedby reference to our Registration Statement on Form S-1 and amendmentsthereto filed with the SEC on December 21, 1999, February 9, March 2,March 7, March 27, and April 4, 2000, RegistrationNo. 333-93185.

 

(1)                                  Incorporatedby reference to Artemis’ Report on Form 10-K for the fiscal year endedDecember 31, 2001—File No. 000-29793.

 

(2)                                  Incorporatedby reference to Artemis’ Report on Form 8-K filed with the SECAugust 21, 2003—File No. 000-29793.

 

(3)                                  Wehave been granted confidential treatment of certain provisions of this exhibitpursuant to Rule 406 of the Securities Act of 1933. The entire agreementhas been filed separately with the SEC.

 

(4)                                  Incorporatedby reference to Artemis’ Report on Form 10-K for the fiscal year endedDecember 31, 2002—File No. 000-29793.

 

(5)                                  Incorporatedby reference to Artemis’ Report on Form 10-K for the fiscal year endedDecember 31, 2003—File No. 000-29793.

 

(6)                                  Incorporatedby reference to Artemis’ Report on Form 8-K filed with the SECJune 18, 2004—File No. 000-29793.

 

(7)                                  Incorporatedby reference to Artemis’ Report on Form 10-Q for the quarterly periodended June 30, 2004—File No. 000-29793.

 

(8)                                  Incorporatedby reference to Artemis’ Report on Form 10-Q for the quarterly periodended September 30, 2004—File No. 000-29793.

 

(9)                                  Incorporatedby reference to Artemis’ Report on Form 8-K filed with the SECJanuary 14, 2005—File No. 000-29793.

 

(10)                            Incorporatedby reference to Artemis’ Definitive Proxy Statement on Schedule 14A filed withthe SEC on October 25, 2004 – File No. 000-29793.

 

**(b)****                                  FinancialStatement Schedules**

 

The financial statement schedules required by Item 8and Item 15 are omitted because the information required to be set forththerein is either not applicable, not material, or the information required bysuch schedules is contained in the consolidated financial statements or notesthereto included elsewhere in this Form 10-K.

 

39

----

 

**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company hasduly caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|   | **ARTEMIS INTERNATIONAL SOLUTIONS  CORPORATION** |
|--------|--------------------------------------------------|
|   |                                             |
|   | /s/ Patrick Ternier                              |   |
|   | Patrick Ternier,                                 |
|   | *Chief Executive Officer*                        |
|   | Date: March 30, 2005                             |

 

Each person whose signature appears below herebyconstitutes and appoints Patrick Ternier and Robert, S. Stefanovich the lawfulattorneys-in-fact and agents of the undersigned, with full power ofsubstitution and resubstitution, for and in the name, place and stead of theundersigned, in any and all capacities, to sign any and all amendments to thisReport, and to file the same, with all exhibits thereto, and other documents inconnection therewith, with the Commission, and hereby grants to suchattorneys-in-fact and agents full power and authority to do and perform eachand every act and thing requisite and necessary to be done, as fully to allintents and purposes as the undersigned might or could do in person, hereby ratifyingand confirming all that said attorneys-in-fact and agents, or their substituteor substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed below by the following persons on behalf of the Company and in thecapacities and on the dates indicated.

 

** **
| Date:  | March 30, 2005 |   | /s/ Patrick Ternier                                                                                          |   |
|--------|----------------|--------|--------------------------------------------------------------------------------------------------------------|--------|
|   |           |   | Patrick Ternier, President and Chief Executive  Officer  (principal executive officer)                       |
|   |           |   |                                                                                                         |
| Date:  | March 30, 2005 |   | /s/ Robert S. Stefanovich                                                                                    |   |
|   |           |   | Robert S. Stefanovich, Executive Vice President  and Chief  Financial Officer (principal accounting officer) |
|   |           |   |                                                                                                         |
| Date:  | March 30, 2005 |   | /s/ Steve Yager                                                                                              |   |
|   |           |   | Steve Yager, Chairman of the Board                                                                           |
|   |           |   |                                                                                                         |
| Date:  | March 30, 2005 |   | /s/ Bengt Algevik                                                                                            |   |
|   |           |   | Bengt Algevik, Director                                                                                      |
|   |           |   |                                                                                                         |
| Date:  | March 30, 2005 |   | /s/ David Cairns                                                                                             |   |
|   |           |   | David Cairns, Director                                                                                       |
|   |           |   |                                                                                                         |
| Date:  | March 30, 2005 |   | /s/ Joseph Liemandt                                                                                          |   |
|   |           |   | Joseph Liemandt, Director                                                                                    |
|   |           |   |                                                                                                         |
| Date:  | March 30, 2005 |   | /s/ Michael Murphy                                                                                           |   |
|   |           |   | Michael Murphy, Director                                                                                     |
|   |           |   |                                                                                                         |
| Date:  | March 30, 2005 |   | /s/ Olof Odman                                                                                               |   |
|   |           |   | Olof Odman, Director                                                                                         |
|   |           |   |                                                                                                         |
| Date:  | March 30, 2005 |   | /s/ Pekka Pere                                                                                               |   |
|   |           |   | Pekka Pere, Director                                                                                         |

 

40

----

 

**ARTEMISINTERNATIONAL SOLUTIONS CORPORATION**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of Independent Registered Public  Accounting Firm                                                                                                                |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                                                                    |       |
| Consolidated Balance Sheets as of December 31, 2004 and 2003                                                                                                            |       |
|                                                                                                                                                                    |       |
| Consolidated Statements of Operations for  each of the three years in the period ended December 31, 2004                                                           |       |
|                                                                                                                                                                    |       |
| Consolidated Statements of Stockholders’  Equity (Deficit) and Comprehensive Income (Loss) for each of the three years  in the period ended December 31, 2004 |       |
|                                                                                                                                                                    |       |
| Consolidated Statements of Cash Flows for  each of the three years in the period ended December 31, 2004                                                           |       |
|                                                                                                                                                                    |       |
| Notes to Consolidated Financial Statements                                                                                                                              | ** ** |

 

----

 

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directorsand Stockholders

Artemis InternationalSolutions Corporation and Subsidiaries

 

Wehave audited the accompanying consolidated balance sheets of ArtemisInternational Solutions Corporation and Subsidiaries (the “Company”) as ofDecember 31, 2004 and 2003, and the related consolidated statements ofoperations, shareholders’ equity (deficit) and comprehensive income (loss) andcash flows for each of the three years in the period ended December 31,2004.  These consolidated financial statements are the responsibility ofthe Company’s management.  Our responsibility is to express an opinion onthese consolidated financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement.  Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our audits provide a reasonable basis forour opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of the Company atDecember 31, 2004 and 2003, and the results of their operations and theircash flows for each of the three years in the period ended December 31, 2004in conformity with accounting principles generally accepted in the UnitedStates of America.

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern.  As discussed in Note 1, theCompany had negative working capital of approximately $3.4 million and anaccumulated deficit of approximately $92.7 million at December 31, 2004,and experienced negative operating cash flow during the year then ended.  These factors, among others, raisesubstantial doubt about the Company’s ability to continue as a goingconcern.  Management’s plans in regard to these matters are described inNote 1.  The consolidated financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 
| /s/ Squar, Milner, Reehl  & Williamson, LLP                                                                   |   |
|-------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                              |
| Newport Beach, California                                                                                         |
| March 18, 2005,  except for the last paragraph of Note 12, as to which the date is  March 29, 2005 |

 

F-2

----

 

**ARTEMISINTERNATIONAL SOLUTIONS CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

** **
| ** **                                                                                                                                                                                                                       | ** ** | **December 31,**                         | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                                                                                                       | ** ** | **2004**                                 | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                                                                                       | ** ** | **(in thousands, except share amounts)** | ** ** |
| **ASSETS**                                                                                                                                                                                                                       |       |                                     |       |   |   |
| Current assets:                                                                                                                                                                                                                  |       |                                     |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                        |       | $                                        | 3,720      |   | $ | 2,593 |   |
| Trade accounts receivable, net                                                                                                                                                                                                   |       | 12,041                                   |       | 13,628 |   |
| Other accounts receivable                                                                                                                                                                                                        |       | 709                                      |       | 839 |   |
| Prepaid expenses                                                                                                                                                                                                                 |       | 1,313                                    |       | 1,123 |   |
| Other current assets                                                                                                                                                                                                             |       | 379                                      |       | 694 |   |
| Total current assets                                                                                                                                                                                                             |       | 18,162                                   |       | 18,877 |   |
|                                                                                                                                                                                                                             |       |                                     |       |   |   |
| Property and equipment, net                                                                                                                                                                                                      |       | 1,008                                    |       | 1,192 |   |
| Intangible assets, net                                                                                                                                                                                                           |       | 1,489                                    |       | 6,520 |   |
| Investment in affiliates and other assets                                                                                                                                                                                        |       | 1,661                                    |       | 1,769 |   |
| Total assets                                                                                                                                                                                                                     |       | $                                        | 22,320     |   | $ | 28,358 |   |
|                                                                                                                                                                                                                             |       |                                     |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ (DEFICIT)**                                                                                                                                                                                | ** ** | ** **                               | ** ** | ** ** | ** ** |
|                                                                                                                                                                                                                             |       |                                     |       |   |   |
| Current liabilities:                                                                                                                                                                                                             |       |                                     |       |   |   |
| Accounts payable                                                                                                                                                                                                                 |       | $                                        | 3,030      |   | $ | 5,024 |   |
| Accrued liabilities                                                                                                                                                                                                              |       | 4,385                                    |       | 5,222 |   |
| Accrued payroll and related taxes                                                                                                                                                                                                |       | 5,360                                    |       | 6,682 |   |
| Deferred revenue                                                                                                                                                                                                                 |       | 5,047                                    |       | 7,227 |   |
| Short-term debt and line of credit, net                                                                                                                                                                                          |       | 3,739                                    |       | 3,386 |   |
| Current portion of long-term debt                                                                                                                                                                                                |       | 21                                       |       | 352 |   |
| Total current liabilities                                                                                                                                                                                                        |       | 21,582                                   |       | 27,893 |   |
|                                                                                                                                                                                                                             |       |                                     |       |   |   |
| Accrued pension and other liabilities                                                                                                                                                                                            |       | 4,465                                    |       | 2,834 |   |
| Deferred taxes                                                                                                                                                                                                                   |       | 160                                      |       | 480 |   |
| Long-term debt, less current portion                                                                                                                                                                                             |       | 1,918                                    |       | 324 |   |
| Total liabilities                                                                                                                                                                                                                |       | 28,125                                   |       | 31,531 |   |
|                                                                                                                                                                                                                             |       |                                     |       |   |   |
| Commitments and contingencies                                                                                                                                                                                                    |       |                                     |       |   |   |
|                                                                                                                                                                                                                             |       |                                     |       |   |   |
| Stockholders’ (deficit):                                                                                                                                                                                                    |       |                                     |       |   |   |
| Series A convertible preferred stock,  liquidation preference of $9,000, $0.001 par value, 25,000,000 shares  authorized, 4,090,909 issued and outstanding at December 31, 2004                                                  |       | 4                                        |       | — |   |
|                                                                                                                                                                                                                             |       |                                     |       |   |   |
| Common stock, $0.001 par value, 50,000,000 shares authorized, 10,245,233  shares issued and outstanding as of December 31, 2004; 500,000,000 shares  authorized and 9,965,018 shares issued and outstanding at December 31, 2003 |       | 10                                       |       | 10 |   |
| Additional paid-in capital, net of issuance  costs                                                                                                                                                                               |       | 89,616                                   |       | 81,070 |   |
| Accumulated deficit                                                                                                                                                                                                              |       | (92,676                                  | )          | (82,991 | ) |
| Accumulated other comprehensive (loss)                                                                                                                                                                                           |       | (2,759                                   | )          | (1,262 | ) |
| Total stockholders’ (deficit)                                                                                                                                                                                               |       | (5,805                                   | )          | (3,173 | ) |
| Total liabilities and stockholders’ deficit                                                                                                                                                                                 |       | $                                        | 22,320     |   | $ | 28,358 |   |

 

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

 

F-3

----

 

**ARTEMIS INTERNATIONAL SOLUTIONS CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                               | ** ** | **For the years ended  December 31,**        | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                               | ** ** | **2004**                                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                               | ** ** | **(in thousands, except per share amounts)** | ** ** |
|                                                                     |       |                                         |       |   |   |   |   |
| Revenue:                                                                 |       |                                         |       |   |   |   |   |
| Software                                                                 |       | $                                            | 13,055     |   | $ | 13,286 |   | $ | 15,070 |   |
| Support                                                                  |       | 17,186                                       |       | 16,568 |   | 15,690 |   |
| Services                                                                 |       | 22,204                                       |       | 27,437 |   | 37,904 |   |
|                                                                     |       | 52,445                                       |       | 57,291 |   | 68,664 |   |
|                                                                     |       |                                         |       |   |   |   |   |
| Cost of revenue:                                                         |       |                                         |       |   |   |   |   |
| Software                                                                 |       | 232                                          |       | 677 |   | 1,734 |   |
| Support                                                                  |       | 5,676                                        |       | 5,102 |   | 6,389 |   |
| Services                                                                 |       | 17,582                                       |       | 20,250 |   | 24,587 |   |
|                                                                     |       | 23,490                                       |       | 26,029 |   | 32,710 |   |
|                                                                     |       |                                         |       |   |   |   |   |
| Gross margin                                                             |       | 28,955                                       |       | 31,262 |   | 35,954 |   |
|                                                                     |       |                                         |       |   |   |   |   |
| Operating expenses:                                                      |       |                                         |       |   |   |   |   |
| Selling and marketing                                                    |       | 14,327                                       |       | 15,942 |   | 12,544 |   |
| Research and development                                                 |       | 7,710                                        |       | 8,152 |   | 7,868 |   |
| General and administrative                                               |       | 8,701                                        |       | 11,142 |   | 15,171 |   |
| Amortization expense                                                     |       | 4,117                                        |       | 4,118 |   | 4,117 |   |
| Impairment charge                                                        |       | 913                                          |       | — |   | — |   |
| Restructuring charges                                                    |       | 2,740                                        |       | — |   | — |   |
|                                                                     |       | 38,508                                       |       | 39,354 |   | 39,700 |   |
|                                                                     |       |                                         |       |   |   |   |   |
| Operating loss                                                           |       | (9,553                                       | )          | (8,092 | ) | (3,746 | ) |
|                                                                     |       |                                         |       |   |   |   |   |
| Interest expense, net                                                    |       | 502                                          |       | 192 |   | 194 |   |
| Equity in net (income) loss of  unconsolidated affiliates                |       | (49                                          | )          | 318 |   | 392 |   |
| Gain on sale of subsidiaries and investee                                |       | —                                       |       | (393 | ) | (977 | ) |
| Other (income) expense, net                                              |       | (95                                          | )          | 91 |   | 495 |   |
| Foreign exchange (gain)                                                  |       | (394                                         | )          | (708 | ) | (382 | ) |
|                                                                     |       | (36                                          | )          | (500 | ) | (278 | ) |
|                                                                     |       |                                         |       |   |   |   |   |
| Loss before income taxes                                                 |       | (9,517                                       | )          | (7,592 | ) | (3,468 | ) |
|                                                                     |       |                                         |       |   |   |   |   |
| Income tax expense                                                       |       | 168                                          |       | 299 |   | 480 |   |
|                                                                     |       |                                         |       |   |   |   |   |
| Net loss                                                                 |       | $                                            | (9,685     | ) | $ | (7,891 | ) | $ | (3,948 | ) |
|                                                                     |       |                                         |       |   |   |   |   |
| Loss per common share:                                                   |       |                                         |       |   |   |   |   |
| Basic                                                                    |       | $                                            | (0.97      | ) | $ | (0.79 | ) | $ | (0.40 | ) |
| Diluted                                                                  |       | $                                            | (0.97      | ) | $ | (0.79 | ) | $ | (0.40 | ) |
|                                                                     |       |                                         |       |   |   |   |   |
| Weighted average common shares used in computing  loss per common share: |       |                                         |       |   |   |   |   |
| Basic                                                                    |       | 9,988                                        |       | 9,965 |   | 9,965 |   |
| Diluted                                                                  |       | 9,988                                        |       | 9,965 |   | 9,965 |   |

 

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

 

F-4

----

 

**ARTEMIS INTERNATIONAL SOLUTIONS CORPORATIONCONSOLIDATED STATEMENTS OFSTOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)For the Period January 1, 2002 to December 31, 2004(in thousands)**

 
| ** **                                                 | ** ** | **Common Stock** | ** ** | **Preferred Stock** | ** ** | **Additional   Paid-in** | ** ** | **Accumulated** | ** ** | **Accumulated   Other   Comprehensive   Income (Loss)** | ** ** | ** **  | ** ** |
|------------------------------------------------------------|------------|------------------|------------|---------------------|------------|--------------------------|------------|-----------------|------------|---------------------------------------------------------|------------|-------------|------------|
| ** **                                                 | ** ** | **Shares**       | ** ** | **Amount**          | ** ** | **Shares**               | ** ** | **Amount**      | ** ** | **Capital**                                             | ** ** | **Deficit** | ** ** | **(As Restated)** | ** ** | **Total** | ** ** |
|                                                       |       |             |       |                |       |                     |       |            |       |                                                    |       |        |       |   |   |   |   |
| Balance January 1, 2002                                    |       | 9,965            |       | $                   | 10         |                     | —     |            | $          | —                                                  |       | $           | 80,187     |   | $ | (71,152 | ) | $ | 537 |   | $ | 9,582 |   |
| Net loss                                                   |       | —           |       | —              |       | —                   |       | —          |       | —                                                  |       | (3,948      | )          | — |   | (3,948 | ) |
| Foreign currency translation adjustment                    |       | —           |       | —              |       | —                   |       | —          |       | —                                                  |       | —      |       | (500 | ) | (500 | ) |
| Adjustment related to UK pension plan *                    |       | —           |       | —              |       | —                   |       | —          |       | —                                                  |       | —      |       | (1,059 | ) | (1,059 | ) |
| Comprehensive loss (as restated)                           |       | —           |       | —              |       | —                   |       | —          |       | —                                                  |       | —      |       | — |   | (5,507 | ) |
| Adjustment related to the reverse  acquisition of Opus 360 |       | —           |       | —              |       | —                   |       | —          |       | 646                                                     |       | —      |       | — |   | 646 |   |
| Balance December 31, 2002                                  |       | 9,965            |       | 10                  |       | —                   |       | —          |       | 80,833                                                  |       | (75,100     | )          | (1,022 | ) | 4,721 |   |
| Net loss                                                   |       | —           |       | —              |       | —                   |       | —          |       | —                                                  |       | (7,891      | )          | — |   | (7,891 | ) |
| Foreign currency translation adjustment                    |       | —           |       | —              |       | —                   |       | —          |       | —                                                  |       | —      |       | (240 | ) | (240 | ) |
| Comprehensive loss (as restated)                           |       | —           |       | —              |       | —                   |       | —          |       | —                                                  |       | —      |       | — |   | (8,131 | ) |
| Warrants issued                                            |       | —           |       | —              |       | —                   |       | —          |       | 237                                                     |       | —      |       | — |   | 237 |   |
| Balance December 31, 2003                                  |       | 9,965            |       | 10                  |       | —                   |       | —          |       | 81,070                                                  |       | (82,991     | )          | (1,262 | ) | (3,173 | ) |
| Net loss                                                   |       | —           |       | —              |       | —                   |       | —          |       | —                                                  |       | (9,685      | )          | — |   | (9,685 | ) |
| Foreign currency translation adjustment                    |       | —           |       | —              |       | —                   |       | —          |       | —                                                  |       | —      |       | (443 | ) | (443 | ) |
| Adjustment related to UK pension plan *                    |       | —           |       | —              |       | —                   |       | —          |       | —                                                  |       | —      |       | (1,054 | ) | (1,054 | ) |
| Comprehensive loss                                         |       | —           |       | —              |       | —                   |       | —          |       | —                                                  |       | —      |       | — |   | (11,182 | ) |
| Issuance of Series A preferred stock                       |       | —           |       | —              |       | 4,091                    |       | 4               |       | 8,546                                                   |       | —      |       |   |   | 8,550 |   |
| Exercise of additional warrants                            |       | 280              |       | —              |       | —                   |       | —          |       | —                                                  |       | —      |       | — |   | — |   |
| Balance December 31, 2004                                  |       | 10,245           |       | $                   | 10         |                     | 4,091      |            | $          | 4                                                       |       | $           | 89,616     |   | $ | (92,676 | ) | $ | (2,759 | ) | $ | (5,805 | ) |

 

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

 

----

* This adjustment records the additional minimum liability as furtherexplained in Note 9 to these consolidated financial statements.

 

F-5

----

 

**ARTEMISINTERNATIONAL SOLUTIONS CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                  | ** ** | **For the years ended   December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                  | ** ** | **2004**                               | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                     | ** ** |
| Cash flow from operating activities:                                                        |       |                                   |       |   |   |   |   |
| Net loss                                                                                    |       | $                                      | (9,685     | ) | $ | (7,891 | ) | (3,948 | ) |
| Adjustments to reconcile net loss to net  cash provided by or used in operating activities: |       |                                   |       |   |   |   |   |
| Depreciation and amortization                                                               |       | 4,620                                  |       | 5,077 |   | 6,213 |   |
| Equity in net loss (income) of  unconsolidated affiliates                                   |       | (49                                    | )          | 318 |   | 392 |   |
| Gain on sale of subsidiaries and investee                                                   |       | —                                 |       | (393 | ) | (977 | ) |
| Write-off of impaired asset                                                                 |       | 914                                    |       | — |   | — |   |
| Disposition of assets                                                                       |       | (16                                    | )          | (91 | ) | — |   |
| Changes in operating assets and  liabilities:                                               |       |                                   |       |   |   |   |   |
| (Increase) decrease in trade accounts  receivable                                           |       | 1,587                                  |       | 965 |   | (3,128 | ) |
| (Increase) decrease in prepaid expenses and  other assets                                   |       | 412                                    |       | (218 | ) | 13 |   |
| Increase (decrease) in deferred revenues                                                    |       | (2,180                                 | )          | (747 | ) | 2,127 |   |
| Increase (decrease) in accounts payable,  accrued expenses, and other liabilities           |       | (3,896                                 | )          | (1,397 | ) | 1,388 |   |
| Net cash provided by (used in) operating  activities                                        |       | (8,293                                 | )          | (4,377 | ) | 2,080 |   |
|                                                                                        |       |                                   |       |   |   |   |   |
| Cash flow from investing activities:                                                        |       |                                   |       |   |   |   |   |
| Capital expenditures, net                                                                   |       | (303                                   | )          | (473 | ) | (959 | ) |
| Proceeds from sale of subsidiaries and  investee                                            |       | —                                 |       | 289 |   | 1,121 |   |
| Net cash provided by (used in) investing  activities                                        |       | (303                                   | )          | (184 | ) | 162 |   |
|                                                                                        |       |                                   |       |   |   |   |   |
| Cash flow from financing activities:                                                        |       |                                   |       |   |   |   |   |
| Proceeds from the issuance of convertible  preferred stock, net of issuance costs           |       | 8,550                                  |       | — |   | — |   |
| Net increase in short term borrowings                                                       |       | 22                                     |       | 226 |   | 2,424 |   |
| Increase in long term borrowings                                                            |       | 1,594                                  |       | — |   | — |   |
| Payments of debt and capital leases                                                         |       | —                                 |       | (598 | ) | (1,481 | ) |
| Net cash provided by (used in) financing  activities                                        |       | 10,166                                 |       | (372 | ) | 943 |   |
|                                                                                        |       |                                   |       |   |   |   |   |
| Effect of foreign currency exchange rate  changes on cash and cash equivalents              |       | (443                                   | )          | (240 | ) | (500 | ) |
|                                                                                        |       |                                   |       |   |   |   |   |
| Net (decrease) increase in cash and cash  equivalents                                       |       | 1,127                                  |       | (5,173 | ) | 2,685 |   |
|                                                                                        |       |                                   |       |   |   |   |   |
| Cash and cash equivalents at the beginning  of the year                                     |       | 2,593                                  |       | 7,766 |   | 5,081 |   |
|                                                                                        |       |                                   |       |   |   |   |   |
| Cash and cash equivalents at the end of the  year                                           |       | $                                      | 3,720      |   | $ | 2,593 |   | $ | 7,766 |   |
|                                                                                             |            |                                        |            |  |  |  |  |  |  |  |

 

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

 

See accompanying notes to consolidatedfinancial statements for discussion of non-cash financing and investing transactionsanddisclosure of cash paid for interest and income taxes.

 

F-6

----

 

**ARTEMISINTERNATIONAL SOLUTIONS CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1. Organization and Summary ofSignificant Accounting Policies**

 

*Organization and Description ofBusiness*

 

Artemis International Solutions Corporation,including its subsidiaries (“Artemis”, the “Company,” or “we”), is one of theworld’s leading providers of investment planning and control software andservices.  Since 1976 the Company has been helping organizations improvetheir performance through portfolio, project and resource management.

 

Customers use the Company’s software and services insuch key areas as (i) IT management and governance, (ii) developing newproducts such as pharmaceuticals, (iii) helping governmental agencies promotebusiness efficiency through better alignment and allocation of resources, (iv)maintaining nuclear power stations and (v) managing the Joint Strike Fighterprogram for the US government.  The Company has an internationaldistribution network in over 44 countries.

 

As of December 31, 2004, approximately 78% (or 56%,assuming conversion of all preferred shares) of the Company’s outstandingcommon stock was owned by Proha Plc (“Proha”), a Finnish Company.

 

Artemis’ common stock is quoted on theOver-the-Counter Bulletin Board administered by Nasdaq under the symbol “AMSI”.

 

*Liquidity and Going ConcernConsiderations*

 

The Company’s independent registered public accountingfirm has included a “going concern” explanatory paragraph in their audit reporton the December 31, 2004 consolidated financial statements, which havebeen prepared assuming that the Company will continue as a going concern. Theaccompanying consolidated financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.  Accordingly,such financial statements do not include any adjustments related to therecoverability and classification of asset carrying amounts or the amount andclassification of liabilities that might result, should the Company be unableto continue as a going concern.  At December 31, 2004, the Company’scurrent liabilities exceeded current assets by approximately $3.4 million andthe Company reported a cash balance of $3.7 million. Operating cash flow wasnegative $8.3 million for the year ended December 31, 2004. The Company hastaken a number of actions to improve its financial strength and cashavailability including but not limited to restructuring actions taken in 2004(see below and Note 18). On June 16, 2004, the Company completed a privateplacement of $9.0 million of convertible preferred stock (see Note 14)significantly strengthening the Company’s financial position. Proceeds from thefinancing are being used for (i) working capital, (ii) the repaymentof debt and (iii) to strengthen the Company’s financial position.

 

Prior to the private placement, the Company enteredinto a $5.0 million asset-based lending facility with Laurus Master Fund, Ltd (“Laurus”)in August 2003 which was amended on July 30, 2004 (see Note 6) to increase theCompany’s financial flexibility.  TheCompany also has other lending facilities available to certain of itssubsidiaries, such as in Japan and France.

 

In addition to the lending facilities available tothe Company, management has taken other steps to reduce and defer discretionaryspending to more closely match expenses with actual and projected revenues. Inlate 2002, the Company decided to start divesting certain non-core investmentsand operations to focus on its core expertise in enterprise portfolio andproject management. This resulted in the sale of its 19.9% interest inAccountor Oy (Finland), ABC Technologies Sarl (France) and its SoftwareProductivity Research operations (US) in November 2002, December 2002 andOctober 2003, respectively. During 2003, the Company also initiateddiscretionary restructuring activities that included workforce reductions andother cost reductions to respond to the weakening of certain of the Company’smarkets, increased operating losses and negative cash flow from operations.Because some of the Company’s key operating metrics did not improve in late2003, the Company adopted a nondiscretionary restructuring plan (see Note 18)that was implemented and communicated to the employees affected by the relatedworkforce reductions during the year ended December 31, 2004.

 

F-7

----

 

A summary of the Company’s future contractualobligations and commercial commitments as of December 31, 2004 is asfollows:

 
| ** **                                          | ** ** | **Year ending December 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|
| ** **                                          | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2009-** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **                                          | ** ** | **(in  thousands)**          | ** ** |
| Long-term debt                                      |       | $                            | 21         |   | $ | 1,509 |   | $ | 8 |   | $ | 8 |   | $ | 393 |   | $ | 1,939 |   |
| Obligations under non-cancellable operating  leases |       | 3,492                        |       | 2,467 |   | 1,219 |   | 896 |   | 823 |   | 8,897 |   |
|                                                |       | $                            | 3,513      |   | $ | 3,976 |   | $ | 1,227 |   | $ | 904 |   | $ | 1,216 |   | $ | 10,836 |   |

 

*Reverse Stock Split*

 

On February 7, 2003,the Company effected a one for twenty-five reverse stock split of itsoutstanding common stock. All information regarding common stock, stockoptions, warrants and related per share amounts has been restated within thisannual report to reflect the reverse stock split.

 

*Reclassifications*

 

Certain prior yearinformation has been reclassified to conform to the 2004 presentation.

 

*Principles of Consolidation*

 

The accompanyingconsolidated financial statements include the accounts of Artemis InternationalSolutions Corporation and its majority owned subsidiaries. All materialintercompany transactions and balances have been eliminated in consolidation.Equity investments in which Artemis owns at least 20% of the voting securities,or exercises significant influence (either individually or in concert with its majorityshareholder, Proha) are accounted for using the equity method. Investments in which the Company owns less than 20% and is not able to exercisesignificant influence over the investee are accounted for under the cost methodof accounting.

 

*Use of Estimates*

 

The preparation of financialstatements in accordance with accounting principles generally accepted in theUnited States of America (“GAAP”) requires management to make estimates andassumptions regarding revenue recognition, and the recoverability of intangibleassets that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenue and expenses during the reportingperiod.  Actual results could differ from those estimates. Significant estimates include valuation of deferred tax assets, allowance foruncollectible accounts receivable, revenue recognition, valuation and usefuleconomic lives of intangible assets, accrued pension liabilities and certainother liabilities.

 

*Revenue Recognition*

 

The Companyhas adopted Statement of Position, or SOP, 97-2, Software Revenue Recognition(which supersedes SOP 91-1, Software Revenue Recognition), as well as SOP 98-9,Modification of SOP 97-2, Software Revenue Recognition with Respect to CertainTransactions, which amends SOP 97-2 and supercedes SOP 98-4.  SOP 97-2, asamended, generally requires revenue earned on software arrangements involvingmultiple elements to be allocated to each element based on the relativeestimated fair market value of each element. The estimated fair value of anelement is based on vendor-specific objective evidence (“VSOE”). Softwarelicense revenue allocated to a software product is recognized upon delivery ofthe product or deferred and recognized in future periods to the extent that anarrangement includes one or more elements that are to be delivered at a futuredate and for which VSOE has not been established.  Maintenance and supportrevenue is recognized ratably over the maintenance term.  First-yearmaintenance typically is sold with the related software license and renewed onan annual basis thereafter. Estimated fair values of ongoing maintenance andsupport obligations are based on separate sales of renewals to other customersor upon renewal rates quoted in the contracts. For such arrangements withmultiple elements, we allocate revenue to each component of the arrangementbased on the estimated fair value of the undelivered elements. Fair value ofservices, such as consulting or training, is based upon separate sales of theseservices. The Company at times may enter into multiple-customer contracts inwhich the Company allocates revenue based on the number of specified users ateach customer, and recognizes revenue upon customer acceptance and satisfyingthe other applicable conditions of the above described accounting policy.

 

Services revenue isrecognized as the service is performed assuming that sufficient evidence existsto estimate the fair value of the services.  Consulting and trainingservices are billed based on contractual hourly rates and revenues arerecognized as the services are performed. Consulting services primarily consistof implementation services related to the installation of the Company’sproducts which do not require significant customization to or modification ofthe underlying software code.

 

F-8

----

 

Significant managementjudgments and estimates must be made in connection with determination of therevenue to be recognized in any accounting period.  If we made differentjudgments or utilized different estimates for any period, material differencesin the amount and/or timing of revenue recognized could result.

 

*Cost of Revenues*

 

Cost of software revenueprimarily reflects the manufacture expense and royalties to third partydevelopers, which are recognized upon delivery of the product or in future periodsto the extent that an arrangement includes one or more elements that are to bedelivered at a future date and for which VSOE has not been established. Cost of support revenue includes (i) sales commissions and salaries paid toemployees who provide first and second level support to clients and (ii) feespaid to consultants, which are recognized as the services are performed. Sales commissions are expensed as incurred.  The costs incurred forimplementation, customer support and training of the Company’s clients usinginternal or external resources are recorded as cost of services revenue whenthe services are performed.

 

*Software Development Costs*

 

The costs incurred todevelop computer software products to be sold or otherwise marketed are chargedto expense until technological feasibility of the product has been established.Once technological feasibility of related software products has beenestablished, computer software development costs are capitalized and reportedat the lower of amortized cost or estimated net realizable value. When aproduct is ready for general release to the public, its capitalized costs areamortized using the straight-line method of amortization over a period not toexceed three years. Company management believes that technological feasibilityis not established until a beta version of the product exists. Historically,costs incurred during the period from when a beta version is available untilgeneral release to the public have not been material. Accordingly, during thethree years ended December 31, 2004, no software costs have beencapitalized.

 

*Allowance for Doubtful AccountsReceivable*

 

We establish the allowancefor doubtful accounts receivable based on our qualitative and quantitativereview of credit profiles of our customers, contractual terms and conditions,current economic trends and historical payment, return and discount experience.We reassess the allowance for doubtful accounts each period. If we madedifferent judgments or utilized different estimates for any period, materialdifferences in the amount and/or timing of such allowance could result.

 

*Property and Equipment*

 

Property and equipment arestated at cost less accumulated depreciation and amortization, which arecalculated using the straight-line method over the shorter of the estimateduseful lives of the related assets (generally ranging from three to fiveyears), or the remaining lease term when applicable.  Gains and losses ondisposals are included in results of operations at amounts equal to the differencebetween the book value of the disposed assets and the proceeds received upondisposal. Expenditures for replacements and leasehold improvements arecapitalized, while expenditures for maintenance and repairs are expensed asincurred.

 

*Intangible Assets*

 

Intangible assets atDecember 31, 2004 consist of acquired customer base valued at cost, whichapproximates estimated fair value at the time of purchase.   The cost assigned to this intangible asset isbeing amortized on a straight-line basis over the estimated useful life of theasset, which is forty-two months from January 1, 2002.  Managementbelieves that the straight-line method is appropriate for the Company’scustomer list, given the caliber and nature of its customerrelationships.  Substantially all intangible assets remaining atDecember 31, 2004 will be fully amortized by July 2005, assuming noimpairment adjustments or future changes in their estimated useful lives.

 

Intangible assets arereviewed at least annually for impairment to ensure they are appropriatelyvalued.  Conditions that may indicate an impairment issue exists includean economic downturn or a change in the assessment of future operations. Where applicable, an appropriate interest rate is utilized, based on applicableeconomic factors, risk and cost of capital.

 

For additional information,see the discussion in “Impairment of Long-Lived Assets” immediately below.

 

*Impairment of Long-Lived Assets*

 

The Company periodicallyevaluates the carrying value of its long-lived assets under the provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*.

 

F-9

----

 

SFAS No. 144 requiresimpairment losses to be recorded on long-lived assets used in operations,including amortizable intangible assets when indicators of impairment arepresent.  In the event a condition is identified that may indicate animpairment issue, an assessment is performed using a variety of methodologies,including analysis of undiscounted future cash flows, estimates of salesproceeds and independent appraisals.  If such assets are impaired, theimpairment to be recognized is measured by the amount by which the carryingamount of the asset exceeds the estimated fair value of the assets. Assets to be disposed of are reported at the lower of the carrying value orestimated fair market value, less cost estimated to sell.

 

During the fourth quarter of2004 the Company reviewed its intangible assets for impairment in accordancewith SFAS No. 144.  As a result theCompany fully impaired such intangible asset related to the Company’s priorcore technology and recorded an impairment charge of approximately $0.9 millionin the quarter ended December 31, 2004. No such impairment charges were recorded during the years endedDecember 31, 2003 or December 31, 2002.  (See Note 5).

 

*Exit andDisposal Activities*

 

The Companyaccounts for expenses related to non-discretionary restructuring activities(including workforce reductions) in accordance with SFAS No. 146, “Accountingfor Costs Associated with Exit and Disposal Activities.”  GAAP prohibits the recognition of anexit-activity liability until (a) certain criteria (which demonstrate that itis reasonably probable that a present obligation to others has been incurred)are met, and (b) the fair value of such liability can be reasonablyestimated.  The Company recorded arestructuring charge of approximately $2.7 million in calendar 2004.  See Note 18 for additional information.

 

*Translation of Foreign Currencies*

 

Artemis uses the U.S. dollaras it functional currency.  Assets and liabilities of foreign subsidiariesare translated into U.S. dollars at year-end exchange rates, and revenues andexpenses are translated at average rates prevailing during the year or otherperiod presented. In accordance with SFAS 52, *ForeignCurrency Translation*, translation adjustments are included as acomponent of stockholders’ deficit. The Company recorded a foreign exchangegain of $0.4 million, $0.7 million and $0.4 million for the years endedDecember 31, 2004, 2003 and 2002, respectively.

 

*Income Taxes*

 

The Company accounts forincome taxes under the provisions of SFAS No. 109, *Accounting for Income Taxes*.  SFAS No. 109 requiresrecognition of deferred tax liabilities and assets for the expected future taxconsequences of events that have been included in the financial statements orincome tax returns.  Under this method deferred tax liabilities and assetsare determined based on the difference between the financial statement and taxbases of assets and liabilities using enacted tax rates for the year in whichthe differences are expected to reverse  (See Note 10).

 

*Valuation of Deferred Tax Assets*

 

The Company records anestimated valuation allowance on its significant deferred tax assets when,based on the weight of available evidence (including the scheduled reversal ofdeferred tax liabilities, projected future taxable income or loss, andtax-planning strategies), it is more likely than not that some or all of thetax benefit will not be realized.

 

*Stock-Based Compensation*

 

The FinancialAccounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-BasedCompensation -Transition and Disclosure – an amendment of SFAS No. 123.”  SFAS No. 148 amends SFAS No. 123, “Accountingfor Stock-Based Compensation,” to provide alternative methods of transition fora voluntary change to the fair-value-based method of accounting for stock-basedemployee compensation.  In addition, SFASNo. 148 amends the disclosure requirements of SFAS No. 123 to require prominentdisclosure in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.  As provided inSFAS No. 123, the Company has elected to apply APB Opinion No. 25 “Accountingfor Stock Issued to Employees” and related interpretations in accounting forits stock-based employee compensation plans. APB No. 25 does not require options to be expensed when granted with anexercise price equal to or greater than the grant-date market value.  The Company is complying with the disclosurerequirements of SFAS No. 148.

 

F-10

----

 

Had theCompany determined compensation cost based on the fair value at the grant datefor its options under SFAS No. 123, the Company’s net loss would have beenincreased to the pro forma amount indicated below:

 
| ** **                                                                                  | ** ** | **For the years ended  December 31,**     | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands, except per share data)** | ** ** |
|                                                                                        |       |                                      |       |   |   |   |   |
| Net (loss) as reported                                                                      |       | $                                         | (9,685     | ) | $ | (7,891 | ) | $ | (3,948 | ) |
| Less: Total stock-based employee compensation expense determined  under Black-Scholes model |       | (700                                      | )          | (2,297 | ) | (7,909 | ) |
| Pro forma net (loss)                                                                        |       | $                                         | (10,385    | ) | $ | (10,188 | ) | $ | (11,857 | ) |
|                                                                                        |       |                                      |       |   |   |   |   |
| Basic and diluted loss per common share:                                                    |       |                                      |       |   |   |   |   |
| As reported                                                                                 |       | $                                         | (0.97      | ) | $ | (0.79 | ) | $ | (0.40 | ) |
| Pro forma                                                                                   |       | $                                         | (1.04      | ) | $ | (1.02 | ) | $ | (1.19 | ) |

 

The abovetable includes compensation expense related to stock options granted toemployees during 2004, 2002 and prior years. The pro forma compensation expense reported in the above table isgenerally based on the vesting provisions in the related stock option grants,and includes an allowance for estimated forfeitures.  The stock-based employee compensation expenseand related pro forma per-share data for 2003 and 2002 in the above table differfrom the disclosure in the Company’s Form 10-K/A filed in July 2004 as a resultof correcting errors relating to the option vesting provisions and othermatters.

 

The following weighted average assumptionswere used as applicable in the above table:

 
| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|------------------|------------|
| ** **              | ** ** | **2004**         | ** ** | **2003 (1)** | ** ** | **2002** | ** ** |
| Annual dividends        |       | zero             |       | — |   | zero |   |
| Expected volatility     |       | 106              | %          | — |   | 217 | % |
| Risk free interest rate |       | 1.4              | %          | — |   | 2.2 | % |
| Expected life           |       | 5 years          |       | — |   | 5 years |   |

 

----

(1)  TheCompany did not grant any stock options during 2003.

 

*Segment Information*

 

The Company disclosesinformation regarding segments in accordance with SFAS No. 131 *Disclosure about Segments of an Enterprise andRelated Information.*  SFAS No. 131 establishes standards forreporting of financial information about operating segments in annual financialstatements and requires reporting selected information about operating segmentsin interim financial reports.  The Company is managed, and financialinformation is developed on a geographical basis, rather than a product linebasis.  Thus, the Company has provided segment information on ageographical basis (see Note 11).

 

*Comprehensive Income/Loss*

 

The Company reportscomprehensive income/loss in accordance with SFAS No. 130, *Reporting Comprehensive Income.*  SFASNo. 130 establishes standards for the reporting and display of comprehensiveincome/loss and its components.  SFAS No. 130 requires that unrealizedholding gains and losses, net of related tax effects, on available-for-salesecurities be reported as comprehensive income/loss until realized.  SFASNo. 87 requires that some or all of the additional minimum liability (as defined)related to defined benefit pension plans (see Note 9) be reported ascomprehensive loss.  Foreign currencytranslation gains and losses are also included in comprehensive income/loss inthe accompanying consolidated statements of stockholders’ equity (deficit) andcomprehensive income (loss).

 

See Notes 19 and 9,respectively, for discussion of the restatement of the December 31, 2003 and2002 consolidated statements of stockholders’ equity (deficit) andcomprehensive income (loss).

 

*Postemployment Benefits*

 

The Company recordspostemployment benefits in accordance with SFAS No. 87, *Employers’ Accounting for Pensions*, andSFAS No. 88, *Employers’ Accounting for Settlements andCurtailments of Defined Benefit Pension Plans and for Termination Benefits*.  The Company discloses postemployment benefitsin accordance with SFAS No. 132, *Employers’Disclosure about Pensions*

 

F-11

----

 

*and Other Postemployment Benefits,*as amended (see below)*.*  SFAS No. 132 establishes standards foremployers who provide benefits to former or inactive employees after employmentbut before retirement.  Postemployment benefits include, but are notlimited to, salary continuation, supplemental employment benefits anddisability related benefits.

 

*Earnings/ Loss per Common Share*

 

The Companycalculates earnings or loss per common share in accordance with SFAS No. 128, *Earnings Per Share*.  Accordingly,basic loss per common share excludes dilution for potentially dilutivesecurities and is computed by dividing net loss available to commonshareholders by the weighted average number of common shares outstanding forthe period (See Note 8). Diluted earnings per common share reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock. When a company isin a loss position, basic and diluted loss per common share are the same.

 

**Significant Recent AccountingPronouncements**

 

In January 2003, the FASB issued FASBInterpretation (“FIN”) No. 46, “Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51.” The primary objectives of FINNo. 46 are to provide guidance on the identification of entities for whichcontrol is achieved through means other than voting rights (variable interestentities, or “VIEs”), and how to determine when and which business enterpriseshould consolidate the VIE. This new model for consolidation applies to anentity for which either: (a) the equity investors do not have acontrolling financial interest; or (b) the equity investment at risk isinsufficient to finance that entity’s activities without receiving additionalsubordinated financial support from other parties. In addition, FIN No. 46requires that both the primary beneficiary and all other enterprises with asignificant variable interest in a VIE make additional disclosures. As amendedin December 2003, the effective dates of FIN No. 46 for publicentities that are not small business issuers are as follows: (a) Forinterests in special-purpose entities: the first period ended afterDecember 15, 2003; and (b) For all other types of VIEs: the firstperiod ended after March 15, 2004. Management has determined that theCompany does not have any VIEs, and there is no impact on its consolidatedfinancial statements.

 

In April 2003, the FASB issued SFASNo. 149, “Amendments of Statement 133 on Derivative Instruments andHedging Activities,” which amends and clarifies financial accounting andreporting for derivative instruments, including certain derivative instrumentsembedded in other contracts and for hedging activities under SFAS No. 133.This pronouncement is effective for contracts entered into or modified afterJune 30, 2003 (with certain exceptions), and for hedging relationshipsdesignated after June 30, 2003. The adoption of SFAS No. 149 did nothave a material impact on the Company’s consolidated financial statements.

 

In May 2003, the FASB issued SFASNo. 150, “Accounting for Certain Financial Instruments with Characteristicsof both Liabilities and Equity.” SFAS No. 150 establishes standards forhow a company classifies and measures certain financial instruments withcharacteristics of both liabilities and equity, and is effective for publiccompanies as follows: (i) in November 2003, the FASB issued FASBStaff Position (“FSP”) FAS 150-03 (“FSP 150-3”), which defers indefinitely(a) the measurement and classification guidance of SFAS No. 150 forall mandatorily redeemable non-controlling interests in (and issued by)limited-life consolidated subsidiaries, and (b) SFAS No. 150’smeasurement guidance for other types of mandatorily redeemable non-controllinginterests, provided they were created before November 5, 2003;(ii) for financial instruments entered into or modified after May 31,2003 that are outside the scope of FSP 150-3; and (iii) otherwise, at thebeginning of the first interim period beginning after June 15, 2003. TheCompany adopted SFAS No. 150 on the aforementioned effective dates. Theadoption of this pronouncement did not have a material impact on the Company’sresults of operations or financial condition.

 

In December 2003, the FASB issued arevision of SFAS No. 132, *Employers’Disclosures about Pensions and Other Postretirement Benefits*. Thispronouncement (“SFAS No. 132-R”) expands employers’ disclosures aboutpension plans and other post-retirement benefits, but does not change themeasurement or recognition of such plans required by SFAS No. 87,No. 88. or No. 106. SFAS No. 132-R retains the existingdisclosure requirements of SFAS No. 132, and requires certain additionaldisclosures about defined benefit post-retirement plans. The defined benefitpension plan of the Company’s United Kingdom subsidiary is the Company’s onlydefined benefit post-retirement plan. Except as described in the followingsentence, SFAS No. 132-R is effective for foreign pension plans for fiscalyears ending after June 15, 2004; after the effective date, restatementfor some of the new disclosures is required for earlier annual periods. Some ofthe interim-period disclosures mandated by SFAS No. 132-R (such as thecomponents of net periodic benefit cost, and certain key assumptions) areeffective for foreign pension plans for quarters beginning afterDecember 15, 2003; other interim-period disclosures will not be requiredfor the Company until the first quarter of 2005. The interim-period disclosurerequirements which became effective on January 1, 2004 and December 31,2004 were adopted by the Company on those dates. The Company is presentlyevaluating the other effects of SFAS No. 132-R on its interim-periodfinancial statement disclosures.

 

In December 2004, the FASB issued SFASNo. 123-R which replaces SFAS No. 123, *Accounting for Stock-Based Compensation*, and supersedes APBOpinion No. 25, *Accounting for StockIssued to Employees*. As originally issued, SFAS No. 123established as preferable a fair-value-based method of accounting for share-basedpayment transactions with employees. However, that pronouncement permitted entitiesto continue applying the intrinsic-value-based model of APB Opinion 25,provided that the financial statements disclosed the pro forma net income orloss based on the fair-value method.  TheCompany is required to apply SFAS No. 123-R

 

F-12

----

 

as of the first interim reporting period that begins afterJune 15, 2005. Thus, the Company’s consolidated financial statements willreflect an expense for (a) all share-based compensation arrangementsgranted after June 30, 2005 and for any such arrangements that aremodified, cancelled, or repurchased after that date, and (b) the portionof previous share-based awards for which the requisite service has not beenrendered as of that date, based on the grant-date estimated fair value of thoseawards.

 

Other recent accounting pronouncements issuedby the FASB (including its Emerging Issues Task Force), the American Instituteof Certified Public Accountants and the Securities and Exchange Commission (the“SEC”), did not or are not believed by management to have a material impact onthe Company’s present or future consolidated financial statements.

 

##### **Note 2. Divestitures and Material Licensing Agreements**

 

*Sale of Accountor Oy*

 

In November 2002, theCompany sold its 19.9% interest in Accountor Oy to Pretax Ltd, an unrelatedparty.  Under the terms of the sale, the Company’s gross proceeds were$0.8 million less transaction costs and purchase commitments (net ofreimbursements) of approximately $0.1 million.  The Company’s investmentin Accountor Oy was carried at less than $0.1 million at the time ofsale.  Accordingly, the Company’s other income for the year endedDecember 31, 2002 includes a pretax gain of $0.7 million on the sale ofAccountor Oy.  During 2003, subsequent eventsoccurred that caused adjustments to the purchase price, as provided in theoriginal agreements.  The result is theCompany’s other income for the year ended December 31, 2003 includes areduction of $0.1 million of the 2002 pretax gain on the sale of AccountorOy.  The final pretax gain on the sale ofAccountor Oy was $0.6 million.

 

*Sale of ABC Technologies- France*

 

In December 2002, theCompany sold its interest in ABC Technologies – France (“ABC Technologies”) toan unrelated party.  Under the terms of the sale, the Company collectedproceeds of approximately $0.3 million in 2003. Based in Paris, France, ABCTechnologies was managed by Artemis’ French subsidiary.  The Company’sinvestment in ABC Technologies was carried at approximately zero at the time ofsale.  Accordingly, the Company’s other income for the year endedDecember 31, 2002 includes a pretax gain of $0.3 million on the sale ofABC Technologies.  Based on achieving certain milestones, an additional$0.1 million of consideration was recorded during the year endedDecember 31, 2003.

 

*Sale of Assets of SoftwareProductivity Research*

 

In October 2003, theCompany entered into an asset purchase agreement for the sale of its SoftwareProductivity Research (“SPR”) operations. Total consideration received for the sale of SPR, including liabilitiesassumed by the buyer, was $0.4 million.

 

*Licensing Agreement with AdvancedManagement Solutions*

 

In December 2004, the Company entered into adefinitive agreement (the “AMS Agreement”) with Advanced Management SolutionsInc. (“AMS”), a company providing Enterprise Project and Resource Managementsolutions, whereby (i) the Company obtained the worldwide exclusive rightto use, market and grant sub-licenses with respect to certain softwaredeveloped by AMS (the “AMS Software), (ii) AMS will provide additionaldevelopment services under direction of the Company, and (iii) the Companyhas obtained the right to purchase the AMS Software through November 30,2006.

 

The initial term of the software license endsNovember 30, 2007, and is renewable for one additional three-year term.The Company has agreed on certain minimum royalty payments to secure worldwideexclusivity. Also as part of the transaction, the Company agreed to pay AMS$0.5 million to secure the option to purchase the AMS Software. Thisoption fee is non-recoverable on the condition that the initially delivered AMSSoftware meets generally accepted industry standards. Further, the Company hasagreed to fund the additional development work with $0.5 million to bepaid in five installments. The first such installment of $0.1 million was paidin December 2004.  The purchase price forthe AMS Software is $2.5 million and is payable in two annualinstallments, should the Company elect to exercise such option.

 

F-13

----

 

**Note 3. Trade Accounts Receivable**

 

At December 31, 2004and 2003 the breakdown of trade accounts receivable was as follows:

 

| ** **                           | ** ** | **December 31,**   | ** ** |
|--------------------------------------|------------|--------------------|------------|
| ** **                           | ** ** | **2004**           | ** ** | **2003** | ** ** |
| ** **                           | ** ** | **(in thousands)** | ** ** |
| Americas                             |       | $                  | 1,927      |   | $ | 1,938 |   |
| EMEA                                 |       | 8,832              |       | 10,101 |   |
| Japan                                |       | 958                |       | 1,383 |   |
| Asia                                 |       | 324                |       | 206 |   |
| Total trade account receivables, net |       | $                  | 12,041     |   | $ | 13,628 |   |

 

Changes in the allowancefor doubtful accounts receivable were as follows:

 

| ** **                      | ** ** | **For the years ended  December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(in thousands)**                    | ** ** |
| Beginning balance               |       | $                                     | (299       | ) | $ | (296 | ) |
| Provision for doubtful accounts |       | (58                                   | )          | (79 | ) |
| Write-offs                      |       | 92                                    |       | 76 |   |
|                            |       |                                  |       |   |   |
| Ending balance                  |       | $                                     | (265       | ) | $ | (299 | ) |

 

**Note 4. Property and Equipment**

 

Property and equipment consist of the following:

 

| ** **                                     | ** ** | **December 31,**   | ** ** |
|------------------------------------------------|------------|--------------------|------------|
| ** **                                     | ** ** | **2004**           | ** ** | **2003** | ** ** |
| ** **                                     | ** ** | **(in thousands)** | ** ** |
| Computer hardware                              |       | $                  | 5,550      |   | $ | 5,402 |   |
| Computer software                              |       | 1,671              |       | 1,615 |   |
| Leasehold improvements                         |       | 345                |       | 336 |   |
| Furniture and fixtures                         |       | 1,052              |       | 1,255 |   |
| Other                                          |       | 51                 |       | 359 |   |
|                                           |       | 8,669              |       | 8,967 |   |
| Less accumulated depreciation and amortization |       | (7,661             | )          | (7,775 | ) |
| Total                                          |       | $                  | 1,008      |   | $ | 1,192 |   |

 

**Note 5. Intangible Assets**

 

Intangible assets consist of the following:

 

| ** **                    | ** ** | **December 31,**   | ** ** |
|-------------------------------|------------|--------------------|------------|
| ** **                    | ** ** | **2004**           | ** ** | **2003** | ** ** |
| ** **                    | ** ** | **(in thousands)** | ** ** |
| Customer base                 |       | $                  | 9,163      |   | $ | 9,163 |   |
| Current technologies          |       | —             |       | 5,592 |   |
|                          |       | 9,163              |       | 14,755 |   |
| Less accumulated amortization |       | (7,674             | )          | (8,235 | ) |
| Total                         |       | $                  | 1,489      |   | $ | 6,520 |   |

 

Intangible assets areamortized on a straight-line basis over their expected useful lives offorty-two months. During the fourth quarter of 2004, the Company evaluated thecarrying values of its intangible assets and recorded an impairment charge ofapproximately $0.9 million on current technologies, representing the remainingunamortized balance. Accordingly, intangible assets and related accumulatedamortization consist entirely of the customer base at December 31, 2004.  During the years ended December 31, 2004,2003 and 2002 approximately $4.1 million of intangible assets was amortizedeach year.

 

F-14

----

 

The Company’s proprietary products are notprotected by patents.  However, toprotect the Company’s intellectual property rights, the Company licenses itssoftware products and requires its customers to enter into license agreementsthat impose restrictions on their ability to utilize the software or transferit to other users.  Additionally, theCompany seeks to avoid disclosure of its trade secrets through a number ofmeans, including, but not limited to, requiring those persons with access tothe Company’s proprietary information to execute confidentiality agreementswith the Company and restricting access to the Company’s source code.  In addition, the Company protects itssoftware, documentation, templates and other written materials under trademark,trade secret and copyright laws.  Evenwith all of these efforts, there can be no assurance that such precautions willprovide meaningful protection from competition or that competitors will notindependently be able to develop similar technology.  If, in the future, litigation is necessary toenforce the Company’s intellectual property rights, to protect the Company’strade secrets, or to determine the validity and scope of the proprietary rightsof others, such litigation could result in substantial costs and diversion ofresources and could have a material adverse effect on the Company’s business,operating results and/or financial condition. Ultimately, the Company may be unable, for financial or other reasons,to enforce its rights under the various intellectual property laws as describedabove.  In addition, the laws of certaincountries in which the Company’s products are or may be licensed may notprotect the Company’s  intellectualproperty rights to the same extent as laws of the United States.

 

The Company believes that its products do notinfringe upon any valid existing proprietary rights of third parties.

 

**Note 6. Debt**

 

In June 2003, theCompany paid off its note payable and line of credit with Wells Fargo Foothill(“Foothill”) and declined the option to extend the underlying loan and securityagreement with Foothill.

 

Also in June2003, the Company obtained a bridge loan of $3.5 million from Proha, accruinginterest at 4.75% per annum, which was fully repaid by the Company during thequarter ended September 30, 2003.

 

On August 14, 2003, the Company enteredinto an agreement with Laurus Master Fund, Ltd. (“Laurus”) and received a$5.0 million revolving credit facility (the “Laurus Facility”) in the formof a three-year convertible note (the “Secured Convertible Note”) secured by aninterest in all of the Company’s property and assets located in the UnitedStates (US) and the United Kingdom (UK), except for intellectual propertyrights. Borrowings under the Laurus Facility are based on the balance ofeligible trade accounts receivable reported by the Company’s operating entitiesin the US and the UK. The Laurus Facility automatically renews every threeyears unless cancelled by the Company or Laurus. In conjunction with the originaltransaction, Laurus was paid a fee of $175,000 and received a ten-yeartransferable warrant (the “Laurus Warrant”) to purchase 125,000 shares ofthe Company’s common stock. The estimated fair value of the Laurus Warrant ofapproximately $237,000 has been treated as additional interest expense and isbeing amortized over the three-year life of the Laurus Facility, unless soonerterminated. The fair value of the Laurus Warrant was estimated based on thefollowing assumptions: expected volatility: 272%; dividends: zero; risk freeinterest rate: 2.6%; and expected life of the warrant: five years. Thewarrant permits Laurus to purchase up to 50,000, 50,000, and 25,000 shares ofthe Company’s common stock at exercise prices of $3.41, $4.10, and $4.78 per share,respectively. The Laurus Warrant exercise price and the number of sharesunderlying the warrant are subject to anti-dilution adjustments for stocksplits, combinations and dividends.

 

In June 2004, the Company used$2.2 million of the net proceeds of the private placement of$9.0 million of convertible preferred stock (the “Preferred Series AFinancing”) completed on June 16, 2004 to reduce the amount outstandingunder the Laurus Facility from $3.5 million to $1.3 million. OnJuly 30, 2004, the Company and Laurus agreed to amend the Laurus Facilityby replacing the Secured Convertible Note of up to $5.0 million with aSecured Convertible Minimum Borrowing Note (the “Minimum Borrowing Note”) inthe amount of $1.5 million and a Secured Revolving Note of up to$3.5 million (collectively the “Laurus Restructuring”). Effective upon theexecution of the Laurus Restructuring documents on July 30, 2004,  the $1.3 million outstanding under theLaurus Facility was incorporated as monies provided by Laurus under the MinimumBorrowing Note.  In August 2004, Laurusprovided Artemis an additional $0.2 million under the Minimum BorrowingNote, thereby exhausting the funds available to Artemis under the MinimumBorrowing Note.

 

The Minimum Borrowing Note is due on August 26,2006 and is convertible into common stock of the Company at the option of theholder at the following prices: 190,000 shares at $1.45 per share, 190,000shares at $1.81 per share, and 342,646 shares at $2.57 per share, totaling $1.5million or 722,646 shares of common stock of the Company.  Loans exceeding $1.5 million may be availableto the Company under the Secured Revolving Note, based on the balance of theCompany’s eligible trade accounts receivable. If the balance on the MinimumBorrowing Note is zero, such portion of the balance of the Secured RevolvingNote that exceeds $1.0 million shall be deemed to be extinguished on theSecured Revolving Note and transferred to a new serialized Minimum BorrowingNote. Once a new serialized Minimum Borrowing Note reaches the sum of $1.5million, the Company is required to file a registration statement with the SECto register the shares underlying the new serialized Minimum Borrowing Note.Thereafter, the conversion price adjusts to 105% of the average closing marketprice of the Company’s common stock for the five trading days immediatelypreceding each additional serialized $1.5 million Minimum Borrowing Note.All of the aforementioned conversion prices are subject to an anti-dilutionprovision in the form of a price protection clause. Under the terms of therelated agreement, absent an event of default as defined, conversion of theMinimum Borrowing Note into the Company’s common stock may not result inbeneficial ownership by Laurus (including shares 

 

F-15

----

 

issuable under the Laurus Warrant that are exercisable within sixtydays of any determination date) of more than 2.5% of the Company’s outstandingcommon stock. The Minimum Borrowing Note has a 30% prepayment penalty. Anyloans under the Secured Revolving Note are convertible only in an event ofdefault. The Company currently has no loans outstanding under the SecuredRevolving Note.

 

The Company filed a registration statement onForm S-1 with the SEC on November 3, 2004 (which was amended in December 2004and January 2005) to register the common stock underlying the Minimum BorrowingNote and the Laurus Warrant.  The SECdeclared such registration statement effective on February 3, 2005.

 

Subsequent to December 31, 2004, Laurusconverted $0.2 million of the outstanding $1.5 million Minimum Borrowing Notein exchange for 166,700 shares of the Company’s common stock.

 

On March 1, 2004**,** theCompany’s wholly-owned subsidiary in Finland, Artemis Finland Oy (“ArtemisFinland”), entered into a loan agreement with a financial institution in theamount of approximately $3.1 million which has been partially repaid subsequentto year end (See Note 12).

 

Interest paid for the years ended December31, 2004, 2003 and 2002 was approximately $0.3 million, $0.1 million and $0.2million, respectively.

 

A summary of the Company’s long term debt atDecember 31, 2004 and 2003 is as follows:

 
| ** **                                                                                                                                                | ** ** | **December 31,**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                                                                | ** ** | **2004**           | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                | ** ** | **(in thousands)** | ** ** |
|                                                                                                                                                      |       |               |       |   |   |
| Laurus Minimum Borrowing Note, average  effective interest rate of 5.1% from July 30 2004. The Note is due on August  26, 2006.                           |       | $                  | 1,500      |   | $ | — |   |
|                                                                                                                                                      |       |               |       |   |   |
| Note payable to Proha. Interest rate of 4%  annually which is payable on demand (A).                                                                      |       | —             |       | 177 |   |
|                                                                                                                                                      |       |               |       |   |   |
| Finland government installment loans,  average effective interest rate of 2.6% and 2.3% for 2004 and 2003,  respectively, payable through September 2006. |       | 439                |       | 365 |   |
|                                                                                                                                                      |       |               |       |   |   |
| Bank Societe Generale term loan due  December 31, 2003, average effective interest rate of 4% for 2003.                                                   |       | —             |       | 56 |   |
|                                                                                                                                                      |       |               |       |   |   |
| Other long-term liabilities                                                                                                                               |       | —             |       | 78 |   |
|                                                                                                                                                      |       | $                  | 1,939      |   | $ | 676 |   |
| Less current portion of long term debt                                                                                                                    |       | (21                | )          | (352 | ) |
| Long term debt, less current portion                                                                                                                      |       | $                  | 1,918      |   | $ | 324 |   |

 

----

(A)      On January 12, 2005, Artemisentered into a Letter of Commitment to pay this note payable no later than June30, 2005. The amount due at December 31, 2004 was $328,000 which has beenreclassified from long term debt to short term debt.

 

See Note 12 for other related party debttransactions.

 

**Note 7. Commitments**

 

The Company leases certainfacilities and equipment under non-cancelable operating lease agreements. Rentexpense for the years ended December 31, 2004, 2003 and 2002 wasapproximately $3.0 million, $3.9 million and $4.2 million, respectively.

 

F-16

----

 

As of December 31, 2004,future minimum rental commitments for the above operating leases are asfollows:

 

| **Year ending December 31,** | ** ** | **(in thousands)** | ** ** |
|------------------------------|------------|--------------------|------------|
| 2005                         |       | $                  | 3,492      |   |
| 2006                         |       | 2,467              |       |
| 2007                         |       | 1,219              |       |
| 2008                         |       | 896                |       |
| 2009                         |       | 824                |       |
| Thereafter                   |       | —             |       |
| Total                        |       | $                  | 8,898      |   |

 

During 2004 the Companyannounced the replacement of its CEO and president. The Company has engaged inadditional restructuring activities to reduce the corporate infrastructure,streamline the business operations and reorganize product operations.   All restructuring activities were expensedin 2004.

 

The Company has employmentagreements and arrangements with its executive officers and certain other keyemployees. Such agreements generally continue until terminated by the executiveor the Company, and provide for severance payments, bonuses or other benefitsunder certain circumstances.

 

**Note 8. Loss Per Common Share**

 

The following table sets forth the computation ofbasic and diluted loss per common share:

 
| ** **                                          | ** ** | **For the years ended  December 31,**         | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------|------------|
|                                                |       | **2004**                                      | ** ** | **2003** | ** ** | **2002** |   |
|                                                |       | **(in  thousands, except per share amounts)** |       |
| Numerator:                                          |       |                                          |       |   |   |   |   |
| Net loss                                            |       | $                                             | (9,685     | ) | $ | (7,891 | ) | $ | (3,948 | ) |
|                                                |       |                                          |       |   |   |   |   |
| Denominator:                                        |       |                                          |       |   |   |   |   |
| Weighted average outstanding shares of common stock |       | 9,988                                         |       | 9,965 |   | 9,965 |   |
| Common stock and equivalents                        |       | 9,988                                         |       | 9,965 |   | 9,965 |   |
|                                                |       |                                          |       |   |   |   |   |
| Loss per common share:                              |       |                                          |       |   |   |   |   |
| Basic                                               |       | $                                             | (0.97      | ) | $ | (0.79 | ) | $ | (0.40 | ) |
|                                                |       |                                          |       |   |   |   |   |
| Diluted                                             |       | $                                             | (0.97      | ) | $ | (0.79 | ) | $ | (0.40 | ) |

 

Diluted loss per commonshare for the years ended December 31, 2004, 2003 and 2002 does notinclude the effect of stock options and warrants (see Note 15) since theireffect would be anti-dilutive.  Options and warrants outstanding atDecember 31, 2004, 2003 and 2002 approximated 2.5 million, 1.2 million and1.3 million, respectively.

 

**Note 9. Benefit Plans**

 

The Company has a definedcontribution plan (“the Plan”) which qualifies under Section 401(k) of theInternal Revenue Code of 1986, as amended. The Plan covers all U.S. employeeswho may contribute up to 15% of their annual compensation with an annualmaximum of $13,000 for calendar 2004. Employer contributions vest to theparticipants incrementally over a period of five years. Company contributionsto the Plan were $54,000 during the year ended December 31, 2004 and zeroduring the years ended December 31, 2003 and 2002.

 

The Company also has adefined benefit pension plan covering the employees of its United Kingdomsubsidiary. Company contributions are determined based upon a percentage, asdetermined by an actuary, of an eligible employee’s annual salary. Company contributions to the defined benefit pension plan during the yearsended December 31, 2004, 2003 and 2002 were $0.5 million, $0.2 million and$0.2 million, respectively.

 

F-17

----

 

Netdefined benefit pension cost included the following components:

 
| ** **                                       | ** ** | **For the years ended  December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2004**                              | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                    | ** ** |
| Service cost (benefits earned during the  year)  |       | $                                     | 261        |   | $ | 191 |   | $ | 162 |   |
| Interest cost on projected benefit  obligation   |       | 517                                   |       | 388 |   | 322 |   |
| Expected return on plan assets                   |       | (474                                  | )          | (311 | ) | (351 | ) |
| Amortization of unrecognized actuarial net  loss |       | 141                                   |       | 117 |   | 0 |   |
|                                             |       | $                                     | 445        |   | $ | 385 |   | $ | 133 |   |

 

Otherpension data follows:

 
| ** **                                      | ** ** | **For the  years ended  December 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2004**                               | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                      |       | **(in  thousands)**                    |       |
| Change in Benefit Obligation                    |       |                                   |       |   |   |   |   |
| Benefit obligation at beginning of year         |       | $                                      | 8,935      |   | $ | 6,281 |   | $ | 5,022 |   |
| Exchange rate                                   |       | 758                                    |       | 731 |   | 599 |   |
| Service cost                                    |       | 261                                    |       | 191 |   | 162 |   |
| Interest cost                                   |       | 517                                    |       | 388 |   | 322 |   |
| Plan participant’s cost                    |       | 113                                    |       | 107 |   | 94 |   |
| Actuarial gain                                  |       | 854                                    |       | 1,030 |   | 197 |   |
| Amendments                                      |       | 212                                    |       | 0 |   | 0 |   |
| Benefits paid, net *                            |       | (43                                    | )          | 207 |   | (115 | ) |
| Benefit obligation at end of year               |       | $                                      | 11,607     |   | $ | 8,935 |   | $ | 6,281 |   |
|                                            |       |                                   |       |   |   |   |   |
| Change in Plan Assets                           |       |                                   |       |   |   |   |   |
| Fair value of plan assets at beginning of  year |       | $                                      | 6,065      |   | $ | 4,108 |   | $ | 4,405 |   |
| Exchange rate                                   |       | 514                                    |       | 445 |   | 498 |   |
| Actual return on plan assets                    |       | 769                                    |       | 949 |   | (975 | ) |
| Employer contribution                           |       | 452                                    |       | 249 |   | 200 |   |
| Plan participants’ contributions           |       | 113                                    |       | 107 |   | 94 |   |
| Benefits paid, net *                            |       | (43                                    | )          | 207 |   | (114 | ) |
| Fair value of plan assets at end of year        |       | $                                      | 7,870      |   | $ | 6,065 |   | $ | 4,108 |   |

 

----

* Benefitspaid are net of transfers from other pension arrangements.

 
| ** **                                                   | ** ** | **For the  years ended  December 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                               | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                   |       | **(in  thousands)**                    |       |
| **Reconciliation of Funded Status**                          |       |                                   |       |   |   |   |   |
| Excess of benefit obligation over fair  value of plan assets |       | $                                      | (3,775     | ) | $ | (2,870 | ) | $ | (2,172 | ) |
| Unrecognized actuarial net loss                              |       |                                   |       |   |   |   |   |
| Accrued pension benefit cost                                 |       | 3,110                                  |       | 2,270 |   | 1,796 |   |
|                                                         |       | $                                      | (665       | ) | $ | (600 | ) | $ | (376 | ) |

 

F-18

----

 

The primaryactuarial assumptions used in determining the above pension benefit obligationamounts were as follows:

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------|------------|
| ** **                           | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Discount Rate                        |       | 5                | %          | 5 | % | 6 | % |
| Increase in Future Compensation      |       | 4                | %          | 5 | % | 4 | % |
| Annual Rate of Return on Plan Assets |       | 7                | %          | 7 | % | 7 | % |

 

As permitted by SFAS No. 87,*Employers’ Accounting for Pensions,*actuarialgains and losses are generally not amortized to pension expense in the periodin which they arise when the gain/loss is not yet included in themarket-related value of plan assets.  GAAP allows such deferral accountingin any period in which the beginning-of-the-year unrecognized actuarial netgain or loss does not exceed 10% of the greater of the projected benefitobligation or the market-related value of plan assets.  For the year ended December 31, 2002,the Company’s defined benefit pension plan was eligible for the deferral accountingdescribed in the preceding sentence.  Thus pension expense for 2002 doesnot include any amortization of the actuarial net change in the market-relatedvalue of plan assets.

 

The accountingfor the Company’s defined benefit pension plan described above requires that anadditional minimum liability (as defined) be recorded when certain conditionsare met at the balance sheet date.  Sincethe Company’s unrecognized prior servicecost was nil at December 31, 2004, 2003 and 2002, the increase in suchliability was charged directly to stockholders’ deficit as a component of othercomprehensive loss.  Managementdetermined that the Company did not reflect the additional minimum liability inthe 2002 consolidated financial statements included in its December 31, 2003Form 10-K filed with the SEC on March 30, 2004. The accompanying consolidated statement of stockholders’ equity andcomprehensive loss for the year ended December 31, 2002 was restated in July2004 to reflect an additional minimum pension liability of approximately$1,060,000.  This adjustment did notaffect the previously reported net loss for the year ended December 31, 2002.

 

In July 2004,the Company also revised certain disclosures in the above tables relating to(a) the December 31, 2003 and 2002 funded status of the pension plan and (b)the December 31, 2003 fair value of the pension plan’s assets.  The differences principally resulted from thecombination of a mathematical error and misapplication of certainfinancial-statement disclosure requirements. Since the related amounts were properly reported in the previouslyissued financial statements, the amended disclosures described in thisparagraph did not effect the accompanying consolidated financial statements.

 

**Note10. Income Taxes**

 

The components of the incometax expense are presented below:

 
| ** **     | ** ** | **For the years ended  December 31,** | ** ** |
|----------------|------------|---------------------------------------|------------|
| ** **     | ** ** | **2004**                              | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **     | ** ** | **(in thousands)**                    | ** ** |
| Current        |       | $                                     | 488        |   | $ | 648 |   | $ | 226 |   |
| Deferred taxes |       | (320                                  | )          | (349 | ) | 254 |   |
|           |       |                                  |       |   |   |   |   |
| Total expense  |       | $                                     | 168        |   | $ | 299 |   | $ | 480 |   |

 

F-19

----

 

For the year endedDecember 31, 2004, current income tax expense consists of approximately$0.4 million of foreign expense and approximately $0.1 million of stateexpense.  The difference between the total expected tax benefit using thefederal statutory rate of 34% and the actual tax expense for the years endedDecember 31, 2004, 2003 and 2002 is accounted for as follows:

 
| ** **                                         | ** ** | **For the  years ended  December 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **2004**                               | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                               |       | **(in  thousands)**                    |       |
| Expected federal income tax benefit                |       | $                                      | (2,880     | ) | $ | (2,581 | ) | $ | (1,179 | ) |
| Effect of permanent differences                    |       | 17                                     |       | (95 | ) | 1,447 |   |
| State income tax expense (net of federal  benefit) |       | 43                                     |       | 24 |   | 133 |   |
| Other                                              |       | 368                                    |       | (344 | ) | 539 |   |
| Change in valuation allowance                      |       | 2,620                                  |       | 3,295 |   | (611 | ) |
| Foreign tax differential                           |       | —                                 |       | — |   | 151 |   |
|                                               |       |                                   |       |   |   |   |   |
| Income tax expense                                 |       | $                                      | 168        |   | $ | 299 |   | $ | 480 |   |

 

Loss before income taxes isanalyzed as follows:

 
| ** **                     | ** ** | **For the years ended  December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|
| ** **                     | ** ** | **2004**                              | ** ** | **2003** | ** ** | **2202** | ** ** |
|                           |       | **(in  thousands)**                   |       |
| Domestic                       |       | $                                     | (8,538     | ) | $ | (7,654 | ) | $ | (2,276 | ) |
| Foreign                        |       | (979                                  | )          | 62 |   | (1,192 | ) |
| Total loss before income taxes |       | $                                     | (9,517     | ) | $ | (7,592 | ) | $ | (3,468 | ) |

 

The components of the netaccumulated deferred income tax assets/(liabilities) as of December 31,2004, 2003 and 2002 are as follows:

 
| ** **                                | ** ** | **December 31,**    | ** ** |
|-------------------------------------------|------------|---------------------|------------|
| ** **                                | ** ** | **2004**            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                      |       | **(in  thousands)** |       |
| Deferred tax assets:                      |       |                |       |   |   |   |   |
| Net operating loss carryforwards          |       | $                   | 10,011     |   | $ | 9,035 |   | $ | 7,099 |   |
| Stock option expense                      |       | 2,129               |       | 2,129 |   | 2,129 |   |
| Expenses based on issue of stock options  |       | 752                 |       | 752 |   | 752 |   |
| Accumulated depreciation and amortization |       | 1,828               |       | — |   | 2,000 |   |
| Allowance for doubtful accounts           |       | 16                  |       | 27 |   | 118 |   |
| Accrued expenses                          |       | 277                 |       | 315 |   | 401 |   |
|                                      |       | 15,013              |       | 12,258 |   | 12,499 |   |
| Deferred tax liabilities:                 |       | (595                | )          | (380 | ) | (4,236 | ) |
| Subtotal                                  |       | 14,418              |       | 11,878 |   | 8,263 |   |
| Valuation allowance                       |       | (14,578             | )          | (12,358 | ) | (9,063 | ) |
| Net deferred tax liability                |       | $                   | (160       | ) | $ | (480 | ) | $ | (800 | ) |

 

The components of deferredtax liabilities at December 31, 2004, 2003 and 2002 relate primarily tothe recording of non-deductible intangible assets from the acquisition ofLegacy Artemis by Proha in August 2000 and the contribution of businessesto Legacy Artemis by Proha in December 2000.

 

Income taxes paid for theyears ended December 31, 2004, 2003 and 2002 were less than $0.5 millionfor each year.  The Company has a U.S. federal tax net operating losscarryforward (“NOL”) of approximately $28 million at December 31, 2004that begins expiring in 2009 and U.S. state NOL’s with expiration dates rangingfrom five to 20 years.  Foreign NOL’s thatmay be allowed under the tax laws in applicable foreign countries are notsignificant.

 

The utilization of some orall of the domestic NOL’s may be severely restricted now or in the future bythe change in ownership provisions of Section 382 of the Internal RevenueCode of 1986, as amended.

 

In December 2004, the FASB issued FSP 109-2, “Accounting and DisclosureGuidance for the Foreign Repatriation Provision within the American JobsCreation Act of 2004.”  FSP 109-2 statesthat an enterprise is allowed time beyond the financial reporting period ofenactment to evaluate the effects of the American Jobs Creation Act of 2004(the “Act”) on its plan for reinvestment or repatriation of foreign earningsfor the purposes of applying SFAS No. 109. The Company has not yet completed evaluating the impact of therepatriation provisions of the Act. Given the preliminary stage of the Company’s evaluation, it is notpossible at this time to determine what impact (if any) the repatriationprovisions will have on the consolidated income tax accruals or the Company’seffective income tax rate.  Accordingly,as provided by FSP 109-2, the Company has not adjusted its income tax expenseor deferred tax liability to reflect the repatriation provisions of the Act.

 

 

F-20

----

 

 

**Note 11: Segment and GeographicInformation**

 

Income from operations isassigned by region based upon management responsibility for such items. The Company redesigned its management responsibilities in early 2004 to coverfour geographic areas: Americas, EMEA (Europe, Middle East, and Africa), Japan,and Asia.  Each geographic area ismanaged by an executive vice president of the Company.  The following table presents informationabout the Company’s operations by geographic area for each of the years endedDecember 31, 2004, 2003 and 2002:

 

**Twelve Months Ended December 31, 2004**

 
| ** **               | ** ** | **Americas** | ** ** | **EMEA** | ** ** | **Japan** | ** ** | **Asia** | ** ** | **Total** | ** ** |
|--------------------------|------------|--------------|------------|----------|------------|-----------|------------|----------|------------|-----------|------------|
| Revenue:                 |       |         |       |     |       |      |       |     |       |      |       |
| Software                 |       | $            | 3,506      |     | $          | 7,760     |       | $        | 1,220      |      | $          | 569 |   | $ | 13,055 |   |
| Support                  |       | 4,964        |       | 10,010   |       | 1,895     |       | 317      |       | 17,186    |       |
| Services                 |       | 3,569        |       | 15,974   |       | 2,081     |       | 580      |       | 22,204    |       |
| Total revenue            |       | 12,039       |       | 33,744   |       | 5,196     |       | 1,466    |       | 52,445    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Cost of revenue:         |       |         |       |     |       |      |       |     |       |      |       |
| Software                 |       | 58           |       | 74       |       | 88        |       | 12       |       | 232       |       |
| Support                  |       | 1,512        |       | 3,478    |       | 574       |       | 112      |       | 5,676     |       |
| Services                 |       | 2,836        |       | 13,124   |       | 1,321     |       | 301      |       | 17,582    |       |
| Total cost of revenue    |       | 4,406        |       | 16,676   |       | 1,983     |       | 425      |       | 23,490    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Gross margin             |       | 7,633        |       | 17,068   |       | 3,213     |       | 1,041    |       | 28,955    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Operating expenses:      |       |         |       |     |       |      |       |     |       |      |       |
| Selling & marketing  |       | 4,335        |       | 8,202    |       | 1,071     |       | 719      |       | 14,327    |       |
| R&D                  |       | 3,341        |       | 3,918    |       | 451       |       | —   |       | 7,710     |       |
| G&A                  |       | 3,120        |       | 4,885    |       | 508       |       | 188      |       | 8,701     |       |
| Amortization expense     |       | 4,117        |       | —   |       | —    |       | —   |       | 4,117     |       |
| Impairment charge        |       | 913          |       | —   |       | —    |       | —   |       | 913       |       |
| Restructuring charges    |       | 1,021        |       | 1,719    |       | —    |       | —   |       | 2,740     |       |
| Total operating expenses |       | 16,847       |       | 18,724   |       | 2,030     |       | 907      |       | 38,508    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Operating income (loss)  |       | $            | (9,214     | )        | $          | (1,656    | )          | $        | 1,183      |      | $          | 134 |   | $ | (9,553 | ) |
|                          |            |              |            |          |            |           |            |          |            |           |            |  |  |  |  |  |  |  |  |

 

F-21

----

 

**Twelve Months Ended December 31, 2003**

 
| ** **               | ** ** | **Americas** | ** ** | **EMEA** | ** ** | **Japan** | ** ** | **Asia** | ** ** | **Total** | ** ** |
|--------------------------|------------|--------------|------------|----------|------------|-----------|------------|----------|------------|-----------|------------|
| Revenue:                 |       |         |       |     |       |      |       |     |       |      |       |
| Software                 |       | $            | 2,652      |     | $          | 9,009     |       | $        | 1,157      |      | $          | 468 |   | $ | 13,286 |   |
| Support                  |       | 5,275        |       | 9,241    |       | 1,751     |       | 301      |       | 16,568    |       |
| Services                 |       | 7,715        |       | 16,173   |       | 3,165     |       | 384      |       | 27,437    |       |
| Total revenue            |       | 15,642       |       | 34,423   |       | 6,073     |       | 1,153    |       | 57,291    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Cost of revenue:         |       |         |       |     |       |      |       |     |       |      |       |
| Software                 |       | 134          |       | 369      |       | 149       |       | 25       |       | 677       |       |
| Support                  |       | 1,577        |       | 2,892    |       | 522       |       | 111      |       | 5,102     |       |
| Services                 |       | 5,246        |       | 12,968   |       | 1,718     |       | 318      |       | 20,250    |       |
| Total cost of revenue    |       | 6,957        |       | 16,229   |       | 2,389     |       | 454      |       | 26,029    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Gross margin             |       | 8,685        |       | 18,194   |       | 3,684     |       | 699      |       | 31,262    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Operating expenses:      |       |         |       |     |       |      |       |     |       |      |       |
| Selling & marketing  |       | 5,147        |       | 8,799    |       | 1,266     |       | 730      |       | 15,942    |       |
| R&D                  |       | 3,650        |       | 4,058    |       | 444       |       | —   |       | 8,152     |       |
| G&A                  |       | 6,035        |       | 4,290    |       | 600       |       | 217      |       | 11,142    |       |
| Amortization expense     |       | 4,118        |       | —   |       | —    |       | —   |       | 4,118     |       |
| Total operating expenses |       | 18,950       |       | 17,147   |       | 2,310     |       | 947      |       | 39,354    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Operating income (loss)  |       | $            | (10,265    | )        | $          | 1,047     |       | $        | 1,374      |      | $          | (248 | ) | $ | (8,092 | ) |

 

F-22

----

 

**Twelve Months Ended December 31, 2002**

 
| ** **               | ** ** | **Americas** | ** ** | **EMEA** | ** ** | **Japan** | ** ** | **Asia** | ** ** | **Total** | ** ** |
|--------------------------|------------|--------------|------------|----------|------------|-----------|------------|----------|------------|-----------|------------|
| Revenue:                 |       |         |       |     |       |      |       |     |       |      |       |
| Software                 |       | $            | 3,746      |     | $          | 9,332     |       | $        | 1,612      |      | $          | 380 |   | $ | 15,070 |   |
| Support                  |       | 5,726        |       | 8,027    |       | 1,733     |       | 204      |       | 15,690    |       |
| Services                 |       | 18,602       |       | 15,281   |       | 2,990     |       | 1,031    |       | 37,904    |       |
| Total revenue            |       | 28,074       |       | 32,640   |       | 6,335     |       | 1,615    |       | 68,664    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Cost of revenue:         |       |         |       |     |       |      |       |     |       |      |       |
| Software                 |       | 228          |       | 1,183    |       | 305       |       | 18       |       | 1,734     |       |
| Support                  |       | 1,901        |       | 3,122    |       | 1,360     |       | 6        |       | 6,389     |       |
| Services                 |       | 11,454       |       | 10,795   |       | 2,294     |       | 44       |       | 24,587    |       |
| Total cost of revenue    |       | 13,583       |       | 15,100   |       | 3,959     |       | 68       |       | 32,710    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Gross margin             |       | 14,491       |       | 17,540   |       | 2,376     |       | 1,547    |       | 35,954    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Operating expenses:      |       |         |       |     |       |      |       |     |       |      |       |
| Selling & marketing  |       | 5,268        |       | 6,040    |       | 1,236     |       | —   |       | 12,544    |       |
| R&D                  |       | 4,563        |       | 3,305    |       | —    |       | —   |       | 7,868     |       |
| G&A                  |       | 6,698        |       | 6,421    |       | 812       |       | 1,240    |       | 15,171    |       |
| Amortization expense     |       | 4,117        |       | —   |       | —    |       | —   |       | 4,117     |       |
| Total operating expenses |       | 20,646       |       | 15,766   |       | 2,048     |       | 1,240    |       | 39,700    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Operating income (loss)  |       | $            | (6,155     | )        | $          | 1,774     |       | $        | 328        |      | $          | 307 |   | $ | (3,746 | ) |
|                          |            |              |            |          |            |           |            |          |            |           |            |  |  |  |  |  |  |  |  |

 

Identifiable assets are assigned by region based upon managementresponsibility for such items.  The following table presents informationabout the Company’s identifiable assets by geographic region:

 
| ** **   | ** ** | **December 31,**    | ** ** |
|--------------|------------|---------------------|------------|
| ** **   | ** ** | **2004**            | ** ** | **2003** | ** ** | **2002** | ** ** |
|         |       | **(in  thousands)** |       |
| Americas     |       | $                   | 5,260      |   | $ | 10,477 |   | $ | 19,366 |   |
| EMEA         |       | 14,262              |       | 15,929 |   | 16,342 |   |
| Japan        |       | 2,113               |       | 2,160 |   | 2,313 |   |
| Asia         |       | 685                 |       | 494 |   | 984 |   |
| Consolidated |       | $                   | 22,320     |   | $ | 29,060 |   | $ | 39,005 |   |

 

See Note 13 for disclosures regarding majorcustomers.

 

**Note 12. Other Related PartyTransactions**

 

During the fourth quarter of 2003, theCompany engaged Bengt Algevik to perform certain business consultancy functionsfor which he received consideration, including reimbursement of travel andother expenses, of approximately $200,000. Mr. Algevik completed hisassignment in May 2004 and was appointed as a director of the Companyeffective June 16, 2004.

 

At December 31, 2004, 2003 and 2002, theCompany had no receivables due from Proha, which, factoring in the common stockconversion rights of the holders of the Series A preferred stock (see Note14) owns approximately 56% of the Company’s outstanding common stock on apost-conversion basis.  AtDecember 31, 2004, 2003 and 2002, the Company had other payables to Prohaof $0.3 million, $0.2 million and $0.1 million, respectively.

 

F-23

----

 

On March 1, 2004, Artemis Finlandentered into a loan agreement with a financial institution in the amount ofapproximately $3.1 million. The loan was originally due on March 1,2006 and accrues interest at 0.5 percentage points above the 3-monthEuribor rate per annum, which is payable on a quarterly basis. The loan wassecured by cash collateral provided by Proha equal to the loan amount and asecurity interest in substantially all of Artemis Finland’s assets. Artemis andProha executed a letter of commitment, whereby Proha agreed to provide theCompany sufficient advance notice of its intent to demand the return of itscollateral from the financial institution. On October 11, 2004, the Company received a notification from Prohadeclaring its intent to demand the return of its $3.1 million collateral.Under this notification, the Company was required to repay the loan byJanuary 10, 2005. On January 11, 2005, Artemis Finland and Prohainformed the financial institution to use the cash collateral provided by Prohaas the method by which Artemis Finland shall be deemed to have pre-paid theloan in full. Contemporaneously, Artemis Finland entered into a PaymentSchedule Agreement (“Payment Agreement”) with Proha, whereby Proha effectivelyreplaced the financial institution as the creditor and Artemis Finland agreedto pay Proha 2.5 million Euros in three installments (1.25 millionEuros by January 17, 2005, 625,000 Euros by February 28, 2005 and625,000 Euros by March 31, 2005). The first two installments totaling approximately $2.5 million werepaid on the due date and the Company expects to make the remaining paymentaccording to the Payment Agreement.  The  payment due on March 31, 2005 approximates$838,000 (based on the March 15, 2005 exchange rate).

 

There are several related party agreements inplace between Artemis Finland and Proha or its subsidiaries and investees asfurther described below:

 

•                  During2002, Artemis Finland incurred $309,000 in fees for certain businessconsulting, legal and accounting services provided by Proha.

 

•                  Additionally,Artemis Finland shares office space with Proha, for which Proha charges ArtemisFinland a share of its office-related costs (“Office Allocation Charge”), suchas rent, utilities, telecommunication costs, office maintenance and certainother business costs based on headcount. The Office Allocation Charge was$431,000, $341,000, and $290,000 for the years ended December 31, 2004, 2003and 2002, respectively.

 

•                  AccountorOy, a provider of accounting and payroll services, which was owned by Proha(80.1%) and Artemis (19.9%) through November 2002 until its sale to anunrelated party, is providing certain bookkeeping, payroll and reportingservices (“Service Charge”) to Artemis Finland. The Service Charge was  $0,$80,000 and $82,000 for the years ended December 31, 2004, 2003 and 2002,respectively.

 

•                  IntellisoftOy, an application service provider, which is owned by Proha (80.1%) andArtemis (19.9%), is providing certain application hosting and other services toArtemis Finland and its customers (“ASP Services Fee”). The ASP Services Feewas  $116,000, $254,000 and $354,000 forthe years ended December 31, 2004, 2003 and 2002, respectively.

 

•                  DatamarOy, a subsidiary of Proha (90%), is providing certain project management andprogramming services to Artemis Finland (“Management Programming Fee”). TheManagement Programming Fee charged to Artemis Finland was $173,000, $229,000and $340,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

 

•                  TesnetGroup Oy (formerly Intellitest International Oy), a company partially owned byProha (35%), provides certain software testing services to Artemis Finland(“Testing Services”).  These TestingServices were $175,000, $225,000 and $219,000 for the years ended December 31,2004, 2003 and 2002, respectively.

 

•                  ArtemisFinland is a distributor of software products provided by Safran SoftwareSolutions AS (“Safran”), a Norwegian company wholly owned by Proha. The royaltypaid by Artemis Finland to Safran was $29,000, $47,000, and $129,000 for theyears ended December 31, 2004, 2003 and 2002, respectively.

 

•                  ArtemisFinland has provided certain software development services to ProCountorInternational Oy (“ProCountor”), a company majority owned by Proha (63%).  Artemis Finland has charged  $0, $0 and $17,000 to ProCountor for suchsoftware development services for the years ended December 31, 2004, 2003 and2002, respectively.  ProCountor has  provided certain software developmentservices to Artemis Finland and charged a fee for use of a web-based travel andexpense claims program of $20,000, $11,000 and $0 for the years ended December31, 2004, 2003 and 2002, respectively.

 

•                  ArtemisFinland cooperated with Futura One Oy, a company majority owned by Proha (51%).Artemis Finland has charged  $0, $0 and$17,000 to Futura One for software development services for the years endedDecember 31, 2004, 2003 and 2002, respectively.

 

At December 31, 2004,2003 and 2002, the Company maintained the following equity holdings in jointventures, which are accounted for under the equity method, with the exceptionof Metier Scandinavia AS (Norway) and the Metier Plancon BV, which are

 

F-24

----

 

accounted for under the cost method.  TheCompany records its equity interest in losses first to the investment balance,then against loans or advances receivable.

 
| ** **                     | ** ** | ** **        | ** ** | **At December 31, 2004** | ** ** | **For the year ended  December 31,2004** | ** ** |
|--------------------------------|------------|-------------------|------------|--------------------------|------------|------------------------------------------|------------|
| ** **                     | ** ** | **Percent  Held** | ** ** | **Investment**           | ** ** | **Total  Investee  Assets**              | ** ** | **Artemis  Receivable** | ** ** | **Total  Investee  Revenue** | ** ** | **Equity in  Net Income  (Loss)** | ** ** |
| ** **                     | ** ** | ** **        | ** ** | **(in  thousands)**      | ** ** |
| Metier Scandinavia AS (Norway) |       | 7.5               | %          | $                        | 57         |                                     | $          | 4,971 |   | $ | 155 |   | $ | 10,482 |   | $ | 86 |   |
| Metier Plancon BV              |       | 11.8              | %          | 87                       |       | 217                                      |       | 52 |   | 3,015 |   | (36 | ) |
| DA Management Solutions        |       | 29.0              | %          | 7                        |       | 60                                       |       | — |   | — |   | (1 | ) |
| Changepoint France             |       | 40.0              | %          | 784                      |       | 887                                      |       | — |   | — |   | — |   |
| Other Distributors             |       | 0                 | %          |                     |       | —                                   |       | 92 |   | — |   | — |   |
|                           |       |              |       | $                        | 935        |                                     | $          | 6,135 |   | $ | 299 |   | $ | 13,497 |   | $ | 49 |   |

 
| ** **                     | ** ** | ** **        | ** ** | **At December 31, 2003** | ** ** | **For the year ended  December 31,2003** | ** ** |
|--------------------------------|------------|-------------------|------------|--------------------------|------------|------------------------------------------|------------|
| ** **                     | ** ** | **Percent  Held** | ** ** | **Investment**           | ** ** | **Total  Investee  Assets**              | ** ** | **Artemis  Receivable** | ** ** | **Total  Investee  Revenue** | ** ** | **Equity in  Net Income  (Loss)** | ** ** |
| ** **                     | ** ** | ** **        | ** ** | **(in  thousands)**      | ** ** |
| Metier Scandinavia AS (Norway) |       | 9.9               | %          | $                        | 44         |                                     | $          | 3,871 |   | $ | 189 |   | $ | 5,170 |   | $ | 59 |   |
| Metier Plancon BV              |       | 11.8              | %          | 121                      |       | 620                                      |       | 81 |   | 2,900 |   | (65 | ) |
| DA Management Solutions        |       | 29.0              | %          | 4                        |       | —                                   |       | — |   | — |   | — |   |
| Intellisoft OY                 |       | 19.9              | %          | —                   |       | 230                                      |       | — |   | 1,169 |   | (44 | ) |
| Changepoint France             |       | 40.0              | %          | 711                      |       | 816                                      |       | — |   | 572 |   | (268 | ) |
| Other Distributors             |       | 0                 | %          |                     |       | —                                   |       | 74 |   | — |   | — |   |
|                           |       |              |       | $                        | 880        |                                     | $          | 5,537 |   | $ | 344 |   | $ | 9,811 |   | $ | (318 | ) |

 
| ** **                                    | ** ** | ** **        | ** ** | **At December 31, 2002** | ** ** | **For the year ended  December 31,2002** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|--------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **Percent  Held** | ** ** | **Investment**           | ** ** | **Total  Investee  Assets**              | ** ** | **Artemis  Receivable** | ** ** | **Total  Investee  Revenue** | ** ** | **Equity in  Net Income  (Loss)** | ** ** |
| ** **                                    | ** ** | ** **        | ** ** | **(in  thousands)**      | ** ** |
| Metier Scandinavia AS (Norway)                |       | 9.9               | %          | $                        | 44         |                                     | $          | 4,081 |   | $ | 221 |   | $ | 3,783 |   | 79 |   |
| Metier International Holdings BV (Holland)    |       | 19.0              | %          | 121                      |       | 960                                      |       | 58 |   | 3,356 |   | (1 | ) |
| Accountor Oy (See note 2) and Intellisoft  Oy |       | 19.9              | %          | —                   |       | 714                                      |       | — |   | 1,011 |   | (106 | ) |
| DA Management Solutions                       |       | 29.0              | %          | 4                        |       | —                                   |       | — |   | — |   | — |   |
| Changepoint France                            |       | 40.0              | %          | 204                      |       | 909                                      |       | — |   | 660 |   | (364 | ) |
| Other Distributors                            |       | 0                 | %          | —                   |       | —                                   |       | 143 |   | — |   | — |   |
|                                          |       |              |       | $                        | 373        |                                     | $          | 6,664 |   | $ | 422 |   | $ | 8,810 |   | $ | (392 | ) |
|                                               |            |                   |            |                          |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

In September 2000, Artemis International France Sarl(“Artemis France”) entered into a joint venture agreement (the “Agreement”)with the Canadian company Changepoint Corporation (“Changepoint”) andestablished the joint venture, Changepoint France Sarl (“ChangepointFrance”).  Artemis France and Changepointown 40% and 60% of Changepoint France, respectively.  The Agreement provides for a put and calloption for Artemis France to sell and Changepoint to purchase the 40% interestheld by Artemis France under certain conditions.  The Company has exercised its putoption to sell its 40% interest in Changepoint France. In May 2004,Compuware Corporation acquired privately held Changepoint.  

 

The Company initiated arbitration proceedingswith respect to its claims and has settled this dispute subsequent to December 31,2004.  As a result, the Company will receiveapproximately $1.2 million in cash by March 31, 2005, representing the nominalvalue of the shares held by Artemis France in the joint venture, shareholderloans and other receivables owed to the Company.

 

**Note 13. Concentration of CreditRisk**

 

During the years endedDecember 31, 2004, 2003 and 2002, one customer, Lockheed MartinCorporation, accounted for approximately $3.8 million (about 7%), $5.7 million(about 10%) and $12.3 million (about 18%), respectively, of consolidatedrevenue.  Substantially all of this revenue was generated in the Americassegment of the Company’s operations.

 

F-25

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See Note 3 for an analysisof the Company’s trade accounts receivable by segment/geographic region.

The Company generally doesnot require collateral from its customers.

 

**Note 14. Stockholders’ Equity**

 

On June 16, 2004 (the “Closing Date”), the Companycompleted a private placement of $9.0 million of unregistered convertiblepreferred stock (the “Preferred Series A Financing”).  In connection withthis transaction, the Company issued an aggregate of 4,090,909 shares ofconvertible preferred stock (the “Series A Preferred Stock”) to certainaccredited investors (the “Series A Holders”), priced at $2.20 per share, eachof which is convertible into one share of the Company’s common stock.

 

In addition, the Company issued to the Series AHolders (i) five-year warrants to purchase an aggregate of 409,090 shares ofcommon stock at an exercise price of $2.64 per share (the “Initial Warrants”)and (ii) 210-day warrants (the “Additional Warrants”) (a) that are exercisableonly in the event that the Six Month Price (as defined below) is less than$2.20 and (b) to purchase a variable number of shares of common stock at $.01per share based upon the Six Month Price.  The number of issuable shareswas determined by the “Six Month Price” which is defined as the greater of$1.75 or the lowest average closing price of the Company’s common stock for any15 consecutive day period during the six-month period immediately following theClosing Date.  The Initial Warrants vested and became fully exercisable onthe issuance date. As of December 15, 2004, the Six Month Price was $1.98per share, which resulted in the issuance of 456,853 Additional Warrants to theSeries A Holders.  As of December 31,2004 certain Series A Holders exercised their Additional Warrants resulting inthe issuance of 279,188 shares of common stock. Subsequent to year end, the remaining outstanding Additional Warrants wereexercised resulting in the issuance of 177,665 shares of common stock.

 

Proceeds from the Preferred Series A Financingapproximated $8.6 million, net of issuance costs of $0.4 million, and are beingused for (i) working capital, (ii) the repayment of debt and (iii) tostrengthen the Company’s balance sheet.  $2.2 million of the net proceedswere transferred on behalf of Artemis directly to Laurus to pay certainover-advances due at the Closing Date.  (See Note 6 for more informationon the Laurus Facility).

 

With respect to the Series A Preferred Stock, theSeries A Holders maintain certain powers, preferences and rights that aresenior to the holders of the Company’s common stock. The Series A Holders (i)are entitled to one vote per share on all matters upon which holders of commonstock are entitled to vote, (ii) have certain voting consents, (iii) so long asat least twenty-five percent of Series A Preferred Stock is outstanding, havethe right to elect one member of the board of directors of the Company, and(iv) so long as at least thirty percent of the Series A Preferred Stock isoutstanding, the Company cannot redeem or declare or pay any cash dividend ordistribution on its common stock without the prior written consent of theholders of at least a majority of the Series A Preferred Stock.

 

The exercise prices and the number of sharesunderlying the warrants are subject to anti-dilution adjustments in connectionwith mergers, acquisitions, stock splits, dividends and the like.  TheSeries A Holders may pay the exercise price for the shares to be purchased uponexercise of the warrants by paying cash equal to the number of shares to bepurchased times the appropriate exercise price per share, or, if the marketprice of our common stock exceeds the exercise price to be paid per share, theSeries A Holders may, at their option, exchange the right to purchase all orpart of the maximum shares underlying the warrants for that number of sharesequal in value to the amount by which the closing price of a share of ourcommon stock preceding the exercise date exceeds the exercise price, multipliedby the number of shares to be purchased at that exercise price.

 

The Company filed a registration statement on FormS-1 with the SEC on July 19, 2004 (which was amended in August and October2004) to register the common stock, which may be issued as describedabove.  The SEC declared such registration statement effective on October29, 2004.

 

Subsequent to December 31, 2004, Laurus converted$0.2 million of the outstanding $1.5 million Minimum Borrowing Note in exchangefor 166,700 shares of the Company’s common stock (see Note 6).

 

During the year endedDecember 31, 2002 the Company recovered certain notes and accountsreceivable, totaling approximately $0.6 million, which had been written offprior to the Company’s reverse merger transaction in 2001.  Since therecovered amounts were not  included inthe net assets in conjunction with the original accounting for such merger, therecoveries were recorded as adjustments to the Company’s additional paid incapital.

 

**Note 15. Stock Options and Warrants**

 

*Stock Options*

 

The Company has grantedoptions to purchase the Company’s restricted common stock under various plansto employees and directors.  All stock option plans are administered bythe Compensation Committee of the Board of Directors, which determines the

 

F-26

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terms of the options granted, including the exerciseprice, the number of shares subject to option, and the vesting period. Options generally vest over terms of three to five years and have a maximumlife of ten years.

 

The stock option plansadopted by Opus360 prior to the consummation of the Share Exchange Transactionsin 2001, and the related stock options continue in full force and effect. Even though Legacy Artemis was the acquiror for accounting purposes in theShare Exchange Transactions, Opus360 as a legal entity survived theconsummation of such transaction. Options granted under Opus 360 plans areredeemable in the common stock of Artemis. The following description of theCompany’s stock option plans reflects the stock option plans of Opus 360 andLegacy Artemis prior to the merger, and the status of the following plans afterJuly 31, 2001.

 

•                  The 1998 Stock Option Plan (the “1998 Plan”)provided for the issuance of 240,000 options.  Options granted, exercisedand cancelled under the plan are 243,090, 35,503 and 174,776, respectively,leaving approximately 170,492 options available under the plan and 32,811outstanding as of December 31, 2004. As options become available due to cancellation and forfeiture, they areadded to the pool of options available for grant under the 2000 Stock OptionPlan.

 

•                  The 2000 Stock Option Plan (the “2000 Plan”) provides forthe granting of incentive and non-qualified stock options to employees, boardmembers and advisors.  When the 2000 Plan was adopted in March of2000, it provided for the issuance of 0.3 million options.  However, the2000 Plan includes scheduled increases in options available for grant equal to5% of the Company’s outstanding common stock to a maximum of 1.2 millionoptions.  On January 1, 2003 the 2000 Plan reached the maximum of 1.2million options available for grant.  In addition, 0.2 million options grantedunder the 1998 Plan and subsequently cancelled are available for grant underthe 2000 Plan.  Options granted, exercised and cancelled under the 2000Plan are 2,206,080, 1,646 and 576,189 respectively, leaving 1,440,601 optionsavailable under the 2000 Plan, including the cancelled 1998 Plan options, andapproximately 1,628,245 options outstanding as of December 31, 2004.  EffectiveNovember 30, 2004, the 2000 Plan was amended and restated. The amended andrestated 2000 Plan provides for the issuance of 2,000,000 options, with automaticincreases (on January 1 of each year) in options available for grant equal to5% of the Company’s outstanding common stock, as of the preceding December 31 upto a maximum of 5,000,000 options. Options granted under the 2000 Plan in 2004 include approximately391,000 with vesting contingent upon the Company meeting certain annualfinancial performance goals.

 

•                  The 2000 Non-Employee Directors’ Plan (the“Non-Employee Directors Plan”) provides for automatic, non-discretionary grantsof up to 300,000 non-qualified stock options to non-employee boardmembers.  Under the Non-Employee Directors Plan 144,900 and 41,440 optionshave been granted and cancelled, respectively, and 103,460 options remainoutstanding at December 31, 2004.  EffectiveNovember 30, 2004, the Non-Employee Directors Plan was amended andrestated. The amended and restated Non-Employee Directors Plan provides thateach Non-Employee Director who is elected or appointed to the Board afterFebruary 24, 2004 shall receive an initial grant of options to purchase15,000 shares of our Common Stock. For each Non-Employee Director serving onthe Board as of February 24, 2004, he or she received a grant of optionson February 24, 2004 to purchase 7,500 shares of our Common Stock, unlessthe Non-Employee Director was provided a special initial grant greater than7,500 shares. Thereafter, commencing in 2005, each continuing Non-EmployeeDirector shall receive a grant of options on his or her Board anniversary dateto purchase up to 7,500 shares of Common Stock. With respect to directorsserving on committees, each Non-Employee Director who, on or afterFebruary 24, 2004, is elected or appointed as, or was already, a member ofthe Audit, Compensation and/or the Nominating Committee, shall receive anadditional grant of options to purchase 3,500 shares of our Common Stock formembership on each respective committee. Thereafter, each Non Employee Directorwho continues to serve on any such committee upon his or her applicablecommittee anniversary date shall be automatically granted an Option on suchanniversary date to purchase up to 3,500 shares of Common Stock.

 

•                  The Company assumed non-qualified stockoptions granted to certain key former employees of Opus360.  As of December31, 2004, 46,983 of these stock options with an exercise price of $250 areoutstanding and exercisable.  The options are exercisable untilFebruary 2010.

 

•                  The Company also assumed non-qualified stockoptions granted to other employees of Opus360 who became Artemis employeesafter the Share Exchange Transactions.  At December 31, 2004, eightyeight of these options with a weighted average exercise price of $34.25remained outstanding.

 

*Warrants*

 

There were 714,096 warrantsto purchase Company common stock outstanding and exercisable atDecember 31, 2004.  Other than the AdditionalWarrants (see below and Note 14), the per-share exercise prices of theremaining warrants range from $2.64 to $46.25 and they expire through 2013.

 

As of December 31,2004, certain Series A Holders exercised their Additional Warrantsresulting in the issuance of 279,188 shares of common stock.  Subsequent to year end the remainingoutstanding Additional Warrants were exercised, resulting in the issuance of177,665 Shares of common stock.

 

F-27

----

 

The following tablessummarize information concerning outstanding options and warrants atDecember 31, 2004:

 
| ** **                       | ** ** | **Stock Options  and Warrants** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|----------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|
| ** **                       | ** ** | **(In thousands)**              | ** ** | ** **                             | ** ** |
| Outstanding at December 31, 2001 |       | 629                             |       | $                                      | 71.01      |   |
| Granted                          |       | 836                             |       | 1.43                                   |       |
| Exercised                        |       | —                          |       | —                                 |       |
| Cancelled or forfeited           |       | (158                            | )          | 51.55                                  |       |
| Outstanding at December 31, 2002 |       | 1,307                           |       | 28.86                                  |       |
| Granted                          |       | 125                             |       | 3.95                                   |       |
| Exercised                        |       | —                          |       | —                                 |       |
| Cancelled or forfeited           |       | (262                            | )          | 19.41                                  |       |
| Outstanding at December 31, 2003 |       | 1,170                           |       | 28.32                                  |       |
| Granted                          |       | 1,904                           |       | 1.34                                   |       |
| Exercised                        |       | (280                            | )          | 0.02                                   |       |
| Cancelled or forfeited           |       | (268                            | )          | 59.60                                  |       |
| Outstanding at December 31, 2004 |       | 2,526                           |       | 13.49                                  |       |
|                             |       |                            |       |                                   |       |
| Exercisable at December 31, 2002 |       | 465                             |       |                                   |       |
| Exercisable at December 31, 2003 |       | 712                             |       |                                   |       |
| Exercisable at December 31, 2004 |       | 1,703                           |       |                                   |       |
|                                  |            |                                 |            |                                        |            |  |

 

 
| ** **                    | ** ** | ** **                                      | ** ** | **Options and Warrants Outstanding**                          | ** ** | **Options and Warrants Exercisable**   | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding  at  December 31,  2004** | ** ** | **Weighted  Average  Remaining  Contractual  Life  in Years** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable  at  December 31,  2004** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| ** **                    | ** ** | ** **                                      |       | **(In  thousands**)                                           |       |                                   |       |   |   | **(In thousands)** |   |   |   |
| $                             | —     |                                            | $          | 27.50                                                         |       | 2,382                                  |       | 6.4 |   | $ | 1.80 |   | 1,559 |   | $ | 2.00 |   |
| 27.50                         |       | 55.00                                           |       | 1                                                             |       | 1.5                                    |       | 45.24 |   | 1 |   | 45.24 |   |
| 55.00                         |       | 82.50                                           |       | 5                                                             |       | 5.6                                    |       | 66.91 |   | 5 |   | 66.91 |   |
| 82.50                         |       | 110.00                                          |       | 35                                                            |       | 5.6                                    |       | 94.36 |   | 35 |   | 94.36 |   |
| 110.00                        |       | 137.50                                          |       | 3                                                             |       | 5.4                                    |       | 123.50 |   | 3 |   | 123.50 |   |
| 220.00                        |       | 247.50                                          |       | 6                                                             |       | 5.2                                    |       | 227.75 |   | 6 |   | 227.75 |   |
| 247.50                        |       | 275.00                                          |       | 94                                                            |       | 5.1                                    |       | 260.26 |   | 94 |   | 260.26 |   |
|                          |       |                                            |       | 2,526                                                         |       | 6.4                                    |       | 13.49 |   | 1,703 |   | 19.33 |   |
|                               |            |                                                 |            |                                                               |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 16. Contingencies/Litigation**

 

The Company is a party to a number of legal claimsarising in the ordinary course of its business.  The Company believes theultimate resolution of these claims will not have a material effect on itsfinancial position, results of operations or cash flows.

 

F-28

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**Note 17. Quarterly Financial Data(Unaudited)**

 

The following table sets forth certain unauditedquarterly consolidated financial data for each of the eight quarters in thetwo-year period ended December 31, 2004.  In the opinion of theCompany’s management, this unaudited information has been prepared on the samebasis as the audited consolidated financial statements contained herein andincludes all adjustments, consisting only of normal recurring adjustments,necessary to present fairly the information set forth therein when read inconjunction with the consolidated financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of resultsfor any future period.

 
| ** **                                                                         | ** ** | **Quarter Ended**                         | ** ** | **Year Ended**    | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------|------------|
| ** **                                                                         | ** ** | **Mar. 31  2004**                         | ** ** | **Jun. 30  2004** | ** ** | **Sept. 30  2004** | ** ** | **Dec. 31  2004** | ** ** | **Dec. 31  2004** | ** ** |
| ** **                                                                         | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Statement of Operations Data:**                                     |       |                                      |       |              |       |   |   |   |   |   |   |
| Revenues                                                                           |       | $                                         | 13,616     |              | $          | 13,431 |   | $ | 11,009 |   | $ | 14,389 |   | $ | 52,445 |   |
| Operating loss                                                                     |       | (3,553                                    | )          | (1,738            | )          | (2,479 | ) | (1,783 | ) | (9,553 | ) |
| Net loss                                                                           |       | (3,892                                    | )          | (1,800            | )          | (2,973 | ) | (1,020 | ) | (9,685 | ) |
| Basic and diluted loss per common share                                            |       | (0.39                                     | )          | (0.18             | )          | (0.30 | ) | (0.10 | ) | (0.97 | ) |
| Weighted average shares used in computing  basic and diluted loss per common share |       | 9,965                                     |       | 9,965             |       | 9,965 |   | 10,059 |   | 9,988 |   |
|                                                                                    |            |                                           |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                                         | ** ** | **Quarter Ended**                         | ** ** | **Year Ended**    | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------|------------|
| ** **                                                                         | ** ** | **Mar. 31  2003**                         | ** ** | **Jun. 30  2003** | ** ** | **Sept. 30  2003** | ** ** | **Dec. 31  2003** | ** ** | **Dec. 31  2003** | ** ** |
| ** **                                                                         | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Statement of Operations Data:**                                     |       |                                      |       |              |       |   |   |   |   |   |   |
| Revenues                                                                           |       | $                                         | 16,195     |              | $          | 13,468 |   | $ | 13,667 |   | $ | 13,961 |   | $ | 57,291 |   |
| Operating loss                                                                     |       | (835                                      | )          | (3,669            | )          | (1,639 | ) | (1,949 | ) | (8,092 | ) |
| Net (loss)                                                                         |       | (908                                      | )          | (4,002            | )          | (1,376 | ) | (1,605 | ) | (7,891 | ) |
| Basic and diluted loss per common share:                                           |       | (0.09                                     | )          | (0.40             | )          | (0.14 | ) | (0.16 | ) | (0.79 | ) |
| Weighted average shares used in computing  basic and diluted loss per common share |       | 9,965                                     |       | 9,965             |       | 9,965 |   | 9,965 |   | 9,965 |   |
|                                                                                    |            |                                           |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 18.  Restructuring Costs**

 

In response to a decline in certain key operatingmetrics such as total revenue, operating margin and revenue per employee, theCompany adopted a non-discretionary restructuring plan that resulted in aworkforce reduction and other cost reductions (collectively, the“Restructuring”) intended to strengthen the Company’s competitive position andfuture operating performance. The Company has implemented the Restructuringduring the year ended December 31, 2004.  The Company’s total chargerelated to this Restructuring was approximately $2.7 million as disclosed inthe accompanying consolidated statements of operations.

 

The Restructuring Charge recognized during 2004 iscomprised primarily of: (i) severance pay (including related payroll taxes) andassociated one-time employee termination costs related to the reduction of theCompany’s workforce; (ii) the closure and consolidation of offices; (iii)relocation costs resulting from organizational realignments; and (iv)professional fees incurred to improve the competitive position of theCompany.  The Company accounts for the costs associated with exiting anactivity, including costs associated with the reduction of the Company’sworkforce, in accordance with SFAS 146.  The following table summarizesthe Company’s Restructuring-related expenses incurred during the year endedDecember 31, 2004:

 
| ** **                 | ** ** | **RESTRUCTURING COSTS BY QUARTER** | ** ** | ** ** | ** ** |
|----------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                 | ** ** | **Q1**                             | ** ** | **Q2**     | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| ** **                 | ** ** | **(in thousands)**                 | ** ** |
| Employee Termination Costs |       | $                                  | 1,002      |       | $          | 95 |   | $ | 410 |   | $ | 491 |   | $ | 1,998 |   |
| Employee Relocation Costs  |       | 47                                 |       | —     |       | 8 |   | — |   | 55 |   |
| Facilities Costs           |       | 31                                 |       | 22         |       | 210 |   | 16 |   | 279 |   |
| Professional Fees          |       | 168                                |       | 31         |       | 25 |   | 184 |   | 408 |   |
|                       |       | $                                  | 1,247      |       | $          | 148 |   | $ | 654 |   | $ | 691 |   | $ | 2,740 |   |

 

F-29

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As part of the Restructuring, the Company hasreduced its workforce by a total of seventy one employees, from 396 to 325(which includes scheduled terminations and voluntary resignations) orapproximately 18% of its workforce.  The Restructuring Charge has affectedcorporate positions and certain operational positions as follows:

 
| ** **                 | ** ** | **RESTRUCTURING COSTS BY REGION** | ** ** | ** ** | ** ** |
|----------------------------|------------|-----------------------------------|------------|------------|------------|
| ** **                 | ** ** | **Americas**                      | ** ** | **EMEA**   | ** ** | **Japan/Asia (A)** | ** ** | **Total** | ** ** |
| ** **                 | ** ** | **(in thousands)**                | ** ** |
| Employee Termination Costs |       | $                                 | 823        |       | $          | 808 |   | $ | 367 |   | $ | 1,998 |   |
| Employee Relocation Costs  |       | 35                                |       | 20         |       | — |   | 55 |   |
| Facilities Costs           |       | —                            |       | 279        |       | — |   | 279 |   |
| Professional Fees          |       | 164                               |       | 244        |       | — |   | 408 |   |
|                       |       | $                                 | 1,022      |       | $          | 1,351 |   | $ | 367 |   | $ | 2,740 |   |

 

----

(A) Restructuringcosts for Japan/Asia have been reported in EMEA segment in Note 11 because suchcosts were incurred in the United Kingdom. The above table reflects the functional impact of the Restructuring.

 

This follows a similar reduction (8% of theworkforce) in the last quarter of 2003, whereby these reductions were based ondiscretionary restructuring actions.  Approximately $0.9 million of thetotal restructuring charge is included in accured liabilities in theaccompanying December 31, 2004 consolidated balance sheets.

 

GAAP prohibits the recognition of an exit-activityliability until (a) certain criteria (which demonstrate that it is reasonablyprobable that a present obligation to others has been created) are met, and (b)the fair value of such liability can be reasonably estimated.  The costsassociated with pre-2004 workforce reductions and related activities that didnot meet the definition of a “liability” (in the opinion of management) wererecorded and expensed in their natural classifications as incurred; as aresult, these expenses were not reported separately as exit-activity orrestructuring charges in the Company’s consolidated statements of operations.

 

**Note 19. Comprehensive Loss**

 

Comprehensiveloss consists of net income or loss, adjusted for other increases or decreasesaffecting stockholders’ deficit that are excluded in the determination of netincome or loss.  In July 2004, theCompany restated its comprehensive loss for the year ended December 31,2003.  The restatement was made tocorrect the foreign currency translation adjustment related to the Company’sinvestment in Changepoint France.  Suchadjustment did not affect the Company’s previously reported net loss for2003.  The calculation of the restated comprehensiveloss for the year ended December 31, 2003 is as follows:

 
| ** **                                 | ** ** | ** ** | ** ** | **2003**           | ** ** |
|--------------------------------------------|------------|------------|------------|--------------------|------------|
|                                       |       |       |       | **(in thousands)** |       |
|                                       |       |       |       | ** **         |       |
| Net loss                                   |       |       |       |               | $          | (7,891 | ) |
| Foreign currency translation loss          |       |       |       | (597               | )          |
| Comprehensive loss, as previously reported |       |       |       | (8,488             | )          |
| Retroaction adjustment                     |       |       |       | 357                |       |
|                                       |       |       |       |               |       |
| Comprehensive loss, as restated            |       |       |       |               | (8,131     | ) |
|                                            |            |            |            |                    |            |  |  |

 

In July 2004, the Company also restated its 2002 comprehensive loss;see Note 9 for additional information.

 

F-30

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