**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, 2005**

 

**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 if the registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act.

 

o Yes   ýNo

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act.

 

o Yes   ýNo

 

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.  ý

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer (as those terms are defined inRule 12b-2 of the Exchange Act), or a non-accelerated filer.

 

Large accelerated filer o Accelerated filer o Non-accelerated filer ý

 

Indicate by check mark whether the registrant is ashell company (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 onJune 30, 2005 was approximately $3.4 million.  There were 10,877,087shares of common stock outstanding as of March 17, 2006.

 

 

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**ARTEMISINTERNATIONAL SOLUTIONS CORP.**

**AnnualReport on Form 10-K**

**For the YearEnded December 31, 2005**

 

**TABLE OFCONTENTS**

 

 
| **Part I**                                     |
|------------------------------------------------|
|                                           |   |   |
| Item  1.                                       |   | Business |
|                                           |   |   |
| Item  1A.                                      |   | Risk  Factors |
|                                           |   |   |
| 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** |

 

1

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*This Report on Form 10-K contains forward-looking statements thatinvolve risks and uncertainties.  Actual events and results could differmaterially from those anticipated in these forward-looking statements as aresult of certain factors.  See Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations - Safe HarborStatement.”*

 

**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 withverticalized solutions and oriented consulting services to address the needs ofboth private and public sector organizations in the areas of:

 

•                  New ProductDevelopment (NPD) and launch

•                  InformationTechnology (“IT”) Management and Governance

•                  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 reiterativebudgeting and resource allocation, to project execution and performancemeasurement, including value and benefit assessment. Our customers rely on usto provide them with a solution to better manage their IT investments, developand launch new products such as pharmaceuticals and high techs, promotebusiness efficiency through better alignment and allocation of funds ingovernmental agencies, optimize investments in assets like nuclear powerstations, and manage defense programs.

 

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

 

More than 440 companiesrepresenting 645,000 users in 44 different countries have licensed Artemissolutions in a broad range of industries, including: AMI Semiconductor, ChicagoMercantile Exchange, Denso, Exelon Energy, Lockheed Martin, MoneyGram, Nokia, TelecomItalia, Toshiba, and USAA.

 

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

 

**Industry Overview**

 

Private and public sectororganizations are under growing pressure to deliver more with less, and improvethe alignment of their investments with evolving objectives in an increasinglycompetitive market characterized by tighter margins, shorter productlifecycles, economic and political uncertainty, and more stringent regulatorycontrols and compliance criteria.

 

Across allindustry sectors, the past two years have confirmed the urgent need to improvethe processes for selecting, budgeting, prioritizing and executing investmentsin order to optimize corporate resources, improve business performance andensure visibility 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

•                  Maintainingagility in the allocation 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

 

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

 

•                  **Within R&Dorganizations**,according to AMR Research and Aberdeen Group, Product Portfolio Management isone of the most strategic investments companies can make in improving ProductLife cycle Management, as it can help them to focus their resources on theproducts that will provide the highest value. The resulting PPM applicationmarket is estimated at $300 million growing at 13% a year. The increasing focusof companies on improving profit growth through better innovation managementoffers an additional confirmation of the dynamics of this market segment.

 

•                  **Within ITorganizations,**accordingto Gartner Group, the two top priorities of CIOs - “linking business and ITstrategies and plans” and “delivering projects that enable business growth” -will continue to fuel the demand for IT Portfolio Management applications,pushing the market to increase over 5% per year until 2009. Other leadinganalyst firms report similar trends, confirmed by our own customers.

 

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: R&Dmanagers, Chief Information Officer, Chief Financial Officers,line of business managers, project and resources managers, knowledgeworkers, customers and partners. Unlike other systems, our solutions arecompletely integrated to offer a real connection between the differentprocesses including demand management, portfolio and budgeting management,project and resource 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:

 

•                  Shift more of our efforts toward theNew Product Development market to leverage the recent focus of R&Dorganizations on increasing their investments in innovation and on getting morereturn from their R&D dollars

 

•                  Continue to show leadership infunctionality not only in IT Management, but in other investment intensivebusinesses areas such 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 toenhance implementation service quality and build more industry best practicesinto our solutions

 

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## **Products**

## ** **

**Artemis 7**, the software product underlying our InvestmentPlanning and Control solutions, was first introduced in December 2001under the name Portfolio Director. Version 6.1 was released in July 2005,extending the capabilities of the previous version by adding:

 

•                  Workflow driven idea and requestmanagement

 

•                  Advanced Planning and Scheduling asan alternative to Microsoft Project usage

 

•                  Improved time reporting features

 

•                  Support of IBM DB2 UniversalDatabase

 

We expect to releaseArtemis 7, version 6.2 in June/July 2006, with content particularlyfocused on improvement requests from our large existing customer base. Theobjective is to increase user satisfaction and allow customers to expand theirimplementations beyond their existing scope.

 

In Q3 2006, we alsoexpect to launch version 7 of Artemis 7, a major release clearly focused onsatisfying specific requirements of the New Product Development and R&Dtarget market in the areas of:

 

•      IdeationManagement

 

•      ProductPortfolio Management analysis

 

•      Phase-Gateprocess management, a methodology widely used in R&D organizations

 

•      MasterPlan Management

 

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

 

***Investment Portfolio Management***

•                  Collect demands and ideas

•                  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

•                  Maintain visibilityof 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***

### ** **

Artemis 7provides a comprehensive set of standard dashboards and unlimited analyticalcapabilities on investment portfolio management, budget and cost control,benefit measurements, resource usage and project management.

 

In addition tomultiple scorecards and other on-line key performance indicators, the productoffers sophisticated web-based integration with Microsoft Excel. An unlimitednumber of Excel based reports can be created through pre-defined templates andfully integrated in each user environment while respecting data securityrequirements. The software also facilitates use of other third party BusinessIntelligence tools by providing access to a set of ready to use reporting datatables.

 

 

4

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

 

The product uses investment and project managementmethodology templates to provide integrated workflow control and stage gatecapabilities. These governance templates contain the steps, milestones andstakeholders involved in the lifecycle approval and funding process for eachinvestment or project including review, approval and authorization steps. Theapplication uses workflows to prompt identified stakeholders to formally reviewand approve different milestones and stages throughout the lifecycle ofinvestments, programs and projects.

 

Triggers can send alerts within the Artemis 7platform or via email to defined investment project stakeholders, providinginstant notification of critical issues for review and approval.

 

***Collaboration***

 

The product provides a comprehensive collaborativecapability, allowing stakeholders and contributors to store and shareinformation. The integrated document management capability allows documents anddata to be linked directly to the target investment, project or work items,while the discussion area provides an informal process for threaded commentsand notes. Risks are more easily monitored and controlled through the sharedRisks and Issues Register. Users may subscribe to specific documents receivingupdates through email and home page alerting.

 

***Integration Management***

 

Artemis 7 is anextensible solution, allowing integration with existing systems and the capacityto extend standard system functionality through Custom Plug-ins, ApplicationProgram Interface (“API”) and Extensible Markup Language (“XML”) capabilities.

 

Artemis 7allows 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 by process favors phased implementations,allowing the organization to start with a 25 user system initially focused onportfolio and budget optimization, then expanding to ten of thousands of usersleveraging all the business processes supported 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**

 

Built in J2EE(the most established Java programming language), Artemis 7 supports themajority of popular platforms and environments, allowing organizations toleverage their existing investment in deployed technologies.

 

**Security**

 

Role basedaccess security ensures that authorized users are presented with an intuitive,easy to navigate interface that provides only the information appropriate totheir role.

 

**Internationalization**

 

Designed forglobal deployment using multiple currencies, Artemis 7 provides multi-languagesupport including DBCS (Double Byte Character Set) and is available today inEnglish, French, German, Spanish, Italian, Russian, Dutch, Japanese, Chineseand Korean.

 

**Integration**

 

Artemis 7 is afully extensible solution, allowing integration with existing systems and thecapacity to extend standard system functionality. Custom Plug-ins enable eventdriven extensions, while our API provides for more complex integrations andextensions. In addition, the application provides a complete XML schematic toaid custom data transfer.

 

 

 

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**Expansion and Strategic Alliances**

 

From a salesperspective, we will seek to continue to consolidate our leadership throughoutEurope and Japan, while increasing sales in North America. We established aprogram for growth in the Japanese market and will selectively extend ourpresence in emerging markets such as China and Australia. To support our growthwithin specific industry market segments, we have established strategicalliances with a number of specialized consulting companies and systemintegrators. These include Atos Origin, BearingPoint, IBM Global Services,Unilog, Fujitsu Consulting, DMR Conseil (Quebec). Our technology-focusedalliances include companies such as IBM Corporation, Oracle Corporation,Microsoft Corporation, Cognos, BEA Systems, and Sun Microsystems.

 

##### **Sellingand Marketing**

##### ** **

We market oursolutions through our own direct sales organizations in the United States, theUnited Kingdom, 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.

 

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**

##### ** **

We providemission-critical software solutions to hundreds of organizations worldwide. Thebelow list demonstrates the diverse geographical and industry coverage we haverecently established with our solutions.

 

**Financial Services:**** **AIG Insurance, Allianz-AGF, AXA Life Insurance, Banco Espirito Santo,Banque La Poste, BNP Paribas, Chicago Mercantile Exchange, Crédit Agricole,Calyon, Generali Insurance, Moneygram, Promina Group Insurance, USAA.

 

**High-Tech & Manufacturing:******AMI Semiconductor, Arcelor, Cummins, Denso Corporation, Hitachi,Jatco, LG, McData Corporation, Ogihara, Philips Medical Systems, Renault, Saralee, Trigem Computers.

 

**Lifescience: **ActelionPharmaceutical, Celesio, Kirin, Gambro, Lundbeck, Maruho , Pfizer, Tanabe, Unomedical.

 

**Government:** Bordeaux District Council,Brisbaine City Council, City of Munich, French UNEDIC, Office of UK DeputyPrime Minister, Singapore Immigration & Checkpoint Authority, ItalianMinistry of Economy & Finance, UK Metropolitan Police, UK RegionalDevelopment Agencies.

 

**Telecommunications:**ChinaTelecom Shanghai, France Telecom, Indonesia PT Telecom, Nokia Corporation,Telecom Italia, Telefonica Moviles, Telenor, T-Systems, Vodafone, Wind Spa.

 

**Energy:**CEA,****Ergon Energy,****Exelon Nuclear, Exelon Energy Delivery,Gazprom, GE Oil & Gas, OsakaGas.

 

**Aerospace & Defense Program:**AlcatelSpace, BAE Systems, Bath Iron Works, Liebherr Aerospace, Lockheed Martin SpaceSystems, Raytheon, Thales, Turbomeca

 

To date, more than 440 companies representing 645,000 users havelicensed our software solutions.

 

**Intellectual Property**

 

Patents do not protect ourproprietary products. However, to protect our intellectual property rights, welicense our software products and require our customers to enter into licenseagreements that impose restrictions on their ability to utilize the software ortransfer it to other users. Additionally, we seek to avoid disclosure of ourtrade secrets through a number of means, including, but not limited to,requiring those persons with access to our proprietary information to executeconfidentiality agreements with us and restricting access to our source code.In addition, we protect our software, documentation, templates and otherwritten materials under trademark, trade secret and copyright laws. Even withall 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 

 

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rights of others, suchlitigation could result in substantial costs and diversion of resources andcould have a material adverse effect on our business, operating results and/orfinancial condition. As a result, we may be unable, for financial or otherreasons, to enforce our rights under the various intellectual property laws asdescribed 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.

 

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. Wealso expect the intensity of existing competition to increase, particularly inthe 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.

 

Our productscompete with a variety of business application software and with in-housedevelopments based 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 ERP software for other businessprocesses.

 

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

 

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

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

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

 

We expect to continue to compete very favorably on a global basis dueto our solution capabilities and inbuilt intelligence, together with ourability to leverage our international presence and local market intimacy.

 

**Research and Development**

 

We incurred research anddevelopment expenses of approximately $7.9 million, $7.7 million and $8.2million, respectively, for the years ended December 31, 2005, 2004 and2003. Research and development expenses consist primarily of salaries andrelated costs associated with the development of 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 2005 we reinforced the responsibilitiesof our Strategic Marketing organization to better align our product strategywith the Company’s strategic objectives.

 

In late 2004, there wasrecognition that the project management technology from Views was not a goodfit for Artemis 7. During our investigation of alternatives, a best-of-breedtechnology became available on the market, thereby significantly reducing ourtime to market for similar cost. This had the immediate benefit of allowing usto deliver a major new functional module wholly developed by this offshore teamin June/July 2005.

 

In 2005, additional stepswere taken to begin the complete transition of the Views Development, QualityAssurance and Tier II Support function to our outsourcing partner’s facility inIndia. Hiring and training of development staff at the outsourcing partner’sfacility dedicated to Artemis started during the second quarter of 2005. Thetransition is expected to be completed by the end of 2006.

 

In addition, Artemis 7Quality Assurance and Tier II functions are being further augmented startingearly 2006, using the outsourcing partner, with further augmentationanticipated later in the year.

 

We believe that continuedinvestment in research and development is critical to attaining our strategicobjectives and, as a result, we expect that our overall capacity in researchand development in 2006 will increase while the overall cost 

 

7

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will decrease, resultingfrom the reorganizing activities described above. This restructuring exerciseallowed Artemis to increase its core development capacity in 2005 whileretaining some 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 in keymarket segments, increasing our 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 fiscal2005, our R&D efforts focused primarily on our Artemis 7 based solutionsand to a lesser extent on Artemis Views.

 

**Services and Support**

 

Drawing on the consolidated experience of a globalnetwork of consultants specialized in the definition and deployment ofprocesses and systems to support enterprise investment planning and control, wehave developed a structured Solution Management Methodology (sm2). This modular, phasedapproach enables reduction indeployment time thereby delivering more immediate benefits, accelerating ROI, andminimizing the risks frequently associated with the deployment of enterprisesolutions. We regularly partner with consulting organizations and systemintegrators to increase the value delivered to our clients.

 

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

 

**Employees**

 

As of December 31,2005, Artemis directly employed approximately 295 persons on a worldwide basis:58 in the United States of America, 190 in Europe, 32 in Japan, and 15 in Asia.Our employees are not represented by labor unions or collective bargainingagreements, except as may be required by the laws of certain foreignjurisdictions. We have not experienced any work stoppages anywhere, andconsider our relations with our employees worldwide to be good.

 

**Financial Information aboutGeographic Areas**

 

Our revenue is segmented by geographic region and isbased upon management responsibility for such operations.  The followingtable presents information about the Company’s revenue (net of eliminations) bygeographic area for each of the three years in the period endedDecember 31, 2005.

 

| ** **    | ** ** | **For the years ended** | ** ** |
|---------------|------------|----------------------------------------|------------|
| ** **    | ** ** | **December 31,**                  | ** ** |
| ** **    | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **    | ** ** | ** **                             | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Americas      |       | $                                      | 9,250      |   | $ | 12,039 |   | $ | 15,642 |   |
| EMEA (1)      |       | 30,823                                 |       | 33,744 |   | 34,423 |   |
| Japan         |       | 6,109                                  |       | 5,196 |   | 6,073 |   |
| Asia          |       | 1,183                                  |       | 1,466 |   | 1,153 |   |
| Total revenue |       | $                                      | 47,365     |   | $ | 52,445 |   | $ | 57,291 |   |

 

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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 “Exchange Act”). The public may read and copy these materials at the SEC’sPublic Reference Room at 100 F Street, NE Washington, D.C. 20549. The publicmay obtain information on the operation of the public reference room by callingthe SEC at 1-800-SEC-0330. The SEC also maintains a website(http://www.sec.gov) that contains reports, proxy and information statementsand other corporate information regarding our Company and other 

 

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companies that file materialswith the SEC electronically. Our corporate headquarters are located at 4041MacArthur Blvd., Suite 401, Newport Beach, California, 92660. Our phone numberat that address is (949) 660-6500.

 

###### **Item 1A. Risk Factors**

###### ** **

Investing in our common stock involves a highdegree of risk. You should carefully review and consider the risks listed inthe “Risk Factors” section below, as well as the other informationcontained in this 2005 Annual Report on Form 10-K. The risks anduncertainties described below are not the only ones we face. Additional risksand uncertainties not currently known to us or that we currently deemimmaterial may also adversely affect our business, financial condition andoperating results. If any of the following risks, or any other risks notdescribed below, actually occur, it is likely that our business, financialcondition and operating results could be seriously harmed. As a result, thetrading price of our common stock could decline, and you could lose part or allof your investment.

 

**We have Incurred Significant Losses in thePast, and We May Continue to Incur Significant Losses in the Future. If WeContinue to Incur Losses, Our Business Will Be Adversely Affected to a MaterialExtent.**

 

The Company has incurred substantial recurringlosses from operations since inception, and has a history of negative operatingcash flow. At December 31, 2005, the Company’s current liabilities exceededcurrent assets by $5.6 million. In addition, the Company has anaccumulated deficit of $96.7 million at December 31, 2005. The Company maynot be able to achieve the level of sales or contain its costs in the long termsufficiently to generate sufficient cash flow to fund its operations.

 

**Our Financial Condition has RaisedSubstantial Doubt Regarding Our Ability to Continue as a Going Concern**

 

We have incurred substantial operating andnet losses, as well as (except calendar 2002 and 2005) negative operating cashflows, since inception. As a result, the independent auditor’s reportaccompanying our consolidated financial statements starting with our AnnualReport on Form 10-K for the year ended December 31, 2001 contains anexplanation that our financial statements have been prepared assuming that wewill continue as a going concern. Factors such as those described in thepreceding risk factor raise substantial doubt about the Company’s ability tocontinue as a going concern. Management has undertaken to significantly reducecosts through a series of actions, including, but not limited to, loweringheadcount, reducing operating costs and considering various financingalternatives for its operations. On June 16, 2004, we completed thePreferred Series A Financing (private placement) transaction described elsewhereherein with a group of accredited investors headed by Emancipation Capital LP.Notwithstanding either the management undertakings to reduce costs or raisingfunds through the private placement, we cannot assure you that management’sefforts will lead us to profitability, nor can we provide any assurance that wecan continue raising funds on acceptable terms. The consolidated financialstatements do not include any adjustments that might result from the outcome ofthese uncertainties. As a result, our ability to continue as a going concern willdepend on our ability to raise working capital and further streamline ouroperations and/or increase sales. Our failure in any of these efforts maymaterially and adversely affect our ability to continue as a going concern.

 

# **The Merger with Trilogy May Not be Consummated IfCertain Closing Conditions Are Not Met**

 

On March 10, 2006, weentered into a merger agreement with Trilogy and RCN pursuant to which RCN willmerge with and into Artemis. Upon completion of the merger, Artemis would becomepart of Trilogy’s recently announced Versata Group, a leading provider ofbusiness rules, configuration and pricing management systems headquartered inAustin, Texas.  Upon the completion of the merger, (i) holdersof our common stock will be entitled to receive $1.60 in cash for each sharethat they own (including shares of our restricted common stock), and (ii) holdersof our preferred stock will be entitled to receive $2.20 in cash for each sharethat they own. Before we can consummate the merger, a number of conditions(including certain financial conditions) must be satisfied. If any of thoseconditions are not satisfied and we do not receive a corresponding waiver fromTrilogy on those conditions, the merger may not be consummated. As a result, wewould need to review other alternatives to fund the Company’s cash needs. Anysuch additional financing may not be available on terms favorable to us, or atall.

 

**It is Uncertain If We Can Renegotiate the Agreement With Laurus AtFavorable Terms or At All, If the Merger with Trilogy is Not Consummated**

 

Concurrent with the execution of the merger agreementwith Trilogy and RCN, we entered into an agreement with Laurus that provides afinal payout relating to, and thereby closing, the Company’s current line ofcredit secured with Laurus.  By the earlier of the close of the proposedmerger or June 16, 2006, the Company has agreed to pay Laurus the following amounts:  (i) all principal outstanding pertainingto the over-advance provided to the Company, which equals $3,000,000, plusaccrued interest, (ii) all principal outstanding under the minimumborrowing note, which equals $865,000, plus accrued interest and (iii) $110,000in exchange for the cancellation of all outstanding warrants owned byLaurus.  If the merger with Trilogy isnot consummated at all or by latest June 16, 2006, we will have torenegotiate the agreement with Laurus or seek additional funding to pay theamounts owed to Laurus. We may not be able to renegotiate the agreement withLaurus at favorable terms or at all, and may not be able to obtain additionalfinancing to repay the debt owed to Laurus.

 

**The Current Slow Economy or Downturn in otherParts of the World and Stagnant or Reduced Information Technology Spending MayNegatively Affect Demand For Our Products And Services Which Would AdverselyAffect Future Revenue.**

 

Recent worldwide economic indicators,including but not limited to gross domestic product and job growth figures inthe U.S., reflect a slowdown in economic activity not only in the United States,but globally as well, including Western Europe (e.g., Germany) and Asia. Someparts of the world currently are suffering actual downturns, not just slowgrowth. This world wide trend is critical, given that approximately 80% of ourCompany’s revenue in 2005 was from non-U.S. sources. Some reports haveindicated either a significant decline or merely maintaining spending atcurrent levels by corporations in the area of information technology, which isthe overall market in which we participate. Contributing to the lethargicspending activity are various conflicts throughout the world making headlinesvirtually every day. While we cannot specifically correlate the impact ofmacro-economic conditions on our sales activities, we believe that the economicconditions and international conflicts have resulted in decreased demand in ourtarget markets, and in particular, have increased the average length of oursales cycle and decreased the size of our license transactions. To the extentthat the current slow growth and/or economic downturn continues or increases inseverity, we believe demand for our products and services, and therefore futurerevenue, will be stagnant or reduced. Even if the current global economyimproves and international conflicts diminish, we cannot assure you thatcorporations will increase their information technology spending in our marketor that we will be able to maintain or improve revenue levels.

 

Contributing to the uncertainies are alsocertain trends some analysts have identified, including but not limited to:

 

delays in closing softwaretransactions have been more prevelant for small software companies such asours;

 

the software industry is ripe forconsolidation, either through (i) mergers and acquistions or(ii) market-share gains by major companies at the expense of smallercompanies, as customers standardize on fewer vendors;

 

some companies are increasinglypurchasing “test copies” of software, not committing to major purchases untilthey are certain the software works and will improve their systems;

 

other companies are experimentingwith “open source” software (often, at no cost), and with renting software fromInternet-based vendors, in order to avoid large, up-front payments;

 

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an increased perception by somecompanies that large software or systems projects are merely “optional,” not“essential;”

 

Customers concluding that they canextract larger discounts during the last few weeks of a quarter, perceivingthat software vendors are eager to meet sales quotas and hit revenue targets;and

 

the June, 2004 disclosure, that asa result of the antitrust trial over Oracle’s hostile bid to acquirePeopleSoft, Oracle was willing to offer an 80% discount off of list price inorder to finalize a transaction, thereby making less attractive the lowerdiscounts that are more apt to be offered by smaller software companies.

 

**Our Quarterly Financial Results Are SubjectTo Significant Fluctuation, And If Our Future Results Are Below The ExpectationsOf Investors, The Price Of Our Common Stock Would Likely Decline.**

 

Our operating results have in the past andcould in the future vary significantly from quarter to quarter. Our quarterlyoperating results are likely to be particularly affected by the number ofcustomers licensing our products during any quarter and the size of suchlicensing transactions. Other factors that could affect our quarterly operatingresults include:

 

our ability to attract newcustomers and retain and sell additional products and services to currentcustomers;

 

the renewal or non-renewal ofmaintenance contracts with our customers;

 

the announcement or introductionof new products or services by us or our competitors;

 

changes in the pricing of ourproducts and services or those of our competitors;

 

variability in the mix of ourproduct and services revenue in any quarter; and

 

the amount and timing of operatingexpenses and capital expenditures relating to the business.

 

Due to these and other factors, we believethat period-to-period comparisons of our results of operations are notmeaningful and should not be relied upon as indicators of our futureperformance. In addition, we may be unable to accurately forecast our operatingresults because our business and the market in which we operate are changingrapidly. Such changes could adversely affect our forecasting ability, whichcurrently relies on historical patterns showing that license revenue tends tobe concentrated in the third month of each quarter due to traditional buyingpatters in the software industry. It is possible that, in some future periods,our revenue performance, expense levels, cash usage and/or other operatingresults will be below the expectations of investors and/or analysts. If thisoccurs, the price of our common stock might decline.

 

**Our Sales Cycle Is Lengthy, Which Could DelayThe Growth Of Our Revenues And/Or Increase Our Expenditures.**

 

Our software and services are complex, andinclude some newer products and services that have only recently been releasedcommercially. We may face significant delays in acceptance of our newerproducts and services. We will not be able to recognize any revenue during theperiod in which a potential customer evaluates whether or not to purchase theseproducts and/or services, a period which could extend for six to nine monthsand beyond. The decision of a customer to use any of our products or servicesmay be expensive, time consuming and complex and may require a customer to makea significant commitment of resources. As a result, we will have to expendvaluable time and resources to educate interested persons at all levels inthese organizations on the use and benefits of our products and services. Ourexpenditure of substantial time and resources to persuade customers to use ourproducts and services and/or an unexpectedly long sales and implementationcycle for them will have a negative impact on the timing of our revenues.

 

**We Currently Depend On A Small Number OfMajor Customers For A Significant Amount Of Our Net Sales And Service Revenues.A Reduction In Business From Any Of These Customers, Or Failure By Any Of TheseCustomers To Timely Pay Amounts Owed To Us, Could Adversely Affect Our NetRevenues And Could Seriously Harm Our Business And Financial Condition.**

 

During the year ended December 31, 2005,net sales (comprised of software licensing, support and consulting services) toour largest customer, Lockheed Martin Corporation, represented approximately 5%of our total net sales. We may continue to be dependent upon this customer fora similarly significant percentage of our revenues for the foreseeable future.We cannot assure you, however, that our net sales generated from this customerwill reach or exceed historical levels in any future period. A cessation orreduction of business from this customer could, in the future, harm ourbusiness and financial condition. We cannot assure you that, if sales to thiscustomer 

 

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decline we will be able to replace these sales with sales to existingor new customers in a timely manner, or at all. If we could not replace thesesales, our business and financial condition would be adversely affected to amaterial extent. Further, should this customer fail to timely pay us amountsowed, we would suffer a substantial decline in our cash flow, which would havea material adverse affect on our business, financial condition and/or resultsof operations.

 

**Integration Of Our Products With TheCustomer’s Existing Systems May Be Difficult, Costly And Time-Consuming, AndCustomers Could Become Dissatisfied If Such Integration Requires More Time,Expense Or Personnel Than Expected.**

 

Subsequent to the initial installation of ourproduct, our customers may decide to integrate our product with one or more oftheir other computer systems and software programs. Our customers may find thatthe integration of our products into additional computer systems and softwareprograms, if required, may be difficult, costly and time-consuming. Customers couldbecome dissatisfied with our products if such integration requires more time,expense or personnel than they expected. Additionally, our losses couldincrease if, for customer satisfaction and reputational reasons and when we areengaged in integrating our software into the customer’s additional computersystems and software programs, we do not bill our customers for all of the timeand expenses we incur in connection with these integration issues, which wouldadversely affect our operating results.

 

**New Customers May Not Accept Our Software AndServices.**

 

Before making any commitment to use oursoftware and services, potential users will likely consider a wide range ofissues, including service benefits, integration with legacy systems, potentialcapacity, functionality and reliability. Prospective users will generally needto change established project and resource management practices and operatetheir businesses in new ways. Because some of our products and servicesrepresent new, Internet-based approaches for most organizations, those personsresponsible for the use or approval of our products and services for ourcustomers will be addressing many new technical and project management issuesfor the first time. If our newer products and services are not attractive topotential customers, we will fail to generate significant new revenues fromthese newer products and services. In addition, if software integrators fail toadopt and support our products and services as project and resource managementtools, our ability to reach our target customers in this market may bediminished.

 

**If We Are Unable To Introduce New Products OrProduct Enhancements On A Timely Basis, Or If The Market Does Not Accept TheseProducts Or Product Enhancements, Our Business Will Suffer.**

 

The market for certain of our products andservices is new and the markets for all of our products and services are likelyto change rapidly. Our future success will depend on our ability to anticipatechanging customer requirements effectively and in a timely manner and to offerproducts and services that meet these demands. The development of new orenhanced software products and services is a complex and uncertain process. Wemay experience design, development, testing and other difficulties that coulddelay or prevent the introduction of new products or product enhancements andcould increase research and development costs. Further, we may experiencedelays in market acceptance of new products or product enhancements as weengage in marketing and education of our user base regarding the advantages andsystem requirements for the new products and services and as customers evaluatethe advantages and disadvantages of upgrading to our new products or services.

 

**We Depend On Implementation, Marketing AndTechnology Relationships; If Our Current And Future Relationships Are NotSuccessful, Our Business Might Be Harmed.**

 

We rely on implementation, marketing andtechnology relationships with a variety of companies. Such relationshipsinclude those with consulting firms; and third-party vendors of software, suchas BEA, Cognos, Intraspect, Concur, Microsoft and Oracle, whose products ortechnologies, such as reporting engines, search engines, application servers,databases and operating systems, we incorporate into or integrate with ourproducts.

 

We depend on these companies to recommend ourproducts to customers, promote our products and/or services, provide our directsales force with customer leads and provide enhanced functionality to ourproducts and/or services. Some of these relationships are not documented inwriting, or are governed by agreements that can be terminated by either partywith little or no penalty or prior notice and do not provide for minimumpayments to us. Companies with which we have an implementation, marketing ortechnology relationship may promote products or services of several differentcompanies, including, in some cases, products or services that compete with ourproducts and services. These companies may not devote adequate resources toselling or promoting our products and services. We may not be able to maintainthese relationships or enter into additional relationships in the future.

 

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**We May Not Become Profitable If We Are UnableTo Adapt Our Business Model To Changes In Our Market.**

 

If we are unable to anticipate changes in themarket for project and resource management software and services, we may not beable to expand our business or successfully compete with other companies. Ourcurrent business model depends upon continuing to enhance and expand ourproject management and collaboration solutions. We may be required to furtheradapt our business model in response to additional changes in the portfolio andproject management marketplace, or if our current business model is notsuccessful.

 

**There Is Significant Competition In OurMarket, Which Could Make It Difficult To Attract Customers, Cause Us To ReducePrices And Result In Reduced Gross Margins Or Loss Of Market Share.**

 

The market for our products and services ishighly competitive, dynamic and subject to frequent technological changes. Weexpect the intensity of competition and the pace of change to at least maintainor increase in the future. We compete not only against industry giants such asMicrosoft and SAP and the in-house development efforts of such companiescreating individualized solutions, but also against a myriad of other softwareapplication vendors offering multiple products. Our current independent softwarevendor competition includes, among many others, Niku Corporation (recentlyacquired by Computer Associates), Primavera Systems Inc. andProSight Inc., and these companies may have greater financial, marketing,and/or other resources than our Company.

 

A number of companies offer products thatprovide some of the functionality of our products. We do not believe that anyone company has a dominant position in our market as a whole. However, we maynot be able to maintain our competitive position against current or potentialcompetitors, especially those with significantly greater financial, marketing,service, support, technical and other resources. Competitors with greaterresources may be able to undertake more extensive marketing campaigns, adopt moreaggressive pricing policies and make more attractive offers to potentialemployees, distributors, resellers or other strategic partners. We expectadditional competition from other established and emerging companies as themarket for our software continues to develop. We may not be able to competesuccessfully against current and future competitors.

 

**If We Fail To Effectively Manage OurInternational Operations, Our Revenues May Not Increase. We May IncurAdditional Losses.**

 

Our presence as a world-wide company hasplaced, and will continue to place, significant strains on our infrastructure,management, internal controls and financial systems. Our personnel, systems,procedures and controls may be inadequate to support our future operations. Inorder to accommodate any possible growth of our business, we will need to hire,train and retain appropriate personnel to manage our operations. We will alsoneed to ensure that our financial and management controls, reporting systemsand operating systems keep pace with the growth and expansion of our business.We may encounter difficulties in developing and implementing required newsystems. If we are unable to manage our expansion and/or growth effectively andmaintain the quality of our products and services, our business may suffer.

 

**Any Acquisitions Of Technologies, Products OrBusinesses That We Make May Not Be Successful, May Cause Us To IncurSubstantial Additional Costs, And/Or May Require Us To Incur Indebtedness OrIssue Equity Securities On Terms That May Not Be Attractive.**

 

As part of our business strategy, we have inthe recent past acquired or invested in technologies, products or businessesthat were expected to be complementary to our business and/or may becomplementary in the future. The process of integrating any future acquisitionscould involve substantial risks for us, including:

 

•      unforeseenoperating difficulties and expenditures;

 

•      difficultiesin assimilation of acquired personnel, operations, technologies and/orproducts;

 

•      the needto manage a significantly larger and more geographically-dispersed business;

 

•      amortizationof large amounts of intangible assets;

 

•      thediversion of management’s attention from ongoing development of our business orother business concerns;

 

•      the risksof loss of employees of an acquired business, including employees who may havebeen instrumental to the success or growth of that business; and

 

•      the useof substantial amounts of our available cash or financial resources toconsummate the acquisition.

 

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We may never achieve the benefits that weexpect from the combination of the Opus360 and Legacy Artemis businesses orthat we might anticipate from any future acquisition. If we make futureacquisitions, we may issue shares of our capital stock that dilute existingstockholders, incur debt, assume significant liabilities and/or createadditional expenses related to amortizing intangible assets, any of which mightreduce our reported earnings (or increase our net losses) and cause our stockprice to decline. Any financing that we might need for future acquisitions mayonly be available to us on terms that materially dilute existing shareholders,restrict our business and/or impose costs on us that would reduce our netincome or increase our net losses.

 

**International Activities Expose Us ToAdditional Operational Challenges That We Might Not Otherwise Face.**

 

In the year ended December 31, 2005,revenue from non-U.S. sources represented approximately 80% of total revenue.(We do not hedge foreign currency risk, and approximately 56% of operatingexpenses in 2005 were denominated in foreign cuurencies.) As we operateinternationally, we are exposed to operational challenges that we would notface if we conducted our operations only in the United States. These include:

 

•      foreign currencyexchange rate fluctuations, particularly if we sell our products indenominations other than U.S. dollars;

 

•      longer salescycles in international markets;

 

•      seasonalfluctuations in purchasing patterns in other countries, particularly decliningsales during summer months in European markets;

 

•      tariffs, exportcontrols and other trade barriers;

 

•      difficulties incollecting accounts receivable in foreign countries;

 

•      the burdens of complyingwith a wide variety of foreign laws;

 

•      politicaldisruptions or coups and terrorist attacks;

 

•      reducedprotection for intellectual property rights in some countries, particularlyAsia; and

 

•      the needto develop internationalized versions of our products and foreign languagemarketing and sales materials.

 

**We May Become Subject To BurdensomeGovernment Regulations And Legal Uncertainties Affecting The Internet, WhichCould Increase Our Expenses And/Or Limit The Scope Of Our Operations.**

 

Legal uncertainties and new regulationsrelating to the use of the Internet could increase our cost of doing business,prevent us from delivering our products and services over the Internet or slowthe growth of our business. To date, governmental regulations have notmaterially restricted use of the Internet in our markets. However, the legaland regulatory environment relating to the Internet is uncertain and maychange. In addition to new laws and regulations being adopted, existing lawsmay be applied to the Internet. New and existing laws may cover several issues,which include:

 

•      userprivacy;

 

•      civilrights and employment claims;

 

•      consumerprotection;

 

•      libel anddefamation;

 

•      copyright,trademark and patent infringement;

 

•      pricingcontrols;

 

•      characteristicsand quality of products and services;

 

•      sales andother taxes; and

 

•      other claimsbased on the nature and content of Internet materials.

 

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In addition, any imposition of state salesand/or use taxes on the products and services sold over the Internet maydecrease demand for some of our products and services. The United StatesCongress has passed legislation which limits the ability of states to imposeany new taxes on Internet-based transactions. If Congress does not renew thislegislation, any subsequent imposition of state taxes on Internet-basedtransactions could limit the demand for our products and services and/orincrease our expenses.

 

**Defects In Our Products Could Result In LossOf Or Delay In Revenue, Failure To Achieve Market Acceptance And/Or IncreasedCosts.**

 

Products as complex as those we offer or aredeveloping frequently contain undetected defects or errors. Despite internaltesting and testing by our customers or potential customers, defects or errorsmay occur in our existing or future products and services. From time to time inthe past, versions of our software that have been delivered to customers havecontained errors. In the future, if we are not able to detect and correct errorsprior to release, we may experience a loss of or delay in revenue, failure toachieve market acceptance and/or increased costs to correct errors, any ofwhich could significantly harm our business.

 

Defects or errors could also result in tortor warranty claims. Warranty disclaimers and liability limitation clauses inour customer agreements may not be enforceable. Furthermore, our errors andomissions insurance may not adequately cover us for claims. If a court were torefuse to enforce the liability-limiting provisions of our contracts for anyreason, or if liabilities arose that were not contractually limited oradequately covered by insurance, our business could be harmed.

 

**We May Experience Reduced Revenue And Harm ToOur Reputation If Any System Failures Result In Unexpected NetworkInterruptions.**

 

Any system failure that we may experience,including network, software or hardware failures, that causes an interruptionin the delivery of our products and services or a decrease in responsiveness ofour services could result in reduced use of our services and damage to ourreputation. Our servers and software must be able to accommodate a high volumeof traffic by organizations and individual users. There can be no assurance,however, that our systems will be able to accommodate our growth. We rely onthird-party Internet service providers to provide our clients with access toour Internet-based services. We have experienced on several occasions serviceinterruptions as a result of systems failures by these Internet serviceproviders, which have lasted between four to eight hours. We believe that theseinterruptions will occur from time to time in the future. In addition, fromtime to time the speed of our system has been reduced as a result of increased trafficthrough our Internet service provider. We may not be able to expand and adaptour network infrastructure at a pace that will be commensurate with theadditional traffic increases that we anticipate will occur.

 

**If We Fail To Protect Our Patents, Trademarks,Copyrights Or Other Intellectual Property Rights, Other Parties CouldAppropriate Our Proprietary Properties, Including Our Technology.**

 

The technology and software we have developedwhich underlies our products and services is very important to us. Ourproprietary products are not protected by patents. However, to protect ourintellectual property rights, we license our software products and require ourcustomers to enter into license agreements that impose restrictions on theirability to utilize the software or transfer it to other users. Additionally, weseek to avoid disclosure of our trade secrets through a number of means,including, but not limited to, requiring those persons with access to ourproprietary information to execute confidentiality agreements with us andrestricting access to our source code. In addition, we protect our software,documentation, templates and other written materials under trademark, tradesecret and copyright laws. Even with all of these safequards, there can be noassurance that such precautions will provide meaningful protection fromcompetition or that competitors will not independently be able to developsimilar technology. The copyright, trademark and trade secret laws, which are asignificant source of protection for our intellectual property, offer onlylimited protection. In addition, legal standards relating to the validity,enforceability and scope of protection of intellectual property rights insoftware are uncertain and still evolving, and the future viability or value ofany of our intellectual property rights is uncertain. Effective trademark,copyright and trade secret protection may not be available in every country inwhich our products are distributed or made available.

 

If, in the future, litigation is necessary toenforce our intellectual property rights, to protect our trade secrets, or todetermine the validity and scope of the proprietary rights of others, suchlitigation could result in substantial costs and diversion of resources andcould have a material adverse effect on our business, operating results and/orfinancial condition. As a result, ultimately, we may be unable, for financialor other reasons, to enforce our rights under the various intellectual propertylaws described above.

 

In addition, the laws and/or administrativeproceedings of certain foreign countries in which our products are or may belicensed (e.g., Asia) may not protect our intellectual property rights to thesame extent as laws of the United States. Relatedly, patent protection 

 

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within the World Trade Organization appears to permit substantialdiscretion to member countries. A notable example is China’s 2004 voidance ofPfizer’s Viagra patent which was awarded by that country in September, 2001.

 

**Third Parties Might Bring Infringement ClaimsAgainst Us Or Our Customers That Could Harm Our Business.**

 

In recent years, there has been significantlitigation in the United States involving patents, trademarks, copyrights andother intellectual property rights, particularly in the software industry. Wecould become subject to intellectual property infringement claims as the numberof our competitors grows and our products and services increasingly overlapwith competitive offerings. In addition, as part of our product licenses, weagree to indemnify our customers against claims that our products infringe uponthe intellectual property rights of others. These claims, even if notmeritorious, could be expensive and divert management’s attention fromoperating our business. We could incur substantial costs in defending ourselvesand our customers against infringement claims. If we become liable to thirdparties for infringement of their intellectual property rights, we could be requiredto pay a substantial damage award and to develop non-infringing technology,obtain one or more licenses for us and our customers from third parties orcease selling the products that contain the infringing intellectual property.We may be unable to develop non-infringing technology or obtain a license at areasonable cost, or at all.

 

**We May Not Be Able To Access Third PartyTechnology, Which We Depend Upon To Conduct Our Business And As A Result WeCould Experience Delays In The Development And Introduction Of New Products andServices Or Enhancements Of Existing Products and Services.**

 

If we lose the ability to access third partytechnology which we use, are unable to gain access to additional products orare unable to integrate new technology with our existing systems, we couldexperience delays in our development and introduction of new products andservices and related improvements or enhancements until equivalent orreplacement technology can be accessed, if available, or developed internally, iffeasible. If we experience these delays, our revenues could be substantiallyreduced. We license technology that is incorporated into our products andservices from third parties. In light of the rapidly evolving nature oftechnology, we may increasingly need to rely on technology licensed to us byother vendors, including providers of development tools that will enable us toquickly adapt our technology to new products and services. Technology from ourcurrent or other vendors may not continue to be available to us on commerciallyreasonable terms, or at all.

 

**Proha Effectively Controls the Company. ThisWill Severely Limit Your Ability To Influence Corporate Matters.**

 

As of December 31, 2005, Proha Plc, a Finnishcompany, beneficially owns approximately 53% of our outstanding common stockafter giving effect to the conversion of the Series A Preferred Stock. Asa result, Proha controls the outcome of any corporate transaction or othermatter submitted to Company stockholders for approval, including share exchanges,consolidations and the sale of all or substantially all of the Company’sassets, and also could prevent or cause a change in control. The interests ofProha may sometimes differ from the interests of the Company’s otherstockholders. In addition, third parties may be discouraged from making atender offer or bid to acquire the Company because of this concentration ofownership. Owners of the Series A Preferred Stock hold voting rights underthe Preferred Series A Financing transaction as more fully describedelsewhere herein, to the extent each holder has the right to convert theSeries A Preferred Stock into common stock. Still, Proha would maintaincontrol as a majority shareholder, even after factoring in such conversionrights, assuming Proha does not sell any of its shares of the Company’s commonstock.

 

**The Market Price For Our Common Stock IsVolatile And Could Result In A Decline In The Value Of Your Investment.**

 

The market price of our common stock, like that of many othertechnology companies, is extremely volatile. The market price of our commonstock has ranged from 20 cents per share to $12.25 per share sincethe second quarter of 2001, and typically has a low trading volume. For thethree months ended December 31, 2005, the daily trading volume of the Company’scommon stock ranged from nil to approximately 217,000 shares and averagedapproximately 11,000 shares. We cannot predict the extent to which investorinterest in our stock will create or sustain an active trading market. If sucha market were to develop, the market price of our common stock may continue tobe highly volatile. The sale of a large block of shares could depress the priceof our common stock to a greater degree than a company that typically has ahigher volume of trading in its securities. The value of your investment in ourcommon stock could decline due to the impact of any of the following factorsupon the market price of our common stock:

 

•      variationin our quarterly operating results, including our inability to increaserevenues;

 

•      announcementsof new product or service offerings by our competitors;

 

•      announcementof new customer relationships by our competitors;

 

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•      changesin market valuations of comparable companies;

 

•      additionsto, or departures of, our executive officers; and

 

•      conditionsand trends in the Internet and electronic commerce industries.

 

Further, the stock exchanges and markets haveexperienced substantial price and volume fluctuations. These fluctuations haveparticularly affected the market prices of equity securities of many technologycompanies and have often been unrelated or disproportionate to the operatingperformance of these companies.

 

**We Do Not Intend To Pay Dividends**

 

During the nine months endedDecember 31, 2000, Legacy Artemis paid a cash dividend of $140,000.However, we do not intend to declare dividends on our common stock in theforeseeable future. In addition, as described elsewhere herein, we arecurrently prohibited from paying any cash dividends under certaincircumstances.

 

**We Are Uncertain Of Our Ability To ObtainAdditional Financing For Our Future Capital Needs.**

 

We believe that cash from operations andexisting cash will be sufficient to meet our working capital and expenserequirements for at least the next twelve months. However, we may need to raiseadditional funds in order to fund our business, expand our sales activities,develop new or enhance existing products and/or respond to competitivepressures. As of December 31, 2005, we had cash and cash equivalents ofapproximately $4.1 million. Additional financing may not be available onterms favorable to us, or at all.

 

**You Will Experience Dilution If We RaiseFunds Through The Issuance Of Additional Equity And/Or Convertible DebtSecurities.**

 

If we raise additional funds through theissuance of equity securities or convertible debt securities, you willexperience dilution of your percentage ownership of our Company. This dilutionmay be substantial. In addition, these securities may have powers, preferencesand rights that are senior to the holders of our common stock and may furtherlimit our ability to pay dividends on our common stock.

 

**The Completion of the Preferred Series AFinancing Subjects You To Potential Dilution and May Limit Our Ability in theFuture Either To Raise Additional Funding Or To Pay Dividends on Our CommonStock.**

 

The Series A Holders have certainpowers, preferences and rights that are senior to the holders of our commonstock. Such rights include, but are not limited to, the potential payment of adividend. So long as at least 30% of the Series A Preferred Stock isoutstanding, the Company shall not, directly or indirectly, redeem, or declareor pay any cash dividend or distribution on, the common stock without the priorexpress written consent of at least a majority of the Series A Holders.One other example of such rights relates to possibly raising additional capitalvia the issuance of additional equity or convertible debt securities in thefuture. So long as at least 30% of the Series A Preferred Stock isoutstanding, the Company cannot issue any additional preferred shares otherthan to the Series A Holders and the Company cannot issue any othersecurities or incur any indebtedness exceeding that which existed onJune 16, 2004, except in accordance with the Equity Exclusion and the DebtExclusion (as each term is defined in the Certificate of Designations, whichcan be reviewed in our Form 8-K filed with the SEC on June 18, 2004,relating to the Preferred Series A Financing transaction), without theprior express written consent of not less than a majority of the Series AHolders.

 

**We have Potential Liability for PossibleViolations of Section 5 of the Securities Act Arising from the Integrationof Certain 2004 Financings with this Offering.**

 

On August 14, 2003, the Company enteredinto an agreement with Laurus and received a $5.0 million revolving creditfacility (the “Laurus Facility”) in the form of a three-year Convertible Notesecured by a security interest in all of the Company’s property and assetslocated in the United States (US) and the United Kingdom (UK), except forintellectual property rights. Borrowings under the Laurus Facility are based onthe balance of eligible trade accounts receivable reported by the Company’soperating entities in the US and the UK. The Laurus Facility automaticallyrenews every three years unless cancelled by the Company or Laurus. Inconjunction with the original transaction, Laurus was paid a fee of $175,000and received a ten-year transferable warrant (the “Laurus Warrant”) to purchase

 

16

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125,000 shares of the Company’s restricted common stock. The LaurusWarrant exercise price and the number of shares underlying the warrant aresubject to anti-dilution adjustments for stock splits, combinations anddividends.

 

On July 30, 2004, the Company and Laurusagreed to restructure and amend the revolving credit facility and replaced theSecured Convertible Note of up to $5.0 million with a Secured ConvertibleMinimum Borrowing Note (the “Minimum Borrowing Note”) in the amount of$1.5 million and a Secured Revolving Note of up to $3.5 million (the“Laurus Restructuring”). 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. Thereafter,the conversion price adjusts to 105% of the average closing market price of theCompany’s common stock for the five trading days immediately preceding eachadditional borrowing (in serialized $1.5 million increments) under theMinimum Borrowing Note. Loans exceeding $1.5 million may be available tothe Company, based on a formula set forth in the original Minimum BorrowingNote. All of the aforementioned conversion prices are subject to downwardadjustment under certain conditions. Under the terms of the related agreement, absentan event of default as defined, conversion of the Minimum Borrowing Note intothe Company’s common stock may not result in beneficial ownership by Laurus(including shares issuable under the Laurus Warrant that are exercisable withinsixty days of any determination date) of more than 2.5% of the Company’soutstanding common stock. The Minimum Borrowing Note has a 30% prepaymentpenalty. Any loans under the Secured Revolving Note are convertible only in anevent of default. The Company currently has no loans outstanding under theSecured Revolving Note.

 

Absent an event of default as defined, thepost-February 15, 2004 interest rate on both of the July 2004 amendedLaurus notes described above is (except as explained in this paragraph) thegreater of the Wall-Street-Journal prime rate plus 0.75% (the “adjustableinterest rate”) or 5%. The adjustable interest rate may be periodically reducedbased on certain defined differences between the average market price of theCompany’s common stock and the conversion prices set forth above, provided thatsuch market price is at least 130% of the applicable conversion price. Themaximum contractual adjustment would reduce the discounted interest rate to theprime rate minus 1.25%. Under the original agreements, the Company wasobligated to file a registration statement with the SEC bySeptember 15, 2003 to register the Company’s common stock underlying theLaurus Facility. The Company was delinquent in filing such registrationstatement and was subject to potential liquidated damages as a result of thisdelinquency. As part of the Laurus Restructuring, the Company received a waiverfrom Laurus with respect to their rights and remedies for the failure to filethe registration statement timely. In consideration for such waiver, theCompany paid a penalty of $75,000. The Company further agreed with Laurus toreset the filing deadline for such registration statement and the date by whichto have it declared effective by the SEC. Such registration statement wasdeclared effective by the SEC on January 28, 2005.

 

It is possible that the amended Laurus transactionmay be integrated with the public offering of our Series A Preferred Stock andthat such amended transaction, which occurred prior to the effective date ofour registration statement, may be in violation of Section 5 of theSecurities Act of 1933, as amended. We and our counsel believe that each ofthese transactions were exempt from registration, and that the amended Laurustransaction should not be integrated with the public offering of our Series APreferred Stock. If it were ultimately determined that the amended transactionis required to be integrated with the public offering of our Series A PreferredStock, Laurus may have the right to rescind such transaction and we may beliable for penalties and/or damages.

 

**Our Common Stock has a Small Public Float andFuture Sales of Our Common Stock May Negatively Affect the Market Price of OurCommon Stock.**

 

As of February 28, 2006, there wereapproximately 10.9 million shares of our common stock outstanding. As agroup, our officers, directors, all preferred shareholders with common stockconversion rights and all other persons who beneficially own more than 10% ofour total outstanding shares, would beneficially own on an as-converted basisan aggregate of approximately 13.5 million shares of our common stock. Onan as-converted basis, our common stock would have a public float ofapproximately 4.2 million shares, which are shares in the hands of publicinvestors, and which, as the term “public float” is defined by Nasdaq, excludesshares that are held directly or indirectly by our directors and executiveofficers or any other person who is the beneficial owner of more than 10% ofour total shares outstanding. These shares are held by a relatively smallnumber of shareholders of record (approximately 700). We cannot predict theeffect, if any, that future sales of shares of our common stock into themarket, including those acquirable by the possible conversion of preferred sharesinto common shares, will have on the market price of our common stock. However,sales of substantial amounts of common stock, including shares issued upon theexercise of warrants and stock options and/or conversion of preferred stockinto common stock, or the perception that such transactions could occur, maymaterially and adversely affect prevailing market prices for our common stock.

 

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**If the Ownership of Our Common StockContinues to be Highly Concentrated, it May Prevent You and Other ShareholdersFrom Influencing Significant Corporate Decisions and May Result in Conflicts ofInterest That Could Cause Our Stock Price to Decline.**

 

As of February 28, 2006, our executiveofficers, directors, major shareholders, and all Holders of Series APreferred Stock (as described above) collectively beneficially own or controlon an as-converted basis approximately 70% of our outstanding shares of commonstock (after giving effect to the exercise of all outstanding vested optionsand warrants exercisable within sixty days from February 28, 2006). Ifthese persons or entities were to act collectively in whole or in part or ifProha, as the majority shareholder decides to act on its own (as describedabove), they could control the outcome of corporate actions requiringshareholder approval, including the election of directors, any merger,consolidation or sale of all or substantially all of our assets, or any othersignificant corporate transactions. Some of these persons or entities may haveinterests different than yours. For example, these persons or entities couldact to delay or prevent a change of control of us, even if such a change ofcontrol would benefit our other shareholders, or these persons or entitiescould pursue strategies that are different from the wishes of other investors.The significant concentration of stock ownership may adversely affect thetrading price of our common stock due to investors’ perception that conflictsof interest may exist or arise.

 

Currently, the persons or entities identifiedabove are not bound to act in concert with the following exception. OnJune 16, 2004, the Holders of the Series A Preferred Stock entered into aletter agreement with Proha Plc, our current majority shareholder, agreeingthat for a period of two years commencing June 16, 2004, a nominatingcommittee shall be the exclusive process by which independent directors are tobe nominated for election to our board of directors. Each party agreed, either(i) to vote directly or indirectly in favor of a candidate so nominated byour board of directors through its nominating committee, or (ii) not tooppose either directly or indirectly any such candidate.

 

**Provisions of Delaware Law, Our AmendedCertificate of Incorporation and Bylaws, Certain Voting Agreements and theConcentration of Stock Ownership Could Delay or Prevent a Change of Control**

 

Provisions of Delaware law, our amended certificate of incorporationand bylaws, certain voting agreements of our stockholders and the concentrationof ownership of our stock could have the effect of delaying or preventing achange in control, even if a change in control would be beneficial to ourstockholders. These provisions include:

 

•      allowingour board of directors, subject to certain restrictions arising from thePreferred Series A Financing transaction described above in thisprospectus, to authorize issuance of one or more classes or series of preferredstock without stockholder approval.

 

•      prohibitingcumulative voting in the election of directors;

 

•      withrespect to certain provisions of our amended certificate of incorporation,requiring a vote of at least two-thirds of the outstanding shares to approveamendments; and

 

•      prohibitingstockholder actions by written consent.

 

**Because the Market for and Liquidity of OurShares is Volatile and Limited, and Because We Are Subject to the “Penny Stock”Rules, the Level of Trading Activity in Our Stock May be Reduced.**

 

Effective June 29, 2001, our commonstock was delisted from the Nasdaq National Market and is now quoted on theOver-the-Counter Bulletin Board (“OTC BB”) (symbol AMSI). The OTC BB isgenerally considered to be a less efficient market than the establishedexchanges or the Nasdaq markets. While we anticipate seeking to be relisted onthe Nasdaq National Market at some time in the future, it is impossible at thistime to predict when, if ever, such application will be made or whether suchapplication will be successful. While our common stock continues to be quotedon the OTC BB, an investor may find it more difficult to dispose of, or toobtain accurate quotations as to the price of our common stock, compared to ifour securities were traded on Nasdaq or a national exchange. In addition, ourcommon stock is subject to certain rules and regulations relating to “pennystocks” (generally defined as any equity security that is not quoted on theNasdaq Stock Market and that has a price less than $5.00 per share, subject tocertain exemptions). Broker-dealers who sell penny stocks are subject tocertain “sales practice requirements” for sales in certain nonexempttransactions (i.e., sales to persons other than established customers andinstitutional “accredited investors”), including requiring delivery of a riskdisclosure document relating to the penny stock market and monthly statementsdisclosing recent bid and offer quotations for the penny stock held in theaccount, and certain other restrictions. If the broker-dealer is the solemarket maker, the broker-dealer must disclose this, as well as thebroker-dealer’s presumed control over the market. For as long as our securitiesare subject to the rules on penny stocks, the liquidity of our common stockcould be significantly limited. This lack of liquidity may also make it moredifficult for us to raise capital in the future.

 

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**Efforts to Reduce Our Expenses May NotAchieve Desired Results, and Could Diminish Our Ability to Retain and/orRecruit Employees.**

 

During the last few years, we have made greatefforts to reduce our operating and other expenses. We cannot assure you thatthese expense reductions will have the desired result of enabling us to achieveprofitability or that they will not have adverse affects on the Company. Ifplanned revenue stability does not materialize, our business, financialcondition and results of operation may be materially harmed. To manageoperations effectively, we must continue to improve our operational, financialand other management processes and systems. Our success also depends on ourability to maintain high levels of employee utilization, project andinstructional quality and competitive pricing for our software and services. Wecannot assure you that we will be successful in maintaining the required levelsof revenue with the current number of employees.

 

As a result of our focus on reducingoperating expenses over the past several years, we are dependent upon a smallernumber of employees for our operations. If we are unable to recruit additionaltechnical employees, we may be unable to adequately service current projects orbid for new projects or sales. If we are unable to recruit additional technicalpersonnel when needed, we may not be able to expand or grow our business. Wecompete for the services of information technology professional with otherconsulting firms, software vendors and consumers of information technologyservices, many of which have greater financial resources than we have. We maynot be successful in retaining and, as needed, hiring a sufficient number ofinformation technology professionals to staff our projects. To attractqualified technical employees, we may need to substantially increase thecompensation, bonuses, stock options or other benefits we offer to employees.These additional costs may negatively affect our business and operatingresults.

 

**Attacks by International Terrorists CouldCause Massive Disruptions to the World Economy or Regional Economies, TherebyAdversely Affecting Demand for Our Products and Adversely Impacting Our RevenueStreams.**

 

The attack on the World Trade Center in NewYork City, and in Washington, D.C. on September 11, 2001 caused animmediate negative affect on the global economy. While we cannot predictwhether such massive acts of terror will occur again in the future, you shouldbe cautioned that any similar or smaller acts of terrorism could have amaterial adverse affect on either the global economy or on at least regionaleconomies throughout the world. This could adversely affect demand for ourproducts and services and could severely diminish our revenue streams, whichcould cause the price of our common stock to significantly decline.

 

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

###### ** **

We occupy facilities in theUnited States and internationally, pursuant to leases that expire from amonth-to-month basis to December 31, 2012. In addition, we maintain facilitiesin various other locations across the United States, Europe and Asia (includingJapan). Our facilities comprise a total of 20,000 square feet in the UnitedStates and 54,000 square feet in Europe and Asia. We believe our currentfacilities are sufficient for our needs.

 

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

##### ** **

We are a party to a number of legal claims arisingin the ordinary course of our business. We believe the ultimate resolution ofthese claims will not have a material adverse effect on our financial position,results of operations or cash flows.

 

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

 

None

 

**Part II**

 

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

 

Our common stock is quotedon the Over-the-Counter Bulletin Board (“OTCBB”) administered by Nasdaq. FromApril 4, 2000 until June 28, 2001, our common stock was listed on theNasdaq National Market under the symbol “OPUS”.  Since June 29, 2001,our common stock has been quoted on the OTCBB, whereby effectiveNovember 25, 2001, the trading symbol on the OTCBB was changed to “AISC”. Subsequent to the Company’s one for twenty-five reverse stock split onFebruary 7, 2003, the trading symbol was changed to “AMSI”. Allinformation regarding common stock, stock options, warrants and related pershare amounts has been restated within this annual report to reflect theFebruary 7, 2003 reverse stock split.

 

Rules 15g-1 through15g-9 promulgated under the Exchange Act (commonly referred to as the “pennystock rules”) impose sales practice and disclosure requirements on certainbroker-dealers who engage in certain transactions involving a “penny stock”. Subjectto certain exceptions, a penny stock generally includes any non-Nasdaq equitysecurity that has a market price of less than $5.00 per share. The closingmarket price of our common stock on the OTCBB during the fourteen months endedFebruary 28, 2006 has ranged between a high of $3.87 and a low of $0.90 pershare, and our common stock is thus deemed to be penny stock for purposes ofthe Exchange Act. The additional sales practice and disclosure requirementsimposed upon broker-dealers may discourage them from effecting transactions inour common stock, which could severely impair the liquidity of our stockin the secondary market.

 

At March 17, 2006, thenumber of stockholders of record was approximately 700 (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, 2005** | ** ** | ** **                     | ** ** | ** ** | ** ** |
| First Quarter                    |       | $                              | 3.10       |   | $ | 2.55 |   |
| Second Quarter                   |       | 3.25                           |       | 2.40 |   |
| Third Quarter                    |       | 3.00                           |       | 1.80 |   |
| Fourth Quarter                   |       | 2.10                           |       | 0.83 |   |
| **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 |   |
|                                  |            |                                |            |  |  |  |  |

 

On March 17, 2006, thelast sales price of our common stock was $1.54 per share.

 

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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 equity instruments under all of our existing equity compensationplans as of December 31, 2005.  See Notes1 and 15 to the Company’s consolidated financial statements included elsewhereherein for additional information.

 
| **Plan category**                                 | ** ** | **Number of   shares of  common stock to  be issued upon  exercise of  outstanding  options and  warrants** | ** ** | **Weighted  average exercise  price of  outstanding  options and  warrants** | ** ** | **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 stockholders     |       | 1,691,809                                                                                                                                      |       | $                                                                                      | 12.28      |                                                                                                                                                                                                      | 2,153,898  |   |
| Equity compensation plans not approved by stockholders |       | 582,935                                                                                                                                        |       | $                                                                                      | 22.96      |                                                                                                                                                                                                      | —     |   |
| Total                                                  |       | 2,274,744                                                                                                                                      |       | $                                                                                      | 15.01      |                                                                                                                                                                                                      | 2,153,898  |   |

 

**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 our Boardof Directors and will be dependent upon our financial condition, operatingresults, capital requirements, general business conditions, restrictionsimposed by financing arrangements, legal and regulatory restrictions on thepayment of dividends and other factors that our Board of Directors deemsrelevant.

 

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.

 

OnJune 16, 2004, the Company completed a private placement of $9.0 millionof convertible preferred stock (the “Series A Preferred Stock”). So longas at least 30% of the Series A Preferred Stock is outstanding, the Companycannot, directly or indirectly, redeem, declare or pay any cash dividend orother distribution on the common stock without the prior express writtenconsent of the holders of at least a majority of the Series A Preferred Stock.

 

**Stock Options**

 

We have granted options topurchase the Company’s common stock under various plans to employees anddirectors.  The Compensation Committee of the Board of Directors, whichdetermines the terms of the options granted, including the exercise price, thenumber of shares subject to option, and the vesting period, administers allstock option plans.  Options generally vest over terms of one to fiveyears 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 thesestock options with an exercise price of $250 are outstanding and exercisable asof December 31, 2005.  The options are exercisable untilFebruary 2010.

 

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•                  The Company also assumed non-qualified stockoptions granted to other employees of Opus360 who became Artemis employeesafter the Share Exchange Transactions.  At December 31, 2005, none ofthe options granted remain outstanding.

 

**Recent Sales of Unregistered Securities**

 

Set forthbelow is information regarding securities sold by the Company fromJanuary 2003 to date which were not registered under the Securities Act of1933, as amended (“the Securities Act”). We believe that each transaction wasexempt from the registration requirements of the Securities Act pursuant toSection 4(2) thereof and/or Regulation D promulgated thereunder astransactions not involving a public offering, based on the private nature ofthe transactions and the financial sophistication of the purchasers, all ofwhom had access to complete information concerning the Company and acquired thesecurities for investment and not with a view to the distribution thereof.

 
| **Security Type**                           | ** ** | **Name of Security Holder** | ** ** | **Date Issued** | ** ** | **No of Shares  underlying  options and  warrants** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|----------------------|------------|--------------------------------------------------------------------|------------|
| 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                                                          | (b)        |
| Preferred stock & warrants                   |       | Samuelson Investment, Inc.                 |       | 6/16/2004            |       | 1,376,904                                                          | (b)        |
| Preferred stock & warrants                   |       | Philip Hempleman                           |       | 6/16/2004            |       | 550,761                                                            | (b)        |
| Preferred stock & warrants                   |       | Porridge, LLC                              |       | 6/16/2004            |       | 550,761                                                            | (b)        |
| Preferred stock & warrants                   |       | Potomac Capital Partners, LP               |       | 6/16/2004            |       | 421,332                                                            | (b)        |
| Preferred stock & warrants                   |       | Potomac Capital International Ltd          |       | 6/16/2004            |       | 140,444                                                            | (b)        |
| Preferred stock & warrants                   |       | Pleaides Investment Partners R, LP         |       | 6/16/2004            |       | 264,366                                                            | (b)        |

 

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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 commonshares noted above represents the maximum which may be issued. As described inthe aforementioned Note to the Company’s consolidated financial statements, theLaurus Master Fund, Ltd. beneficial ownership of the Company’s common stock iscontractually limited to 2.5% of the outstanding shares. The Company filed aregistration statement on Form S-1 with the SEC to register the commonstock underlying the Minimum Borrowing Note and the Laurus Warrant. The SECdeclared such registration statement effective on February 3, 2005.

 

(b)         The Company filed a registration statement onForm S-1 with the SEC to register the common stock underlying the warrantsand the convertible preferred stock.  The SEC declared such registrationstatement effective on October 29, 2004. The Company filed apost-effective amendment to this registration statement on August 9, 2005.

 

The aggregate selling price, the conversion terms of the preferredstock, the terms of exercise of the related warrants, and the use of netproceeds received in the above June 16, 2004 transactions are disclosed inNote 14 to the Company’s consolidated financial statements included elsewhereherein.

 

**Item 6.  Selected Financial Data**

 

The following selected consolidated financial datashould be read in conjunction with “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and the consolidated financialstatements and notes thereto included elsewhere in this report.  Theselected consolidated financial data are derived from our audited consolidatedfinancial statements, which have been prepared assuming that the Company willcontinue as a going concern.  As disclosed in Note 1 to the financialstatements, the Company has incurred substantial recurring losses fromoperations and may incur losses in the future.  These and other factors asdescribed in Note 1 raise substantial doubt about the Company’s ability tocontinue as a going concern without financial restructuring, absent animprovement in the Company’s operating performance.

 

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| ** **                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                             | ** ** | ** **                                 | ** ** | **(in thousands, except per share data)** | ** ** | ** ** | ** ** |
| **Summary of operations data:**                        |       |                                       |       |   |   |   |   |   |   |   |   |
| Revenues                                               |       | $                                          | 47,365     |   | $ | 52,445 |   | $ | 57,291 |   | $ | 68,664 |   | $ | 67,646 |   |
| Operating (loss)                                       |       | (4,648                                     | )          | (9,553 | ) | (8,092 | ) | (3,746 | ) | (66,483 | ) |
| Net (loss)                                             |       | (4,045                                     | )          | (9,685 | ) | (7,891 | ) | (3,948 | ) | (59,764 | ) |
| Basic and diluted loss per common share                |       | (0.38                                      | )          | (0.97 | ) | (0.79 | ) | (0.40 | ) | (6.78 | ) |
| Shares used in computing loss per common  share        |       | 10,717                                     |       | 9,988 |   | 9,965 |   | 9,965 |   | 8,816 |   |
|                                                   |       |                                       |       |   |   |   |   |   |   |   |   |
| **Balance sheet data:**                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                              |       | 4,057                                      |       | 3,720 |   | 2,593 |   | 7,766 |   | 5,081 |   |
| Working capital deficiency                             |       | (5,577                                     | )          | (3,420 | ) | (9,016 | ) | (4,964 | ) | (5,432 | ) |
| Total assets                                           |       | 17,077                                     |       | 22,320 |   | 28,358 |   | 39,005 |   | 38,570 |   |
| Long-term debt, including amounts due  within one year |       | 2,109                                      |       | 1,939 |   | 676 |   | 1,185 |   | 2,618 |   |
| Total stockholders' equity (deficit)                   |       | (10,712                                    | )          | (5,805 | ) | (3,173 | ) | 4,721 |   | 9,582 |   |
|                                                        |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**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 materially fromthose described.  Although we believe our expectations that are expressedin these forward-looking statements are reasonable, we cannot promise that ourexpectations will turn out to be correct.  Our actual results could bematerially different from and worse than our expectations. With respect toforward-looking statements, the Company invokes the protection afforded by thePrivate 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 continuous alignmentof investments with strategic business goals, consequently the ability toeffectively select, plan, budget and control investment projects becomes thekey for optimizing corporate resources. We believe this creates an even greaterrequirement for integrated investment planning and control solutions to supportthe needs of value creation, visibility, governance and compliance.

 

We have a 30-year history of successfullydelivering enterprise and project management solutions to Global 2000 customerswith the most extensive portfolio, project and resource management needs.Companies trust Artemis’ software to manage their business-critical processes.Customers use our software in such key areas as (i) developing andlaunching new products, (ii) IT management andgovernance, (iii) optimizing strategic assets in utilities, (iv)managing key aerospace and defense programs, and (v) and helping governmentalagencies promote business efficiency through better alignment and allocation ofresources.

 

***Critical AccountingPolicies***

 

The discussion and analysis of our financialcondition and results of operations is 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 reportedamount of assets, liabilities, revenues and expenses, and related disclosure ofcontingent 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;

•      Valuation of long-lived and intangibleassets;

•      Amortizationof intangible assets;

•      Valuationof deferred tax assets; and

•      Estimation of the allowance for doubtfulaccounts 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 estimated fair values of each of the elements.The estimated fair value of an element is based on vendor-specific objectiveevidence (“VSOE”). Software license revenue allocated to a software product isrecognized upon delivery of the product, or deferred and recognized in futureperiods to the extent that an arrangement includes one or more elements thatare to be delivered at a future date and for which VSOE has not beenestablished. Maintenance and support revenue is recognized ratably over themaintenance term. First-year maintenance typically is sold with the relatedsoftware license and renewed on an annual basis thereafter. Estimated fairvalues of ongoing maintenance and support obligations are based on separatesales of renewals to other customers or upon renewal rates quoted in thecontracts. For such arrangements with multiple elements, we allocate revenue toeach component of the arrangement based on the estimated fair value of theundelivered elements. The fair value of services, such as consulting ortraining, is based upon separate sales of these services. The Company at timesmay enter into multiple-customer contracts in which the Company allocatesrevenue based on the number of specified users at each customer, and recognizesrevenue upon customer acceptance and satisfying the other applicable conditionsof 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 areperformed. Consulting services primarily consist of implementation servicesrelated to the installation of the Company’s products, which do not requiresignificant customization to or modification of the underlying software code.

 

23

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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*

 

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 flowsresulting from the use of the assets. If we determine that the carrying valueof any such assets may not be recoverable, we measure impairment by using theprojected discounted cash-flow method in accordance with SFAS No. 144.

 

*Amortization ofintangible assets*

 

During 2005 all intangible assets were fullyamortized. The Company recorded amortization expense of approximately $1.5million during the year ended December 31, 2005.

 

*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 receivable each period. If we made differentjudgments or utilized different estimates for any period, material differencesin the amount and/or timing of such allowance could result.

 

**Significant Recent AccountingPronouncements**

 

In December 2003, the FinancialAccounting Standards Board (“FASB”) issued a revision of Statement of FinancialAccounting Standards (“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 existing disclosurerequirements of SFAS No. 132, and requires certain additional disclosuresabout defined benefit post-retirement plans. The defined benefit pension planof the Company’s United Kingdom subsidiary is the Company’s only definedbenefit post-retirement plan. Except for the transition rules governinginterim-period disclosures, SFAS No. 132-R was effective for foreignpension plans for fiscal years ended after June 15, 2004; after theeffective date, restatement for some of the new disclosures is required forearlier annual periods.

 

In December 2004, the FASB issued SFASNo. 123-R which replaces SFAS No. 123 and supersedes AccountingPrinciples Board (“APB”) Opinion No. 25. As originally issued, SFASNo. 123 established as preferable a fair-value-based method of accountingfor share-based payment transactions with employees. However, thatpronouncement permitted entities to continue applying the intrinsic-value-basedmodel of APB Opinion 25, provided that the financial statements disclosedthe pro forma net income or loss based on the fair-value method. The Company isrequired to apply SFAS No. 123-R as of the first interim reporting periodthat begins after December 31, 2005 under a rule adopted by the SECon April 14, 2005 that amends the compliance dates of SFAS No. 123-R.Thus, the Company’s consolidated financial statements will reflect an expensefor (a) all share-based compensation arrangements granted afterDecember 31, 2005 and for any such arrangements that are modified,cancelled, or repurchased after that date, and (b) the portion of previousshare-based awards for which the requisite service has not been rendered as ofthat date, based on the grant-date estimated fair value of those awards.

 

In May 2005, the FASB issued SFASNo. 154, “Accounting Changes and Error Corrections,” which replaces APBOpinion No. 20 and FASB Statement No. 3. This pronouncement appliesto all voluntary changes in accounting principle, and revises the requirementsfor accounting for and reporting a change in accounting principle. SFASNo. 154 requires retrospective application to prior periods’ financialstatements of a voluntary change in accounting principle, unless it isimpracticable to do so. This pronouncement also requires that a change in themethod of depreciation, amortization, or depletion for long-lived,non-financial assets be accounted for as a change in accounting estimate thatis effected by a change in accounting principle. SFAS No. 154 retains manyprovisions of APB Opinion 20 without change, including those related 

 

24

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to reporting a change inaccounting estimate, a change in the reporting entity, and correction of anerror. The pronouncement also carries forward the provisions of SFAS No. 3which govern reporting accounting changes in interim financial statements. SFASNo. 154 is effective for accounting changes and corrections of errors madein fiscal years beginning after December 15, 2005. The Statement does notchange the transition provisions of any existing accounting pronouncements,including those that were in a transition phase as of the effective date ofSFAS No. 154.

 

InFebruary 2006, the FASB issued SFAS No. 155 entitled “Accounting for CertainHybrid Financial Instruments,” an amendment of SFAS No. 133 (“Accounting forDerivative Instruments and Hedging Activities”) and SFAS No. 140 (“Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities”). In this context, a hybrid financial instrument refers to certainderivatives embedded in other financial instruments. SFAS No. 155 permits fairvalue re-measurement of any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation under SFAS No. 133.SFAS No. 155 also establishes a requirement to evaluate interests insecuritized financial assets in order to identify interests that are eitherfreestanding derivatives or “hybrids” which contain an embedded derivative requiringbifurcation. In addition, SFAS No. 155 clarifies which interest/principalstrips are subject to SFAS No. 133, and provides that concentrations of creditrisk in the form of subordination are not embedded derivatives. SFAS No. 155amends SFAS No. 140 to eliminate the prohibition on a qualifyingspecial-purpose entity from holding a derivative financial instrument thatpertains to a beneficial interest other than another derivative. When SFAS No.155 is adopted, any difference between the total carrying amount of thecomponents of a bifurcated hybrid financial instrument and the fair value ofthe combined “hybrid” must be recognized as a cumulative-effect adjustment ofbeginning deficit/retained earnings.

 

SFASNo. 155 is effective for all financial instruments acquired or issued after thebeginning of an entity’s first fiscal year that begins after September 15, 2006.Earlier adoption is permitted only as of the beginning of a fiscal year,provided that the entity has not yet issued any annual or interim financialstatements for such year. Restatement of prior periods is prohibited.

 

Other recent accounting pronouncements issuedby the FASB (including its Emerging Issues Task Force), the American Instituteof Certified Public Accountants and the SEC, did not or are not believed bymanagement to have a material impact on the Company’s present or futureconsolidated financial statements.

 

25

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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,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | ** **                                 | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                                               | ** ** | **2005**                                   | ** ** | **Revenue** | ** ** | **2004** | ** ** | **Revenue** | ** ** | **2003** | ** ** | **Revenue** | ** ** |
| ** **                                               | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | ** **                                 | ** ** | ** ** | ** ** | **(in millions)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue:                                                 |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Software                                                 |       | $                                          | 11.5       |   | 24 |   | $ | 13.1 |   | 25 |   | $ | 13.3 |   | 23 |   |
| Support                                                  |       | 17.3                                       |       | 37 |   | 17.2 |   | 33 |   | 16.6 |   | 29 |   |
| Services                                                 |       | 18.6                                       |       | 39 |   | 22.2 |   | 42 |   | 27.4 |   | 48 |   |
|                                                     |       | 47.4                                       |       | 100 |   | 52.5 |   | 100 |   | 57.3 |   | 100 |   |
| Cost of revenue:                                         |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Software                                                 |       | 0.4                                        |       | 1 |   | 0.2 |   | — |   | 0.7 |   | 1 |   |
| Support                                                  |       | 5.0                                        |       | 10 |   | 5.7 |   | 11 |   | 5.1 |   | 9 |   |
| Services                                                 |       | 15.0                                       |       | 32 |   | 17.6 |   | 34 |   | 20.3 |   | 35 |   |
|                                                     |       | 20.4                                       |       | 43 |   | 23.5 |   | 45 |   | 26.1 |   | 45 |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Gross margin                                             |       | 27.0                                       |       | 57 |   | 29.0 |   | 55 |   | 31.2 |   | 55 |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Operating expenses                                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Selling and marketing                                    |       | 14.9                                       |       | 31 |   | 14.3 |   | 27 |   | 15.9 |   | 28 |   |
| Research and development                                 |       | 7.8                                        |       | 17 |   | 7.7 |   | 15 |   | 8.2 |   | 14 |   |
| General and administrative                               |       | 7.4                                        |       | 16 |   | 8.7 |   | 17 |   | 11.1 |   | 19 |   |
| Amortization expense                                     |       | 1.5                                        |       | 3 |   | 4.1 |   | 8 |   | 4.1 |   | 7 |   |
| Impairment charge                                        |       | —                                     |       | — |   | 0.9 |   | 2 |   | — |   | — |   |
| Restructuring charges                                    |       | —                                     |       | — |   | 2.7 |   | 5 |   | — |   | — |   |
|                                                     |       | 31.6                                       |       | 67 |   | 38.4 |   | 73 |   | 39.3 |   | 68 |   |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Operating loss                                           |       | (4.7                                       | )          | (10 | ) | (9.4 | ) | (18 | ) | (8.1 | ) | (13 | ) |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Non operating (income) expense Interest  expense, net    |       | 0.8                                        |       | 2 |   | 0.5 |   | 1 |   | 0.2 |   | — |   |
| Equity in net (income) loss of unconsolidated  affilates |       |                                       |       |   |   | (0.1 | ) | — |   | 0.3 |   | 1 |   |
| Gain on sale of subsidiaries and investee                |       |                                       |       |   |   | — |   | — |   | (0.4 | ) | (1 | ) |
| Other (income) expense, net                              |       | (1.3                                       | )          | (3 | ) | (0.1 | ) | — |   | 0.1 |   | — |   |
| Foreign exchange gain                                    |       | (0.8                                       | )          | (2 | ) | (0.4 | ) | (1 | ) | (0.7 | ) | (1 | ) |
| Non operating income, net                                |       | (1.3                                       | )          | (3 | ) | (0.1 | ) | — |   | (0.5 | ) | (1 | ) |
|                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Income tax expense                                       |       | 0.7                                        |       | 2 |   | 0.2 |   | — |   | 0.3 |   | 1 |   |
| Net loss                                                 |       | $                                          | (4.1       | ) | (9 | ) | $ | (9.7 | ) | (19 | ) | $ | (7.9 | ) | (13 | ) |

 

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**2005compared to 2004**

 

**Revenue**

 

*SoftwareRevenue*

 

Software revenue representsfees earned for granting customers licenses to use our software products. Software revenue decreased $1.6 million or 12% to $11.5 million during 2005from $13.1 million during 2004. Software revenue represents 24% and 25% oftotal revenue for the years ended December 31, 2005 and 2004,respectively. Software revenue from our flagship product, Artemis 7, which isthe main platform for our investment planning and control solutions, increasedto 61% of total software revenue in 2005, up from 40% in 2004. The increase insoftware revenue in the UK by $1.0 million or 199%, Japan, up $0.3 million or 22%,France, up $0.2 million or 9%, and Italy, up $0.1 million or 9%, were more thanoffset by a decrease in software revenue in the US, down $1.6 million or 46%,Germany, down $0.8 million or 70% and Finland, down $0.8 million or 35%.

 

*SupportRevenue*

 

Support revenue consists of fees for providingsoftware updates and technical support for our software products.  Supportrevenue remained flat at $17.3 million in 2005 compared to $17.2 million in 2004. Increasesin support revenue resulting from new software sales were offset by expectedattrition within the existing customer base on some of our more matureproducts. The Company continues to emphasize cultivating the existing customerbase and focusing on customer satisfaction to secure a high level of customerretention.

 

*ServicesRevenue*

 

Services revenue consists offees for consulting and training generated by our personnel and throughsubcontracted third-party arrangements.  Services revenue decreased $3.6million or 16% to $18.6 million during 2005 from $22.2 million during2004.  Decreases in services revenue in the US, down $1.2 million or 34%,Finland, down by $0.9 million or 31%, the UK, down by $0.8 million of 20%, wereonly partially offset by increases in Japan, up $0.7 million or 33%. The levelof services revenue in our various operations was impacted by the timing andsize of software sales and the lower level of consulting services related toour software sales of Artemis 7.

 

*DeferredRevenue*

 

Deferredrevenue was $4.9 million and $5.0 million for the years ended atDecember 31, 2005 and 2004, respectively. Deferred revenue typicallyrepresents deferred support revenue that is recognized ratably over the term ofthe support agreement. The December 31, 2005 balance also includes deferred softwarerevenue related to Artemis 7 software sold to a customer in the US thatis expected to be recognized as revenue in 2006. Excluding the aforementioned deferred software revenue, the decrease indeferred revenue in 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 $3.1 millionor 13% to $20.4 million during 2005 from $23.5 million during 2004.  Costof revenue as a percentage of total revenue decreased by 2 percentage points,from 45% during 2004 to 43% during 2005. The majority of the cost of revenue isdirectly related to our support and services revenue. The overall decrease incost of revenue as a percentage of total revenue is primarily a result of amore efficient delivery of support services. The increase in cost of revenuefor software sales reflects in part additional third-party royalties for someadditional functionality included in our Artemis 7 software during 2005.

 

**GrossMargin**

 

Gross margin as a percentageof total revenue increased by 2 percentage points, from 55% during 2004 to 57%during 2005. This was achieved through a shift in mix toward software andsupport revenue, whereby such revenue as a percentage of total revenueincreased to 61% in 2005 from 58% in the previous year. Increases in grossmargin on support services revenue were only partially offset by decreases ingross margin on software and consulting services revenue. The gross marginpercentage for services revenue decreased only slightly in 2005 as we reducedthe number of internal consultants during 2004 in anticipation of a lower levelof consulting services in 2005.

 

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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 $0.6 million or 4% to $14.9 millionduring 2005, from $14.3 million in 2004. The increase in sales and marketingexpenses was primarily due to additional sales and marketing effortsfocused on further promoting our industry–specific solutions.

 

*Researchand development*

 

Research anddevelopment expenses consist primarily of salaries and related costs associatedwith the development of our products. These expenses increased $0.2 million or2% to $7.9 million in 2005 compared to 2004.

 

Decreases inresearch and development expense resulting from the reduction in headcount inour US development center were more than offset by the addition of resources toour outsourced development team and related transition costs. We now have over30 resources available in India for development and testing activities. Thetransition is expected to be completed by the end of 2006 and should lead toannualized cost savings of approx. $2.7M.million.

 

*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 $1.3million or 15% to $7.4 million during 2005, from $8.7 million during 2004. Thedecrease is primarily a result of the restructuring actions taken during theyear as well as efforts to reduce discretionary spending. During 2005, weincurred one-time, acquisition-related expenses in the amount of $0.4 million.

 

*Amortizationexpense and impairment charges*

 

Amortizationexpense represents the financial statement effect of amortizing intangibleassets recorded in conjunction with the pushdown to the Company’s consolidatedfinancial statements of Proha’s purchase of Legacy Artemis inAugust 2000.  These assets were being amortized on a straight-linebasis over the remaining life of forty-two months commencing January 1,2002. The Company recorded amortization expense of $1.5 million and $4.1 millionfor the years ended December 31, 2005 and 2004, respectively. The decrease inamortization expense in 2005 compared to 2004 is a result of the intangibleasset related to certain technology being fully impaired during the fourthquarter ended December 31, 2004 and the intangible asset related to acertain customer base being fully amortized in July 2005.

 

During the fourth quarter of 2004, theCompany evaluated the carrying values of its intangible assets. As a result, animpairment charge of $0.9 million was recorded in the year endedDecember 31, 2004. Using discounted cash flow projections of expectedreturns from these assets, the Company determined that the intangible assetrelated to certain prior core technology should be fully impaired.

 

*Restructuring charge*

* *

The Company’s restructuring charges for theyear ended December 31, 2004, are comprised primarily of: (i) severancepay (including related payroll taxes) and associated one-time employeetermination costs related to the reduction of the Company’s workforce;(ii) relocation costs resulting from organizational realignments; and(iii) professional fees incurred to improve the competitive position ofthe Company. The Company accounts for the costs associated with exiting anactivity, including costs associated with the reduction of the Company’sworkforce, in accordance with SFAS No. 146. The termination costs recordedby the Company are not associated with nor do they benefit continuingactivities.

 

Inherent in the estimation of the costsrelated to the Company’s restructuring efforts are assessments related to themost likely expected outcome of the significant actions to accomplish therestructuring. Changing business conditions may affect the assumptions relatedto the timing and extent of the Company’s restructuring activities. The Companyreviews the status of restructuring activities on a quarterly basis and, ifappropriate, records changes to its restructuring obligations in operationsbased on management’s most current estimates.

 

The Company has not initiated anynon-discretionary restructuring actions during the year ended December 31,2005.

 

28

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

 

Non-operating income/expenses consist of (i) netinterest expense, (ii) equity in the net income or loss of unconsolidatedaffiliates, (iii) foreign exchange gains, (iv) other (income) expense and (v)gain on sale of subsidiaries and investee.  The Company had a netnon-operating income of $1.3 million during 2005 compared to net non-operatingincome of less than $0.1 million during 2004. During the years ended December31, 2005 and 2004, the Company incurred interest expense in the amount of $0.8million and $0.5 million, respectively, resulting mainly from a loan initiationfee and the interest rate related to an advance under the existing $5.0 millionrevolving credit facility with Laurus. During 2005, the Company recognized apretax gain of $0.8 million as a result of the disposition of an affiliatedentity. Foreign exchange gains and losses result from changes in the exchangerates of the currencies used in the countries in which Artemis operates. TheCompany accounts for certain investments in other companies under the equitymethod of accounting.  The Company recorded equity in net income ofunconsolidated affiliates of $0.1 million for both, 2005 and 2004.

 

**Changes in Foreign CurrencyExchange Rates**

 

The effect of changes inforeign currency exchange rates for the year ended December 31, 2005compared to 2004 decrease in revenues and a increase in operating loss ofapproximately $0.3 million and less than $0.1 million, respectively.

 

**Provision for Income Taxes**

 

The Company recorded incometax expense of approximately $0.7 million and $0.2 million for the years endedDecember 31, 2005 and 2004, respectively.  The income tax expense onthe pre-tax loss of approximately $3.3 million and $9.5 million for the yearsended December 31, 2005 and 2004, respectively, is principally the resultof foreign income tax on the Company’s profitable non-US subsidiaries.

 

**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. Software revenue represents 25% and 23% of totalrevenue for the years ended December 31, 2004 and 2003, respectively.Software revenue from our flagship product, Artemis 7, which is the mainplatform for our investment planning and control solutions, increased to 40% oftotal software revenue in 2004, up from 31% in 2003. Excluding a largemulti-million dollar transaction recorded in the UK of which approximately $1.6million was recorded in 2003, software revenue for Artemis 7 increased by 107%year-over-year. In November 2004, we released Artemis 7, Version 6.0,extending its functionality and capabilities. This has in part led to highersales in the last month of the year compared to the previous year. The increasein software revenue in the US by $0.9 million or 32%, and our subsidiaries inFinland, up $0.5 million or 31%, Germany, up $0.5 million or 75%, and France,up $0.2 million or 9%, were more than offset by a decrease in software revenuein our UK 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, $4.1 millionor 79% is related to consulting services provided in the US. The decrease inservice revenue is in part a result of the completion of several largeconsulting 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 

 

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Asia, up $0.2 million or51%. The level of services revenue in our various operations was impacted bythe timing and size of software sales and the lower level of consultingservices related to our software sales of Artemis 7.

 

*DeferredRevenue*

 

Thebalance of deferred revenue decreased $2.2 million to $5.0 million atDecember 31, 2004 from $7.2 million at December 31, 2003.  The shiftin deferred revenue is a result of the timing of our support billings andrelated collections.

 

**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.

 

**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.

 

*Research anddevelopment*

 

Research anddevelopment expenses consist primarily of salaries and related costs associatedwith the development of our products. These expenses decreased $0.5 million or5% to $7.7 million during 2004 from $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.

 

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,

 

30

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increasing ourfootprint 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 pushdown to the Company’s consolidatedfinancial statements of Proha’s purchase of Legacy Artemis inAugust 2000.  These assets were fully amortized during the thirdquarter of 2005. Amortization expense was the same for the years endedDecember 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 value of theassets. Assets to be disposed of are reported at the lower of the carryingvalue or fair 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 was recorded in the year endedDecember 31, 2004. Using discounted cash flow projections of expectedreturns from these assets, the Company determined that the intangible assetrelated to certain prior core technology should be fully impaired.

 

*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 Companyreduced 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 affected corporate positions and certain operational positionsin the Americas, EMEA and the Asia/Japan segments in the approximate amounts of$1.0 million, $1.4 million and $0.4 million, respectively.  This follows asimilar reduction (8% of the workforce) in the last quarter of 2003, wherebythese reductions were based on discretionary restructuring actions. Approximately $0.9 million of the total restructuring charge is included incurrent liabilities in the accompanying December 31, 2004 consolidatedbalance sheet. See the tabular presentations in Note 18 to the Company’sconsolidated financial statements included elsewhere herein for additionalinformation.

 

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 change 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.

 

31

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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 ofSPR was $0.4 million.

 

**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 endedDecember 31, 2004 and 2003, respectively.  The income tax expense onthe pre-tax loss of approximately $9.5 million and $7.6 million for the yearsended December 31, 2004 and 2003, respectively, is principally the resultof foreign income tax on the Company’s profitable non-US subsidiaries.

 

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

##### ** **

#### *Cash flows for the year ended December 31, 2005 and 2004*

#### * *

AtDecember 31, 2005 the Company had cash of $4.1 million compared to $3.7million at December 31, 2004.

 

Our operating activities were cash neutral duringthe year ended December 31, 2005. Our net loss of $4.0 million wasthe major component that reduced operating cash flow. A net decrease inaccounts payable and other liabilities of $0.6 million and a decrease indeferred revenues of $0.2 million further reduced operating cash flow. Theeffects of these items on cash were offset by factors such as (i) adecrease in trade accounts receivable of $2.6 million, (ii) non-cashexpenses of $1.9 million in depreciation and amortization related to ourfixed assets and identifiable intangible assets, (iii) a decrease inprepaid expenses and other assets of $0.9 million, and (iv) the gainon the disposition of an affiliated entity of $0.8 million.

 

Our investing activities provided $0.7million during the year ended December 31, 2005, related to the settlement withCompuware Corporation pertaining to an investment held by the Company.

 

Our financing activities provided $1.3 millionduring the year ended December 31, 2005. In January 2005, Prohaeffectively replaced a Finnish financial institution as the creditor of a $3.1million loan we entered into during the first quarter of 2004. This loan wasrepaid in full by early April 2005. In March 2005, the Company received an overadvancein the amount of $3.0 million under the existing credit facility with Laurus.During the first half of 2005, Laurus also converted $0.6 million of anoutstanding $1.5 million convertible note. During the third quarter of 2005, weentered into a loan agreement with a Japanese financial institution in theamount of approximately $2.1 million. of which $0.4 million was repaid byDecember 31, 2005. At December 31, 2005, we also had over advancecapabilities of $1.1 million based on the Laurus Facility as well asunused credit facilities 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. The Company’s principal sourcesof liquidity are cash and cash equivalents, our expected cash flows fromoperations and our lines of credit.

 

 

32

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A summary of the Company’s future contractualobligations and commercial commitments as of December 31, 2005 is asfollows:

 

 

| ** **                                       | ** ** | ** ** | ** ** | **Less than** | ** ** | **1-3**                 | ** ** | **3-5**    | ** ** | **More than** | ** ** |
|--------------------------------------------------|------------|------------|------------|--------------------|------------|-------------------------|------------|------------|------------|--------------------|------------|
| ** **                                       | ** ** | **Total**  | ** ** | **1 year**    | ** ** | **years**               | ** ** | **years**  | ** ** | **5 years**   | ** ** |
| ** **                                       | ** ** | ** ** | ** ** | ** **         | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** **         | ** ** |
| Long-term debt Obligations                       |       | $          | 2,109      |               | $          | 659                     |       | $          | 1,193      |               | $          | 181 |   | $ | 76 |   |
| Operating Lease Obligations                      |       | 6,430      |       | 2,536              |       | 1,846                   |       | 1,145      |       | 903                |       |
| Accrued pension and other long-term  liabilities |       | 5,106      |       | —             |       | —                  |       | —     |       | 5,106              |       |
|                                             |       |       |       |               |       |                    |       |       |       |               |       |
|                                             |       | $          | 13,645     |               | $          | 3,195                   |       | $          | 3,039      |               | $          | 1,326 |   | $ | 6,085 |   |

 

In early 2005, the Company reviewed variousstrategies to fund the Company and retained an investment-banking firm toengage in selling the Company. As a result, on March 10, 2006, the Companyentered into a merger agreement with a wholly-owned subsidiary of Trilogy,Inc., in a transaction valued at approximately $27 million. The agreementprovides for the payment of $1.60 per share to holders of Artemis’ commonstock, and $2.20 per share for the holders of Series A Preferred Stock ofArtemis, which represents their liquidation value. The transaction is subjectto certain covenants relating to the Company’s financial performance and theapproval of the stockholders of Artemis, with a meeting of the stockholdersexpected to be held in May 2006. On completion of the merger, Artemis willbecome a part of Trilogy’s recently announced Versata Group. Assuming asuccessful completion of this merger transaction, cash requirements through theend of fiscal year 2006 are to fund operations at approximately the same levelsas fiscal year 2005 as well as to fund certain acquisition-related costs, suchas investment-banking, fairness opinion and legal fees. These fees are expectedto be approximately $1.6 million.

 

We may need to raise additional funds throughpublic and/or private financings, or other arrangements to fund operations andstrengthen our global presence should the merger not be consummated. Suchadditional equity financing may be dilutive to our existing stockholders. Ourcapital requirements depend on numerous factors, including the rate of marketacceptance of our products and services, our ability to service customers, ourability to maintain and expand our customer base, the level of resourcesrequired to maintain or expand our marketing and sales organization, researchand development activities and other factors. 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. Ourinability to raise additional capital consequently could seriously harm thegrowth of our business and results of operations.

 

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. The merger transaction described above is expected tosignificantly support these strategies.

 

In recent years, the Company has taken steps toreduce and defer discretionary spending to more closely match expenses withactual and projected revenues. We initiated certain discretionary actionsbeginning in late 2002 to streamline the Company’s operations and focus on ourcore expertise in enterprise portfolio and project management. This entailedreducing the work force and selling off certain non-core assets. During 2004,following the change in management, a number of non-discretionary restructuringactions were taken to further reduce the cost base of the Company. Theobjective of those actions was to assure an improvement in operating margin ona moving forward basis. The target was to rebalance the revenue mix of theCompany toward higher software license and support revenues, as well as to simplifyand reduce the global infrastructure. The actions were continued during 2005leading to a reduction in workforce from 437 employees in December 2002 to 295employees in December 2005.

 

Several actions were taken during 2005 toprovide funds for working capital purposes. In March 2005, the Company receivedan overadvance in the amount of $3.0 million under the existing credit facilitywith Laurus. During the first half of 2005, Laurus also converted $0.6 millionof an outstanding $1.5 million convertible note in exchange for 385,978 sharesof common stock, leaving $0.9 million outstanding as of December 31, 2005. On March 9, 2006, the Company agreed withLaurus to repay the Advance of $3.0 million and the principal outstanding underthe Minimum Borrowing Note of $865,000, plus accrued interest on the earlier ofthe effective date of the merger transaction described above, or June 16, 2006.The Company also agreed to pay an additional $110,000 in exchange for thecancellation of warrants owned by Laurus and any prepayment penalties under theagreements with Laurus. During the third quarter of 2005, we alsoentered into a loan agreement with a Japanese financial institution in theamount of approximately $2.1 million of which $0.4 million was repaid byDecember 31, 2005. The loan bears interest at 1.95% per annum and is due inmonthly installments through July 31, 2008.

 

In addition,we received approximately $1.2 million in cash in March 2005 from asettlement of a dispute with Compuware Corporation (“Compuware”) related to ajoint venture between our subsidiary in France and Changepoint Corporation(which was acquired by Compuware in May 2004).

 

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We have experienced net losses in each of thethree years in the period ended December 31, 2005. At December 31,2005, we reported an accumulated deficit of approximately $96.7 millionand our current liabilities exceeded current assets by approximately $5.6 million.Our independent public accountants have included a going concern paragraph intheir audit report on the Company’s December 31, 2005 consolidatedfinancial statements which have been prepared assuming that the Company willcontinue as a going concern (based upon management’s plans discussed above),which contemplates, among other things, the realization of assets andsatisfaction of liabilities in the ordinary course of business. Accordingly,the consolidated financial statements included elsewhere herein do not includeany adjustments related to the recoverability and classification of assetcarrying amounts or the amount and classification of liabilities that mightresult, should the Company be unable to continue as a going concern.

 

**Impact of Inflation**

 

In 2005, approximately 80%of our total revenues and 62% 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, 2005,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 rate or other market risks.

 

The Company utilizes linesof credit to fund operational cash needs.  The Company’s outstandingbalance under its lines of credit at December 31, 2005 was approximately$3.9 million.  The weighted average interest rate for the Company’s lineof credit during 2005 was 9.4%. 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 an immediate10% increase or decrease in interest rates would have a material effect on ourconsolidated financial position.

 

We conduct a significantportion of our business in currencies other than the United States dollar. Forthe year ended December 31, 2005, approximately 80% of our revenues and62% of our operating expenses were denominated in currencies other than ourfunctional currency, the United States dollar. These foreign currencies areprimarily Euros, British Pounds, and Japanese Yen. Changes in the value ofmajor foreign currencies relative to the value of the United States dollarcould potentially adversely affect revenues and operating results.  We donot hedge foreign currency exposure. As a result, we will continue toexperience foreign currency exchange gains and losses.

 

# **Item8.**  Financial Statements andSupplementary 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 and with the participation ofour management, including our Chief Executive Officer (“CEO”) and ChiefFinancial Officer (“CFO”), we evaluated the effectiveness of the design andoperation of our disclosure controls and procedures (as defined inRule 13a-15(e) and 15d –15(e) of the Exchange Act) as of a datewithin 90 days prior to the filing date of this report (the “Evaluation Date”).The CEO and CFO concluded based upon that evaluation that, as of December 31,2005, they were effectively and timely informed by our disclosure controls andprocedures of the material information relating to us (or our consolidatedsubsidiaries) as would be required to be included in our periodic filings withthe SEC. Further, our CEO and the CFO concluded based on their most recentevaluation as of the Evaluation Date that there

 

34

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are no significant deficiencies or material weaknessesin the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the Company’s ability to record,process, summarize and report financial data.

 

**Changes inControls and Procedures**

 

There were no changes made in our internalcontrol over financial reporting during the quarter ended December 31, 2005that materially affected, or were reasonably likely to materially affect ourinternal control over financial reporting.

 

****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 internal control system, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the control system are met.

 

Further, the design of acontrol system must reflect the fact that there are resource constraints, andthe benefits of controls must be considered relative to their costs. Because ofthe inherent limitations on all internal control systems, no evaluation ofcontrols can provide absolute assurance that all control issues and instancesof fraud, if any, within the Company have been detected. These inherentlimitations include the realities that judgments in decision-making can befaulty, and that breakdowns can occur because of simple error or mistake. Additionally,controls can be circumvented by the individual acts of some persons, bycollusion of two or more people, and/or by management override of the control. Thedesign of any system of internal control is also based in part upon certainassumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions. Over time, controls may become inadequate becauseof changes in circumstances, and/or the degree of compliance with the policiesand procedures may deteriorate. Because of the inherent limitations in acost-effective internal control system, financial reporting misstatements dueto error or fraud may occur and not 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 allnamed executive officers (as defined below in Item 11) and directors. A summaryof the background and experience of each of these individuals is set forthafter the table.

 
| **NAME**           | ** ** | **AGE** | ** ** | **POSITION**                                         | ** ** | **COMMITTEE**                      |
|--------------------|------------|---------|------------|------------------------------------------------------|------------|------------------------------------|
| Patrick Ternier(1) |       | 49      |       | President and Chief Executive Officer                |       |                               |
| Robert Stefanovich |       | 41      |       | Executive Vice President and Chief Financial Officer |       |                               |
| Charles Savoni     |       | 47      |       | Senior Vice President, General Counsel and Secretary |       |                               |
| Bengt Algevik      |       | 56      |       | Director                                             |       |                               |
| David Cairns       |       | 60      |       | Director                                             |       | Audit and Nominating               |
| Joseph Liemandt    |       | 37      |       | Director                                             |       | Compensation and Nominating        |
| Michael Murphy     |       | 47      |       | Director                                             |       | Audit and Compensation             |
| Olof Odman         |       | 62      |       | Director                                             |       | Audit, Compensation and Nominating |
| Pekka Pere (2)     |       | 47      |       | 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.

 

(2)                                  Effective August 10, 2005, Steve Yagerresigned as the Chairman of the Company’s Board of Directors and Board memberPekka Pere assumed such position.

 

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 toJanuary 2004, Mr. Ternier was a director for both Artemis InternationalSarl France and Artemis International GmbH. From 1989 to 1991, he served as thecountry manager for Artemis International Sarl France. From 1985 to 1988, heserved as the Sales and Marketing Manager for Artemis International SarlFrance.

 

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.

 

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From 1994 to 2002, he served as Corporate Attorney, Senior CorporateAttorney and Assistant General Counsel for Canon Computer Systems, Inc.

 

MR. ALGEVIK was elected a director of the Company onJune 16, 2004. Mr. Algevik is the President of Algevik Management AB,a management-consulting firm and has served in that capacity sinceSeptember 2000. Prior to founding Algevik Management AB, beginning inMay 1997, he was the CEO of SYSteam AB, comprised of 900 consultantsproviding IT-based solutions to mid-sized companies. Since 1995,Mr. Algevik has also been a board member of the Swedish public company,Jeeves Information System AB.

 

MR. CAIRNS was elected a director of the Company onNovember 30, 2004. He has served as Chairman of Prism Technologies Ltd., a UKsoftware infrastructure company since 2001. Mr. Cairns was also the CEO and aboard member of Global Logistics Technologies Inc. (“G-Log”), a USheadquartered supply-chain software company from April 2003 until the end of2005 when he completed the sale of G-Log to Oracle Corporation. Mr. Cairns wasappointed to the board of Gray Peaks Inc. (a US company operating in thesoftware and telecoms sector) in July 2004 and chairs the Audit Committee. Mr.Cairns was Chief Executive of Martlet Venture Management Limited, a Canadianventure capital company, from 1996 through 2000. Mr. Cairns holds an MBA fromCranfield University and is a Fellow of the Chartered Institute of ManagementAccountants (UK).

 

MR. LIEMANDT was elected a director of the Companyon June 16, 2004. Mr. Liemandt is the President, CEO, and Chairman of the Board of Directors of Trilogy, Inc.He founded Trilogy, a leading provider of industry-specific enterprisesoftware, in 1989. Mr. Liemandt also holds other management and boardpositions in various privately held Trilogy-controlled entities.

 

MR. MURPHY was elected a director of the Company onMarch 17, 2003. Mr. Murphy is currently the CEO ofInQuira, Inc., and has served in that capacity since January 2001. Priorto joining InQuira, Mr. Murphy served as an executive at CambridgeTechnology Partners (“CTP”), where he was in charge of the Western Region.Mr. Murphy later oversaw the sales, marketing, alliances and partnerprograms of CTP.

 

MR. ODMAN was elected a director of theCompany in July 2001. Since December 1999, he has been a member ofthe Board of Directors of Proha Plc., and is currently Chairman of the ProhaPlc Board of Directors. Mr. Odman is also Chairman of the Board ofDirectors of Swedish public companies, Jeeves Information System AB andLightLab AB. In addition, Mr. Odman is Chairman of the Board of Directorsof Safran AS, Norway, LightLab Asia Corp, Taiwan, Transaction Network ServicesAB, Sweden, Cobnet AB, Sweden, Kyssinge Golf AB, Sweden and Golf de Pierpoint,Belgium. Mr. Odman is also a board member of Dovre AS, Norway and BrightEurope AB, Sweden.

 

MR. PERE was elected a director of theCompany in July 2001. He has been President and Chief Executive Officer ofProha Plc since 1984 and is also the founder of Proha Plc. Mr. Pere isalso the deputy chairman of the Board of Directors of the Federation of the FinnishInformation Industries, and is either a board member or the chairman of severalother information technology related companies. Mr. Pere was Chairman ofthe Board of Directors of Proha Plc from 1984 until 1999, where he has sinceremained a board member.

 

### **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 Exchange Act requires the Company’sdirectors and executive officers and persons who beneficially own more than tenpercent of a registered class of the Company’s equity securities to file withthe SEC initial reports of ownership and reports of changes in ownership ofcommon stock and other equity securities of the Company. Officers, directorsand greater than ten percent beneficial shareholders are required by SECregulations to furnish the Company with copies of all Section 16(a) forms theyfile. To our knowledge, all such reports were filed in 2005 on a timely basisas required by Section 16(a) of the Exchange Act.**

### ** **

***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

 

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as a Code of Business Conduct and Ethics for all its employees. TheCompany shall, without charge, provide to any person, upon request, a copy ofits Code of Ethics for Senior Financial Officers. All such requests should bemailed to: Artemis International Solutions Corporation, 4041 MacArthur Blvd.,Suite 401, Newport Beach, CA 92660, 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 31,2005, 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, 2005or during the year then ended.

 

**SummaryCompensation Table**

 
| ** **                      | ** ** | **ANNUAL  COMPENSATION** | ** ** | **LONG  TERM COMPENSATION** | ** ** |
|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | ** **               | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | **AWARDS** | ** ** | **PAYOUTS** | ** ** |
| **Name and Principal Position** | ** ** | **Year**                 | ** ** | **Salary  ($)**             | ** ** | **Bonus  ($)** | ** ** | **Other  Annual  Compensation  ($)** | ** ** | **Restricted  Stock  Awards  ($)** | ** ** | **Number  of  Securities  Underlying  Options  (#)** | ** ** | **Long-Term  Incentive Plan  Payouts  ($)** | ** ** | **All  Other  Compensation  ($)** | ** ** |
|                            |       |                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Patrick Ternier,                |       | 2005                     |       | $                           | 258,000    |   | — |   | * |   | — |   | — |   | — |   | 27,000 |   |
| President and  Chief            |       | 2004                     |       | 255,000                     |       | $ | 19,000 |   | * |   | — |   | 250,000 |   | — |   | 26,000 |   |
| Executive Officer  (1) (2)      |       | 2003                     |       | —                      |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                            |       |                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Michael J.  Rusert,             |       | 2005                     |       | —                      |       | — |   | — |   | — |   | — |   | — |   | 12,000 |   |
| Former President  and           |       | 2004                     |       | 26,000                      |       | 6,000 |   | * |   | — |   | — |   | — |   | 273,000 |   |
| Chief Executive  Officer (3)    |       | 2003                     |       | 283,000                     |       | 25,000 |   | * |   | — |   | — |   | — |   | — |   |
|                            |       |                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Robert  Stefanovich,            |       | 2005                     |       | 200,000                     |       | — |   | — |   | — |   | — |   | — |   | 13,000 |   |
| Executive Vice  President,      |       | 2004                     |       | 193,000                     |       | 7,000 |   | — |   | — |   | 120,000 |   | — |   | 6,000 |   |
| Chief Financial  Officer        |       | 2003                     |       | 173,000                     |       | 9,000 |   | — |   | — |   | — |   | — |   | — |   |
|                            |       |                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Charles F.  Savoni,             |       | 2005                     |       | 165,000                     |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Senior Vice President,          |       | 2004                     |       | 155,000                     |       | 4000 |   | — |   | — |   | 35,000 |   | — |   | — |   |
| General Counsel,  Secretary     |       | 2003                     |       | 148,000                     |       | 6,000 |   | — |   | — |   | — |   | — |   | — |   |
|                                 |            |                          |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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      *The value of personal benefits provided was less than the minimum amountrequired to be reported.

 

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

 

(2)   Mr. Ternier was an employee prior to beingappointed President and Chief Executive Officer. Mr. Ternier’s salary for 2003was not related to his duties as an executive officer of the Company.

 

(3)   Mr. Rusert was appointed to the position ofPresident and Chief Executive Officer effective January 25, 2002. He resignedfrom the Company effective January 16, 2004. The payments under “All OtherCompensation” were made pursuant to the Separation Agreement and Mutual Releasediscussed further below.

 

37

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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) was 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 Company made no individual grants of stock options during the year ended December 31, 2005 to any Named Executive Officers.

 

**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, 2005 by each of the Named Executive Officers and the value of in-the-money unexercised options at December 31, 2005.

 
| ** **         | ** ** | **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** | ** ** |
|--------------------|------------|-----------------------------------|------------|---------------------|------------|-------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **NAME**           | ** ** | **(#)**                           | ** ** | **($)**             | ** ** | **EXERCISABLE/UNEXERCISABLE  (#)**                                            | ** ** | **EXERCISABLE/UNEXERCISABLE  ($) (1)**                             | ** ** |
|               |       |                              |       |                |       |                                                                          |       |                                                               |       |
| Patrick Ternier    |       | 0                                 |       | N/A                 |       | 170,267/83,333                                                                |       | $8,333/$4,167                                                      |       |
| Michael Rusert     |       | 0                                 |       | N/A                 |       | 250,000/0                                                                     |       | 0/0                                                                |       |
| Robert Stefanovich |       | 0                                 |       | N/A                 |       | 93,333/46,667                                                                 |       | 7,000/2,000                                                        |       |
| Charles Savoni     |       | 0                                 |       | N/A                 |       | 13,417/19,833                                                                 |       | 1,488/875                                                          |       |

 

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(1) Value is based on the closing market price of the Company’s commonstock on December 31, 2005 ($1.40) minus the exercise price.

 

None of our NamedExecutive Officers exercised any of their stock options during 2005.

 

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

 

We have an employment agreement with PatrickTernier, President and Chief Executive Officer. Mr. Ternier is entitled toreceive a targeted annual base salary (as of July 27, 2005, the date ofthe Annual Meeting - $275,000 per year) and is eligible for a targeted bonus of$200,000, subject to the achievement of certain annual performance criteria setby the Compensation Committee (applicable to fiscal year endedDecember 31, 2005). In addition, Mr. Ternier is entitled to receivean annual car allowance of up to $18,000. If the agreement is terminated forcause, Mr. Ternier 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. Ternier would be entitled, to receive (i) payment continuationof his base salary for a twelve month period, and (ii) to receive anyincentive bonus earned but not yet paid as of the termination date. Inaddition, all options granted which have not vested at the date of terminationwould immediately vest. The agreement also contains certain restrictions oncompetition. Additionally, the Company granted Mr. Ternier in his firstyear of employment as President and Chief Executive Officer an Initial Grant of250,000 stock options to purchase shares of common stock at an exercise priceequal to the market value of the common stock as of the grant date. One thirdof the Initial Grant of options vest on the grant date and the balance vest inequal increments on the first two successive anniversaries of the grant date. Commencingin Mr. Ternier’s second year of employment as President and ChiefExecutive Officer, he is eligible to receive additional option grants (whichmay have a different vesting schedule), based on meeting certain annualperformance criteria as recommended by the Compensation Committee and approvedby the Board of Directors.

 

We have an employment agreement withMr. Stefanovich, Executive Vice President and Chief Financial Officer.Mr. Stefanovich is entitled to receive an annual base salary (as ofJuly 27, 2005, the date of the Annual Meeting - $200,000 per year) and iseligible for a bonus of $70,000, subject to the achievement of certain annualperformance criteria set by the Compensation Committee (applicable to fiscalyear ended December 31, 2005). In addition, Mr. Stefanovich isentitled to receive an annual car allowance of up to $15,000. If the agreementis terminated for cause, Mr. Stefanovich 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. Stefanovich would be entitled toreceive (i) payment continuation of his base salary for a twelve month period,(ii) a continuation of Company provided medical benefits at the same levelhe was receiving prior to termination for the same twelve month period, and(iii) any incentive bonus  earnedbut

 

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not paid as of the termination date pro-rated for the quarter in whichany such termination would take effect based on the termination date. Inaddition, all options granted which have not vested at the date of terminationwould immediately vest. The agreement also contains certain restrictions oncompetition. Additionally, the Company in its sole discretion may grantto Mr. Stefanovich stock options to purchase shares of common stock,consistent with the policy pertaining to executive officers as recommended bythe Compensation Committee and approved by the Board of Directors.

 

We have an employment agreement withMr. Savoni, Senior Vice President, General Counsel and Secretary.Mr. Savoni is entitled to receive an annual base salary (as ofJuly 27, 2005, the date of the Annual Meeting - $164,300 per year) and iseligible for an annual bonus of $45,000, subject to the achievement of certainannual performance criteria set by the Compensation Committee (applicable to fiscalyear ended December 31, 2005). If the agreement is terminated for cause,Mr. Savoni is entitled only to receive that portion of his base salaryowed through the date of termination. If events that constitute a change incontrol of the Company occur, or if the agreement is terminated without cause,Mr. Savoni would be entitled, (i) to a lump sum payment equivalent tohis base salary for a nine month period, and (ii) to receive any incentivebonus earned but not paid as of the termination date pro-rated for the quarterin which any such termination would take effect based on the termination date.In addition, all options granted which have not vested at the date oftermination would immediately vest. The agreement also contains certainrestrictions on competition. Additionally, the Company in its solediscretion may grant to Mr. Savoni stock options to purchase shares ofcommon stock, consistent with the policy pertaining to executive officers asrecommended by the Compensation Committee and approved by the Board ofDirectors.

 

**401(k) Plan**

 

The Companyhas a defined contribution plan (“the Plan”) which qualifies underSection 401(k) of the Internal Revenue Code of 1986, as amended. The Plancovers all U.S. employees who may contribute up to 15% of their annual compensationwith an annual maximum of $14,000 for calendar 2005. Employer contributionsvest to the participants incrementally over a period of five years. Companycontributions to the Plan were $79,000 and $54,000 and zero during the yearsended December 31, 2005, 2004 and 2003, respectively.

 

**Compensation of Directors**

 

The Company has granted options to employeesand directors to purchase the Company’s common stock under various plans. 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, administers all stock option plans. Optionsgenerally vest over terms of three to five years and have a maximum life of tenyears.

 

Prior to 2004, no fees were paid to any members ofthe Board. Effective January 1, 2004, each non-employee director receivesa retainer of $15,000 per year, provided they attend at least 60% of the Boardmeetings held each year. Each non-employee director who is also a member of theAudit, Compensation and/or Nominating Committees receives $5,000 per year fortheir service on each respective committee, provided they each attend at least60% of their respective committee meetings held each year. The Board ofDirectors may decide, at its discretion, to defer such cash payments based onthe Company’s performance and financial condition. In addition, the Companyshall reimburse all reasonable travel and other expenses incurred by itsdirectors in fulfilling their duties as directors and/or committee members.

 

In March 2000, the Company adopted the ArtemisInternational Solutions Corporation 2000 Non-Employee Directors Stock OptionPlan (“Non-Employee Director Plan”). The Non-Employee Director Plan has been amendedand restated, as recommended by the Company’s Board of Directors and ratifiedby shareholders at the 2004 Annual Meeting. Under the Non-Employee DirectorPlan, each non-employee director who is elected or appointed to the Board afterFebruary 24, 2004 receives an initial grant of options to purchase 15,000shares of our common stock at an exercise price equal to the market value ofthe common stock as of the date of his or her election or appointment. For eachnon-employee director already serving on the Board as of February 24,2004, he or she received a grant of options on February 24, 2004, topurchase 7,500 shares of our common stock at an exercise price equal to themarket value of the common stock as of February 24, 2004, unless thenon-employee director was provided a special initial grant greater than 7,500shares. Thereafter, commencing in 2005, each non-employee director receives agrant of options on his or her Board anniversary date to purchase up to 7,500shares of common stock (without making any adjustment under the Non-EmployeeDirector Plan or otherwise for any stock split, stock dividend or similarrecapitalization event occurring on or after the date of the most currentamendment and restatement of the Non-Employee Director Plan becoming effective).In February 2005, the Board voted to approve an additional grant toMessrs. Pere and Odman for 7,500 options each, in recognition of theirlong service on the Board on behalf of the Company and for equitable purposesconsidering the grants issued to newly elected Board members.

 

With respect to directors serving on committees,under the Non-Employee Director Plan, each non-employee director who, on orafter February 24, 2004, is elected or appointed as, or was already, amember of the Audit, Compensation and/or the Nominating Committee, received agrant of options to purchase 3,500 shares of our common stock at an exercise

 

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priceequal to the market value of the common stock as of February 24, 2004, ifalready so serving on any such committee, or as of any later date applicablewhen first becoming a member of any such committee. Thereafter, eachnon-employee director who continues to serve on any such committee upon his orher applicable committee anniversary date is automatically granted an option onsuch anniversary date to purchase up to 3,500 shares of common stock (withoutmaking any adjustment under the Non-Employee Director Plan or otherwise for anystock split, stock dividend or similar recapitalization event occurring on orafter the date of the most current amendment and restatement of theNon-Employee Director Plan becoming effective).

 

Option grantsprovided under the Non-Employee Director Plan shall vest as the Boarddetermines from time-to-time. The current vesting schedules established by theBoard are as follows:  (i) for aninitial grant of options to purchase 15,000 shares pertaining to directorselected or appointed to the Board after February 24, 2004 - 50% of theoptions vest on the grant date, with the remaining 50% vesting one year later,provided that the director has attended at least 60% of the Board meetings heldduring the interim period; (ii) for the grant of options to purchase 7,500shares pertaining to directors already serving on the Board as ofFebruary 24, 2004, -  100% of theoptions vested as of February 24, 2005, provided that the director hadattended at least 60% of the Board meetings held during the preceding year;(iii) commencing in 2005, for any annual grant of options to purchase7,500 shares pertaining to directors who reach their Board anniversary date-  100% of the options vest one yearafter the anniversary date, provided that the director has attended at least60% of the Board meetings held during the interim 12-month period; and(iv) for the grant of options to purchase 3,500 shares pertaining todirectors who, on or after February 24, 2004, are elected or appointed as,or were already, a member of the Audit, Compensation and/or the NominatingCommittees - 100 % of the options vest one year after the applicable committeeanniversary date, provided that the director remains on said committee and hasattended at least 60% of the applicable committee meetings held during theinterim 12-month period.

 

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 a director of the Companyeffective June 16, 2004.

 

**COMPANYSTOCK PRICE PERFORMANCE**

 

##### **Thefollowing performance graph assumes an investment of $100 on December 31, 2000,and compares the change to December 31, 2005, in the market prices of theCompany’s common stock with the change in a broad market index (NASDAQ StockMarket – U.S.) and an industry index (S & P Application Software Index).The Company paid a cash dividend of $140,000 during the nine months endedDecember 31, 2000 and no dividends thereafter. The performance of the indicesis shown on a total return (dividend reinvestment) basis. The graph linesmerely connect the prices on the dates indicated, and do not reflectfluctuations between those dates.**

 

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**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN***

AMONG ARTEMIS INTERNATIONAL SOLUTIONS CORP.,

THE NASDAQ STOCK MARKET (U.S.) INDEX

AND THE S & P APPLICATION SOFTWARE INDEX

 

##### ****

 

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* $100 invested on 12/31/00 in stock or index-including reinvestment ofdividends.

Fiscal year ending December 31.

 

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##### **Item 12.    Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters**

##### ** **

V**OTING SECURITIES AND PRINCIPAL HOLDERS THEREOF**

 

Thefollowing table sets forth information with respect to beneficial ownership ofthe Company’s common stock as of February 28, 2006, for (i) each personknown by the Company to beneficially own more than 5% of each class;(ii) each director and nominee for director; (iii) each NamedExecutive Officer (as defined above); and (iv) all of the Company’sexecutive officers and directors as a group. Except as indicated by footnoteand applicable community property laws, the persons named in the table beloware believed to have sole voting and investment power with respect to allshares of common stock shown as beneficially owned by them. Unless otherwiseindicated, the principal address of each stockholder listed below is c/o ArtemisInternational 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)                  |       | 15,000                                                              |       |                                                           | *          |
| David Cairns (5)                                 |       | 22,000                                                              |       |                                                           | *          |
| Joseph Liemandt (5) (8) (9)                      |       | 1,398,904                                                           |       |                                                           | *          |
| Michael Murphy (5)                               |       | 33,000                                                              |       |                                                           | *          |
| Olof Odman (3) (4) (5)                           |       | 32,980                                                              |       |                                                           | *          |
| Pekka Pere (3) (4) (5)                           |       | 7,996,042                                                           |       |                                                           | *          |
| Charles F. Savoni (5)                            |       | 24,500                                                              |       |                                                           | *          |
| Robert Stefanovich (5)                           |       | 140,000                                                             |       |                                                           | *          |
| Patrick Ternier (4) (5)                          |       | 253,600                                                             |       |                                                           | *          |
| All directors and executive officers as a  group |       |                                                                |       |                                                           |       |
| (9 persons) (6)                                  |       | 562,060                                                             |       | 5                                                              | %          |

 

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*  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, suchentity owns 7,977,062 shares of common stock.

 

(3)           This individual also serves onthe 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 pecuniary interests in Proha Plc.

 

(5)                                  Includesthe number of shares of common stock that could be acquired withinsixty days of February 28, 2006, pursuant to outstanding stock options, asfollows: Mr. Odman, 32,980 shares; Mr. Pere 18,980 shares;Mr. Liemandt 22,000 shares; Mr. Murphy 33,000 shares;Mr. Algevik 15,000 shares; Mr. Cairns 22,000 shares;Mr. Stefanovich 140,000 shares; Mr. Ternier 253,600 shares;Mr. Savoni 24,500 shares, and of the group 562,060 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).

 

(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 thegeneral partner of EC and has voting and dispositive power over the securitiesheld by EC. The managing member of Emancipation Capital LLC is Mr. CharlesFrumberg. Emancipation Capital

 

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LLC and Mr. Frumberg disclaim beneficialownership of the securities held by EC, except for their pecuniary interesttherein. The total shares beneficially owned by EC of 1,678,984 include 136,364shares of common stock currently issuable to EC upon exercise of certainwarrants that were fully vested and exerciseable on the issuance date and152,284 shares of common stock issued upon exercise of other warrants.

 

(8)                                  TrilogyCapital Holdings Corporation (f/k/a Samuelson Investment Inc.) is wholly ownedby Trilogy, Inc. Mr. Liemandt is Chairman of the Board, President andCEO of Trilogy, 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 certain warrants that were fullyvested and exerciseable on the issuance date and 126,904 shares of common stockissued upon exercise of other warrants.

 

**Item 13.    Certain Relationshipsand Related Transactions**

 

At December 31, 2005, 2004 and 2003, theCompany had other net payables to Proha, which factoring in the common stockconversion rights of the holders of the Series A preferred stock ownsapproximately 53% of the Company’s outstanding common stock on apost-conversion basis, of $0.5 million, $0.4 million and$0.3 million, respectively.

 

OnMarch 1, 2004, Artemis Finland entered into a loan agreement with afinancial institution in the amount of approximately $3.1 million. Theloan was originally due on March 1, 2006 and accrued interest at0.5 percentage points above the 3-month Euribor rate per annum, payable ona quarterly basis. The loan was secured by cash collateral provided by Prohaequal to the loan amount and a security interest in substantially all ofArtemis Finland’s assets. Artemis and Proha executed a letter of commitment,whereby Proha agreed to provide the Company sufficient advance notice of itsintent to demand the return of its collateral from the financial institution. OnOctober 11, 2004, the Company received a notification from Proha declaringits intent to demand the return of its $3.1 million collateral. Under thisnotification, the Company was required to repay the loan by January 10,2005. On January 11, 2005, Artemis Finland and Proha informed thefinancial institution to use the cash collateral provided by Proha as themethod by which Artemis Finland shall be deemed to have pre-paid the loan infull. Contemporaneously, Artemis Finland entered into a Payment Schedule Agreement(“Payment Agreement”) with Proha, whereby Proha effectively replaced thefinancial institution as the creditor and Artemis Finland agreed to pay Proha2.5 million Euros in three installments (1.25 million Euros byJanuary 17, 2005, 625,000 Euros by February 28, 2005 and 625,000Euros by March 31, 2005). The first two installments were paid on theirdue dates and the final installment of approximately $0.8 million was made onApril 1, 2005.

 

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

 

•                  ArtemisFinland shares office space with Proha, for which Proha charges Artemis Finlanda share of its office-related costs (“Office Allocation Charge”), such as rent,utilities, telecommunication costs, office maintenance and certain otherexpenses based on headcount. The Office Allocation Charge approximated  $424,000, $431,000, and $341,000 for theyears ended December 31, 2005, 2004 and 2003 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 zero forthe years ended December 31, 2005 and 2004, and approximated $80,000 for theyear ended December 31, 2003.

 

•                  IntellisoftOy, an application service provider, which is owned by Proha (80.1%) and Artemis(19.9%), is providing certain application hosting and other services to ArtemisFinland and its customers (“ASP Services Fee”). The ASP Services Feeapproximated $0, $116,000 and $254,000 for the years ended December 31, 2005,2004 and 2003, 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 approximated $158,000,$173,000 and $229,000 for the years ended December 31, 2005, 2004 and 2003,respectively.

 

•                  TesnetGroup Oy (formerly Intellitest International Oy), a company partially owned byProha (35%), provides

 

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certain software testing services to ArtemisFinland (“Testing Services”). These Testing Services approximated $122,000,$175,000 and $225,000 for the years ended December 31, 2005, 2004 and 2003,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 approximated $41,000, $29,000 and $47,000 forthe years ended December 31, 2005, 2004 and 2003, respectively.

 

•                  ArtemisFinland has provided certain software development services to ProCountorInternational Oy (“ProCountor”), a company majority owned by Proha (63%). ArtemisFinland has charged approximately $4,000, $0 and $0 to ProCountor for suchsoftware development services for the years ended December 31, 2005, 2004 and2003, 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 approximately $4,000, $20,000 and $11,000 for theyears ended December 31, 2005, 2004 and 2003, respectively.

 

On August 12, 2005, the Company’s whollyowned subsidiary in Japan, Artemis International KK (“Artemis Japan”) enteredinto a loan agreement with a financial institution in the amount ofapproximately $2.1 million (or 233 million Yen), of which $1.7 million wasoutstanding at December 31, 2005. The loan bears interest at 1.95% per annumand is due in monthly installments through July 31, 2008. The proceedsfrom the loan were used to acquire certain intellectual property rights fromthe Company’s wholly owned subsidiary in the UK.

 

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.

 

**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, 2005 and2004 and fees billed for other services rendered by Squar Milner during suchperiods:

 

| ** **         | ** ** | **For the years ended  December 31,** | ** ** |
|--------------------|------------|-----------------------------------------------------------|------------|
| ** **         | ** ** | **2005**                                                  | ** ** | **2004** | ** ** |
| ** **         | ** ** | **(in thousands)**                                   | ** ** |
| Audit fees         |       | 340                                                       |       | $ | 330 |   |
| Audit related fees |       | 9                                                         |       | 110 |   |
| Tax fees           |       | 50                                                        |       | 50 |   |
| All other fees     |       | 8                                                         |       | 24 |   |
| Total fees         |       | $                                                         | 407        |   | $ | 514 |   |
|                    |            |                                                           |            |  |  |  |  |

 

Audit fees include all billings and out-of-pocket expenses related tothe annual audit, quarterly and annual work related to the review of Forms10-Q, 10-K and other SEC filings and the 401(k) audit. All amounts for auditand tax fees for 2005 listed in the table above are based on agreed upon feesand expenses. All amounts for 2004 listed in the table above are based on theactual fees and expenses incurred. Audit related expenses for 2004 principallyrepresent the fees incurred for the consent reviews related to the S-1 filings.

 

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

 

**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 the Audit Committee charter. Prior to engagement of the independentauditor for each year’s audit, management or the independent registered publicaccounting firm submits to

 

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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 notdelegate to management its responsibility to pre-approve services to beperformed by the independent registered public accounting firm.

 

**Part IV**

 

##### **Item 15. Exhibits and Financial Statement Schedules**

##### ** **

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

 

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

2.                    Consolidated BalanceSheets as of December 31, 2005 and 2004.

3.                    ConsolidatedStatements of Operations for each of the three years in the period endedDecember 31, 2005.

4.                    ConsolidatedStatements of Stockholders’ Equity (Deficit) and Comprehensive (Loss) for eachof the three years in the period ended December 31, 2005.

5.                    ConsolidatedStatements of Cash Flows for each of the three years in the period endedDecember 31, 2005.

6.                    Notes toConsolidated Financial Statements.

 

**(3)****                                 Listingof 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.                                           |

 

45

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| 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)                                                                                                                 |
| 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 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)                                                                                                                                     |
| 10.49.2 |   | Laurus  Agreement, dated February 6, 2006, and amended March 9, 2006, between Laurus  Master Fund, Ltd. and Artemis International Solutions Corporation. (11)                                                                                       |
| 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)                                                                                                                                     |

 

46

----

 
| 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, between Artemis Finland Oy and Proha Plc.(9)                                                                                  |
| 10.63   |   | Agreement  and Plan of Merger, dated as of March 10, 2006, between Artemis International  Solutions Corporation and the wholly-owned subsidiary of Trilogy, Inc., RCN  Acquisition, Inc. (11) |
| 10.64   |   | Voting  Agreement, dated March 10, 2006, between RCN Acquisition, Inc., Proha Plc and  the Series A Preferred Stockholders of the Company. (11)                                               |
| 10.65   |   | Proha Agreement,  dated March 10, 2006, between Proha Plc and Artemis International Solutions  Corporation. (11)                                                                              |
| 14.1    |   | Code of Business Conduct and Ethics  Policy.(5)                                                                                                                                               |
| 14.2    |   | Code of Ethics For Senior Financial  Officers.(5)                                                                                                                                             |
| 24.1    |   | Powers of Attorney (included on signature  page).                                                                                                                                             |
| 31.1    |   | Certification of Chief  Executive Officer pursuant to Securities Exchange Act Rules 13A-14 and  15D-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.       |
| 31.2    |   | Certification of Chief  Financial Officer pursuant to Securities Exchange Act Rules 13A-14 and  15D-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.       |
| 32.1    |   | Certification pursuant to  18 U.S.C. §1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                  |
| 32.2    |   | Certification pursuant to  18 U.S.C. §1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                  |

 

----

*                                         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.

 

(11)                            Incorporatedby reference to Artemis’ Report on Form 8-K filed with the SECMarch 14, 2006—File No. 000-29793.

 

47

----

 

**(b)           FinancialStatement Schedules**

 

The financial statementschedules required by Item 8 and Item 15 are omitted because the informationrequired to be set forth therein is either not applicable, not material, or theinformation required by such schedules is contained in the consolidatedfinancial statements or notes thereto included elsewhere in this Form 10-K.

 

48

----

 

**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 31, 2006                             |

 

Each person whose signatureappears below hereby constitutes and appoints Patrick Ternier and Robert, S.Stefanovich the lawful attorneys-in-fact and agents of the undersigned, withfull power of substitution and resubstitution, for and in the name, place andstead of the undersigned, in any and all capacities, to sign any and allamendments to this Report, and to file the same, with all exhibits thereto, andother documents in connection therewith, with the Commission, and hereby grantsto such attorneys-in-fact and agents full power and authority to do and performeach and every act and thing requisite and necessary to be done, as fully toall intents and purposes as the undersigned might or could do in person, herebyratifying and confirming all that said attorneys-in-fact and agents, or theirsubstitute or substitutes, may lawfully do or cause to be done by virtuehereof.

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the following persons on behalf of the Company and in thecapacities and on the dates indicated have signed this Report below.

 

** **
| Date:  | March 31, 2006 |   | /s/ Patrick Ternier                                                                                          |   |
|--------|----------------|--------|--------------------------------------------------------------------------------------------------------------|--------|
|   |           |   | Patrick Ternier, President and Chief Executive  Officer  (principal executive officer)                       |
|   |           |   |                                                                                                         |
| Date:  | March 31, 2006 |   | /s/ Robert S. Stefanovich                                                                                    |   |
|   |           |   | Robert S. Stefanovich, Executive Vice President  and  Chief Financial Officer (principal accounting officer) |
|   |           |   |                                                                                                         |
| Date:  | March 31, 2006 |   | /s/ Pekka Pere                                                                                               |   |
|   |           |   | Pekka Pere, Director                                                                                         |
|   |           |   |                                                                                                         |
| Date:  | March 31, 2006 |   | /s/ Bengt Algevik                                                                                            |   |
|   |           |   | Bengt Algevik, Director                                                                                      |
|   |           |   |                                                                                                         |
| Date:  | March 31, 2006 |   | /s/ David Cairns                                                                                             |   |
|   |           |   | David Cairns, Director                                                                                       |
|   |           |   |                                                                                                         |
| Date:  | March 31, 2006 |   | /s/ Joseph Liemandt                                                                                          |   |
|   |           |   | Joseph Liemandt, Director                                                                                    |
|   |           |   |                                                                                                         |
| Date:  | March 31, 2006 |   | /s/ Michael Murphy                                                                                           |   |
|   |           |   | Michael Murphy, Director                                                                                     |
|   |           |   |                                                                                                         |
| Date:  | March 31, 2006 |   | /s/ Olof Odman                                                                                               |   |
|   |           |   | Olof Odman, Director                                                                                         |

 

49

----

 

**ARTEMISINTERNATIONAL SOLUTIONS CORPORATION**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of Independent Registered Public Accounting Firm                                                                                                          |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                             |   |
| Consolidated Balance Sheets as of December 31, 2005 and 2004                                                                                                     |   |
|                                                                                                                                                             |   |
| Consolidated Statements of Operations for each of the three years in  the period ended December 31, 2005                                                    |   |
|                                                                                                                                                             |   |
| Consolidated Statements of Stockholders’ Equity (Deficit) and  Comprehensive (Loss) for each of the three years in the period ended  December 31, 2005 |   |
|                                                                                                                                                             |   |
| Consolidated Statements of Cash Flows for each of the three years in  the period ended December 31, 2005                                                    |   |
|                                                                                                                                                             |   |
| 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, 2005 and 2004, and the related consolidated statements ofoperations, stockholders equity (deficit) and comprehensive (loss) and cashflows for each of the three years in the period ended December 31,2005.  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, 2005 and 2004, and the results of their operations and theircash flows for each of the three years in the period ended December 31,2005 in 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 $5.6 million and anaccumulated deficit of approximately $96.7 million at December 31, 2005,and experienced negative operating cash flow in both 2004 and 2003. Thesefactors, among others, raise substantial doubt about the Company’s ability tocontinue as a going concern.  Management’s plans in regard to thesematters are described in Note 1.  The consolidated financial statements donot include any adjustments that might result from the outcome of thisuncertainty.

 

 
| /s/ Squar, Milner, Reehl  & Williamson, LLP |   |
|-------------------------------------------------|--------|
|                                            |
| Newport Beach, California                       |
| March 17, 2006                             |

 

F-2

----

 

**ARTEMISINTERNATIONAL SOLUTIONS CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                      | ** ** | **December 31,**                                        | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                      | ** ** | **2005**                                                     | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                                      | ** ** | **(in thousands, except share amounts)** | ** ** |
| **ASSETS**                                                                                                                                                                                      |       |                                                         |       |   |   |
| Current assets:                                                                                                                                                                                 |       |                                                         |       |   |   |
| Cash and cash equivalents                                                                                                                                                                       |       | $                                                            | 4,057      |   | $ | 3,720 |   |
| Trade accounts receivable, net                                                                                                                                                                  |       | 9,478                                                        |       | 12,041 |   |
| Other accounts receivable                                                                                                                                                                       |       | 572                                                          |       | 709 |   |
| Prepaid expenses                                                                                                                                                                                |       | 1,365                                                        |       | 1,313 |   |
| Other current assets                                                                                                                                                                            |       | 136                                                          |       | 379 |   |
| Total current assets                                                                                                                                                                            |       | 15,608                                                       |       | 18,162 |   |
|                                                                                                                                                                                            |       |                                                         |       |   |   |
| Property and equipment, net of accumulated  depreciation and amortization                                                                                                                       |       | 491                                                          |       | 1,008 |   |
| Intangible assets, net of accumulated  amortization                                                                                                                                             |       | —                                                       |       | 1,489 |   |
| Investment in affiliates and other assets                                                                                                                                                       |       | 978                                                          |       | 1,661 |   |
| Total assets                                                                                                                                                                                    |       | $                                                            | 17,077     |   | $ | 22,320 |   |
|                                                                                                                                                                                            |       |                                                         |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                                                                                  |       |                                                         |       |   |   |
| Current liabilities:                                                                                                                                                                            |       |                                                         |       |   |   |
| Accounts payable                                                                                                                                                                                |       | $                                                            | 3,122      |   | $ | 2,881 |   |
| Due to related party                                                                                                                                                                            |       | 493                                                          |       | 376 |   |
| Accrued liabilities                                                                                                                                                                             |       | 3,012                                                        |       | 4,385 |   |
| Accrued payroll and related taxes                                                                                                                                                               |       | 5,199                                                        |       | 5,360 |   |
| Deferred revenue                                                                                                                                                                                |       | 4,877                                                        |       | 5,047 |   |
| Short-term debt and lines of credit, net                                                                                                                                                        |       | 3,871                                                        |       | 3,512 |   |
| Current portion of long-term debt                                                                                                                                                               |       | 611                                                          |       | 21 |   |
| Total current liabilities                                                                                                                                                                       |       | 21,185                                                       |       | 21,582 |   |
|                                                                                                                                                                                            |       |                                                         |       |   |   |
| Accrued pension and other liabilities                                                                                                                                                           |       | 5,106                                                        |       | 4,465 |   |
| Deferred taxes                                                                                                                                                                                  |       | —                                                       |       | 160 |   |
| Long-term debt, less current portion                                                                                                                                                            |       | 1,498                                                        |       | 1,918 |   |
| Total liabilities                                                                                                                                                                               |       | 27,789                                                       |       | 28,125 |   |
|                                                                                                                                                                                            |       |                                                         |       |   |   |
| Commitments and contingencies (Notes 7, 16  and 20)                                                                                                                                             |       |                                                         |       |   |   |
|                                                                                                                                                                                            |       |                                                         |       |   |   |
| Stockholders’ deficit:                                                                                                                                                                     |       |                                                         |       |   |   |
|                                                                                                                                                                                            |       |                                                         |       |   |   |
| Series A convertible preferred stock,  liquidation preference of $9,000, $0.001 par value, 25,000,000 shares authorized, 4,090,909 shares  issued and outstanding                               |       | 4                                                            |       | 4 |   |
| Common stock, $0.001 par value, 50,000,000  shares authorized, 10,877,087 shares issued and outstanding as of December  31, 2005; 10,245,233 shares issued and outstanding at December 31, 2004 |       | 11                                                           |       | 10 |   |
| Additional paid-in capital, net of issuance  costs                                                                                                                                              |       | 90,357                                                       |       | 89,616 |   |
| Accumulated deficit                                                                                                                                                                             |       | (96,721                                                      | )          | (92,676 | ) |
| Accumulated other comprehensive (loss)                                                                                                                                                          |       | (4,363                                                       | )          | (2,759 | ) |
| Total stockholders’ (deficit)                                                                                                                                                              |       | (10,712                                                      | )          | (5,805 | ) |
| Total liabilities and stockholders’ deficit                                                                                                                                                |       | $                                                            | 17,077     |   | $ | 22,320 |   |
|                                                                                                                                                                                                 |            |                                                              |            |  |  |  |  |  |  |

 

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

 

F-3

----

 

**ARTEMISINTERNATIONAL SOLUTIONS CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                               | ** ** | **For the years ended**                                | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **December 31,**                                                    |
| ** **                                                               | ** ** | **2005**                                                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                               | ** ** | **(in thousands, except per share amounts)** | ** ** |
|                                                                     |       |                                                                  |       |   |   |   |   |
| Revenue:                                                                 |       |                                                                  |       |   |   |   |   |
| Software                                                                 |       | $                                                                     | 11,487     |   | $ | 13,055 |   | $ | 13,286 |   |
| Support                                                                  |       | 17,248                                                                |       | 17,186 |   | 16,568 |   |
| Services                                                                 |       | 18,630                                                                |       | 22,204 |   | 27,437 |   |
|                                                                     |       | 47,365                                                                |       | 52,445 |   | 57,291 |   |
|                                                                     |       |                                                                  |       |   |   |   |   |
| Cost of revenue:                                                         |       |                                                                  |       |   |   |   |   |
| Software                                                                 |       | 447                                                                   |       | 232 |   | 677 |   |
| Support                                                                  |       | 4,990                                                                 |       | 5,676 |   | 5,102 |   |
| Services                                                                 |       | 14,973                                                                |       | 17,582 |   | 20,250 |   |
|                                                                     |       | 20,410                                                                |       | 23,490 |   | 26,029 |   |
|                                                                     |       |                                                                  |       |   |   |   |   |
| Gross margin                                                             |       | 26,955                                                                |       | 28,955 |   | 31,262 |   |
|                                                                     |       |                                                                  |       |   |   |   |   |
| Operating expenses:                                                      |       |                                                                  |       |   |   |   |   |
| Selling and marketing                                                    |       | 14,877                                                                |       | 14,327 |   | 15,942 |   |
| Research and development                                                 |       | 7,862                                                                 |       | 7,710 |   | 8,152 |   |
| General and administrative                                               |       | 7,375                                                                 |       | 8,701 |   | 11,142 |   |
| Amortization expense                                                     |       | 1,489                                                                 |       | 4,117 |   | 4,118 |   |
| Impairment charge                                                        |       | —                                                                |       | 913 |   | — |   |
| Restructuring charges                                                    |       | —                                                                |       | 2,740 |   | — |   |
|                                                                     |       | 31,603                                                                |       | 38,508 |   | 39,354 |   |
|                                                                     |       |                                                                  |       |   |   |   |   |
| Operating loss                                                           |       | (4,648                                                                | )          | (9,553 | ) | (8,092 | ) |
|                                                                     |       |                                                                  |       |   |   |   |   |
| Interest expense, net                                                    |       | 747                                                                   |       | 502 |   | 192 |   |
| Equity in net (income) loss of  unconsolidated affiliates                |       | —                                                                |       | (49 | ) | 318 |   |
| Gain on sale of subsidiaries and investee                                |       | —                                                                |       | — |   | (393 | ) |
| Other (income) expense, net                                              |       | (1,310                                                                | )          | (95 | ) | 91 |   |
| Foreign exchange gain                                                    |       | (745                                                                  | )          | (394 | ) | (708 | ) |
|                                                                     |       | (1,308                                                                | )          | (36 | ) | (500 | ) |
|                                                                     |       |                                                                  |       |   |   |   |   |
| Loss before income taxes                                                 |       | (3,340                                                                | )          | (9,517 | ) | (7,592 | ) |
|                                                                     |       |                                                                  |       |   |   |   |   |
| Income tax expense                                                       |       | 705                                                                   |       | 168 |   | 299 |   |
| Net loss                                                                 |       | $                                                                     | (4,045     | ) | $ | (9,685 | ) | $ | (7,891 | ) |
|                                                                     |       |                                                                  |       |   |   |   |   |
| Loss per common share:                                                   |       |                                                                  |       |   |   |   |   |
| Basic                                                                    |       | $                                                                     | (0.38      | ) | $ | (0.97 | ) | $ | (0.79 | ) |
| Diluted                                                                  |       | $                                                                     | (0.38      | ) | $ | (0.97 | ) | $ | (0.79 | ) |
|                                                                     |       |                                                                  |       |   |   |   |   |
| Weighted average common shares used in computing  loss per common share: |       |                                                                  |       |   |   |   |   |
| Basic                                                                    |       | 10,717                                                                |       | 9,988 |   | 9,965 |   |
| Diluted                                                                  |       | 10,717                                                                |       | 9,988 |   | 9,965 |   |

 

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

 

F-4

----

 

**ARTEMIS INTERNATIONAL SOLUTIONS CORPORATION**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY (DEFICIT)**

**AND COMPREHENSIVE (LOSS)For the Period January 1, 2003 to December 31, 2005(in thousands)**

 
| ** **                                                       | ** ** | **Common Stock** | ** ** | **Preferred Stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** **  | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|-------------------------|------------|-----------------|------------|---------------------------------------|------------|-------------|------------|
| ** **                                                       | ** ** | **Shares**            | ** ** | **Amount**               | ** ** | **Shares**              | ** ** | **Amount**      | ** ** | **Capital**                           | ** ** | **Deficit** | ** ** | **(Loss)** | ** ** | **Total** | ** ** |
|                                                             |       |                  |       |                     |       |                    |       |            |       |                                  |       |        |       | **(As Restated)** |   |   |   |
| **Balance  January 1, 2003**                                     |       | 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 | ) |
| Net loss                                                         |       | —                |       | —                   |       | —                  |       | —          |       | —                                |       | (4,045      | )          | — |   | (4,045 | ) |
| Foreign currency  translation adjustment                         |       | —                |       | —                   |       | —                  |       | —          |       | —                                |       | —      |       | (1,074 | ) | (1,074 | ) |
| Adjustment  related to UK pension plan *                         |       | —                |       | —                   |       | —                  |       | —          |       | —                                |       | —      |       | (530 | ) | (530 | ) |
| Comprehensive  loss                                              |       | —                |       | —                   |       | —                  |       | —          |       | —                                |       | —      |       | — |   | (5,649 | ) |
| Exercise of  additional warrants, options and conversion of debt |       | 632                   |       | 1                        |       | —                  |       | —          |       | 741                                   |       | —      |       | — |   | 742 |   |
| **Balance  December 31, 2005**                                   |       | 10,877                |       | $                        | 11         |                    | 4,091      |            | $          | 4                                     |       | $           | 90,357     |   | $ | (96,721 | ) | $ | (4,363 | ) | $ | (10,712 | ) |
|                                                                  |            |                       |            |                          |            |                         |            |                 |            |                                       |            |             |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

----

* This adjustment recordsthe additional minimum liability as further explained in Note 9 to theseconsolidated financial statements.

 

F-5

----

 

**ARTEMISINTERNATIONAL SOLUTIONS CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                  | ** ** | **For the years ended** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                  | ** ** | **December 31,**                  | ** ** |
| ** **                                                                                  | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                | ** ** |
| Cash flow from operating activities:                                                        |       |                                   |       |   |   |   |   |
| Net loss                                                                                    |       | $                                      | (4,045     | ) | $ | (9,685 | ) | $ | (7,891 | ) |
| Adjustments to reconcile net loss to net  cash provided by or used in operating activities: |       |                                   |       |   |   |   |   |
| Depreciation and amortization                                                               |       | 1,896                                  |       | 4,620 |   | 5,077 |   |
| Equity in net loss (income) of unconsolidated  affiliates                                   |       | —                                 |       | (49 | ) | 318 |   |
| Gain on sale of subsidiaries and investee                                                   |       | (756                                   | )          | — |   | (393 | ) |
| Write-off of impaired asset                                                                 |       | —                                 |       | 914 |   | — |   |
| Disposition of assets                                                                       |       | 60                                     |       | (16 | ) | (91 | ) |
| Changes in operating assets and  liabilities:                                               |       |                                   |       |   |   |   |   |
| Decrease in trade accounts receivable                                                       |       | 2,563                                  |       | 1,587 |   | 965 |   |
| (Increase) decrease in prepaid expenses and  other assets                                   |       | 938                                    |       | 412 |   | (218 | ) |
| Increase (decrease) in deferred revenues                                                    |       | (170                                   | )          | (2,180 | ) | (747 | ) |
| Increase in amount due to related party                                                     |       | 117                                    |       | 32 |   | 16 |   |
| Decrease in accounts payable, accrued  expenses, and other liabilities                      |       | (593                                   | )          | (3,928 | ) | (1,413 | ) |
| Net cash provided by (used in) operating  activities                                        |       | 10                                     |       | (8,293 | ) | (4,377 | ) |
|                                                                                        |       |                                   |       |   |   |   |   |
| Cash flow from investing activities:                                                        |       |                                   |       |   |   |   |   |
| Capital expenditures, net                                                                   |       | (169                                   | )          | (303 | ) | (473 | ) |
| Proceeds from sale of subsidiaries and  investee                                            |       | 829                                    |       | — |   | 289 |   |
| Net cash provided by (used in) investing  activities                                        |       | 660                                    |       | (303 | ) | (184 | ) |
|                                                                                        |       |                                   |       |   |   |   |   |
| Cash flow from financing activities:                                                        |       |                                   |       |   |   |   |   |
| Proceeds from exercise of stock options and  warrants, net of taxes                         |       | 108                                    |       | — |   | — |   |
| Proceeds from the issuance of convertible  preferred stock, net of of issuance costs        |       | —                                 |       | 8,550 |   | — |   |
| Net increase in short term borrowings                                                       |       | 949                                    |       | 22 |   | 226 |   |
| Increase in long term borrowings                                                            |       | 214                                    |       | 1,594 |   | — |   |
| Payments of debt and capital leases                                                         |       | —                                 |       | — |   | (598 | ) |
| Net cash provided by (used in) financing  activities                                        |       | 1,271                                  |       | 10,166 |   | (372 | ) |
|                                                                                        |       |                                   |       |   |   |   |   |
| Effect of foreign currency exchange rate  changes on cash and cash equivalents              |       | (1,604                                 | )          | (443 | ) | (240 | ) |
|                                                                                        |       |                                   |       |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                                       |       | 337                                    |       | 1,127 |   | (5,173 | ) |
|                                                                                        |       |                                   |       |   |   |   |   |
| Cash and cash equivalents at the beginning  of the year                                     |       | 3,720                                  |       | 2,593 |   | 7,766 |   |
|                                                                                        |       |                                   |       |   |   |   |   |
| Cash and cash equivalents at the end of the  year                                           |       | $                                      | 4,057      |   | $ | 3,720 |   | $ | 2,593 |   |

 

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

 

See accompanying notes to consolidatedfinancial statements for discussion of non-cash financing and investingtransactionsand disclosure 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) developing new products such as pharmaceuticals, (ii) ITmanagement and governance, (iii) maintaining nuclear power stations, (iv)managing defense programs such as the Joint Strike Fighter program for the USgovernment, and (v) helping governmental agencies promote business efficiencythrough better alignment and allocation of resources. The Company has aninternational distribution network in 44 countries.

 

As of December 31, 2005, approximately 73% (or 53%,assuming conversion of all preferred stock) of the Company’s outstanding commonstock 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 publicaccounting firm has included a “going concern” explanatory paragraph in theiraudit report on the December 31, 2005 consolidated financial statements,which have been prepared assuming that the Company will continue as a goingconcern. The accompanying consolidated financial statements do not include anyadjustments that 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. AtDecember 31, 2005, the Company’s current liabilities exceeded currentassets by approximately $5.6 million and the Company reported a cash balance of$4.1 million. Operating cash flow was positive in the amount of $0.2 millionfor the year ended December 31, 2005. The Company has taken a number of actionsto improve its financial strength and cash availability including but notlimited to discretionary restructuring actions taken in 2003 andnon-discretionary restructuring actions taken in 2004 (see Note 18). OnJune 16, 2004, the Company completed a private placement of$9.0 million of convertible preferred stock (see Note 14) as a means tostrengthen 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 in July 2004 and March 2005 (see Note 6) toincrease the Company’s financial flexibility. The Company also has otherlending facilities available to certain of its subsidiaries, such as in Japanand France.

 

In early 2005, the Company reviewed variousstrategies to improve its capital structure and provide additional funding tomeet the Company’s operational needs. After review of various alternatives,including but not limited to raising capital through the sale of additionalequity by a private placement or a secondary offering, management engaged afinancial advisor to assist in the sale of the Company. On March 10, 2006, theCompany entered into a merger agreement with a wholly owned subsidiary ofTrilogy, Inc. (see Note 20). The transaction is subject to certain covenantsrelating to the Company’s financial performance and the approval of thestockholders of Artemis, with a meeting of the stockholders expected to be heldin May 2006. If the merger is consummated, Artemis will become part of Trilogy’srecently announced Versata Group and cease to be publicly traded.

 

F-7

----

 

A summary of the Company’s future contractualobligations and commercial commitments as of December 31, 2005 is asfollows:

 
| ** **                                          | ** ** | **Year ending December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010-  thereafter** | ** ** | **Total** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                     | ** ** |
| Long-term debt                                      |       | $                                           | 659        |   | $ | 669 |   | $ | 524 |   | $ | 91 |   | $ | 167 |   | $ | 2,109 |   |
| Obligations under non-cancellable operating  leases |       | 2,536                                       |       | 1,110 |   | 736 |   | 591 |   | 1,457 |   | 6,430 |   |
|                                                |       | $                                           | 3,195      |   | $ | 1,779 |   | $ | 1,260 |   | $ | 682 |   | $ | 1,624 |   | $ | 8,539 |   |

 

*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 2005 presentation. Thesereclassifications did not effect previously reported results of operations.

 

*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 itsmajority shareholder, 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 financialstatements and the reported amounts of revenue and expenses during thereporting period.  Actual results could differ materially from thoseestimates.  Significant estimates made by management include, amongothers, valuation of deferred tax assets, allowance for uncollectible accountsreceivable, revenue recognition, valuation and useful economic lives ofintangible assets, accrued pension liabilities and certain other 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.  As amended,SOP 97-2  generally requires revenueearned on software arrangements involving multiple elements to be allocated toeach element based on the relative estimated fair value of each element. Theestimated fair value of an element is based on vendor-specific objectiveevidence (“VSOE”). Software license revenue allocated to a software product isrecognized upon delivery of the product or deferred and recognized in futureperiods to the extent that an arrangement includes one or more elements thatare to be delivered at a future date and for which VSOE has not beenestablished.  Maintenance and support revenue is recognized ratably overthe maintenance term.  First-year maintenance typically is sold with therelated software license and renewed on an annual basis thereafter. Estimatedfair values of ongoing maintenance and support obligations are based onseparate sales of renewals to other customers or upon renewal rates quoted inthe contracts. For such arrangements with multiple elements, we allocaterevenue to each component of the arrangement based on the estimated fair valueof the undelivered elements. The fair value of services, such as consulting ortraining, is based upon separate sales of these services. The Company at timesmay enter into multiple-customer contracts in which the Company allocatesrevenue based on the number of specified users at each customer, and recognizesrevenue upon customer acceptance and satisfying the other applicable conditionsof the above described accounting policy.

 

Services revenue isrecognized as the service is performed assuming that sufficient evidence existsto estimate the

 

F-8

----

 

fair value of the services.  Consulting andtraining services 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 that do not require significant customization to or modification ofthe underlying software code.

 

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 futureperiods to the extent that an arrangement includes one or more elements thatare to be delivered at a future date and for which VSOE has not beenestablished.  Cost of support revenue includes (i) sales commissions andsalaries paid to employees who provide first and second level support toclients and (ii) fees paid to consultants, which are recognized as the servicesare performed.  Sales commissions are expensed as incurred.  Thecosts incurred for implementation, customer support and training of the Company’sclients using internal or external resources are recorded as cost of servicesrevenue when the 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 these software products has been established,computer software development costs are capitalized and reported at the lowerof amortized cost or estimated net realizable value. When a product is readyfor general release to the public, its capitalized costs are amortized usingthe straight-line method over a period not to exceed three years. Managementbelieves that technological feasibility is not established until a beta versionof the product exists. Costs incurred during the period from when a beta versionis available until general release to the public have not been material.Accordingly, the Company has not capitalized any software development costs in2005 or in prior years.

 

*FinancialInstruments*

 

The carryingamount of the Company’s trade accounts receivable, trade accounts payable,accrued expenses, and credit facilities approximates their estimated fair valuedue to either the short-term maturities of those financial instruments or thefact that the credit facilities bear market interest rates.  In the opinion of management, the fair valueof transactions with related parties cannot be estimated without incurringexcessive cost; for that reason, the Company has not provided such disclosure.  However, information about related-partyliabilities (such as the carrying amount, the interest rate, and the maturitydate) and other related party transactions is provided, where applicable,elsewhere in these notes to the consolidated financial statements.

 

Financialinstruments that subject the Company to credit risk include cash balancesmaintained in the United States in excess of the federal depository insurancelimit.  Company accounts at U.S.financial institutions are insured by the Federal Deposit Insurance Corporationup to $100,000.  See Note 13 foradditional information on concentration of credit risk.

 

*Cash andCash Equivalents*

 

The Companyconsiders all highly liquid short-term investments with original maturities ofthree months or less when purchased to be cash equivalents.

 

*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 receivable each period. If wemade different judgments or utilized different estimates for any period,material differences 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 thedifference between the book value of the disposed assets and the proceeds receivedupon disposal. Expenditures for replacements and leasehold improvements arecapitalized, while expenditures for maintenance and repairs are expensed asincurred.

 

*Intangible Assets*

 

Intangible assets atDecember 31, 2004 consisted entirely of acquired customer base carried atcost, which approximates estimated fair value at the time ofpurchase.   The cost assigned tothis intangible asset was amortized on a straight-line basis over the estimateduseful life of the asset, which was forty-two months from January 1,2002.  Management believes that the straight-line method is appropriatefor the Company’s customer list, given the caliber and nature of its customerrelationships.  Substantially all intangible assets remaining atDecember 31, 2004 were fully amortized by July 2005.

 

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.

 

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

 

F-9

----

 

*Impairment of Long-Lived Assets*

 

The Companyperiodically evaluates the carrying value of its long-lived assets under theprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*. SFAS No. 144 requires impairment losses tobe recorded on long-lived assets used in operations, including amortizableintangible assets, when indicators of impairment are present.  In theevent a condition is identified that may indicate an impairment issue, anassessment is performed using a variety of methodologies, including analysis ofundiscounted future cash flows, estimates of sales proceeds and independentappraisals.  If such assets are impaired, the impairment to be recognizedis measured by the amount by which the carrying amount of the asset exceeds theestimated fair value of the asset.  Assets to be disposed of are reportedat the lower of the carrying value or estimated fair value, less cost estimatedto sell.

 

During the fourth quarter of2004, the Company reviewed its intangible assets for impairment in accordancewith SFAS No. 144. As a result the Company fully impaired the intangible assetrelated to its prior core technology and recorded an impairment charge ofapproximately $0.9 million in the quarter ended December 31, 2004. No suchimpairment charges were recorded during the years ended December 31, 2005or 2003 (See Note 5).

 

*Exit and Disposal Activities*

 

The Company accounts for expenses related to non-discretionaryrestructuring activities (including workforce reductions) in accordance withSFAS No. 146, “Accounting for Costs Associated with Exit and DisposalActivities.”  GAAP prohibits therecognition of an exit-activity liability until (a) certain criteria (whichdemonstrate that it is reasonably probable that a present obligation to othershas been incurred) are met, and (b) the fair value of such liability can bereasonably estimated. The Company recorded a restructuring charge ofapproximately $2.7 million in calendar 2004. See Note 18 for additionalinformation.

 

*Translation of Foreign Currencies*

 

Artemis uses the U.S. dollaras its functional currency.  Assets and liabilities of foreignsubsidiaries are translated into U.S. dollars at year-end exchange rates, andrevenues and expenses are translated at average rates prevailing during theyear or other period presented. In accordance with SFAS No. 52, *Foreign Currency Translation*, translationadjustments are included as a component of stockholders’ deficit. The Companyrecorded a foreign exchange gain of $0.7 million, $0.4 million and $0.7 millionfor the years ended December 31, 2005, 2004 and 2003, 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 forStock-Based Compensation -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, SFAS No. 148 amends the disclosurerequirements of SFAS No. 123 to require prominent disclosure in both annual andinterim financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method used on reported results. Asprovided in SFAS No. 123, the Company has elected to apply AccountingPrinciples Board (“APB”) Opinion No. 25 “Accounting for Stock Issued toEmployees” and related interpretations in accounting for its stock-basedemployee compensation plans. APB No. 25 does not require options to be expensedwhen granted with an exercise price equal to or greater than the grant-datemarket value. The Company is complying with the disclosure requirements of SFASNo. 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,**                          | ** ** |
| ** **                                                                                  | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands, except per share data)** | ** ** |
|                                                                                        |       |                                      |       |   |   |   |   |
| Net (loss) as reported                                                                      |       | $                                         | (4,045     | ) | $ | (9,685 | ) | $ | (7,891 | ) |
| Less: Total stock-based employee  compensation expense determined using Black-Scholes model |       | (375                                      | )          | (700 | ) | (2,297 | ) |
| Pro forma net (loss)                                                                        |       | $                                         | (4,420     | ) | $ | (10,385 | ) | $ | (10,188 | ) |
|                                                                                        |       |                                      |       |   |   |   |   |
| Basic and diluted loss per common share:                                                    |       |                                      |       |   |   |   |   |
| As reported                                                                                 |       | $                                         | (0.38      | ) | $ | (0.97 | ) | $ | (0.79 | ) |
| Pro forma                                                                                   |       | $                                         | (0.41      | ) | $ | (1.04 | ) | $ | (1.02 | ) |

 

The abovetable includes compensation expense related to stock options granted toemployees during 2005, 2004 and prior years. The pro forma compensation expensereported in the above table is generally based on the vesting provisions in therelated stock option grants, and includes an allowance for estimatedforfeitures. The stock-based employee compensation expense and related proforma per-share data for 2003 in the above table differ from the disclosure inthe Company’s Form 10-K/A filed with the Securities and Exchange Commission(the “SEC”) in July 2004 as a result of correcting errors relating to thevesting provisions and other matters.

 

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

 
| ** **              | ** ** | **For the years ended** | ** ** |
|-------------------------|------------|-------------------------|------------|
| ** **              | ** ** | **December 31,**        | ** ** |
| ** **              | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003 (1)** | ** ** |
| Annual dividends        |       | zero                    |       | zero |   | — |   |
| Expected volatility     |       | 99                      | %          | 106 | % | — |   |
| Risk free interest rate |       | 3.4                     | %          | 1.4 | % | — |   |
| Expected life           |       | 5 years                 |       | 5 years |   | — |   |

 

----

(1) The Company did not grant any stock optionsduring 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 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 (asdefined) related to defined benefit pension plans (see Note 9) be reported ascomprehensive loss. Foreign currency translation gains and losses are alsoincluded in comprehensive income/loss in the accompanying consolidatedstatements of stockholders’ equity (deficit) and comprehensive (loss).

 

See Note 19 for discussionof the restatement of the December 31, 2003 consolidated statement ofstockholders’ equity (deficit) and comprehensive (loss).

 

F-11

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*Post Employment Benefits*

 

The Companyrecords postemployment benefits in accordance with SFAS No. 87, “Employers’ Accounting for Pensions”,and SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments ofDefined Benefit Pension Plans and for Termination Benefits”. The Companydiscloses postemployment benefits in accordance with SFAS No. 132, Employers’ Disclosure about Pensions and Other Postemployment Benefits*,*as amended (see below)*.*  SFAS No. 132 establishesstandards for employers who provide benefits to former or inactive employeesafter employment but before retirement.  Postemployment benefits include,but are not limited to, salary continuation, supplemental employment benefitsand disability 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 reflect 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 is the same.

 

**Significant Recent AccountingPronouncements**

 

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 for the transition rules governinginterim-period disclosures, SFAS No. 132-R was effective for foreignpension plans for fiscal years ended after June 15, 2004; after theeffective date, restatement for some of the new disclosures is required forearlier annual periods.

 

In December 2004, the FASB issued SFASNo. 123-R which replaces SFAS No. 123 and supersedes AccountingPrinciples Board (“APB”) Opinion No. 25. As originally issued, SFASNo. 123 established as preferable a fair-value-based method of accountingfor share-based payment transactions with employees. However, thatpronouncement permitted entities to continue applying the intrinsic-value-basedmodel of APB Opinion 25, provided that the financial statements disclosedthe pro forma net income or loss based on the fair-value method. The Company isrequired to apply SFAS No. 123-R as of the first interim reporting periodthat begins after December 31, 2005 under a rule adopted by the SECon April 14, 2005 that amends the compliance dates of SFAS No. 123-R.Thus, the Company’s consolidated financial statements will reflect an expensefor (a) all share-based compensation arrangements granted afterDecember 31, 2005 and for any such arrangements that are modified,cancelled, or repurchased after that date, and (b) the portion of previousshare-based awards for which the requisite service has not been rendered as ofthat date, based on the grant-date estimated fair value of those awards.

 

In May 2005, the FASB issued SFASNo. 154, “Accounting Changes and Error Corrections,” which replaces APBOpinion No. 20 and FASB Statement No. 3. This pronouncement appliesto all voluntary changes in accounting principle, and revises the requirementsfor accounting for and reporting a change in accounting principle. SFASNo. 154 requires retrospective application to prior periods’ financialstatements of a voluntary change in accounting principle, unless it isimpracticable to do so. This pronouncement also requires that a change in themethod of depreciation, amortization, or depletion for long-lived,non-financial assets be accounted for as a change in accounting estimate thatis effected by a change in accounting principle. SFAS No. 154 retains manyprovisions of APB Opinion 20 without change, including those related toreporting a change in accounting estimate, a change in the reporting entity,and correction of an error. The pronouncement also carries forward theprovisions of SFAS No. 3 which govern reporting accounting changes ininterim financial statements. SFAS No. 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning afterDecember 15, 2005. The Statement does not change the transition provisionsof any existing accounting pronouncements, including those that were in atransition phase as of the effective date of SFAS No. 154.

 

InFebruary 2006, the FASB issued SFAS No. 155 entitled “Accounting for CertainHybrid Financial Instruments,” an amendment of SFAS No. 133 (“Accounting forDerivative Instruments and Hedging Activities”) and SFAS No. 140 (“Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities”). In this context, a hybrid financial instrument refers to certainderivatives embedded in other financial instruments. SFAS No. 155 permits fairvalue re-measurement of any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation under SFAS No. 133.SFAS No. 155 also establishes a requirement to evaluate interests insecuritized financial assets in order to identify interests that are eitherfreestanding derivatives or “hybrids” which contain an embedded derivativerequiring bifurcation. In addition, SFAS No. 155 clarifies whichinterest/principal strips are subject to SFAS No. 133, and provides thatconcentrations of credit risk in the form of subordination are not embeddedderivatives. SFAS No. 155 amends

 

F-12

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SFASNo. 140 to eliminate the prohibition on a qualifying special-purpose entityfrom holding a derivative financial instrument that pertains to a beneficialinterest other than another derivative. When SFAS No. 155 is adopted, anydifference between the total carrying amount of the components of a bifurcatedhybrid financial instrument and the fair value of the combined “hybrid” must berecognized as a cumulative-effect adjustment of beginning deficit/retainedearnings.

 

SFASNo. 155 is effective for all financial instruments acquired or issued after thebeginning of an entity’s first fiscal year that begins after September 15, 2006.Earlier adoption is permitted only as of the beginning of a fiscal year,provided that the entity has not yet issued any annual or interim financialstatements for such year. Restatement of prior periods is prohibited.

 

Other recent accounting pronouncements issuedby the FASB (including its Emerging Issues Task Force), the American Instituteof Certified Public Accountants and the SEC, did not or are not believed bymanagement to have a material impact on the Company’s present or futureconsolidated financial statements.

 

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

##### ** **

*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 thesale of SPR, including liabilities assumed by the buyer, was $0.4 million.

 

*Sale of Changepoint France*

 

InSeptember 2000, Artemis International France Sarl (“Artemis France”)entered into a joint venture agreement (the “Agreement”) with the Canadiancompany Changepoint Corporation (“Changepoint”) and established the jointventure, Changepoint France Sarl (“Changepoint France”). Artemis France andChangepoint owned 40% and 60% of Changepoint France, respectively. The Agreementprovided for a put and call option for Artemis France to sell and Changepointto purchase the 40% interest held by Artemis France under certain conditions. TheCompany has exercised its put option to sell its 40% interest in ChangepointFrance. In May 2004, Compuware Corporation acquired privately heldChangepoint.

 

An issuearose regarding the Company exercising its put option, which the partiessettled in March of 2005 (the “Settlement”). Pursuant to the Settlement,the Company received $0.8 million (including VAT of $0.1 million) and $0.6million  (including VAT of $0.1 million)in cash in March and April of 2005, respectively, representing thenominal value of the shares held by Artemis France in the joint venture,shareholder loans and other receivables owed to the Company. As a result of theSettlement, the Company recognized a pretax gain of $0.8 million reported underthe caption “Other (income) expense, net” in the Company’s consolidatedstatement of operations for the year ended December 31, 2005.

 

*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 Companyobtained 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 was paid by the Company to AMS in April 2005 and isnon-recoverable. The option fee was capitalized and recorded under the caption “Investmentin affiliates and other assets” in the accompanying consolidated balance sheetat December 31, 2005 and is being amortized over the option term throughNovember 30, 2006. The purchase price for the AMS Software is$2.5 million and is payable in two annual installments, should the Companyelect to exercise such option.

 

Further, the Company has agreed to fund theadditional development work with $0.5 million to be paid in fiveinstallments. The Company made payments of $0.1 million each inDecember 2004 and October 2005.

 

F-13

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**Note 3. Trade Accounts Receivable**

 

At December 31, 2005and 2004 the breakdown of trade accounts receivable was as follows:

 

 
| ** **                           | ** ** | **December 31,**    | ** ** |
|--------------------------------------|------------|---------------------|------------|
| ** **                           | ** ** | **2005**            | ** ** | **2004** | ** ** |
|                                 |       | **(in  thousands)** |       |
| Americas                             |       | $                   | 981        |   | $ | 1,927 |   |
| EMEA                                 |       | 7,918               |       | 8,832 |   |
| Japan                                |       | 335                 |       | 958 |   |
| Asia                                 |       | 244                 |       | 324 |   |
| Total trade account receivables, net |       | $                   | 9,478      |   | $ | 12,041 |   |

 

Changes in theallowance for doubtful accounts receivable were as follows:

 
| ** **                      | ** ** | **For the years ended  December 31,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                            |       | **(in  thousands)**                   |       |
| Beginning balance               |       | $                                     | (265       | ) | $ | (299 | ) |
| Provision for doubtful accounts |       | 59                                    |       | (58 | ) |
| Write-offs                      |       | 4                                     |       | 92 |   |
| Ending balance                  |       | $                                     | (202       | ) | $ | (265 | ) |

 

**Note 4.Property and Equipment**

 

At December 31, 2005 and2004, Property and equipment consisted of the following:

 
| ** **                                      | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------|------------|--------------------|------------|
| ** **                                      | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| Computer hardware                               |       | $                  | 4,853      |   | $ | 5,550 |   |
| Computer software                               |       | 1,515              |       | 1,671 |   |
| Leasehold improvements                          |       | 305                |       | 345 |   |
| Furniture and fixtures                          |       | 951                |       | 1,052 |   |
| Other                                           |       | 42                 |       | 51 |   |
|                                            |       | 7,666              |       | 8,669 |   |
| Less accumulated depreciation and  amortization |       | (7,175             | )          | (7,661 | ) |
| Total                                           |       | $                  | 491        |   | $ | 1,008 |   |
|                                                 |            |                    |            |  |  |  |  |  |

 

**Note 5.Intangible Assets**

 

At December 31, 2005 and2004, intangible assets consisted of the following:

 
| ** **                    | ** ** | **December 31,**   | ** ** |
|-------------------------------|------------|--------------------|------------|
| ** **                    | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                    | ** ** | **(in thousands)** | ** ** |
| Customer base                 |       | $                  | 9,163      |   | $ | 9,163 |   |
| Less accumulated amortization |       | (9,163             | )          | (7,674 | ) |
| Total                         |       | $                  | —     |   | $ | 1,489 |   |

 

Intangible assets areamortized on a straight-line basis over their expected useful lives and werefully amortized in July of 2005. During the fourth quarter of 2004, the Companyevaluated the carrying values of its intangible assets and recorded animpairment charge of approximately $0.9 million on current technologies,representing the remaining unamortized balance. Accordingly, intangible assetsand related accumulated amortization consisted entirely of the customer base atDecember 31, 2005 and 2004. During the years ended December 31, 2005, 2004and 2003, the Company recorded approximately $1.5 million, $4.1 million and$4.1 million in amortization expense.

 

Patents do not protect the Company’sproprietary products. However, to protect the Company’s intellectual propertyrights, the Company licenses its software products and requires its customersto enter into license agreements that impose

 

F-14

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restrictions on their abilityto utilize the software or transfer it 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. Inaddition, the Company protects its software, documentation, templates and otherwritten materials under trademark, trade secret and copyright laws. Even withall 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 the Company’s intellectual property rights,to protect the Company’s trade secrets, or to determine the validity and scopeof the proprietary rights of others, such litigation could result insubstantial costs and diversion of resources and could have a material adverseeffect on the Company’s business, operating results and/or financial condition.Ultimately, the Company may be unable, for financial or other reasons, toenforce its rights under the various intellectual property laws as describedabove. In addition, the laws of certain foreign countries in which the Company’sproducts are or may be licensed may not protect 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 and received a $5.0 million revolving creditfacility (the “Laurus Facility”) in the form of a three-year convertible note(the “Secured Convertible Note”) secured by an interest in all of the Company’sproperty and assets located in the United States (US) and the United Kingdom(UK), except for intellectual property rights. Borrowings under the LaurusFacility were based on the balance of eligible trade accounts receivablereported by the Company’s operating entities in the US and the UK. The LaurusFacility was to automatically renew every three years unless cancelled byeither party. In conjunction with this transaction, Laurus was paid a fee of$175,000 and received a ten-year transferable warrant (the “Laurus Warrant”) topurchase 125,000 shares of the Company’s common stock. The estimated fair valueof the Laurus Warrant of approximately $237,000 has been treated as additionalinterest expense and is being amortized over the three-year life of the LaurusFacility, unless terminated earlier. The fair value of the Laurus Warrant wasestimated based on the following assumptions: expected volatility: 272%;dividends: zero; risk free interest rate: 2.6%; and expected life of thewarrant: five years. The warrant permits Laurus to purchase up to 50,000,50,000, and 25,000 shares of the Company’s common stock at exercise prices of$3.41, $4.10, and $4.78 per share, respectively. The Laurus Warrant exerciseprice and the number of shares underlying the warrant are subject toanti-dilution adjustments for stock splits, 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 (see Note 14) to reduce the amountoutstanding under the Laurus Facility from $3.5 million to$1.3 million. On July 30, 2004, the Company and Laurus agreed toamend the Laurus Facility by replacing the Secured Convertible Note of up to$5.0 million with a Secured Convertible Minimum Borrowing Note (the “MinimumBorrowing Note”) in the amount of $1.5 million and a Secured RevolvingNote of up to $3.5 million (collectively the “Laurus Restructuring”).Effective upon the execution of the Laurus Restructuring documents, the$1.3 million outstanding under the Laurus Facility was incorporated asmonies provided by Laurus under the Minimum Borrowing Note. InAugust 2004, Laurus provided Artemis an additional $0.2 million underthe Minimum Borrowing Note, thereby exhausting the funds available to Artemisunder the Minimum Borrowing Note.

 

The Minimum Borrowing Note was due onAugust 26, 2006 and is convertible into common stock of the Company at theoption of the holder at the following prices: 190,000 shares at $1.45 per share,190,000 shares at $1.81 per share, and 342,646 shares at $2.57 per share,totaling 722,646 shares of common stock of the Company. Loans exceeding $1.5million may be available to the Company under the Secured Revolving Note, basedon the balance of the Company’s eligible trade accounts receivable. If thebalance on the Minimum Borrowing Note is zero, such portion of the balance ofthe Secured Revolving Note that exceeds $1.0 million shall be deemed to beextinguished on the Secured Revolving Note and transferred to a new serializedMinimum Borrowing Note. Once a new serialized Minimum Borrowing Note reaches$1.5 million, the Company is required to file a registration statement with theSEC to register the shares underlying such note. Thereafter, except as amendedon March 31, 2005 (see below), the conversion price adjusts to 105% of theaverage closing market price of the Company’s common stock for the five tradingdays immediately preceding each additional serialized $1.5 million MinimumBorrowing Note. All of the aforementioned conversion prices are subject to ananti-dilution provision in the form of a price protection clause. Under theterms of the related agreement, absent an event of default as defined,conversion of the

 

F-15

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Minimum Borrowing Note into theCompany’s common stock may not result in beneficial ownership by Laurus(including shares issuable under the warrants issued to Laurus in conjunctionwith the Laurus Facility that are exercisable within sixty days of anydetermination date) of more than 2.5% of the Company’s outstanding commonstock. The Minimum Borrowing Note has a 30% prepayment penalty. Any loans underthe Secured Revolving Note are convertible only in the event of a default. TheCompany currently has no loans outstanding under the Secured Revolving Note.

 

During 2005, Laurus converted $635,000 of theoutstanding $1.5 million Minimum Borrowing Note in exchange for 385,978 sharesof the Company’s common stock, leaving $865,000 outstanding under the MinimumBorrowing Note as of December 31, 2005 which is classified as “Short-term debtand line of credit, net” in the accompanying consolidated balance sheet.

 

On March 31, 2005, the Company andLaurus executed a Waiver Letter and Amendment (the “Letter Agreement”). Pursuantto the terms of the Letter Agreement, the Company received $2,850,000, net offees of $150,000, on March 31, 2005 in the form of a revolving creditadvance (the “Advance”) under the existing $5.0 million facility with Laurus. TheAdvance bears interest of one percent (1.00%) per month and becomes due onJanuary 1, 2006. At December 31, 2005, the Advance of $3.0 million isclassified as “Short-term debt and line of credit, net” in the accompanyingconsolidated balance sheet. The parties further agreed that the conversionprice with respect to the next Minimum Borrowing Note (as defined in AmendmentNo. 1 to the Security Agreement, dated July 30, 2004) as may beissued after March 31, 2005 shall be equal to the lesser of (i) $2.92per share or (ii) 105% of the volume weighted average closing price forthe Company’s common stock on the principal market (or on any securitiesexchange or other securities market on which the common stock is then listed orquoted) for the five trading days immediately prior to the $1,500,000aggregation of such new Minimum Borrowing Note.

 

On March 9,2006, the Company agreed with Laurus to repay the Advance of $3.0 million andthe principal outstanding under the Minimum Borrowing Note of $865,000, plusaccrued interest on the earlier of the effective date of the merger transactiondescribed in Note 20, or June 16, 2006. The Company also agreed to pay anadditional $110,000 in exchange for the cancellation of warrants owned byLaurus and any prepayment penalties under the agreements with Laurus.

 

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 was repaid in 2005 (See Note 12).

 

On August 12, 2005, the Company’s whollyowned subsidiary in Japan, Artemis International KK (“Artemis Japan”) enteredinto a loan agreement with a financial institution in the amount ofapproximately $2.1 million (or 233 million Yen). The loan bears interest at1.95% per annum and is due in monthly installments through July 31, 2008. Theproceeds from the loan were used to acquire certain intellectual propertyrights from the Company’s wholly owned subsidiary in the UK. At December 31,2005, $1.7 million was outstanding of which $0.6 million is classified under “Currentportion of long-term debt” and $1.1 million is classified under “Long-terndebt, less current portion” in the accompanying consolidated balance sheet.

 

Interest paid for the years ended December31, 2005, 2004 and 2003 was approximately $0.8 million, $0.3 million and $0.1million, respectively.

 

A summary of the Company’s long-term debt atDecember 31, 2005 and 2004 is as follows:

 
| ** **                                                                                                                                                           | ** ** | **December 31,**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                                                                           | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                           | ** ** | **(in thousands)** | ** ** |
|                                                                                                                                                                 |       |               |       |   |   |
| Bank Loan – Artemis Japan, bearing annual  interest of 1.95% payable through July 31, 2008                                                                      |       | $                  | 1,746      |   | $ | — |   |
|                                                                                                                                                                 |       |               |       |   |   |
| Finnish Government installment loans for  development of software products and Artemis Finland Pension Fund                                                          |       | 355                |       | 439 |   |
|                                                                                                                                                                 |       |               |       |   |   |
| Laurus Minimum Convertible Borrowing Note, average  effective annual interest rate of prime plus 0.75% from July 30, 2004. The  note was due on August 26, 2006 (A). |       | —             |       | 1,500 |   |
|                                                                                                                                                                 |       |               |       |   |   |
| Other long-term liabilities                                                                                                                                          |       | 8                  |       | — |   |
|                                                                                                                                                                 |       | $                  | 2,109      |   | $ | 1,939 |   |
| Less current portion of long term debt                                                                                                                               |       | (611               | )          | (21 | ) |
| Long term debt, less current portion                                                                                                                                 |       | $                  | 1,498      |   | $ | 1,918 |   |

 

----

(A)On March 9, 2006, the Company agreed to repay the amount outstanding under theMinimum Borrowing Note no later than June 16, 2006; see Note 20.

 

See Note 12 for other related party debttransactions.

 

F-16

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**Note 7. Commitments**

 

The Company leases certainfacilities and equipment under non-cancelable operating lease agreements. Rentexpense for the years ended December 31, 2005, 2004 and 2003 wasapproximately $2.7 million, $3.0 million and $3.9 million, respectively.

 

As of December 31, 2005,future minimum rental commitments for the above operating leases are asfollows:

 

| **Year ending December 31,** | ** ** | **(in thousands)** | ** ** |
|------------------------------|------------|--------------------|------------|
| 2006                         |       | $                  | 2,536      |   |
| 2007                         |       | 1,110              |       |
| 2008                         |       | 736                |       |
| 2009                         |       | 591                |       |
| 2010                         |       | 554                |       |
| Thereafter                   |       | 903                |       |
| Total                        |       | $                  | 6,430      |   |

 

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. Allrestructuring activities were expensed in 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,**         | ** ** |
|------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Numerator:                                           |       |                                         |       |   |   |   |   |
| Net loss                                             |       | $                                            | (4,045     | ) | $ | (9,685 | ) | $ | (7,891 | ) |
|                                                 |       |                                         |       |   |   |   |   |
| Denominator:                                         |       |                                         |       |   |   |   |   |
| Weighted average outstanding shares of common  stock |       | 10,717                                       |       | 9,988 |   | 9,965 |   |
| Common stock and equivalents                         |       | 10,717                                       |       | 9,988 |   | 9,965 |   |
|                                                 |       |                                         |       |   |   |   |   |
| Loss per common share:                               |       |                                         |       |   |   |   |   |
| Basic                                                |       | $                                            | (0.38      | ) | $ | (0.97 | ) | $ | (0.79 | ) |
|                                                 |       |                                         |       |   |   |   |   |
| Diluted                                              |       | $                                            | (0.38      | ) | $ | (0.97 | ) | $ | (0.79 | ) |

 

Diluted loss per commonshare for the years ended December 31, 2005, 2004 and 2003 does notinclude the effect of stock options and warrants (see Note 15) since theireffect would be anti-dilutive.  Options and warrants outstanding atDecember 31, 2005, 2004 and 2003 approximated 2.3 million, 2.5 million and1.2 million, respectively.

 

**Note 9. Benefit Plans**

 

The Companyhas a defined contribution plan (“the Plan”) which qualifies underSection 401(k) of the Internal Revenue Code of 1986, as amended. The Plancovers all U.S. employees who may contribute up to 15% of their annualcompensation with an annual maximum of $14,000 for calendar 2005. Employercontributions vest to the participants incrementally over a period of fiveyears. Company contributions to the Plan were $79,000, $54,000 and zeroduring the

 

F-17

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years ended December 31, 2005, 2004 and 2003,respectively.

 

The Company also has adefined benefit pension plan covering the employees of its United Kingdom (“UK”)subsidiary. Company contributions are based upon a percentage, as determined byan actuary, of an eligible employee’s annual salary.  Companycontributions to the defined benefit pension plan during the years endedDecember 31, 2005, 2004 and 2003 were $0.3 million, $0.5 million and $0.2million, respectively. The Company uses a December 31 measurement date for thisdefined benefit pension plan.

 

Net periodic benefit costincluded the following components:

 
| ** **                                       | ** ** | **For the years ended December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                       | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                   | ** ** |
| Service cost                                     |       | $                                    | 306        |   | $ | 261 |   | $ | 191 |   |
| Interest cost                                    |       | 603                                  |       | 517 |   | 388 |   |
| Expected return on plan assets                   |       | (538                                 | )          | (474 | ) | (311 | ) |
| Amortization of unrecognized actuarial net  loss |       | 122                                  |       | 141 |   | 117 |   |
|                                             |       | $                                    | 493        |   | $ | 445 |   | $ | 385 |   |

 

Other pension data follows:

 
| ** **                                      | ** ** | **For the years ended December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                      | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | **(in thousands)**                   | ** ** |
| Change in Benefit Obligation                    |       |                                 |       |   |   |   |   |
| Benefit obligation at beginning of year         |       | $                                    | 11,607     |   | $ | 8,935 |   | $ | 6,281 |   |
| Effect of exchange rate fluctuations            |       | (1,360                               | )          | 758 |   | 731 |   |
| Service cost                                    |       | 306                                  |       | 261 |   | 191 |   |
| Interest cost                                   |       | 603                                  |       | 517 |   | 388 |   |
| Plan participant’s cost                    |       | 105                                  |       | 113 |   | 107 |   |
| Actuarial loss                                  |       | 1,994                                |       | 854 |   | 1,030 |   |
| Amendments                                      |       | —                               |       | 212 |   | — |   |
| Benefits paid, net *                            |       | (101                                 | )          | (43 | ) | 207 |   |
| Benefit obligation at end of year               |       | $                                    | 13,154     |   | $ | 11,607 |   | $ | 8,935 |   |
|                                            |       |                                 |       |   |   |   |   |
| Change in Plan Assets                           |       |                                 |       |   |   |   |   |
| Fair value of plan assets at beginning of  year |       | $                                    | 7,870      |   | $ | 6,065 |   | $ | 4,108 |   |
| Effect of exchange rate fluctuations            |       | (945                                 | )          | 514 |   | 445 |   |
| Actual return on plan assets                    |       | 1,664                                |       | 769 |   | 949 |   |
| Employer contribution                           |       | 313                                  |       | 452 |   | 249 |   |
| Plan participants’ contributions           |       | 105                                  |       | 113 |   | 107 |   |
| Benefits paid, net *                            |       | (101                                 | )          | (43 | ) | 207 |   |
| Fair value of plan assets at end of year        |       | $                                    | 8,906      |   | $ | 7,870 |   | $ | 6,065 |   |

 

----

* Benefits paid are netof transfers from other pension arrangements.

 
| ** **                                                   | ** ** | **December 31,**   | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                   | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                   | ** ** | **(in thousands)** | ** ** |
| **Reconciliation of Funded Status**                          |       |               |       |   |   |   |   |
| Excess of benefit obligation over fair  value of plan assets |       | $                  | (4,248     | ) | $ | (3,737 | ) | $ | (2,870 | ) |
| Unrecognized acturial net loss                               |       | 3,483              |       | 3,110 |   | 2,270 |   |
|                                                         |       | $                  | (765       | ) | $ | (627 | ) | $ | (600 | ) |

 

F-18

----

 

Amounts recognized consist of:

 
| ** **                           | ** ** | **For the years ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                           | ** ** | **(in thousands)**                   | ** ** |
| Accrued benefit cost                 |       | $                                    | (3,408     | ) | $ | (2,740 | ) | $ | (1,659 | ) |
| Accumulated other comprehensive loss |       | 2,643                                |       | 2,113 |   | 1,059 |   |
| Net amount recognized                |       | $                                    | (765       | ) | $ | (627 | ) | $ | (600 | ) |

 

The increase in the additional minimum liability included in othercomprehensive loss approximated $0.5 million, $1.1 million and zero for theyears ended December 31, 2005, 2004 and 2003, respectively.

 

Additional information

 
| ** **                     | ** ** | **December 31,**   | ** ** |
|--------------------------------|------------|--------------------|------------|
| ** **                     | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Pension benefit obligation     |       | $                  | 13,154     |   | $ | 11,607 |   | $ | 8,935 |   |
| Accumulated benefit obligation |       | 12,489             |       | 10,861 |   | 7,734 |   |
| Fair value of plan assets      |       | 8,906              |       | 7,870 |   | 6,065 |   |
|                                |            |                    |            |  |  |  |  |  |  |  |

 

The primary actuarial assumptions used in determining pension benefitobligations and net periodic benefit cost were as follows:

 
| ** **                               | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| ** **                               | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Discount rate                            |       | 5                                    | %          | 5 | % | 5 | % |
| Increase in future compensation          |       | 4                                    | %          | 4 | % | 5 | % |
| Expected long-term return on plan assets |       | 7                                    | %          | 7 | % | 7 | % |

 

The Company’s pension planweighted-average asset allocation at December 31, 2005, 2004 and 2003 by assetcategory is as follows:

 
| ** **      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------|------------|----------|------------|----------|------------|----------|------------|
| Equities        |       | 81       | %          | 85       | %          | 83       | %          |
| Debt securities |       | 5        | %          | 10       | %          | 12       | %          |
| Real estate     |       | 0        | %          | 0        | %          | 3        | %          |
| Other           |       | 14       | %          | 5        | %          | 2        | %          |
|            |       | 100      | %          | 100      | %          | 100      | %          |

 

The definedbenefit pension plan’s assets are invested in the “Discretionary Fund,” whichis a mutual fund that is actively managed by Prudential M&G - the UKaffiliate of Prudential’s international investment management group.  The Discretionary Fund (the “Fund”), whichwas launched in 1983, had total assets of approximately $1.8 billion as ofDecember 31, 2005.  The Fund’s equityinvestments are diversified among stocks representing most segments of themarket, reflecting its conservative approach; at December 31, 2005, the Fund’slargest holding was less than 5% of its total assets.  In addition to active stock selection, assetallocation decisions are made in an attempt to add value relative to the Fund’sbenchmark.  At the end of calendar2005,  the Fund reduced its allocation toequities in Europe and Japan, and correspondingly increased its cash position.Fund management has maintained its general preference for equities over bonds,while the higher-than-average cash position offsets the below-average realestate holdings. Approximately 50% of the Fund’s assets were invested in UKequities as of December 31, 2005, with an additional 14% allocated tosecurities of companies in other Western Europen countries and 8% invested inNorth American companies.

 

At theDecember 31, 2005 British pound/U.S. dollar exchange rate, the pension plan’sactuary estimates that the Company’s contribution to its UK pension plan forcalendar 2006 will approximate $300,000.

 

The following benefits,which reflect expected future service as appropriate, are expected to be paid:

 

| **Year**    | ** ** | **Amount**              | ** ** |
|-------------|------------|-------------------------|------------|
| ** **  | ** ** | **(in thousands)** | ** ** |
| 2006        |       | $                       | 98         |   |
| 2007        |       | 144                     |       |
| 2008        |       | 162                     |       |
| 2009        |       | 191                     |       |
| 2010        |       | 251                     |       |
| 2011 - 2015 |       | 1,576                   |       |
|             |            |                         |            |  |

 

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. Since the Company’s unrecognized prior service cost was nil at December 31,2005 and 2004, the increase in such liability was charged directly tostockholders’ deficit as a component of other comprehensive loss.

 

In July 2004,the Company revised certain disclosures in the above tables relating to theDecember 31, 2003 funded status of the pension plan and the fair value of thepension plan’s assets. The differences principally resulted from thecombination of a mathematical error and misapplication of certainfinancial-statement disclosure requirements. Since the related amounts wereproperly reported in the previously issued financial statements, the amendeddisclosures described in this paragraph did not effect the accompanyingconsolidated financial statements.

 

**Note 10. Income Taxes**

 

The components of the incometax expense are presented below:

 
| ** **     | ** ** | **For the years ended  December 31,** | ** ** |
|----------------|------------|---------------------------------------|------------|
| ** **     | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **     | ** ** | **(in thousands)**                    | ** ** |
| Current        |       | $                                     | 865        |   | $ | 488 |   | $ | 648 |   |
| Deferred taxes |       | (160                                  | )          | (320 | ) | (349 | ) |
|           |       |                                  |       |   |   |   |   |
| Total expense  |       | $                                     | 705        |   | $ | 168 |   | $ | 299 |   |
|                |            |                                       |            |  |  |  |  |  |  |  |  |

 

F-19

----

 

For the year ended December 31,2005, current income tax expense consists of approximately $0.8 million offoreign expense and approximately $0.1 million of state expense.  Thedifference between the total expected tax benefit using the federal statutoryrate of 34% and the actual tax expense for the years ended December 31,2005, 2004 and 2003 is accounted for as follows:

 
| ** **                                                             | ** ** | **For the years ended  December 31,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**                    | ** ** |
| Expected federal income tax benefit                                    |       | $                                     | (1,341     | ) | $ | (2,880 | ) | $ | (2,581 | ) |
| Effect of permanent differences                                        |       | 8                                     |       | 17 |   | (95 | ) |
| State income tax expense (net of federal  benefit)                     |       | (94                                   | )     | 43 |   | 24 |   |
| Other                                                                  |       | 57                                    |       | 368 |   | (344 | ) |
| Change in valuation allowance                                          |       | 2,075                                 |       | (261 | ) | 3,295 |   |
| Reversal of timing difference associated  with forfeited stock options |       | —                                |       | 2,881 |   | — |   |
|                                                                   |       |                                  |       |   |   |   |   |
| Income tax expense                                                     |       | $                                     | 705        |   | $ | 168 |   | $ | 299 |   |

 

Loss before income taxes is analyzed as follows:

 
| ** **                     | ** ** | **For the years ended  December 31,** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                     | ** ** | **(in thousands)**                                   | ** ** |
| Domestic                       |       | $                                                         | (5,145     | ) | $ | (8,538 | ) | $ | (7,654 | ) |
| Foreign                        |       | 1,805                                                     |       | (979 | ) | 62 |   |
| Total loss before income taxes |       | $                                                         | (3,340     | ) | $ | (9,517 | ) | $ | (7,592 | ) |

 

The components of the netaccumulated deferred income tax assets/(liabilities) as of December 31,2005, 2004 and 2003 are as follows:

 
| ** **                                  | ** ** | **December 31,**   | ** **   |
|---------------------------------------------|------------|--------------------|--------------|
| ** **                                  | ** ** | **2005**           | ** **   | **2004** | ** ** | **2003** | ** ** |
| ** **                                  | ** ** | **(in thousands)** | ** **   |
| Deferred tax assets:                        | ** ** | ** **         | ** **   |
| Net operating loss carryforwards            |       | $                  | 11,871       |   | $ | 10,011 |   | $ | 9,035 |   |
| Stock option expense                        |       | —             |         | — |   | 2,129 |   |
| Expenses based on issuance of stock options |       | —             |         | — |   | 752 |   |
| Accumulated depreciation and amortization   |       | 1,627              |         | 1,828 |   | — |   |
| Allowance for doubtful accounts             |       | 17                 |         | 16 |   | 27 |   |
| Accrued expenses                            |       | 256                |         | 277 |   | 315 |   |
|                                        |       | 13,771             |         | 12,132 |   | 12,258 |   |
| Deferred tax liabilities                    |       | —             |         | (595 | ) | (380 | ) |
| Subtotal                                    |       | 13,771             |         | 11,537 |   | 11,878 |   |
| Valuation allowance                         |       | (13,771            | )            | (11,697 | ) | (12,358 | ) |
| Net deferred tax liability                  |       | $                  |  — |   | $ | (160 | ) | $ | (480 | ) |
|                                             |            |                    |              |  |  |  |  |  |  |  |  |

 

The components of deferredtax liabilities at December 31, 2004 and 2003 relate primarily torecording non-deductible intangible assets from the acquisition of LegacyArtemis by Proha in August 2000 and the contribution of businesses toLegacy Artemis by Proha in December 2000.

 

Income taxes paid for theyears ended December 31, 2005, 2004 and 2003 were less than $0.9 millionfor each year.  The Company has a U.S. federal tax net operating losscarry forward (“NOL”) of approximately $32 million at December 31, 2005that begins expiring in 2009 and U.S. state NOL’s with expiration dates rangingfrom five to 20 years. Foreign NOL’s that may be allowed under the tax laws inapplicable foreign countries are not significant.

 

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.

 

F-20

----

 

In December 2004, the FASB issued FASB StaffPosition (“FSP”) 109-2, “Accounting and Disclosure Guidance for the ForeignRepatriation Provision within the American Jobs Creation Act of 2004.”  FSP 109-2 states that an enterprise isallowed time beyond the financial reporting period of enactment to evaluate theeffects of the American Jobs Creation Act of 2004 (the “Act”) on its plan forreinvestment or repatriation of foreign earnings for the purposes of applyingSFAS No. 109. The Company has not yet completed evaluating the impact of therepatriation provisions of the Act. Given the preliminary stage of the Company’sevaluation, it is not possible at this time to determine what impact (if any)the repatriation provisions will have on the consolidated income tax accrualsor the Company’s effective income tax rate. Accordingly, as provided by FSP109-2, the Company has not adjusted its income tax expense or deferred taxliability to reflect the repatriation provisions of the Act.

 

**Note 11: Segment and GeographicInformation**

 

Income from operations is assigned by region based upon managementresponsibility for such items.  The Company redesigned its managementresponsibilities in early 2004 to cover four geographic areas: Americas, EMEA(Europe, Middle East, and Africa), Japan, and Asia. An executive vice presidentof the Company manages each geographic area. The following table presentsinformation about the Company’s operations by geographic area for each of theyears ended December 31, 2005, 2004 and 2003:

 

**TwelveMonths Ended December 31, 2005**

 
| ** **               | ** ** | **Americas** | ** ** | **EMEA** | ** ** | **Japan** | ** ** | **Asia** | ** ** | **Total** | ** ** |
|--------------------------|------------|--------------|------------|----------|------------|-----------|------------|----------|------------|-----------|------------|
| Revenue:                 |       |         |       |     |       |      |       |     |       |      |       |
| Software                 |       | $            | 1,893      |     | $          | 7,537     |       | $        | 1,488      |      | $          | 569 |   | $ | 11,487 |   |
| Support                  |       | 4,987        |       | 10,110   |       | 1,844     |       | 307      |       | 17,248    |       |
| Services                 |       | 2,370        |       | 13,176   |       | 2,777     |       | 307      |       | 18,630    |       |
| Total revenue            |       | 9,250        |       | 30,823   |       | 6,109     |       | 1,183    |       | 47,365    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Cost of revenue:         |       |         |       |     |       |      |       |     |       |      |       |
| Software                 |       | 52           |       | 240      |       | 139       |       | 16       |       | 447       |       |
| Support                  |       | 1,361        |       | 3,274    |       | 288       |       | 67       |       | 4,990     |       |
| Services                 |       | 1,702        |       | 11,365   |       | 1,593     |       | 313      |       | 14,973    |       |
| Total cost of revenue    |       | 3,115        |       | 14,879   |       | 2,020     |       | 396      |       | 20,410    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Gross margin             |       | 6,135        |       | 15,944   |       | 4,089     |       | 787      |       | 26,955    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Operating expenses:      |       |         |       |     |       |      |       |     |       |      |       |
| Selling & marketing  |       | 4,149        |       | 8,576    |       | 1,545     |       | 607      |       | 14,877    |       |
| R&D                  |       | 2,515        |       | 4,772    |       | 575       |       | —   |       | 7,862     |       |
| G&A                  |       | 3,932        |       | 2,818    |       | 427       |       | 198      |       | 7,375     |       |
| Amortization expense     |       | 1,489        |       | —   |       | —    |       | —   |       | 1,489     |       |
| Total operating expenses |       | 12,085       |       | 16,166   |       | 2,547     |       | 805      |       | 31,603    |       |
|                     |       |         |       |     |       |      |       |     |       |      |       |
| Operating income (loss)  |       | $            | (5,950     | )        | $          | (222      | )          | $        | 1,542      |      | $          | (18 | ) | $ | (4,648 | ) |

 

F-21

----

 

**TwelveMonths 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 | ) |

 

**TwelveMonths 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

----

 

Identifiable assets areassigned by region based upon management responsibility for such items. The following table presents information about the Company’s identifiableassets by geographic region:

 

 
| ** **   | ** ** | **December 31,**   | ** ** |
|--------------|------------|-------------------------|------------|
| ** **   | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **   | ** ** | **(in thousands)** | ** ** |
| Americas     |       | $                       | 2,130      |   | $ | 5,260 |   | $ | 10,477 |   |
| EMEA         |       | 11,896                  |       | 14,262 |   | 15,227 |   |
| Japan        |       | 2,429                   |       | 2,113 |   | 2,160 |   |
| Asia         |       | 622                     |       | 685 |   | 494 |   |
| Consolidated |       | $                       | 17,077     |   | $ | 22,320 |   | $ | 28,358 |   |
|              |            |                         |            |  |  |  |  |  |  |  |  |

 

See Note 13 for disclosures regarding majorcustomers.

 

**Note 12. Other Related PartyTransactions**

 

At December 31, 2005, 2004 and 2003, theCompany had other net payables to Proha (which, factoring in the common stockconversion rights of the holders of the Series A preferred stock (see Note14), owns approximately 53% of the Company’s outstanding common stock on apost-conversion basis) of $0.5 million, $0.4 million and$0.3 million, respectively.

 

OnMarch 1, 2004, Artemis Finland entered into a loan agreement with afinancial institution in the amount of approximately $3.1 million. Theloan was originally due on March 1, 2006 and accrued interest at0.5 percentage points above the 3-month Euribor rate per annum, payable ona quarterly basis. The loan was secured by cash collateral provided by Prohaequal to the loan amount and a security interest in substantially all ofArtemis Finland’s assets. Artemis and Proha executed a letter of commitment,whereby Proha agreed to provide the Company sufficient advance notice of itsintent to demand the return of its collateral from the financial institution. OnOctober 11, 2004, the Company received a notification from Proha declaringits intent to demand the return of its $3.1 million collateral. Under thisnotification, the Company was required to repay the loan by January 10,2005. On January 11, 2005, Artemis Finland and Proha informed thefinancial institution to use the cash collateral provided by Proha as themethod by which Artemis Finland shall be deemed to have pre-paid the loan infull. Contemporaneously, Artemis Finland entered into a PaymentSchedule 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 twoinstallments were paid on their due dates and the final installment ofapproximately $0.8 million was made on April 1, 2005.

 

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

 

•                  ArtemisFinland shares office space with Proha, for which Proha charges Artemis Finlanda share of its office-related costs (“Office Allocation Charge”), such as rent,utilities, telecommunication costs, office maintenance and certain otherexpenses based on headcount. The Office Allocation Charge approximated  $424,000, $431,000, and $341,000 for theyears ended December 31, 2005, 2004 and 2003 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 zero forthe years ended December 31, 2005 and 2004, and approximated $80,000 for theyear ended December 31, 2003.

 

•                  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 Feeapproximated $0, $116,000 and $254,000 for the years ended December 31, 2005,2004 and 2003, 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 approximated $158,000,$173,000 and $229,000 for the years ended December 31, 2005, 2004 and 2003,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 approximated $122,000, $175,000 and $225,000for the years ended December 31, 2005, 2004 and 2003, respectively.

 

F-23

----

 

•                  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 approximated $41,000, $29,000 and $47,000 forthe years ended December 31, 2005, 2004 and 2003, respectively.

 

•                  ArtemisFinland has provided certain software development services to ProCountorInternational Oy (“ProCountor”), a company majority owned by Proha (63%). ArtemisFinland has charged approximately $4,000, $0 and $0 to ProCountor for suchsoftware development services for the years ended December 31, 2005, 2004 and2003, 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 approximately $4,000, $20,000 and $11,000 for theyears ended December 31, 2005, 2004 and 2003, respectively.

 

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 a director of the Companyeffective June 16, 2004.

 

On August 12, 2005, the Company’s whollyowned subsidiary in Japan, Artemis International KK (“Artemis Japan”) enteredinto a loan agreement with a financial institution in the amount of approximately$2.1 million (or 233 million Yen), of which $1.7 million was outstanding atDecember 31, 2005. The loan bears interest at 1.95% per annum and is due inmonthly installments through July 31, 2008 (see Note 6).

 

AtDecember 31, 2005, 2004 and 2003, the Company maintained the followingequity holdings in joint ventures, which are accounted for under the equitymethod, with the exception of Metier Scandinavia AS (Norway) and the MetierPlancon BV, which are 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, 2005** | ** ** | **For the year ended  December 31,2005** | ** ** |
|---------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                      | ** ** | **Percent  Held**       | ** ** | **Investment**                          | ** ** | **Total  Investee  Assets**                                  | ** ** | **Artemis  Receivable** | ** ** | **Total  Investee  Revenue** | ** ** | **Equity in  Net Income  (Loss)** | ** ** |
| ** **                      | ** ** | **(in thousands)** | ** ** |
| Metier  Scandinavia AS (Norway) |       | 7.5                     | %          | $                                       | 4          |                                                         | $          | 5,601 |   | $ | — |   | $ | 10,443 |   | $ | 78 |   |
| Metier  Plancon BV              |       | 11.8                    | %          | 53                                      |       | 807                                                          |       | 272 |   | 3,013 |   | 9 |   |
| DA  Management Solutions        |       | 29.0                    | %          | 6                                       |       | 52                                                           |       | — |   | — |   | (1 | ) |
| Other  Distributors             |       | 0                       | %          |                                    |       | —                                                       |       | 50 |   | — |   | — |   |
|                            |       |                    |       | $                                       | 63         |                                                         | $          | 6,460 |   | $ | 322 |   | $ | 13,456 |   | $ | 86 |   |
|                            |       |                    |       |                                    |       |                                                         |       |   |   |   |   |   |   |
| ** **                      | ** ** | ** **              | ** ** | **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 |   |
|                                 |            |                         |            |                                         |            |                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-24

----

 
| ** **                      | ** ** | ** **              | ** ** | **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 | ) |
|                                 |            |                         |            |                                         |            |                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

InSeptember 2000, Artemis International France Sarl (“Artemis France”)entered into a joint venture agreement (the “Agreement”) with the Canadiancompany Changepoint Corporation (“Changepoint”) and established the jointventure, Changepoint France Sarl (“Changepoint France”). Artemis France andChangepoint owned 40% and 60% of Changepoint France, respectively. TheAgreement provided for a put and call option for Artemis France to sell andChangepoint to purchase the 40% interest held by Artemis France under certainconditions. The Company has exercised its put option to sell its 40% interestin Changepoint France. In May 2004, Compuware Corporation acquiredprivately held Changepoint.

 

An issuearose regarding the Company exercising its put option, which the partiessettled in March of 2005 (the “Settlement”). Pursuant to the Settlement,the Company received $0.8 million (including VAT of $0.1 million) and $0.6million  (including VAT of $0.1 million)in cash in March and April of 2005, respectively, representing thenominal value of the shares held by Artemis France in the joint venture,shareholder loans and other receivables owed to the Company. As a result of theSettlement, the Company recognized a pretax gain of $0.8 million reported underthe caption “Other (income), net” in the Company’s consolidated statement ofoperations for the year ended December 31, 2005.

 

**Note 13. Concentration of CreditRisk**

 

During the years endedDecember 31, 2005, 2004 and 2003, one customer, Lockheed MartinCorporation, accounted for approximately $2.5 million (about 5%), $3.8 million(about 7%) and $5.7 million (about 10%), respectively, of consolidatedrevenue.  Substantially all of this revenue was generated in the Americassegment of the Company’s operations.

 

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 of convertiblepreferred stock (the “Series A Preferred Stock”) to certain accreditedinvestors (the “Series A Holders”), priced at $2.20 per share, each of which isconvertible 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 were exercisableonly in the event that the Six Month Price (as defined below) was 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 was 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 exercisedtheir Additional Warrants resulting in the issuance of 279,188 shares of commonstock. In January 2005, 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).

 

F-25

----

 

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.

 

During 2005, Laurus converted $635,000 of theoutstanding $1.5 million Minimum Borrowing Note in exchange for 385,978 sharesof the Company’s common stock (see Note 6).

 

In addition, certain former employees and formerdirectors exercised their stock options during 2005, resulting in the issuanceof 68,212 shares of the Company’s common stock.

 

**Note 15. Stock Options and Warrants**

 

*Stock Options*

 

The Companyhas granted options to purchase the Company’s restricted common stock undervarious plans to employees and directors.  The Compensation Committee ofthe Board of Directors, which determines the terms of the options granted,including the exercise price, the number of shares subject to option, and thevesting period, administers all stock option plans.  Optionsgenerally vest over terms of three to five years and have a maximum life of tenyears.

 

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 acquirer for accounting purposes in theShare Exchange Transactions, Opus360 as a legal entity survived the consummationof such transaction. Options granted under Opus 360 plans are redeemable in thecommon stock of Artemis. The following description of the Company’s stockoption plans reflects the stock option plans of Opus 360 and Legacy Artemisprior to the merger, and the status of the following plans after July 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 170,492 options available under the plan and 32,811 outstanding as ofDecember 31, 2005. As options become available due to cancellation andforfeiture, they are added to the pool of options available for grant under the2000 Stock Option Plan.

 

•                  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 optionsgranted under the 1998 Plan and subsequently cancelled are available for grantunder the 2000 Plan.  Options granted, exercised and cancelled under the2000 Plan are 2,266,080, 62,358 and 728,684 respectively, leaving 2,045,358options available under the 2000 Plan, including the cancelled 1998 Planoptions, and 1,475,038 options outstanding as of December 31, 2005. Effective November 30, 2004, the 2000 Plan wasamended and restated to provide for the issuance of 2,000,000 options, withautomatic increases (on January 1 of each year) in options available for grantequal to 5% of the Company’s outstanding common stock, as of the precedingDecember 31 up to a maximum of 5,000,000 options. Options granted under the2000 Plan include approximately 315,000 with vesting contingent upon theCompany meeting certain annual financial performance goals.

 

•                  The 2000 Non-Employee Directors’ Plan (the “Non-EmployeeDirectors Plan”) provides for automatic, non-discretionary grants of up to300,000 non-qualified stock options to non-employee board members. Under theNon-Employee

 

F-26

----

 

DirectorsPlan, 243,900, 52,440 and 7,500 options have been granted, cancelled andexercised, respectively, and 183,960 options remain outstanding atDecember 31, 2005. Effective November 30, 2004, theNon-Employee Directors Plan was amended and restated to provide that eachNon-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 ofDecember 31, 2005, 46,983 of these stock options with an exercise price of $250are outstanding 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, 2005, none ofthese options were outstanding.

 

*Warrants*

 

There were 535,952 warrantsto purchase Company common stock outstanding and exercisable atDecember 31, 2005. The per-share exercise prices of these warrants rangefrom $2.64 to $46.25 and they expire through 2013.

 

The following tablessummarize information concerning outstanding options and warrants atDecember 31, 2005:

 

| ** **                       | ** ** | ** **              | ** ** | **Weighted** | ** ** |
|----------------------------------|------------|-------------------------|------------|--------------|------------|
| ** **                       | ** ** | ** **              | ** ** | **Average**  | ** ** |
| ** **                       | ** ** | **Stock Options**  | ** ** | **Exercise** | ** ** |
| ** **                       | ** ** | **and Warrants**   | ** ** | **Price**    | ** ** |
| ** **                       | ** ** | **(In thousands)** | ** ** | ** **   | ** ** |
| 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        |       |
| Granted                          |       | 159                     |       | 2.79         |       |
| Exercised                        |       | (246                    | )          | 0.44         |       |
| Cancelled or forfeited           |       | (164                    | )          | 1.53         |       |
| Outstanding at December 31, 2005 |       | 2,275                   |       | 15.01        |       |
|                             |       |                    |       |         |       |
| Exercisable at December 31, 2003 |       | 712                     |       |         |       |
| Exercisable at December 31, 2004 |       | 1,703                   |       |         |       |
| Exercisable at December 31, 2005 |       | 1,731                   |       |         |       |
|                                  |            |                         |            |              |            |  |

 

The weightedaverage grant-date estimated fair value of stock options and warrants grantedin 2003, 2004 and 2005 approximated $240,000, $2.8 million, and $330,000,respectively.  The total intrinsic valueof stock options and warrants exercised in 2004 and 2005 approximated $850,000and $560,000, respectively.

 

F-27

----

 
| ** **          | ** ** | ** **       | ** ** | **Options and Warrants Outstanding** | ** ** | **Options and Warrants  Exercisable** | ** ** |
|---------------------|------------|------------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| ** **          | ** ** | ** **       | ** ** | ** **                           | ** ** | **Weighted**                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **       | ** ** | **Number**                           | ** ** | **Average**                           | ** ** | ** ** | ** ** | **Number** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **       | ** ** | **Outstanding**                      | ** ** | **Remaining**                         | ** ** | **Weighted** | ** ** | **Exercisable** | ** ** | **Weighted** | ** ** |
| ** **          | ** ** | ** **       | ** ** | **at**                               | ** ** | **Contractual**                       | ** ** | **Average** | ** ** | **at** | ** ** | **Average** | ** ** |
| **Range of**        | ** ** | **December 31,** | ** ** | **Life**                             | ** ** | **Exercise**                          | ** ** | **December 31,** | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **2005**         | ** ** | **in Years**                         | ** ** | **Price**                             | ** ** | **2005** | ** ** | **Price** | ** ** |
| ** **          | ** ** | ** **       | ** ** | **(In thousands)**                   | ** ** | ** **                            | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| $                   | 1.25       |             | $          | 27.50                                |       | 2,131                                 |       | 6.3 |   | $ | 2.05 |   | 1,588 |   | $ | 2.16 |   |
| 27.51               |       | 55.00            |       | 1                                    |       | 0.6                                   |       | 46.25 |   | 1 |   | 46.25 |   |
| 55.01               |       | 82.50            |       | 5                                    |       | 4.7                                   |       | 67.00 |   | 5 |   | 66.91 |   |
| 82.51               |       | 110.00           |       | 35                                   |       | 4.6                                   |       | 94.35 |   | 35 |   | 94.35 |   |
| 110.01              |       | 137.50           |       | 3                                    |       | 4.4                                   |       | 123.50 |   | 3 |   | 123.50 |   |
| 220.01              |       | 247.50           |       | 6                                    |       | 4.2                                   |       | 227.75 |   | 6 |   | 227.75 |   |
| 247.51              |       | 275.00           |       | 94                                   |       | 4.1                                   |       | 260.26 |   | 93 |   | 260.26 |   |
|                |       |             |       | 2,275                                |       | 6.1                                   |       | 15.01 |   | 1,731 |   | 19.19 |   |
|                     |            |                  |            |                                      |            |                                       |            |  |  |  |  |  |  |  |  |  |  |

 

The weightedaverage remaining contractual life of stock options and warrants that areexercisable as of December 31, 2005 approximates 5.5 years.  The aggregate December 31, 2005 intrinsic valueof such options and warrants approximates $25,000.

 

**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.

 

**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, 2005.  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**                                                   | ** ** | **Jun. 30**    | ** ** | **Sept. 30** | ** ** | **Dec. 31** | ** ** | **Dec. 31** | ** ** |
| ** **                                                                         | ** ** | **2005**                                                           | ** ** | **2005**            | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Statement of Operations Data:**                                     |       |                                                               |       |                |       |   |   |   |   |   |   |
| Revenues                                                                           |       | $                                                                  | 11,971     |                | $          | 12,373 |   | $ | 10,069 |   | $ | 12,952 |   | $ | 47,365 |   |
| Operating loss                                                                     |       | (1,660                                                             | )          | (1,179              | )          | (1,624 | ) | (185 | ) | (4,648 | ) |
| Net loss                                                                           |       | (1,254                                                             | )          | (883                | )          | (1,353 | ) | (555 | ) | (4,045 | ) |
| Basic and diluted loss per common share                                            |       | (0.12                                                              | )          | (0.08               | )          | (0.13 | ) | (0.05 | ) | (0.38 | ) |
| Weighted average shares used in computing  basic and diluted loss per common share |       | 10,563                                                             |       | 10,710              |       | 10,711 |   | 10,717 |   | 10,717 |   |
|                                                                                    |            |                                                                    |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                                         | ** ** | **Quarter Ended**                                             | ** ** | **Year Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                                         | ** ** | **Mar. 31**                                                   | ** ** | **Jun. 30**    | ** ** | **Sept. 30** | ** ** | **Dec. 31** | ** ** | **Dec. 31** | ** ** |
| ** **                                                                         | ** ** | **2004**                                                           | ** ** | **2004**            | ** ** | **2004** | ** ** | **2004** | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(In thousands, except per share 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 |   |
|                                                                                    |            |                                                                    |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |

 

**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 and future operatingperformance. The Company implemented the Restructuring during the year endedDecember 31, 2004.  The Company’s total

 

F-28

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chargerelated to this Restructuring was approximately $2.7 million as disclosed inthe accompanying consolidated statements of operations.

 

The Restructuring charge recognized in 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 summarizes theCompany’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 |   |
|                       |       | $                                                 | 1,248      |   | $ | 148 |   | $ | 653 |   | $ | 691 |   | $ | 2,740 |   |

 

As part of the Restructuring, the Company reducedits workforce by a total of seventy-one employees, from 396 to 325 (whichincludes scheduled terminations and voluntary resignations) or approximately18% of its workforce.  The Restructuring charge has affected corporatepositions and certain operational positions as follows:

 
| ** **                 | ** ** | **Restructuring Costs by Region** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|
| ** **                 | ** ** | **Americas**                                     | ** ** | **EMEA** | ** ** | **Japan/Asia*** | ** ** | **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 |   |

 

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* 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 thefunctional 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 accrued liabilities in theaccompanying December 31, 2004 consolidated balance sheet.

 

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.

 

At February 28, 2006, the Company reported aheadcount of 283. This reduction of forty-two employees or 13% of the Company’sworkforce since December 2004 is a result of attrition and discretionaryrestructuring actions. The Company did not initiate any non-discretionary restructuringplans in 2005.

 

**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, the Company restated its comprehensive loss forthe year ended December 31, 2003 to correct the foreign currency translationadjustment related to the Company’s investment in Changepoint 

 

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France. Suchadjustment did not affect the Company’s previously reported net loss for 2003.The calculation of the restated comprehensive loss for the year ended December31, 2003 is as follows:

 

 

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

 

**Note20. Subsequent Events (Unaudited)**

** **

*Merger Agreement*

 

On March 10, 2006, the Company entered into amerger agreement with a wholly owned subsidiary of Trilogy, Inc., RCNAcquisition, Inc. (“RCN”) in a transaction (hereinafter referred to asthe “Merger”) valued at approximately $27 million. The merger agreementprovides for the payment of $1.60 per share (the “Common Stock MergerConsideration”) to holders of the Company’s common stock, and $2.20 per sharefor the holders of Series A Preferred Stock of the Company, which representstheir liquidation value pursuant to the Certificate of Designations,Preferences and Rights of Series A Convertible Preferred Stock. The transactionis subject to certain covenants relating to the Company’s financial performanceand the approval of the stockholders of Artemis, with a meeting of thestockholders expected to be held in May 2006. On completion of the merger,Artemis would become part of Trilogy’s recently announced Versata Group.  As a wholly-owned subsidiary of RCN, theCompany would be able to discontinue its Exchange Act reportingresponsibilities. All outstanding options under the Company’s optionplans with an exercise price below the Common Stock Merger Consideration willbe converted into the right to receive the value between the exercise price andthe Common Stock Merger Consideration. Outstanding options with an exerciseprice equal to or greater than the Common Stock Merger Consideration willreceive no payment and will be cancelled. The holders of warrants issued inconnection with the Series A Preferred Stock have agreed to cancel theiroutstanding warrants for no consideration.

 

In addition, under the terms of the mergeragreement, the Company’s current majority stockholder (Proha) has the right toseek a superior merger/buy-out proposal through March 31, 2006. The transactionis subject to a termination fee of $750,000, which would apply whether asuperior proposal is submitted either as a result of Proha’s efforts or in anunsolicited manner through the date of the aforementioned shareholders’meeting.

 

Joseph Liemandt, a member of the Board of Directorsof the Company, is the Chairman of the Board, CEO and President of Trilogy,Inc., which wholly owns Trilogy Capital Holdings Corporation (f/k/a SamuelsonInvestment Inc.), a holder of Series A Preferred Stock of Artemis. In addition,and as noted above, RCN is a wholly owned subsidiary of Trilogy, Inc.

 

The merger agreement has been publicly disclosed toprovide investors with information regarding its terms and is not intended toprovide any other factual information about Artemis and its affiliates orTrilogy and its affiliates. The merger agreement contains representations andwarranties the parties thereto made to and solely for the benefit of each other.The assertions embodied in those representations and warranties are qualifiedby information in confidential disclosure schedules that the parties haveexchanged in connection with signing the merger agreement and that modify,qualify and create exceptions to the representations and warranties containedin the merger agreement. Accordingly, investors should not rely on therepresentations and warranties as characterizations of the actual state offacts, since (i) they were made only as of the date of the merger agreement ora prior, specified date, (ii) in some cases they are subject to qualificationswith respect to materiality, knowledge and/or other matters and (iii) they aremodified in important part by the underlying disclosure schedules. Thedisclosure schedules contain information that has been included in the Company’sprior public disclosures, as well as non-public information. Moreover,information concerning the subject matter of the representations and warrantiesmay have changed since the date of the merger agreement, which subsequentinformation may or may not be fully reflected in Artemis’ public disclosures.

 

*VotingAgreement*

 

Concurrent with the execution of the merger agreement, Proha and amajority of the Company’s Series A Preferred Stockholders executed a voting agreement (the “VotingAgreement”) pursuant to which they have agreed to vote their shares in favor ofthe merger and not to solicit, assist or vote for an alternative transaction,except that Proha has the right to seek a superior proposal until March31, 2006. The Voting Agreementterminates if (i) the merger agreement is terminated or (ii) in certaininstances, at Proha’s discretion. These stockholders are able to transfer theirshares of the Company’s securities as long as the transferee agrees to be boundby the terms of the Voting Agreement.

 

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##### ***Proha Agreement***

 

Concurrent with the execution of the merger agreement, Proha and theCompany executed an agreement (“Proha Agreement”) that sets forth certaincommitments relating to indebtedness between Proha and the Company, as well astransition arrangements between Proha and one of the Company’s affiliates,Artemis Finland. Within five business days of the close of the Merger, theCompany will pay $0.4 million to Proha to settle the indebtedness between theparties. In addition, the parties have agreed to negotiate in good faith and toexecute extensions of a lease agreement and an administrative servicesagreement between Proha and Artemis Finland, with such extensions to be onterms consistent with those currently in effect, for such period as shall bereasonably requested by the Company.

 

##### ***Laurus Agreement***

 

Concurrent with the execution of the merger agreement, the Company hasalso executed an agreement (the “Laurus Agreement”) that provides a finalpayout relating to, and thereby closing, the Company’s current line of creditsecured with Laurus. By theearlier of the close of the Merger or June 16, 2006 (the “Payout Date”), theCompany has agreed to pay Laurusthe following amounts:  (i) all principaloutstanding pertaining to the over-advance provided to the Company, whichequals $3.0 million plus accrued interest, (ii) all principal outstanding underthe minimum borrowing note, which equals $0.9 million plus accrued interest and(iii) $110,000 in exchange for the cancellation of their warrants  (collectively, the “Payments”). There are noadditional prepayment penalties due resulting from closing the Laurus Facility.The parties have agreed to execute a customary payoff letter releasing allguarantees and liens under the Laurus Facility at the Payout Date (See Note 6for further disclosure on the Laurus Facility).

 

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