**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

----

**FORM 10-Q**
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

**For the Quarter Ended September30, 2001**

**Commission File Number000-31589**

**VASTERA, INC.**(Exact Name ofRegistrant as Specified in its Charter)

| **Delaware**                     | **54–1616513**     |
|----------------------------------|-------------------------|
| (State  or Other Jurisdiction of | (I.R.S.  Employer       |
| Incorporation  or Organization)  | Identification  Number) |

**45025 Aviation Drive, Suite 300Dulles, VA 20166(703) 661-9006**(Address and phone number of principal executive offices)

----

Indicate bycheck number whether the registrant (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes       ý         No        o

At November 6,2001 there were 38,387,051 shares of the registrant's Common Stock, $.01 parvalue per share, outstanding.

 

**VASTERA, INC.**

**TABLE OF CONTENTS**
| **PART I — FINANCIAL  INFORMATION**                                                                   |                                                                                                              |
|------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------|
|                                                                                                       |                                                                                                              |
| ITEM 1 – Financial Statements                                                                         |                                                                                                              |
|                                                                                                       |                                                                                                              |
|                                                                                                       | Condensed  Consolidated Balance Sheets as of December 31, 2000 and September 30, 2001                             |   |
|                                                                                                       |                                                                                                              |   |
|                                                                                                       | Condensed  Consolidated Statements of Operations for the Three and Nine Months Ended  September 30, 2000 and 2001 |   |
|                                                                                                       |                                                                                                              |   |
|                                                                                                       | Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended September 30,  2000 and 2001           |   |
|                                                                                                       |                                                                                                              |   |
|                                                                                                       | Notes  to Unaudited Condensed Consolidated Financial Statements                                                   |   |
|                                                                                                       |                                                                                                              |   |
| ITEM  2 – Management’s Discussion and Analysis of Financial Condition and Results  of Operations |                                                                                                              |
|                                                                                                       |                                                                                                              |
| ITEM  3 – Quantitative and Qualitative Disclosures of Market Risk                                     |                                                                                                              |
|                                                                                                       |                                                                                                              |
| **PART II – OTHER INFORMATION**                                                                       |                                                                                                              |
|                                                                                                       |                                                                                                              |
| ITEM 1 – Legal Proceedings                                                                            |                                                                                                              |
| ITEM  2 – Changes in Securities and Use of Proceeds                                                   |                                                                                                              |
| ITEM 6 –  Exhibits and Reports on Form 8-K                                                            |                                                                                                              |
|                                                                                                       |                                                                                                              |
| **SIGNATURES**                                                                                             |                                                                                                              |

 

 

**PART I – FINANCIAL INFORMATION****(UNAUDITED)**

 

**Item 1:              FinancialStatements**

**VASTERA, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS****(In thousands, except per share data)**
|                                                                                                                                                                     |   | **December 31,** |       | **September 30,**   |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|------------|---------------------|------------|
|                                                                                                                                                                     |   | **2000**         |       | **2001**            |       |
|                                                                                                                                                                     |   |             |       | **(Unaudited****)** |       |
| **Assets**                                                                                                                                                               |   |             | ** ** |                | ** ** |
| Current assets:                                                                                                                                                          |   |             |       |                |       |
| Cash and cash equivalents                                                                                                                                                |   | $                | 19,693     |                | $          | 10,537 |   |
| Short–term investments                                                                                                                                              |   | 70,978           |       | 65,094              |       |
| Accounts receivable, net of allowance for  doubtful accounts of $665 and $789, respectively                                                                              |   | 11,163           |       | 11,832              |       |
| Prepaid expenses and other current assets                                                                                                                                |   | 1,653            |       | 2,337               |       |
| Total current assets                                                                                                                                                     |   | 103,487          |       | 89,800              |       |
| Property and equipment, net                                                                                                                                              |   | 6,183            |       | 7,076               |       |
| Intangible assets, net                                                                                                                                                   |   | 75,302           |       | 70,422              |       |
| Deposits and other assets                                                                                                                                                |   | 538              |       | 716                 |       |
|                                                                                                                                                                     |   |             |       |                |       |
| Total assets                                                                                                                                                             |   | $                | 185,510    |                | $          | 168,014 |   |
|                                                                                                                                                                     |   |             |       |                |       |
| **Liabilities and  Stockholders' Equity**                                                                                                                                |   |             |       |                |       |
| Current liabilities:                                                                                                                                                     |   |             |       |                |       |
| Line of credit and capital lease obligations,  current                                                                                                                   |   | $                | 1,837      |                | $          | 2,237 |   |
| Accounts payable                                                                                                                                                         |   | 2,896            |       | 4,735               |       |
| Accrued expenses                                                                                                                                                         |   | 3,422            |       | 3,893               |       |
| Accrued compensation and benefits                                                                                                                                        |   | 3,683            |       | 4,191               |       |
| Deferred revenue, current                                                                                                                                                |   | 10,171           |       | 6,203               |       |
| Total current liabilities                                                                                                                                                |   | 22,009           |       | 21,259              |       |
| Long–term liabilities:                                                                                                                                              |   |             |       |                |       |
| Line of credit and capital lease obligations,  net of current portion                                                                                                    |   | 1,787            |       | 2,052               |       |
| Deferred revenue, net of current portion                                                                                                                                 |   | 2,704            |       | 2,147               |       |
| Total liabilities                                                                                                                                                        |   | 26,500           |       | 25,458              |       |
|                                                                                                                                                                     |   |             |       |                |       |
|                                                                                                                                                                     |   |             |       |                |       |
| Stockholders' equity:                                                                                                                                                    |   |             |       |                |       |
| Common stock, $0.01 par value; 100,000 shares  authorized; 36,336 and 38,171 shares issued and outstanding as of December  31, 2000 and September 30, 2001, respectively |   | 363              |       | 383                 |       |
| Additional paid–in capital                                                                                                                                          |   | 292,887          |       | 310,173             |       |
| Accumulated other comprehensive income                                                                                                                                   |   | 66               |       | 201                 |       |
| Deferred compensation                                                                                                                                                    |   | (8,927           | )          | (4,680              | )          |
| Accumulated deficit                                                                                                                                                      |   | (125,379         | )          | (163,521            | )          |
|                                                                                                                                                                     |   |             |       |                |       |
| Total stockholders' equity                                                                                                                                               |   | 159,010          |       | 142,556             |       |
|                                                                                                                                                                     |   |             |       |                |       |
| Total liabilities and stockholders' equity                                                                                                                               |   | $                | 185,510    |                | $          | 168,014 |   |

The accompanying notes are an integral part ofthese condensed consolidated financial statements.

 

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS****(Unaudited)(In thousands, except per share data)**
|                                                               | **Three Months Ended September 30,**      |    | **Nine Months Ended September 30,** |    |
|--------------------------------------------------------------------|-------------------------------------------|---------|-------------------------------------|---------|
|                                                               | **2000**                                  |    | **2001**                            |    | **2000** |   | **2001** |   |
|                                                               |                                      |    |                                |    |   |   |   |   |
| **Revenues:**                                                      |                                      |    |                                |    |   |   |   |   |
|                                                               | Subscription/transaction revenues         | $       | 4,327                               |    | $ | 11,466 |   | $ | 9,956 |   | $ | 29,652 |   |
|                                                               | Services revenues                         | 4,210   |                                | 5,239   |   | 12,016 |   | 14,176 |   |
|                                                               |                                      |    |                                |    |   |   |   |   |
|                                                               | Total revenues                            | 8,537   |                                | 16,705  |   | 21,972 |   | 43,828 |   |
|                                                               |                                      |    |                                |    |   |   |   |   |
| **Cost of revenues:**                                              |                                      |    |                                |    |   |   |   |   |
|                                                               | Cost of subscription/transaction revenues | 1,657   |                                | 4,747   |   | 2,398 |   | 12,549 |   |
|                                                               | Cost of services revenues                 | 3,082   |                                | 3,551   |   | 9,582 |   | 9,757 |   |
|                                                               |                                      |    |                                |    |   |   |   |   |
| **Operating expenses:**                                            |                                      |    |                                |    |   |   |   |   |
|                                                               | Sales and marketing                       | 3,400   |                                | 4,893   |   | 10,045 |   | 13,805 |   |
|                                                               | Research and development                  | 2,975   |                                | 3,667   |   | 9,132 |   | 10,958 |   |
|                                                               | General and administrative                | 1,526   |                                | 2,317   |   | 3,883 |   | 6,711 |   |
|                                                               | Depreciation                              | 594     |                                | 849     |   | 1,594 |   | 2,351 |   |
|                                                               | Amortization                              | 1,677   |                                | 5,710   |   | 1,916 |   | 16,497 |   |
|                                                               | In-process research and development       | -       |                                | -       |   | - |   | 6,901 |   |
|                                                               | Stock–based compensation             | 2,517   |                                | 1,421   |   | 8,128 |   | 4,684 |   |
|                                                               |                                      |    |                                |    |   |   |   |   |
|                                                               | Total operating expenses                  | 12,689  |                                | 18,857  |   | 34,698 |   | 61,907 |   |
|                                                               |                                      |    |                                |    |   |   |   |   |   |
|                                                               | Loss from operations                      | (8,891  | )                                   | (10,450 | ) | (24,706 | ) | (40,385 | ) |
|                                                               | Other income (expense)                    | (8      | )                                   | 505     |   | 64 |   | 2,243 |   |
|                                                               |                                      |    |                                |    |   |   |   |   |
| Net loss                                                           | (8,899                                    | )       | (9,945                              | )       | (24,642 | ) | (38,142 | ) |
| Dividends and accretion on redeemable  convertible preferred stock | (22,176                                   | )       | -                                   |    | (35,602 | ) | - |   |
|                                                               |                                      |    |                                |    |   |   |   |   |
| Net loss applicable to common stockholders                         | $                                         | (31,075 | )                                   | $       | (9,945 | ) | $ | (60,244 | ) | $ | (38,142 | ) |
|                                                               |                                      |    |                                |    |   |   |   |   |
| Basic and diluted net loss per common share                        | $                                         | (3.23   | )                                   | $       | (0.26 | ) | $ | (7.94 | ) | $ | (1.02 | ) |
|                                                               |                                      |    |                                |    |   |   |   |   |
| Weighted–average common shares  outstanding                   | 9,630                                     |    | 38,060                              |    | 7,587 |   | 37,392 |   |
|                                                               |                                      |    |                                |    |   |   |   |   |
| Pro forma basic and diluted net loss per  common share             | $                                         | (0.38   | )                                   | $       | (0.26 | ) | $ | (1.19 | ) | $ | (1.02 | ) |
|                                                               |                                      |    |                                |    |   |   |   |   |
| Pro forma weighted–average common shares  outstanding         | 23,697                                    |    | 38,060                              |    | 20,702 |   | 37,392 |   |
|                                                                    |                                           |         |                                     |         |  |  |  |  |  |  |  |  |  |  |

 

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

 

**C****ONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)(In thousands)**

** **
|                                                                           | **Nine Months Ended  September 30,**                                         |    |
|--------------------------------------------------------------------------------|------------------------------------------------------------------------------|---------|
|                                                                           | **2000**                                                                     |    | **2001** |   |
| **Cash flows from operating  activities:**                                     |                                                                         |    |   |   |
|                                                                           | Net loss                                                                     | $       | (24,642 | ) | $ | (38,142 | ) |
|                                                                           | Adjustments to reconcile net loss to net cash  used in operating activities: |    |   |   |   |
|                                                                           | Stock–based compensation                                                | 8,128   |   | 4,684 |   |
|                                                                           | Depreciation and amortization                                                | 3,510   |   | 18,848 |   |
|                                                                           | In process research and development                                          | --      |   | 6,901 |   |
|                                                                           | Provision for allowance for doubtful accounts                                | 200     |   | 829 |   |
|                                                                           | Amortization of revenue discount related to  Ford contract                   | 26      |   | 225 |   |
|                                                                           | Amortization of revenue discount related to  warrants issued to a customer   | 225     |   | -- |   |
|                                                                           |                                                                         |    |   |   |
|                                                                           | Changes in operating assets and liabilities:                                 |    |   |   |   |
|                                                                           | Accounts receivable                                                          | (7,037  | ) | (1,502 | ) |
|                                                                           | Prepaid expenses and other current assets                                    | (2,136  | ) | (686 | ) |
|                                                                           | Deposits and other assets                                                    | 154     |   | (225 | ) |
|                                                                           | Accounts payable and accrued expenses                                        | 2,695   |   | (1,566 | ) |
|                                                                           | Accrued compensation and benefits                                            | 48      |   | (885 | ) |
|                                                                           | Deferred revenue                                                             | 2,039   |   | (4,525 | ) |
|                                                                           | Net cash used in operating activities                                        | (16,790 | ) | (16,044 | ) |
|                                                                           |                                                                         |    |   |   |
| **Cash flows from investing  activities:**                                     |                                                                         |    |   |   |
|                                                                           | Net sales of short-term investments                                          | 762     |   | 6,118 |   |
|                                                                           | Acquisition of property and equipment                                        | (1,889  | ) | (1,061 | ) |
|                                                                           | Net cash used in investing activities                                        | (1,127  | ) | 5,057 |   |
|                                                                           |                                                                         |    |   |   |
| **Cash flows from financing  activities:**                                     |                                                                         |    |   |   |
|                                                                           | Proceeds from issuance of redeemable  convertible preferred stock            | 16,974  |   | -- |   |
|                                                                           | Proceeds from the exercise of stock options  and preferred stock warrants    | 3,693   |   | 3,317 |   |
|                                                                           | Principal payments on long–term debt                                    | (728    | ) | (1,466 | ) |
|                                                                           | Net cash provided by (used in) financing  activities                         | 19,939  |   | 1,851 |   |
| Effect of foreign currency exchange rate  changes on cash and cash equivalents | (149                                                                         | )       | (20 | ) |
|                                                                           | Net decrease in cash and cash equivalents                                    | 1,873   |   | (9,156 | ) |
| Cash and cash equivalents, beginning of period                                 | 961                                                                          |    | 19,693 |   |
| Cash and cash equivalents, end of period                                       | $                                                                            | 2,834   |   | $ | 10,537 |   |
|                                                                                |                                                                              |         |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)**

** **

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

             The accompanying unauditedcondensed consolidated financial statements of Vastera, Inc. and itssubsidiaries (“Vastera,” the “Company," "we," or "us")have been prepared on the same basis as audited financial statements andinclude all adjustments, including all normal recurring adjustments that arenecessary for a fair presentation of the financial position, results ofoperations and cash flows for the interim periods presented. The results ofoperations for the interim periods presented are not necessarily indicative ofthe results to be expected for any subsequent quarter or for the entire yearending December 31, 2001.  Allsignificant intercompany balances and transactions have been eliminated inconsolidation. Certain information and footnote disclosures normally includedin financial statements prepared in accordance with generally acceptedaccounting principles have been condensed or omitted pursuant to the Securitiesand Exchange Commission's (the “SEC”) rules and regulations.  The Company's interim financial statementsshould be read in conjunction with the Company's audited consolidated financialstatements and notes thereto, as filed with the SEC with the Company’s AnnualReport on Form 10-K and other reports filed with the SEC.

             Vastera is a leading provider ofweb-native solutions for global trade management.  The Company's offerings include a library of global tradecontent, web-native software solutions, management and implementationconsulting and managed services. Managed services range from management of aspecific global trade function to providing complete management of a client'sglobal trade operations. Our customers utilize these offerings to manage theirglobal trade processes. Global trade involves the shipment of goods betweencountries and the management of information and business processes to completeshipment.

             The Company's operations aresubject to certain risks and uncertainties, including among others,uncertainties relating to product development, rapidly changing technology,current and potential competitors with greater financial, technological,production, and marketing resources, dependence on key management personnel,limited protection of intellectual property and proprietary rights, uncertaintyof future profitability and possible fluctuations in financial results.

**2.          Summary of SignificantAccounting Policies:**

**Use of Estimates**

             The preparation of the unauditedcondensed consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

**Revenue Recognition**

             The Company's revenues consist ofsubscription/transaction revenues and services revenues.

*Subscription/TransactionRevenues*

             Subscription/transaction revenuesconsist of subscription–based revenues, transaction–based revenuesand perpetual software license revenues. The Company recognizes revenue fromthe sale of software products in accordance with Statement of Position("SOP") 97–2, "Software Revenue Recognition."

             Subscription–based revenuesare derived from term-license arrangements in which our clients license oursoftware products and obtain the right to unspecified enhancements on awhen-and-if-available basis and ongoing support and content updateservices.  Revenues are recognizedratably over the contract term. Terms of subscription arrangements typicallyrange from three to five years.

             Transaction–based revenuesare derived from agreements that provide for transaction fees based on aclient’s usage of our software products or on the performance of our managedservices solutions. Revenues from the usage of our software products are recognizedas transactions occur.  Managed servicessolutions include the processing of our clients’ customs entries and theclassification of our clients’ goods. Managed services transaction arrangements are often subject to annualminimum transaction thresholds and revenues have been recognized based on thelower of the cumulative actual transactions processed or the pro-rata minimumfor the period.

             Perpetual software license revenuesare derived from perpetual software license arrangements and related maintenancecontracts. Maintenance contracts include the right to unspecified enhancementson a when-and-if available basis, ongoing support and content update services.The content updates provided under maintenance arrangements are significant andfrequent and thus the entire arrangement is in substance a subscription.Revenues from perpetual software license sales are recognized ratably over theestimated economic life of the product. The Company has estimated that the lifeof the product is three years, which is consistent with the historical periodsbetween major upgrades to the functionality and architecture of our productssuch that we would charge all customers a new fee to migrate to the newversion. Revenues from maintenance contracts are recognized ratably over thecontract term, typically one year.

*Services Revenues*

             Services revenues are derived fromimplementation, management consulting and training services. Services areperformed on a time and materials basis or under fixed price arrangements andare recognized as the services are performed or using the percentage ofcompletion method of accounting.

**Concentrations of Credit Risk**

             Financial instruments thatpotentially subject the Company to concentrations of credit risk consistprimarily of cash equivalents, short-term investments, and accounts receivable.The Company limits the amount of investment exposure in any one financialinstrument and does not have any foreign currency investments. The Companysells products and services to customers across several industries throughoutthe world without requiring collateral. The Company does, however, routinelyassess the financial strength of its customers and maintains allowances foranticipated losses.

             As of December 31, 2000 no customeraccounted for more than 10% of the Company’s accounts receivable.  As of September 30, 2001, two customers accounted for 20% and 13% of the Company’s accounts receivable.  Subsequent to September 30, 2001, themajority of these customers’ accounts receivable were collected.

**Unaudited Net Loss Per Common Share**

             Basic net loss per common share iscomputed by dividing net loss applicable to common stockholders by theweighted-average number of common shares outstanding for the period. Dilutednet loss per common share includes the potential dilution that could occur ifsecurities or other contracts to issue common stock were exercised or convertedinto common stock. As of September 30, 2000 and 2001, options to purchaseapproximately 6,775,000 and 7,679,000 shares of common stock, respectively,were outstanding; as of September 30, 2000, warrants to purchase approximately415,000 shares of redeemable convertible preferred stock were outstanding; andas of September 30, 2000, approximately 8,335,000 shares of redeemable convertiblepreferred stock that were convertible into approximately 13,859,000 shares ofcommon stock were outstanding.  Due tothe anti-dilutive nature of the options, warrants and redeemable convertiblepreferred stock, there is no effect on the calculation of weighted–averageshares for diluted earnings per share. As a result, the basic and diluted lossper share amounts are identical.

             Unaudited pro forma loss per common shareis computed using the pro forma weighted-average number of common sharesoutstanding for the period.  Pro formaweighted-average common shares includes the assumed conversion of alloutstanding convertible preferred stock into common stock as of the beginningof the period presented, the issuance of 6,900,000 shares of common stock in connectionwith the Company’s initial public offering, and the exercise of 340,000warrants to purchase preferred stock executed immediately preceding the initialpublic offering.

**Comprehensive Income**

             As of December 31, 2000 andSeptember 30, 2001, accumulated other comprehensive income includes unrealizedgains and losses on investments and foreign currency translation adjustments.

**Recent Accounting Pronouncements**

             In June 2001, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“SFAS”) No. 141 “Business Combinations” and SFAS No. 142 “Goodwilland Other Intangible Assets.” SFAS No. 141 requires business combinationsinitiated after June 30, 2001 to be accounted for using the purchase method ofaccounting, and broadens the criteria for recording intangible assets separatefrom goodwill.  Recorded goodwill andintangibles will be evaluated against these new criteria and may result incertain intangibles being subsumed into goodwill, or alternatively, amounts initiallyrecorded as goodwill may be separately identified and recognized apart fromgoodwill. SFAS No. 142 requires the use of a nonamortization approach toaccount for purchased goodwill and certain intangibles.  Under a nonamortization approach, goodwilland certain intangibles will not be amortized into results of operations, butinstead will be reviewed for impairment and written down and charged to resultsof operations only in the periods in which the recorded value of goodwill andcertain intangibles is more than its fair value. The provisions of eachstatement, which apply to goodwill and intangible assets acquired prior to June30, 2001, will be adopted by the Company on January 1, 2002.  The Company expects the adoption of SFAS No.141 and SFAS No. 142 to result in certain of its intangible assets beingsubsumed into goodwill and will have the impact of eliminating its amortizationof goodwill and certain types of intangibles assets commencing January 1, 2002.

             In June 2001, the FASB issued SFASNo. 143, “Accounting for Asset Retirement Obligations.”  It requires an entity to recognize the fairvalue of a liability for an asset retirement obligation in the period in whichit is incurred if a reasonable estimate of fair value can be made.  If a reasonable estimate of fair valuecannot be made in the period the asset retirement obligation is incurred, theliability shall be recognized when a reasonable estimate of fair value can bemade.  This new standard is effective inthe first quarter of 2003.  The Companydoes not believe that SFAS No. 143 will have a material effect on our financialstatements.

             In August 2001, the FASB issuedSFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”which supersedes SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long- Lived Assets to Be Disposed Of.”  SFAS No. 144 is effective in the first quarter of 2002.  The Company does not believe that the SFASNo. 144 will have a material effect on its financial statements.

**3.          Acquisition**

             On March 29, 2001, we acquiredSpeed Chain Network, Inc. (“Speedchain”), a development stage company with norevenues since its inception in 1999. Speedchain was a supply chain event management and global e-logisticssolutions provider.  The acquisition waseffected through the merger of Speedchain into one of our wholly ownedsubsidiaries, Vastera Acquisition Corporation. The acquisition was accounted for under the purchase method ofaccounting and the operating results of Speedchain have been included in theaccompanying condensed consolidated financial statements from the date ofacquisition.

             Under the terms of the acquisitionagreement, we issued 944,485 shares of common stock in exchange for all of theoutstanding preferred stock and common stock of Speedchain.  The shares of common stock issued by us werevalued at $14.00 per share, the average of the closing prices for the threedays before and after March 1, 2001.  Wealso issued options to acquire approximately 24,000 shares of our common stockin exchange for the vested Speedchain stock options we assumed in the businesscombination.  The options were valued atapproximately $328,000 using the Black-Scholes model assuming 128% volatility,a risk free interest rate of 6.19%, and an exercise period of three years.  On March 29, 2001, we also issued options toacquire approximately 64,000 shares of our common stock in exchange for theunvested Speedchain stock options we assumed in the business combination.Accordingly, the Company recorded $465,000 of deferred compensation that willbe amortized on an accelerated basis over the remaining vesting period of theseoptions.

             The aggregate purchase price wasdetermined as follows  (in thousands):

|                        | **Value**                |   |
|-----------------------------|--------------------------|--------|
| Fair value of common stock  | $                        | 13,223 |   |
| Fair value of options       | 328                      |   |
| Assumed liabilities         | 3,401                    |   |
| Transaction costs and other | 1,860                    |   |
|                        | Aggregate purchase price | $      | 18,812 |   |
|                             |                          |        |  |  |

             The acquisition resulted in anallocation of the purchase price to the net tangible and intangible assets ofSpeedchain, as well as the write-off of the portion of the purchase priceallocated to in-process research and development (“IPR&D”) projects.  The Company has allocated the purchase pricebased upon the fair values of the assets and the liabilities acquired and allocatedto the purchase price accordingly.

             The purchase price has beenallocated on a preliminary basis as follows (in thousands):

|                   | **Value** |   |
|------------------------|-----------|--------|
| Current assets         | $         | 38     |   |
| Property and equipment | 57        |   |
| Assembled workforce    | 300       |   |
| IPR&D              | 6,901     |   |
| Goodwill               | 11,516    |   |
|                   | $         | 18,812 |   |

             Theamounts allocated to assembled workforce and goodwill are being amortized on astraight-line method over the estimated useful life of these assets, which aretwo years and four years, respectively.

             Wevalued IPR&D projects acquired in the acquisition at approximately $6.9million, based upon the results of an independent appraisal of the developmentprojects for which technological feasibility has not been established and noalternative future uses exist.  Theacquired IPR&D projects are targeted at the supply chain event managementand e-logistics market.

             Thevalue of the IPR&D projects identified was determined by estimating thefuture cash flows from each of the respective projects at the assumed date ofcommercial feasibility, discounting these net cash flows back to their presentvalue and then applying a percentage of completion to the calculated presentvalue.  The percentage of completion forthe projects were determined using milestones representing management’sestimate of effort, value added and degree of difficulty of the portion of theprojects completed as of March 29, 2001, as compared to the remaining researchand development to be completed to bring the projects to technicalfeasibility.    Speedchain’s projectsstarted in February 2000 and, as of March 29, 2001, the Company estimated theprojects were 70% complete.

             Developmentof the technology remains a substantial risk to the Company due to factorsincluding the remaining effort necessary to achieve technical feasibility,rapidly changing customer needs and competitive threats from othercompanies.  Failure to bring theseproducts to market in a timely manner could adversely affect future sales andprofitability of the combined company. Additionally, the value of the other intangible assets acquired maybecome impaired.

             Inconnection with the Speedchain acquisition, the Company recognizedapproximately $550,000 in liabilities as the cost associated with closingredundant facilities and terminating certain employees.  The accrual consisted primarily of severanceand other employee termination costs. These activities resulted in the termination of eight employees inconnection with the elimination of duplicative positions and the restructuringof certain operations.  Substantiallyall of this accrual is expected to be paid out in 2001.

             The following unaudited pro formainformation has been prepared as if the acquisition of Speedchain had occurredas of January 1, 2000, excluding the one-time IPR&D charge of approximately$6.9 million.
|                                               | **Pro Forma for the  Year Ended  December 31, 2000** |   | **Pro Forma for the  Nine Months Ended  September 30, 2001** |   |
|----------------------------------------------------|------------------------------------------------------|--------|--------------------------------------------------------------|--------|
|                                               | **(Unaudited)**                                      |   | **(Unaudited)**                                              |   |
| Total revenues                                     | $                                                    | 32,970 |                                                         | $      | 43,828 |   |
| Net loss                                           | (79,540                                              | )      | (34,068                                                      | )      |
| Pro forma basic and diluted loss per common  share | (3.12                                                | )      | (0.90                                                        | )      |
|                                                    |                                                      |        |                                                              |        |  |  |

             Theunaudited pro forma information is not necessarily indicative of the results ofoperations that would have occurred had the acquisition been made at thebeginning of the periods presented or the future results of the combined operations.

**4.          Secured Revolving Lineof Credit and Equipment Line of Credit:**

             Asof December 31, 2000 and September 30, 2001, the outstanding balance under theequipment line of credit was approximately $2,925,000 and $3,850,000,respectively, and there were no amounts outstanding under the secured revolvingline of credit.  The revolving line ofcredit was scheduled to expire on December 31, 2000 and was extended toApril 30, 2001.  In May 2001, theCompany renegotiated and amended its secured revolving line of credit andequipment line of credit.  As amended,the Company may now borrow up to $10,000,000 under the revolving line ofcredit, with a $2,500,000 sub-limit for the issuance of letters of credit.  Advances under the revolving line of creditare limited to the lesser of $10,000,000 or the sum of 80% of eligible accountsreceivable, as defined in the loan agreement. The revolving line of credit bears interest at the greater of the bank’sprime rate or the overnight federal funds rate (5.50% as of September 30,2001).  The revolving line of creditmatures in May 2002.

             TheCompany may borrow up to $6,439,649 under the equipment line of credit.  The equipment line of credit bears interestat the bank’s prime rate plus 50 basis points (6.0% as of September 30,2001).  The equipment line of credit hastwo interest–only payment periods. Amounts borrowed until November 15,2001 are subject to interest–only payments. After this date, the Companyis required to make principal and interest payments to repay these borrowingsover a period of 30 months. The second interest–only payment periodapplies to borrowings made from November 16, 2001 to May 15, 2002. After May15, 2002, the Company is required to make principal and interest payments torepay the borrowings from the second interest–only period over a periodof 30 months, and no additional borrowings may occur thereafter.

             Theterms of the revolving line of credit and equipment line of credit require theCompany to comply with certain financial covenants, including, but not limitedto, restrictions and limitations on future indebtedness, sale of assets, andmaterial changes in the Company’s business. The financial covenants include a minimum quick ratio, as defined in theloan agreement, of 2.0 to 1.0 and a maximum ratio of total liabilities totangible net worth of 1.0 to 1.0 for 2001 and 1.5 to 1.0 for 2002 andthereafter.  The most restrictive of thefinancial covenants is that the Company's negative operating income shall notbe in excess of the amounts specified below (in thousands): 
| **As of the quarter ended,** | **Negative Operating  Income** |   |
|------------------------------|--------------------------------|--------|
| March  31, 2001              | $                              | 6,500  |   |
| June  30, 2001               | 6,500                          |   |
| September  30, 2001          | 5,000                          |   |
| December  31, 2001           | 3,500                          |   |
| March  31, 2002              | 2,500                          |   |
| June  30, 2002               | 1,000                          |   |
| September  30, 2002          | 0                              |   |
| Thereafter                   | 0                              |   |
|                              |                                |        |  |

Negativeoperating income is defined in the loan agreement as loss from operations plus,to the extent they have been deducted in determining the loss from operations,the sum of non-cash expenses including amortization of goodwill, amortizationof intangibles, in-process research and development charges and stock-basedcompensation expenses, less the sum of non-cash items of income, plus netinterest income/expense, as calculated in accordance with generally acceptedaccounting principles.  As of September30, 2001, the Company was in compliance with the financial covenants.

**5.          Commitments andContingencies:**

**Reimbursed Expenses**

             The Company reimburses Ford MotorCompany for certain expenses in connection with the August 2000 acquisition ofFord’s global customs operations.  TheCompany expects to pay approximately $534,000 in fees to Ford each month forthe reimbursement of expenses incurred by Ford for the use of facilities, thecosts of leased employees and the maintenance and expenses related to theacquired technology.

**Litigation**

             The Company is periodically a partyto disputes arising from normal business activities. In the opinion ofmanagement, resolution of these matters will not have a material adverse effectupon the financial position or future operating results of the Company.

**6.          Segment Information:**

             The Company has adopted SFASNo. 131, "Disclosures about Segments of an Enterprise and RelatedInformation".  The Company has tworeportable operating segments: subscription/transaction and services. Thesubscription/transaction segment generates revenues from subscription,transaction and software license agreements of its Global Trade ManagementSolutions. The services segment provides implementation, management consultingand training services to the Company’s customers. The Company evaluates itssegments' performances based on revenues and gross profit. The Company'sunallocated costs include corporate and other costs not allocated to thesegments for management's reporting purposes.

             The following table summarizes theCompany's two segments (in thousands): 
|      | **Three Months Ended  September 30,** |    | **Nine Months Ended  September 30,** |    |
|-----------|---------------------------------------|---------|--------------------------------------|---------|
|      | **2000**                              |    | **2001**                             |    | **2000** |   | **2001** |   |
|      | **(unaudited)**                       |    | **(unaudited)**                      |    | **(unaudited)** |   | **(unaudited)** |   |
| Revenues: |                                  |    |                                 |    |   |   |   |   |
|      | Subscription/transaction              | $       | 4,327                                |    | $ | 11,466 |   | $ | 9,956 |   | $ | 29,652 |   |
|      | Services                              | 4,210   |                                 | 5,239   |   | 12,016 |   | 14,176 |   |
|      | Total revenues                        | 8,537   |                                 | 16,705  |   | 21,972 |   | 43,828 |   |
|      |                                  |    |                                 |    |   |   |   |   |
| Net loss: |                                  |    |                                 |    |   |   |   |   |
|      | Subscription/transaction              | 2,670   |                                 | 6,719   |   | 7,558 |   | 17,103 |   |
|      | Services                              | 1,128   |                                 | 1,688   |   | 2,434 |   | 4,419 |   |
|      | Gross profit                          | 3,798   |                                 | 8,407   |   | 9,992 |   | 21,522 |   |
|      | Unallocated expense                   | (12,689 | )                                    | (18,857 | ) | (34,698 | ) | (61,907 | ) |
|      | Interest income                       | 89      |                                 | 709     |   | 317 |   | 2,813 |   |
|      | Interest expense                      | (97     | )                                    | (204    | ) | (253 | ) | (570 | ) |
|      | Net loss                              | $       | (8,899                               | )       | $ | (9,945 | ) | $ | (24,642 | ) | $ | (38,142 | ) |
|           |                                       |         |                                      |         |  |  |  |  |  |  |  |  |  |  |

             Under SFAS No. 131, theCompany is required to provide enterprise-wide disclosures about revenues byproduct and services, long-lived assets by geographic area, and revenues fromsignificant customers.

**Geographic Information**

             The Company sells its product andservices through its offices in the United States and through its subsidiariesin the United Kingdom, Canada and Mexico. Information regarding revenues andlong-lived assets attributable to the United States and to all foreigncountries is stated below. The geographic classification of product andservices revenues was based upon the location of the customer. Vastera'sproduct and services revenues were generated in the following geographicregions (in thousands): 
|                        | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------|---------------------------------------|--------|--------------------------------------|--------|
|                        | **2000**                              |   | **2001**                             |   | **2000** |   | **2001** |   |
|                        | **(unaudited)**                       |   | **(unaudited)**                      |   | **(unaudited)** |   | **(unaudited)** |   |
| United States               | $                                     | 8,114  |                                 | $      | 11,398 |   | $ | 20,502 |   | $ | 34,321 |   |
| Europe and Asia             | 423                                   |   | 2,731                                |   | 1,470 |   | 4,519 |   |
| Other international regions | --                                    |   | 2,576                                |   | -- |   | 4,988 |   |
|                        | Total revenues                        | $      | 8,537                                |   | $ | 16,705 |   | $ | 21,972 |   | $ | 43,828 |   |
|                             |                                       |        |                                      |        |  |  |  |  |  |  |  |  |  |

             Vastera's tangible long-livedassets were located as follows:
|                        | **December 31,  2000**  |   | **September 30,  2001** |   |
|-----------------------------|-------------------------|--------|-------------------------|--------|
| United States               | $                       | 5,694  |                    | $      | 6,413 |   |
| Europe and Asia             | 489                     |   | 460                     |   |
| Other international regions | -                       |   | 203                     |   |
|                        |                    |   |                    |   |
|                        | Total long-lived assets | $      | 6,183                   |   | $ | 7,076 |   |
|                             |                         |        |                         |        |  |  |  |

**Significant Customers**

             For the three months endedSeptember 30, 2001, two customers accounted for 31% and 15% of total revenues,respectively. For the nine months ended September 30, 2001, one customeraccounted for 34% of total revenues. For the three months ended September 30, 2000, two customers accountedfor 17% and 13% of total revenues, respectively.  For the nine months ended September 30, 2000, one customeraccounted for 10% of total revenues.

**7.          Stock-based Compensation**

             The Company applies AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations in accounting for it stock optionplan.  Accordingly, the Company hasrecorded deferred compensation cost of approximately $6.4 million in thelast six months of 1999 and approximately $13.4 million in the first ninemonths of 2000. On March 29, 2001, the Company also recorded approximately$465,000 of deferred compensation in connection with the issuance of options toacquire 64,000 shares of its common stock in exchange for the unvestedSpeedchain stock options it assumed in the related business combination.  These deferred compensation amountsrepresent the aggregate difference between the exercise price and the fairvalue for accounting purposes of the underlying shares of common stock at thedate of grant. This amount is included as a component of stockholders' equity andis being amortized on an accelerated basis over the applicable vestingperiod.  Stock-based compensation, whichhas been separately identified in the accompanying condensed consolidatedstatement of operations, has not been included in costs of revenues, sales andmarketing, research and development, and general and administrative expense asindicated below:
|                                       | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|--------------------------------------------|---------------------------------------|--------|--------------------------------------|--------|
|                                       | **2000**                              |   | **2001**                             |   | **2000** |   | **2001** |   |
|                                       | **(unaudited)**                       |   | **(unaudited)**                      |   | **(unaudited)** |   | **(unaudited)** |   |
| Cost  of subscription/transaction revenues | $                                     | 247    |                                 | $      | 47 |   | $ | 268 |   | $ | 154 |   |
| Cost  of services revenues                 | 328                                   |   | 199                                  |   | 1,108 |   | 656 |   |
| Sales  and marketing                       | 989                                   |   | 570                                  |   | 3,275 |   | 1,879 |   |
| Research  and development                  | 213                                   |   | 138                                  |   | 792 |   | 455 |   |
| General  and administrative                | 740                                   |   | 467                                  |   | 2,685 |   | 1,540 |   |
|                                       | Total  stock-based compensation       | $      | 2,517                                |   | $ | 1,421 |   | 8,128 |   | $ | 4,684 |   |
|                                            |                                       |        |                                      |        |  |  |  |  |  |  |  |  |  |

**8.          SupplementalInformation:**

**Cash Flow Information**

             Cash paid for interest was$243,000, and $327,000 for the nine months ended September 30, 2000 and 2001, respectively.

             Noncash activities were as follows(in thousands):
|                                                                                        | **Nine Months Ended  September 30,** |   |
|---------------------------------------------------------------------------------------------|--------------------------------------|--------|
|                                                                                        | **2000**                             |   | **2001** |   |
|                                                                                        |                                 |   |   |   |
| Capitalized  lease obligations incurred                                                     | $                                    | 1,899  |   | $ | 2,131 |   |
| Issuance  of common stock and stock options in acquisitions                                 | 79,200                               |   | 13,551 |   |
| Deferred  compensation in connection with stock options issued to employees in  acquisition | -                                    |   | 465 |   |
| Assumed  liabilities, transaction costs and other, net of assets acquired in  acquisition   | 855                                  |   | 5,166 |   |
| Dividends  and accretion on redeemable convertible preferred stock                          | 35,602                               |   | - |   |
|                                                                                             |                                      |        |  |  |  |  |

 

**Item 2:              Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

*             ThisQuarterly Report on Form 10-Q contains forward-looking statements.  For this purpose, any statements containedherein that are not statements of historical fact may be deemed to beforward-looking statements.  Withoutlimiting the foregoing, the words “anticipates,” “believes,” “expects,”“plans,” and similar phrases (as well as other words or expressions referencingfuture events, conditions or circumstances) are intended to identifyforward-looking statements.  Our actualresults could differ materially from those projected in the forward-lookingstatements as a result of various factors, including, but not limited to, thefactors set forth in the caption “Risks Relating to Our Business.”  This discussion should be read inconjunction with the condensed consolidated financial statements and relatednotes for the periods specified. Further reference should be made to the Company’s Annual Report on Form10-K and other reports filed with the SEC.*

 

**Overview**

             We are a leading provider ofweb-native software products and services that facilitate international buyingand selling of goods by streamlining and optimizing global trade processes. Wecall these products and services our solutions. Global trade involves thecross-border shipment of goods and the management of the information andbusiness processes required to complete these shipments. In 1992, we introducedEMS-2000, a U.S.-centric, DOS-based export management solution. In 1994, weintroduced EMS-2000 Version 4, a multi-country, two-tier, Windows-based exportmanagement solution. In 1997, we introduced Global Passport, a multi-country,three-tier, client-server based, import/export management solution. In 2000, weintroduced TradeSphere, a multi-country, multi-module suite of web-nativeglobal trade management solutions and we introduced TradePrism.com, a tradeportal that provides an Internet-based delivery mechanism for our global trademanagement capabilities. Since our inception, we have continued to developcomprehensive solutions with features, functionality and services that allowcompanies to manage the complexities of global trade.

             We provide our products and servicesto over 200 clients from our offices in the United States, the United Kingdom,Mexico, and Canada.  Our clientstypically acquire a limited number of server and user subscriptions or licensesto implement in a division or department. As they expand implementation of ourproducts globally and to their clients, suppliers and business partners, ourclients acquire additional subscriptions or licenses. We currently market ourproducts and services on a global basis through our direct sales force and otherchannels, such as strategic alliances and partners. We expect revenues from ourinternational operations to increase as we continue to expand our internationalsales and services organizations.

             In January 2001 and March 2001, weexpanded the global trade management services we provide to Ford Motor Companyby assuming responsibility for administering and managing Ford’s global tradeoperations in Mexico and Canada, respectively. The contractual terms relatingto other foreign operations have not been finalized and are subject tonegotiation based upon the actual costs. These costs include personnel costs,administrative overhead and information technology processing costs.

             Our agreement with Ford U.S. has aminimum term of four years and may continue for a total of ten years.  The guaranteed minimum revenues from theFord U.S. Imports operations are $11.6 million for 2001, 2002 and 2003 and $6.8million for 2004.  The agreements withFord Mexico and Ford Canada also have minimum terms of four years and each maycontinue for a total of ten years.  Onthe third anniversary of the agreement with each entity, either party mayterminate for any reason after providing the non-terminating party one-yearadvance notice.  Commencing upon thefourth anniversary of the agreement with each entity, either party mayterminate the agreement for any reason upon providing six months advancewritten notice.  These agreementsprovide us with a guaranteed and recurring revenue stream over the next threeto four years.  We expect to derive atleast $16.5 million in revenues in 2001, 2002, and 2003 from our agreementswith Ford U.S., Ford Mexico and Ford Canada. Our client relationship with Ford will have a significant impact on ourtotal revenues and is expected to account for greater than 10% of revenues forthe foreseeable future.  For the threemonths ended September 30, 2001, Ford accounted for approximately 31% of ourtotal revenues.  For the nine monthsended September 30, 2001, Ford accounted for approximately 34% of our totalrevenues.  For the three months endedSeptember 30, 2001, Vectant, Inc. accounted for approximately 15% of our totalrevenues.

**Speedchain Acquisition**

             On March 29, 2001, we acquiredSpeed Chain Network, Inc. (“Speedchain”), a development stage company with norevenues since its inception in 1999. Speedchain is a supply chain event management and global e-logisticssolutions provider.  The acquisition waseffected through the merger of Speedchain into one of our wholly ownedsubsidiaries, Vastera Acquisition Corporation. The acquisition was accounted for under the purchase method ofaccounting and the operating results of Speedchain have been included in theaccompanying condensed consolidated financial statements from the date ofacquisition.

             Under the terms of the acquisitionagreement, we issued 944,485 shares of common stock in exchange for all of theoutstanding preferred stock and common stock of Speedchain.  The shares of common stock issued by us werevalued at $14.00 per share, the average of the closing prices for the threedays before and after March 1, 2001.  Wealso issued options to acquire approximately 24,000 shares of our common stockin exchange for the vested Speedchain stock options we assumed in the businesscombination.  The options were valued atapproximately $328,000 using the Black-Scholes model, assuming 128% volatility,a risk free interest rate of 6.19%, and an exercise period of three years.  On March 29, 2001, we also issued options toacquire approximately 64,000 shares of our common stock in exchange for theunvested Speedchain stock options we assumed in the business combination.Accordingly, we recorded $465,000 of deferred compensation that will beamortized on an accelerated basis over the remaining vesting period of theseoptions.

             We valued IPR&D projectsacquired in the acquisition at approximately $6.9 million, based upon theresults of an independent appraisal of the development projects for whichtechnological feasibility has not been established and no alternative futureuses exist.  The acquired IPR&Dprojects are targeted at the supply chain event management and e-logisticsmarket.

             The value of the IPR&D projectsidentified was determined by estimating the future cash flows from each of therespective projects at the assumed date of commercial feasibility, discountingthese net cash flows back to their present value and then applying a percentageof completion to the calculated present value. The percentage of completion for the projects were determined using milestonesrepresenting management’s estimate of effort, value added and degree ofdifficulty of the portion of the projects completed as of March 29, 2001, ascompared to the remaining research and development to be completed to bring theprojects to technical feasibility. Speedchain’s projects started in February 2000 and, as of March 29,2001, we estimated the projects were 70% complete.

             Development of the technologyremains a substantial risk to the Company due to factors including theremaining effort necessary to achieve technical feasibility, rapidly changingcustomer needs and competitive threats from other companies.  Failure to bring these products to market ina timely manner could adversely affect future sales and profitability of thecombined company.  Additionally, thevalue of the other intangible assets acquired may become impaired.

**Source of Revenues and Revenue Recognition Policy**

             Our revenues are classified aseither subscription/transaction revenues or services revenues. In 2000, we renamedour software products and services as follows:
| • | our Global Passport software product is now  called TradeSphere;                                                                                          |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                      |
| • | our strategic and operational consulting  services are now called Trade Management Consulting; and                                                        |
|   |                                                                                                                                                      |
| • | our managed–services consisting of  Global e–Content, TradeSphere and our proprietary methodology and  services is now called Managed Services. |

             A description of our currentrevenue classifications follows:

*Subscription/TransactionRevenues*

             Subscription/transaction revenuesconsist of subscription–based revenues, transaction–based revenuesand perpetual software license revenues.

**             Subscription-basedRevenues.**  Subscription–based revenues arederived from term-license arrangements in which our clients license TradeSphereand TradePrism.com for a contract term and obtain the right to unspecifiedenhancements on a when-and-if-available basis, ongoing support and contentupdate services, for the term of the arrangement.  Revenues are recognized ratably over the contract term. Terms ofsubscription arrangements typically range from three to five years.  Payments on subscription arrangements arecollected annually, quarterly or monthly.

**             Transaction-basedRevenues.**  Transaction–based revenues are derivedfrom agreements that provide for transaction fees based on a client’s usage ofTradeSphere or TradePrism.com software products or on the performance of ourmanaged services solutions. Revenues are recognized from the usage of oursoftware products as transactions occur. Managed services solutions include the processing of our clients’ customentries and the classification of our clients’ goods.  Managed services transaction arrangements are often subject toannual minimum transaction thresholds and revenues have been recognized basedon the lower of the cumulative actual transactions processed or the pro-rataminimum for the period.  Payments ontransaction revenues are typically collected monthly.

**             PerpetualSoftware License Revenues.** Perpetual software license revenues arederived from sales of perpetual software licenses and the related maintenancecontracts. Maintenance contracts include the right to unspecified enhancementson a when-and-if available basis, ongoing support and content update services.The content updates provided under maintenance arrangements are significant andfrequent and thus the entire arrangement is in substance a subscription.Revenues from perpetual software license sales are recognized ratably over theestimated economic life of the product. The Company has estimated that the lifeof the product is three years, which is consistent with the historical periodsbetween major upgrades to the functionality and architecture of our productssuch that we would charge all customers a new fee to migrate to the newversion. Revenues from maintenance contracts are recognized ratably over thecontract term, typically one year. Payments on maintenance revenues are typically collected annually inadvance, but may also be collected quarterly in advance.

*Services Revenues*

             Our services revenues consist ofTradeSphere services revenues and Trade Management Consulting revenues.

**             TradeSphereServices Revenues.**  TradeSphere services revenues are derivedfrom implementation and training services. These revenues are provided oneither a time-and-materials or on a fixed–price basis and are recognizedas the services are performed or on the percentage-of-completion method ofaccounting.

             **TradeManagement Consulting Revenues.** Trade Management Consulting revenues are derived from managementconsulting services. These revenues are provided on either a time-and-materialsor on a fixed–price basis and are recognized as the services areperformed or on the percentage-of-completion method of accounting.

             Our services revenues haveincreased due to the growth in our client base, expansion of our implementationorganization and expansion of our management consulting organization. Servicesrevenues are typically billed and collected monthly. In the future we expectservices revenues to decrease as a percentage of total revenues.

             Our sales cycle averages six tonine months on software sales and nine to twelve months on managed servicesagreements. Furthermore, we haveexperienced, and expect to continue to experience, significant variation in thesize of individual sales. As a result of this and other factors, our resultshave varied significantly in the past and are likely to be subject tosignificant fluctuations in the future. Since subscription/transaction revenuesare recognized ratably, and the timing of services revenues is dependent on thescope of the engagement, we believe that period-to-period comparisons of theresults of operations are not necessarily indicative of the results we expectfor any future period.

**Deferred Revenues**

             Deferred revenues include amountsbilled to clients for whom revenues have not been recognized and generallyresult from billed, but deferred subscription/transaction revenues and deferredservices not yet rendered. Deferred revenues will be recognized on a monthly basisover the remaining economic life of the product or when the services areperformed. As we continue to increase our subscription and transaction-basedrevenues relative to our perpetual licenses, we expect our deferred revenues tofluctuate because  subscription andtransaction-based customers are billed and pay ratably (monthly or quarterly).We do not consider deferred revenue to be a good indicator of future revenues.

**Cost of Revenues**

             Cost of revenues includes the costof our subscription/transaction revenues and the cost of our services revenues.

             Cost of subscription/transactionrevenues includes royalties owed to third parties for technology productsintegrated into our software products as well as the cost of salaries andrelated expenses for our technical support and managed services organizations.We expect the cost of subscription/transaction revenues to continue to increaseas we further expand our offerings, build out our managed services trade hubsand integrate other technology products into our product offerings.

             Cost of services revenues includesthe cost of salaries and related expenses for implementation, managementconsulting and training services provided to clients, as well as, the cost ofthird parties contracted to provide either application consulting orimplementation services to our clients. 

The total cost of revenues may fluctuate basedon the mix of products and services sold.

**In-process Research and Development**

             For the ninemonths ended September 30, 2001, the Company incurred a one-time IPR&Dcharge of approximately $6.9 million associated with the acquisition ofSpeedchain.  The Company valuedIPR&D acquired in the Speedchain acquisition consummated on March 29, 2001at approximately $6.9 million based upon the results of an independentappraisal of the development project for which technological feasibility hasnot been established and no alternative future uses exist.  The acquired IPR&D project is targetedat the supply chain event management and e-logistics market.

**Stock-based Compensation**

             Stock-based compensation representsthe aggregate difference between the exercise price and the fair value foraccounting purposes of the underlying common stock at the date of grant. OnMarch 29, 2001, $465,000 of deferred compensation was recorded in connectionwith the unvested stock options that were assumed in connection with theSpeedchain acquisition.  These amountsare included as a component of stockholders' equity and are being amortized onan accelerated basis over the applicable vesting period.

             For the three months endedSeptember 30, 2000 and 2001, we amortized approximately $2.5 million and $1.4million of deferred compensation, respectively. For the nine months endedSeptember 30, 2000 and 2001, we amortized approximately $8.1 million and $4.7million of deferred compensation, respectively. We expect to amortize deferredcompensation of approximately $5.7 million, $2.6 million, $926,000 and $45,000for the years ended December 31, 2001, 2002, 2003 and 2004, respectively.The amount of stock-based compensation expense to be recorded in future periodscould decrease if options are forfeited for which accrued but unvestedcompensation has been recorded.

**Beneficial Conversion**

             On February 4, 2000 andFebruary 29, 2000, pursuant to a stock purchase agreement with new andexisting investors, we issued approximately 1,569,000 shares of Series Econvertible preferred stock for approximately $17.0 million. We recorded abeneficial conversion feature as a dividend of approximately $8.1 millionin the first quarter of 2000 to reflect the difference between the underlyingconversion price per share of common stock and the estimated fair market valuefor accounting purposes of the common stock on the date of issuance.

**Comparison of the Three Months Ended September 30, 2000 toSeptember 30, 2001**

*Revenues*

**             Totalrevenues.**  Total revenues increased 96% fromapproximately $8.5 million for the three months ended September 30, 2000to approximately $16.7 million for the three months ended September 30,2001.

**             Subscription/transactionrevenues.**  Subscription/transaction revenues increased165% from approximately $4.3 million for the three months ended September30, 2000 to approximately $11.5 million for the three months endedSeptember 30, 2001. We attribute this increase to continued growth in ourmanaged services client base, further market acceptance of our productofferings and our increased sales and marketing efforts.   Subscription/transaction revenues accountedfor 51% of our total revenues for the three months ended September 30, 2000 and69% for the three months ended September 30, 2001.  We expect subscription/transaction revenues to continue toaccount for at least two-thirds of our total revenues.

**             Servicesrevenues.**  Services revenues increased 24% fromapproximately $4.2 million for the three months ended September 30, 2000to approximately $5.2 million for the three months ended September 30,2001. This increase resulted from increases in our client base as well as inour average billing rates. Services revenues accounted for 49% of our totalrevenues for the three months ended September 30, 2000 and 31% for the threemonths ended September 30, 2001.  Weexpect services revenues to continue to account for up to one-third of ourtotal revenues.

*Cost of Revenues*

**Cost ofsubscription/transaction revenues.**  Thecost of subscription/transaction revenues increased from approximately $1.7million for the three months ended September 30, 2000 to approximately $4.7million for the three months ended September 30, 2001. This increase resultedfrom our investment in our client support infrastructure and the growth of ourmanaged services client base. The cost of subscription/transaction revenues asa percentage of subscription/transaction revenues was 38% for the three monthsended September 30, 2000 and 41% for the three months ended September 30, 2001.This increase as a percentage of subscription/transaction revenues reflectedour expansion of our technical support and managed services organization. Weexpect to realize productivity improvements from our investment in our supportinfrastructure and the leveraging of personnel in the performance of ourmanaged services agreements.  As weenter into large multi-year managed services agreements in new industryverticals or new geographic regions that may require significant investments inthe related infrastructure, the costs associated with these managed servicesagreements may be greater in the initial year than in the latter years as werealize productivity improvements from these infrastructure investments.Accordingly, we expect that our cost of subscription/transaction revenues mayfluctuate as a percentage of subscription/transaction revenues on a quarterover quarter basis.

**             Cost ofservices revenues.**  The cost of services revenues increased 15%from approximately $3.1 million for the three months ended September 30,2000 to approximately $3.6 million for the three months ended September30, 2001. This increase resulted from utilizing third party consultants forclient implementations. The cost of services revenues as a percentage ofservices revenues was 73% for three months ended September 30, 2000 and 68% forthree months ended September 30, 2001. This decrease reflects the productivityimprovements that we have made in our implementation and trainingorganizations.   We expect the cost ofservices revenues as a percentage of services revenues to be between 65% to 70%on an annual basis, but this percentage could fluctuate outside this range inany given quarter.

*Operating Expenses*

**             Sales andmarketing.**  Sales and marketing expenses consistprimarily of salaries, commissions and bonuses earned by sales and marketingpersonnel, sales training events, public relations, advertising, trade shows andtravel expenses related to both promotional events and direct sales efforts.Sales and marketing expenses increased 44% from approximately $3.4 millionfor three months ended September 30, 2000 to approximately $4.9 millionfor the three months ended September 30, 2001. This increase resulted from ourcontinued investment in our sales and marketing infrastructure, bothdomestically and internationally. These investments included significantpersonnel and related expenses, recruiting fees, travel expenses and relatedfacility and equipment costs. In addition, we increased marketing activities,including trade shows, public relations, direct mail campaigns and otherpromotional activities during this period. Sales and marketing expensesrepresented 40% of our total revenues for the three months ended September 30,2000 and 29% for the three months ended September 30, 2001. We believe that wewill need to continue to increase our sales and marketing expenses to expandour market position. As a result, we anticipate that sales and marketingexpenses will continue to increase in absolute dollar amounts but decrease as apercentage of total revenues in future years.

**             Researchand development.**  Research and development expenses consistprimarily of salaries, benefits and equipment for software developers, qualityassurance personnel, program managers and technical writers. Research anddevelopment expenses increased 23% from approximately $3.0 million for thethree months ended September 30, 2000 to approximately $3.7 million forthe three months ended September 30, 2001. This increase resulted from anincrease in the number of internal and contract software developers and qualityassurance personnel needed to support our product development and testing activities.Research and development expenses represented 35% of our total revenues for thethree months ended September 30, 2000 and 22% for the three months endedSeptember 30, 2001.  We believe that wemust continue to invest in research and development in order to develop newproducts and services. As a result, we anticipate that research and developmentexpenses will continue to increase in absolute dollar amounts but decrease as apercentage of total revenues.

**             General andadministrative.**  General and administrative expenses consistprimarily of salaries, benefits and related costs for executive, finance,administrative and information services personnel. These expenses also includefees for legal, audit and accounting, and other professional services. Generaland administrative expenses increased 52% from approximately $1.5 millionfor the three months ended September 30, 2000 to approximately$2.3 million for the three months ended September 30, 2001. This increaseresulted from the addition of executive, finance and administrative personnelto support the growth of our business. General and administrative expensesrepresented 18% of our total revenues for the three months ended September 30,2000 and 14% for the three months ended September 30, 2001.  We believe our general and administrativeexpenses will continue to increase in absolute dollar amounts, but decrease asa percentage of total revenues as we expand our administrative staff,domestically and internationally, and incur expenses associated with being apublic company. We expect these expenses to include annual and other publicreporting costs, directors' and officers' liability insurance, investorrelations programs and additional legal, accounting and consulting fees.

**             Depreciation.** Depreciation expense increased 43% from approximately $594,000 for thethree months ended September 30, 2000 to approximately $849,000 for the threemonths ended September 30, 2001. This increase resulted from the depreciationof fixed assets purchased to build the infrastructure needed to support thegrowth of our business. Depreciation expense represented 7% of our totalrevenues for the three months ended September 30, 2000 and 5% for the threemonths ended September 30, 2001.

**             Amortization.** Amortization expense increased approximately $4.0 million fromapproximately $1.7 million for the three months ended September 30, 2000 toapproximately $5.7 million for the three months ended September 30, 2001. Thisincrease resulted from the amortization of goodwill and intangible assets fromthe acquisition of Ford’s global customs operations in July 2000 and theSpeedchain acquisition in March 2001. Amortization expense represented 20% ofour total revenues for the three months ended September 30, 2000 and 34% forthe three months ended September 30, 2001. In the aggregate, amortization forthe year ended December 31, 2001 is expected to be approximately $22.2million.  We expect the adoption of SFASNo. 141 and SFAS No. 142 to result in certain of our intangible assets beingsubsumed into goodwill and will have the impact of eliminating our amortizationof goodwill and certain types of intangibles assets commencing January 1, 2002.

**             Stock-basedcompensation.**  Stock-based compensation expense decreasedfrom approximately $2.5 million for the three months ended September 30, 2000to approximately $1.4 million for the three months ended September 30,2001. Deferred compensation of approximately $4.7 million at September 30,2001 will be amortized on an accelerated basis over the applicable vestingperiod.

**             Otherincome (expenses), net.**  Other income (expenses), net fluctuatesbased on our cash balances available for investment, borrowings under our lineof credit, interest expense related to our term loans and realized gains andlosses on investments. Other income (expenses), net increased fromapproximately $(8,000) for the three months ended September 30, 2000 toapproximately $505,000 for the three months ended September 30, 2001. Thisincrease reflects the additional interest expense on the equipment line ofcredit for three months ended September 30, 2001, offset by the interest incomeearned on our proceeds from our initial public offering completed in October2000 currently maintained in short-term investments.

**             Incometaxes.**  No provision for income taxes has beenrecorded for either the three months ended September 30, 2000 or 2001 due toaccumulated net operating losses. We have recorded a valuation allowance forthe full amount of our net deferred tax assets as a result of the uncertaintysurrounding the timing of the realization of these future tax benefits.

**Comparison of the Nine Months Ended September 30, 2000 toSeptember 30, 2001**

*Revenues*

**             Totalrevenues.**  Total revenues increased 99% fromapproximately $21.9 million for the nine months ended September 30, 2000to approximately $43.8 million for the nine months ended September 30,2001.

**             Subscription/transactionrevenues.**  Subscription/transaction revenues increased198% from approximately $9.9 million for the nine months ended September30, 2000 to approximately $29.7 million for the nine months endedSeptember 30, 2001. We attribute this increase to continued growth in ourmanaged services client base, further market acceptance of our productofferings and our increased sales and marketing efforts.   Subscription/transaction revenues accountedfor 45% of our total revenues for the nine months ended September 30, 2000 and68% for the nine months ended September 30, 2001.  We expect subscription/transaction revenues to continue toaccount for at least two-thirds of our total revenues.

**             Servicesrevenues.**  Services revenues increased 18% fromapproximately $12.0 million for the nine months ended September 30, 2000to approximately $14.2 million for the nine months ended September 30,2001. This increase resulted from increases in our client base as well as inour average billing rates. Services revenues accounted for 55% of our totalrevenues for the nine months ended September 30, 2000 and 32% for the ninemonths ended September 30, 2001.  Weexpect services revenues to continue to account for up to one-third of ourtotal revenues.

*Cost of Revenues*

**             Cost ofsubscription/transaction revenues.**  Thecost of subscription/transaction revenues increased from approximately $2.4million for the nine months ended September 30, 2000 to approximately $12.5million for the nine months ended September 30, 2001. This increase resultedfrom our investment in our client support infrastructure and the growth of ourmanaged services client base. The cost of subscription/transaction revenues asa percentage of subscription/transaction revenues was 24% for the nine monthsended September 30, 2000 and 42% for the nine months ended September 30, 2001.This increase as a percentage of subscription/transaction revenues reflectedour expansion of our technical support and managed services organization. Weexpect to realize productivity improvements from our investment in our supportinfrastructure and the leveraging of personnel in the performance of our managedservices agreements.  As we enter intolarge multi-year managed services agreements in new industry verticals or newgeographic regions that may require significant investments in the relatedinfrastructure, the costs associated with these managed services agreements maybe greater in the initial year than in the latter years as we realizeproductivity improvements from these infrastructure investments. Accordingly,we expect that our cost of subscription/transaction revenues may fluctuate as apercentage of subscription/transaction revenues on a quarter over quarterbasis.

**             Cost ofservices revenues.**  The cost of services revenues increased 2%from approximately $9.6 million for the nine months ended September 30,2000 to approximately $9.8 million for the nine months ended September 30,2001. This increase resulted from utilizing third party consultants for clientimplementations. The cost of services revenues as a percentage of servicesrevenues was 80% for nine months ended September 30, 2000 and 69% for ninemonths ended September 30, 2001. This decrease reflects the productivityimprovements that we have made in our implementation and trainingorganizations.   We expect the cost ofservices revenues as a percentage of services revenues to be between 65% to 70%on an annual basis, but this percentage could fluctuate outside this range inany given quarter.

*OperatingExpenses*

**             Sales andmarketing.**  Sales and marketing expenses increased 37%from approximately $10.0 million for the nine months ended September 30,2000 to approximately $13.8 million for the nine months ended September30, 2001. This increase resulted from our continued investment in our sales andmarketing infrastructure, both domestically and internationally. Theseinvestments included significant personnel and related expenses, recruitingfees, travel expenses and related facility and equipment costs. In addition, weincreased marketing activities, including trade shows, public relations, directmail campaigns and other promotional activities during this period. Sales andmarketing expenses represented 46% of our total revenues for the nine monthsended September 30, 2000 and 31% for the nine months ended September 30, 2001.We believe that we will need to continue to increase our sales and marketingexpenses to expand our market position. As a result, we anticipate that salesand marketing expenses will continue to increase in absolute dollar amounts butdecrease as a percentage of total revenues in future years.

**             Researchand development.**  Research and development expenses increased20% from approximately $9.1 million for the nine months ended September30, 2000 to approximately $11.0 million for the nine months endedSeptember 30, 2001. This increase resulted from an increase in the number ofinternal and contract software developers and quality assurance personnelneeded to support our product development and testing activities. Research anddevelopment expenses represented 42% of our total revenues for the nine monthsended September 30, 2000 and 25% for the nine months ended September 30,2001.  We believe that we must continueto invest in research and development in order to develop new products andservices. As a result, we anticipate that research and development expenseswill continue to increase in absolute dollar amounts but decrease as apercentage of total revenues.

**             General andadministrative.**  General and administrative expensesincreased 73% from approximately $3.9 million for the nine months endedSeptember 30, 2000 to approximately $6.7 million for the nine months endedSeptember 30, 2001. This increase resulted from the addition of executive,finance and administrative personnel to support the growth of our business.General and administrative expenses represented 18% of our total revenues forthe nine months ended September 30, 2000 and 15% for the nine months endedSeptember 30, 2001.  We believe ourgeneral and administrative expenses will continue to increase in absolutedollar amounts, but decrease as a percentage of total revenues as we expand ouradministrative staff, domestically and internationally, and incur expensesassociated with being a public company. We expect these expenses to includeannual and other public reporting costs, directors' and officers' liabilityinsurance, investor relations programs and additional legal, accounting andconsulting fees.

**             Depreciation.** Depreciation expense increased 47% from approximately $1.6 million forthe nine months ended September 30, 2000 to approximately $2.4 million for thenine months ended September 30, 2001. This increase resulted from thedepreciation of fixed assets purchased to build the infrastructure needed tosupport the growth of our business. Depreciation expense represented 7% of ourtotal revenues for the nine months ended September 30, 2000 and 5% for the ninemonths ended September 30, 2001.

**             Amortization.** Amortization expense increased approximately $14.6 million fromapproximately $1.9 million for the nine months ended September 30, 2000 toapproximately $16.5 million for the nine months ended September 30, 2001. Thisincrease resulted from the amortization of goodwill and intangible assets fromthe acquisition of Ford’s global customs operations in July 2000 and theSpeedchain acquisition in March 2001. Amortization expense represented 9% ofour total revenues for the nine months ended September 30, 2000 and 38% for thenine months ended September 30, 2001.

**             Stock-basedcompensation.**  Stock-based compensation expense decreasedfrom approximately $8.1 million for the nine months ended September 30, 2000 toapproximately $4.7 million for the nine months ended September 30, 2001.Deferred compensation of approximately $4.7 million at September 30, 2001 willbe amortized on an accelerated basis over the applicable vesting period.

**             Otherincome (expenses), net.**  Other income (expenses), net fluctuatesbased on our cash balances available for investment, borrowings under our lineof credit, interest expense related to our term loans and realized gains andlosses on investments. Other income (expenses), net increased fromapproximately $64,000 for the nine months ended September 30, 2000 toapproximately $2.2 million for the nine months ended September 30, 2001. Thisincrease reflects the additional interest expense on the equipment line ofcredit for nine months ended September 30, 2001, offset by the interest incomeearned on our proceeds from our initial public offering completed in October2000 currently maintained in short-term investments.

**             Incometaxes.**  No provision for income taxes has beenrecorded for either the nine months ended September 30, 2000 or 2001 due toaccumulated net operating losses. We have recorded a valuation allowance forthe full amount of our net deferred tax assets as a result of the uncertaintysurrounding the timing of the realization of these future tax benefits.

**Liquidity and Capital Resources**

             We had cash, cash equivalents andshort-term investments of $75.6 million as of September 30, 2001, a decrease of$15.0 million from December 31, 2000.

             The Company has a secured revolvingline of credit and an equipment line of credit with PNC Bank. As of December31, 2000 and September 30, 2001, the outstanding balance under the equipmentline of credit was approximately $2,925,000 and $3,850,000, respectively, andthere were no amounts outstanding under the secured revolving line ofcredit.  The revolving line of creditwas scheduled to expire on December 31, 2000 and was extended to April 30,2001.  In May 2001, the Companyrenegotiated and amended its secured revolving line of credit and equipmentline of credit.  As amended, the Companymay now borrow up to $10,000,000 under the revolving line of credit, with a$2,500,000 sub-limit for the issuance of letters of credit.  Advances under the revolving line of creditare limited to the lesser of $10,000,000 or the sum of 80% of eligible accountsreceivable, as defined in the loan agreement. The revolving line of credit bears interest at the greater of the bank’sprime rate or the overnight federal funds rate (5.5% as of September 30,2001).  The revolving line of creditmatures in May 2002.

             The Company may borrow up to$6,439,649 under the equipment line of credit. The equipment line of credit bears interest at the bank’s prime rateplus 50 basis points (6.0% as of September 30, 2001).  The equipment line of credit has two interest-only paymentperiods. Amounts borrowed until November 15, 2001 are subject to interest-onlypayments. After this date, the Company is required to make principal andinterest payments to repay these borrowings over a period of 30 months. Thesecond interest-only payment period applies to borrowings made from November16, 2001 to May 15, 2002. After May 15, 2002, the Company is required to makeprincipal and interest payments to repay the borrowings from the secondinterest-only period over a period of 30 months, and no additional borrowingsmay occur thereafter.

             The terms of the revolving line ofcredit and equipment line of credit require the Company to comply with certainfinancial covenants including, but not limited to, restrictions and limitationson future indebtedness, sale of assets and material changes in the Company’sbusiness.  The financial covenantsinclude a minimum quick ratio, as defined in the loan agreement, of 2.0 to 1.0and a maximum ratio of total liabilities to tangible net worth of 1.0 to 1.0for 2001 and 1.5 to 1.0 for 2002 and thereafter.

The mostrestrictive of the financial covenants is that the Company's negative operatingincome shall not be in excess of the amounts specified below (in thousands): 
| **As of the quarter ended,** | **Negative Operating  Income** |   |
|------------------------------|--------------------------------|--------|
|                         |                           |   |
| March  31, 2001              | $                              | 6,500  |   |
| June  30, 2001               | 6,500                          |   |
| September  30, 2001          | 5,000                          |   |
| December  31, 2001           | 3,500                          |   |
| March  31, 2002              | 2,500                          |   |
| June  30, 2002               | 1,000                          |   |
| September  30, 2002          | 0                              |   |
| Thereafter                   | 0                              |   |
|                              |                                |        |  |

Negativeoperating income is defined in the loan agreement as loss from operations plus,to the extent they have been deducted in determining the loss from operations,the sum of non-cash expenses including amortization of goodwill, amortizationof intangibles and stock-based compensation expenses, less the sum of non-cashitems of income, plus net interest income/expense, as calculated in accordancewith generally accepted accounting principles. As of September 30, 2001, the Company was in compliance with thefinancial covenants.

             Net cash used in operatingactivities totaled approximately $16.0 million for the nine months endedSeptember 30, 2000 and $15.6 million for the nine months ended September 30,2001.  Net cash flows from operatingactivities reflect net losses of approximately $24.6 million for the ninemonths ended September 30, 2000 and $38.1 million for the nine months endedSeptember 30, 2001, and to a lesser extent, are offset by the non-cash expensesrelating to depreciation and amortization, stock-based compensation andprovision for allowance for doubtful accounts. In addition, the net cash usedin operations increased due to the increase in accounts receivable and adecrease in accrued compensation and deferred revenues.

             Net cash provided by (used in)investing activities was approximately ($1.1) million for the nine months endedSeptember 30, 2000 and $5.1 million for the nine months ended September 30,2001.  Our investing activities reflectthe additions of property and equipment and sales of investments. We alsoanticipate that our capital expenditures will increase over the next severalyears as we expand our facilities and acquire equipment to support expansion ofour sales, marketing and research and development activities.

             Net cash provided by financingactivities was approximately $19.9 million for the nine months ended September30, 2000 and $1.9 million for the nine months ended September 30, 2001.  The cash provided by financing activitiesfor the nine months ended September 30, 2000 reflect the net proceeds from thesale of our redeemable convertible preferred stock.   The cash used in financing activities for the nine months endedSeptember 30, 2001 reflect the principal payments on the equipment line ofcredit offset by the proceeds from the exercise of preferred stock warrants andstock options.

             Amounts borrowed from one lendinginstitution for capital leases are due over 36 to 48-month repayment periodsand are collateralized by our software products. As of December 31, 2000and September 30, 2001, the outstanding balance under this capital leaseagreement was approximately $541,000 and $439,000, respectively.

             We expect to pay approximately$2.1 million, $2.0 million, $967,000 and $679,000 on our equipmentline of credit and lease agreements in 2001, 2002, 2003 and 2004, respectively.We will fund these commitments through our current cash resources and ourfuture cash flow from operations.

             We intend to continue the investmentin the business, particularly in the areas of research and development, salesand marketing. Our future liquidity and capital requirements will depend onnumerous factors, including:
| • | The costs and timing of expansion of sales and  marketing activities;                              |
|--------|----------------------------------------------------------------------------------------------------|
|   |                                                                                               |
| • | The costs and timing of product development  efforts and the success of these development efforts; |
|   |                                                                                               |
| • | The extent to which our existing and new  products and services gain market acceptance;            |
|   |                                                                                               |
| • | The level and timing of revenues;                                                                  |
|   |                                                                                               |
| • | The costs involved in maintaining and  enforcing intellectual property rights;                     |
|   |                                                                                               |
| • | The timing of market developments; and                                                             |
|   |                                                                                               |
| • | Available borrowings under line of credit and  capital lease arrangements.                         |

             In addition, we may use cashresources to fund acquisitions of complementary businesses andtechnologies.  We believe that ourcurrent cash resources will be sufficient to meet our working capital andcapital expenditures for at least the next 12 months. Thereafter, we mayfind it necessary to obtain additional equity or debt financing. In the eventthat additional financing is required, we may not be able to raise it on termsacceptable to us, if at all.

             The Company reimburses Ford forcertain expenses in connection with the acquisition of Ford’s global customs operations.  The Company expects to pay approximately$534,000 in fees to Ford each month for the reimbursement of expenses incurredby Ford for the use of facilities, the costs of leased employees and themaintenance and expenses related to the acquired technology.

**Recent Accounting Pronouncements**

             In June 2001, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“SFAS”) No. 141 “Business Combinations” and SFAS No. 142 “Goodwilland Other Intangible Assets.” SFAS No. 141 requires business combinationsinitiated after June 30, 2001 to be accounted for using the purchase method ofaccounting, and broadens the criteria for recording intangible assets separatefrom goodwill.  Recorded goodwill andintangibles will be evaluated against these new criteria and may result incertain intangibles being subsumed into goodwill, or alternatively, amountsinitially recorded as goodwill may be separately identified and recognizedapart from goodwill. SFAS No. 142 requires the use of a nonamortizationapproach to account for purchased goodwill and certain intangibles.  Under a nonamortization approach, goodwilland certain intangibles will not be amortized into results of operations, butinstead will be reviewed for impairment and written down and charged to resultsof operations only in the periods in which the recorded value of goodwill andcertain intangibles is more than its fair value. The provisions of eachstatement, which apply to goodwill and intangible assets acquired prior to June30, 2001, will be adopted by the Company on January 1, 2002.  The Company expects the adoption of SFAS No.141 and SFAS No. 142 to result in certain of its intangible assets beingsubsumed into goodwill and will have the impact of eliminating its amortizationof goodwill and certain types of intangibles assets commencing January 1, 2002.

             In June 2001, the FASB issued SFASNo. 143, “Accounting for Asset Retirement Obligations.”  It requires an entity to recognize the fairvalue of a liability for an asset retirement obligation in the period in whichit is incurred if a reasonable estimate of fair value can be made.  If a reasonable estimate of fair valuecannot be made in the period the asset retirement obligation is incurred, theliability shall be recognized when a reasonable estimate of fair value can bemade.  This new standard is effective inthe first quarter of 2003.  The Companydoes not believe that SFAS No. 143 will have a material effect on our financialstatements.

             In August 2001, the FASB issuedSFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”which supersedes SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long- Lived Assets to Be Disposed Of.”  SFAS No. 144 is effective in the first quarter of 2002.  The Company does not believe that the SFASNo. 144 will have a material effect on its financial statements.

 

**Risks Relating to Our Business**

*             In addition to other information in the Form 10-Q, thefollowing risk factors should be carefully considered in evaluating Vastera andits business, because such factors may have a significant impact on Vastera’sbusiness, operating results and financial condition.  If any of the risk factors set forth in this Form 10-Q or inVastera’s other Securities and Exchange Commission filings actually occur, ourbusiness, financial conditions and results of operations could be materiallyand adversely impacted.  Actual resultscould differ materially from those projected in any forward-looking statements.*

**We have a history of losses and expect to incur losses in the future.**

             We incurred net losses ofapproximately $8.3 million in 1998, $10.5 million in 1999,$35.8 million in 2000 and $38.1 million for the nine months endedSeptember 30, 2001. Our accumulated deficit as of September 30, 2001 wasapproximately $163.5 million. We expect to continue to incur net losses inthe foreseeable future. We believe that the success of our business depends onour ability to significantly increase revenue and to limit our operatingexpenses. If our revenues fail to grow at anticipated rates or our operatingexpenses increase without a corresponding increase in our revenues, or we failto adjust operating expense levels appropriately, we may not be able to achieveand maintain profitability, which would increase the possibility that the valueof your investment will decline.

**Our inability to provide our managed services successfully to existingand future clients, including Ford with whom we have entered into a significantcontract, would substantially reduce our revenues, increase our costs, hurt ourreputation in our industry and adversely affect our business.**

             As a critical element of ourstrategy, we intend to provide managed services to our current and future clients.We plan to deliver services ranging from providing operational management for asingle global trade process to managing a client's worldwide trade operation.We expect that the revenues we receive from providing these services willincrease as a percentage of our revenues over time and represent a materialportion of our revenues. If we are not able to successfully provide theseservices to existing or future clients, this strategy will have failed, and wewill not realize significant expected future revenues.

             Furthermore, we have established acontractual relationship with Ford under which we acquired Ford's globalcustoms operations and will provide Ford with our managed services.  Through this relationship, Ford has becomeour single largest client, generating a significant portion of our revenues.For the three and nine months ended September 30, 2001, we derivedapproximately 31% and 34% of our total revenues from Ford, respectively.Because the Ford contract is our largest to date, we cannot assure you that wehave adequate resources to meet our obligations to Ford.  Any inability to perform under our agreementwith Ford or other agreements with existing and future clients wouldsignificantly reduce our revenues, increase our costs, hurt our reputation inour industry and adversely affect our business.

**The market for our recently developed web-native solutions is newlyemerging and dependent on the growth of the Internet, and if the Internet doesnot grow as fast or is not as effective as we anticipate, clients may not useour products and our revenues may decline.**

             The market for our web-nativesolutions is newly emerging and we cannot be certain that this market willcontinue to develop and grow or that companies will choose to use our solutionsrather than attempt to develop alternative platforms and applicationsinternally or through other means. The anticipated growth of the global trademarket may depend on the growth of the Internet. Increased use of the Internetlargely depends upon available Internet security, bandwidth and reliability. Ifuse of the Internet by businesses does not increase as fast and is not aseffective as we currently anticipate, the market for our web-native solutionsmay not grow as we expect and our revenues would be adversely affected.

**Any restriction on our ability to access a foreign country's rules andregulations that are incorporated into our global trade content, GlobaleContent, cost effectively and legally or any failure to update our GlobaleContent timely to include changes in such rules and regulations, maycompromise the effectiveness of our solutions and adversely impact ourrevenues.**

             The success of our global trademanagement solutions for our clients depends on our ability to obtain or accessthe complex rules and regulations published by foreign governments governing aparticular country's import and export of goods. The foundation of oursolutions, Global eContent, is subject to rapid change at the initiative offoreign governments, based on factors beyond our control. Any changes in acountry's rules and regulations relating to global trade that we are unable toinclude in our Global eContent library may result in dissatisfied clients andpossible litigation. In addition, to the extent a foreign government restrictsour access to its rules and regulations, charges a fee for such access orgrants proprietary rights to such information to one or more of ourcompetitors, our solutions may not be useful to, or cost efficient for, ourcurrent and future clients and our revenues could decrease.

**Our services agreement with Ford is subject to terminationfor any reason by either Ford or us after four years and, if it is terminated,we will not realize the revenues expected to be generated thereunder.**

             The services agreement between Fordand us has a 10-year term that may be terminated by either party for any reasonafter four years. If the services agreement is terminated prior toJuly 2010, we will not realize a material amount of revenues expected tobe generated thereunder. Any events adversely affecting our relationship withFord may result in us not being able to achieve the full marketing benefitassociated with having Ford as a principal client, which would reduce ourrevenues, increase our costs and hurt our reputation in our industry.

**Fluctuations in our operating results and the composition of ourrevenues, particularly compared to the expectations of market analysts andinvestors, may lead to a reduced price of our common stock.**

             Our operating results have variedin the past and could fluctuate significantly in the future. We expect that ouroperating results will continue to vary in the future, based on a number offactors, including:
| • | Demand for our products and services;                                                                       |
|--------|-------------------------------------------------------------------------------------------------------------|
|   |                                                                                                        |
| • | Increases in our operating expenses;                                                                        |
|   |                                                                                                        |
| • | Competition in our industry;                                                                                |
|   |                                                                                                        |
| • | Economic conditions adversely affecting  technology companies in our industry;                              |
|   |                                                                                                        |
| • | Variability in the mix of our subscription and  transaction revenues and our consulting revenues;           |
|   |                                                                                                        |
| • | Timing of new solution introductions and  enhancements to our TradeSphere and TradePrism.com solutions; and |
|   |                                                                                                        |
| • | Continued business from our existing clients.                                                               |

          Due to the foregoing factors, our annual orquarterly results of operations may not meet the expectations of securitiesanalysts and investors, which could cause the price of our common stock todecline.

**Our ability to achieve or maintain profitability will be constrained ifwe do not effectively manage our rapid growth.**

             We have significantly increased ouremployee base to meet increasing demand for our client solutions. The number ofour employees has increased by 146employeesfrom 312 as of December 31, 2000 to 458 as of September 30, 2001. As weexpand our operations, we expect to continue to increase the size of ouremployee base. Our management and operations have been strained by this growthand will continue to be strained by our anticipated growth. To competeeffectively and to manage future growth, we must continue to improve ourfinancial and management controls, reporting systems and procedures on a timelybasis. We must also expand, train and manage our employee base.  If we are not successful in managing ourgrowth, our ability to achieve or maintain profitability may be harmed.

**We may be unable to attract and retain key personnel, which wouldadversely affect our ability to develop and effectively manage our business.**

             Our future performance will dependlargely on the efforts and abilities of our senior executives, key technical,professional services, sales and marketing and managerial personnel. Thisdependence is particular to our business because personal relationships are acritical element of obtaining and maintaining clients. Our success will dependon our ability to attract and retain these key employees in the future. Theemployment of our key personnel, including our executives, is at will. Themarket for such persons is extremely competitive and we may not find qualifiedreplacements for personnel who leave us. In the past, we have experienced difficultyin hiring qualified technical, professional services, sales, marketing andmanagerial personnel. In addition, we do not maintain key person life insuranceon any of our key personnel, and have no plans to do so. The loss of, or theinability to attract, any one or more of our key personnel may harm our abilityto develop and effectively manage our business.

**If we are unable to obtain additional capital as needed or obtainadditional capital on unfavorable terms in the future, our operations and growthstrategy may be adversely affected and the market price for our common stockcould decline.**

             Historically, we have financed ouroperations primarily through the sale of our equity securities. As of September30, 2001, we had cash and cash equivalents of approximately $10.5 million plusshort-term investments of approximately $65.1 million and an accumulateddeficit of approximately $163.5 million. While we believe that the net proceedsfrom our initial public offering, combined with current cash resources, will besufficient to meet our working capital and capital expenditures for at least 12months, we may need to raise additional debt or equity capital to fund theexpansion of our operations, to enhance our products and services, or toacquire or invest in complementary products, services, businesses ortechnologies. If we raise additional funds through further issuances ofconvertible debt or equity securities, our existing stockholders could suffersignificant dilution, and any new equity securities we issue could have rights,preferences and privileges superior to those of holders of our common stock,including shares of common stock sold in our initial public offering. Any debtfinancing secured by us in the future could involve restrictive covenantsrelating to our capital raising activities and other financial and operationalmatters, which may make it more difficult for us to obtain additional capitaland to pursue business opportunities, including potential acquisitions. Inaddition, we may not be able to obtain additional financing on terms favorableto us, if at all. If adequate funds are not available on terms favorable to us,our operations and growth strategy may be adversely affected and the marketprice for our common stock could decline.

**Our international operations and planned expansion expose us to businessrisks that could limit the effectiveness of our growth strategy and cause ouroperating results to suffer.**

             We intend to expand ourinternational operations substantially and enter new international markets,including providing our services to divisions and subsidiaries of Fordoperating in foreign countries. This expansion will require significantmanagement attention and financial resources to translate successfully oursoftware products into various languages, to develop compliance expertiserelating to international regulatory agencies and to develop direct andindirect international sales and support channels. We face a number of risksassociated with conducting our business internationally that could negativelyimpact our operating results, including:
| • | language barriers, conflicting international  business practices and other difficulties relating to the management and  administration of a global business; |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                         |
| • | longer sales cycles associated with educating  foreign clients about the benefits of our products and services;                                              |
|   |                                                                                                                                                         |
| • | currency fluctuations and exchange rates;                                                                                                                    |
|   |                                                                                                                                                         |
| • | multiple and possibly overlapping tax  structures and the burdens of complying with a wide variety of foreign laws;                                          |
|   |                                                                                                                                                         |
| • | the need to consider characteristics unique to  technology systems used internationally; and                                                                 |
|   |                                                                                                                                                         |
| • | economic or political instability in some  international markets.                                                                                            |

             We may not succeed in our effortsor we may experience delays in the execution of our plan to enter newinternational markets, establish, maintain or increase international demand forour solutions or expand our international operations, which may harm our growthstrategy and could cause our operating results to suffer.

**Our lengthy and variable sales cycle makes it difficult for us to predictwhen or if sales will occur and, therefore, we may experience an unplannedshortfall in revenues.**

             Our products have a lengthy andunpredictable sales cycle that contributes to the uncertainty of our operatingresults. Clients typically view the purchase of our solutions as a significantand strategic decision. As a result, clients generally evaluate our solutionsand determine their impact on existing infrastructure over a lengthy period oftime. Our sales cycle has averaged approximately six to nine months forsoftware sales and nine to twelve months for managed services agreements,depending on a particular client's implementation requirements and whether theclient is new or is extending an existing implementation. The license of oursoftware products may be subject to delays if the client has lengthy internalbudgeting, approval and evaluation processes. We may incur significant sellingand marketing expenses during a client's evaluation period, including the costsof developing a full proposal and completing a rapid proof of concept or customdemonstration, before the client engages us. Larger clients may purchase oursolutions as a part of multiple simultaneous purchasing decisions, which may resultin additional unplanned administrative processing and other delays. Inaddition, any prolonged decline in the demand for technology products andservices could reduce the market for our solutions, making sales moredifficult.  If revenues forecasted froma specific client for a particular quarter are not realized or are delayed toanother quarter, we may experience an unplanned shortfall in revenues, whichcould adversely affect our operating results.

**Any loss of our licensed third-party technology may result in increasedcosts of or delays in providing our solutions, which would harm our operatingresults.**

             We license technology from severalcompanies on a non-exclusive basis that is integrated into our TradeSphereproduct suite, including development tools and facilities from IBM (WebSphereand MQ Series) and Forte, which was acquired by Sun Microsystems. We anticipatethat we will continue to license technology from these and other third partiesin the future. This software may not continue to be available on commerciallyreasonable terms, or at all. While the term of our license with SunMicrosystems expires on December 23, 2002, and our license with IBM expires onJune 30, 2006, these licenses would be difficult and time-consuming toreplace. The loss of any of these technology licenses could result in delays inthe licensing of our TradeSphere products until equivalent technology, ifavailable, is identified, licensed and integrated, and would adversely affectour operating results.

**The dynamic and complex nature of Global eContent increases thelikelihood that we may face costly product liability claims.**

             The foundation of our softwaresolutions and managed services, Global eContent, is a rules-based applicationthat provides comprehensive management of government trade regulations andprograms acquired, interpreted, and updated by Vastera’s in-country tradeexperts. Because of the dynamic and complex nature of Global eContent, we mayface product liability claims in connection with our current products andfuture products. Any provisions in our agreements with our clients designed tolimit our exposure to potential product liability claims and any productliability insurance may not be adequate to protect us from such claims underour agreements. A successful product liability claim brought against us couldharm our financial condition. Even if unsuccessful, any product liability claimcould result in costly litigation and divert management's attention andresources. In addition, the effective implementation of our products may dependupon the successful operation of third-party licensed products in conjunctionwith our products, and therefore any undetected errors in these licensedproducts may prevent the implementation or impair the functionality of ourproducts, delay new product introductions and injure our reputation.

**The uncertainty of future government regulation of the Internet andglobal trade may add to our operating costs.**

             We may face unanticipated operatingcosts because of the current uncertainty surrounding potential governmentregulation of the Internet and e-commerce. We believe that we are not currentlysubject to direct regulation of online commerce, other than regulationsapplicable to businesses generally. However, the Internet has rapidly emergedas a commerce medium and governmental agencies have not yet been able to adaptall existing regulations to the Internet environment. Laws and regulations maybe introduced and court decisions reached that affect the Internet or otheronline services, covering issues such as user pricing, user privacy, freedom ofexpression, access charges, content and quality of products and services,advertising, intellectual property rights and information security. As anInternet company, it is unclear in which jurisdictions we are actuallyconducting business. Our failure to qualify to do business in a jurisdictionthat requires us to do so could subject us to fines or penalties and couldresult in our inability to enforce contracts in that jurisdiction. Even if wewere able to ascertain correctly in which jurisdictions we conduct business,many of these jurisdictions have yet to determine the application of theirexisting laws to web-based global trade or develop laws that apply to suchtrade. Complying with new regulation would increase our operating costs.

**We may be unable to expand the import and export trade managementservices provided to Ford into other geographic regions and other product linesin the manner anticipated.**

             Under our agreement, we are providingFord with import and export trade management services in a phased ingeographical approach, which started with the United States, and presentlyincludes Mexico and Canada. If we are unable to perform the services providedin the United States, Mexico and Canada in accordance with our mutually agreedupon performance criteria or if Ford experiences business difficulties in othergeographical regions, Ford may be unable to incorporate our services into manyof its operations in other geographic regions and product lines, which wouldreduce our future revenue growth. Additionally, in the past Ford may not havecomplied fully with all of the regulatory requirements established by foreigngovernments, which may impede our ability to establish and leverage ouroperations under the Ford agreements in other geographic regions and which inturn would reduce our future revenue growth. Any failure to receive therequisite government approvals in connection with providing Ford managedservices would adversely impact our operating results.

**We may be unable to protect our proprietary rights adequately, whichcould result in their unauthorized use by our competitors and have an adverseimpact on our revenues.**

             Our success depends on our abilityto protect our proprietary rights. We rely primarily on:
| • | Copyright, trade secret and trademark laws;                                                                                                                                         |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                |
| • | Confidentiality agreements with employees and  third parties; and                                                                                                                   |
|   |                                                                                                                                                                                |
| • | Protective contractual provisions such as  those contained in license agreements with consultants, vendors and clients,  although we have not signed such agreements in every case. |

             Despite our efforts to protect ourproprietary rights, unauthorized parties may copy aspects of our products andobtain and use information we regard as proprietary. Other parties may breachconfidentiality agreements and other protective contracts. We may not becomeaware of these breaches or have adequate remedies available. We may need tolitigate claims against third parties who infringe our intellectual propertyrights, which could be costly.

             We have not secured registration ofall our marks in the United States and have pursued limited registration of ourintellectual property in foreign countries. The laws of some foreign countriesdo not protect our proprietary rights to the same extent, as do the laws of theUnited States. Effective copyright, trademark and trade secret protection maynot be available in other jurisdictions. If we cannot adequately protect ourproprietary rights, our competitors could benefit from the unauthorized use ofsuch rights, resulting in an adverse impact on our revenues. Even if we areable to protect our proprietary rights, we could incur significant costs todefend our rights.

**Our patent protection strategy is in development currently and anyinadequacy in the protection of our technology could increase our operatingcosts.**

             We may also rely on patents toprotect our proprietary rights in the future. Any patent strategy we attempt toimplement may not be successful and could harm our business by disclosingunpatentable trade secrets. The laws that apply to the types of patents we mayseek are evolving and are subject to change. We presently have filedprovisional patent applications in the United States. These applications maynot result in patents or may take longer than we expect to result in patents.We may also decide to not file patent applications in all the countries inwhich we operate or intend to operate. Our decision to do so may inhibit ourability to protect our proprietary rights in those countries. Even if we areissued patents, we cannot assure you that they will provide us any meaningfulprotection or competitive advantage. If we try to enforce our patents, thirdparties may challenge our patents in court or before the U.S. Patent andTrademark Office. An unfavorable outcome in any such proceeding could requireus to cease using the technology or to license rights from prevailing thirdparties. There can be no assurance that any prevailing party would offer us alicense or that we could execute a license on terms that are commerciallyacceptable to us. Developing and enforcing our patent protection strategy mayincrease our operating costs.

**We may have to defend against intellectual property infringement claims,which could be expensive, and if we are not successful, could result insubstantial monetary liability and disrupt our business.**

             We cannot be certain that oursolutions do not or will not infringe valid patents, copyrights, trademarks orother intellectual property rights held by third parties. As a result, we maybe subject to legal proceedings and claims from time to time relating to theintellectual property of others in the ordinary course of our business.  We may incur substantial expenses indefending against any third–party infringement claims, regardless oftheir merit. Successful infringement claims against us may result insubstantial monetary liability and may disrupt our business.

**Competition in our market could make it difficult to attract clients,cause us to reduce prices, resulting in reduced gross margins, or cause us tofail to gain market share or experience a loss of market share, any of whichcould reduce our operating results.**

             The market for our products andservices is competitive, dynamic and subject to frequent technological changes.The intensity of competition and the pace of change are expected to increase inthe future. Our solutions face competition from a number of competitorsoffering products and services that vary in functionality including:
| • | Content aggregators such as Dun &  Bradstreet and TradeCompass;                                                 |
|--------|--------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                     |
| • | International trade logistics providers such  as ClearCross, Capstan, Nextlinx and QRS Corporation;                      |
|   |                                                                                                                     |
| • | Trade consultants such as management  consulting firms, law firms and boutique consulting firms; and                     |
|   |                                                                                                                     |
| • | Outsourcing service providers, such as  third-party logistics providers, fourth-party logistics providers and  carriers. |

             We expect additional competitionfrom other established and emerging companies as the market for global tradesolutions evolves. Current or future competitors may develop or offer servicesthat are comparable or superior to ours at a lower price, which could harm ourrevenues and profitability. Increased competition could result in pricereductions, reduced gross margins and loss of market share or failure to gainmarket share, any of which would seriously harm our business. We may not beable to compete successfully against current and future competitors, which mayreduce our operating results and lower the value of your investment in ourcommon stock.

**Any future acquisitions may be difficult and disruptive, we may notrealize the expected benefits from any such acquisitions and our operatingresults may be harmed if we cannot address the challenges presented byacquisitions.**

             In the past we have acquiredbusinesses to expand our operations or market presence and intend to continueour expansion by acquiring or investing in companies, assets or technologiesthat complement our business and offer opportunities for growth. Thesetransactions involve many risks and challenges that we might not successfullyovercome, including:
| • | Difficulties in assimilating technologies,  products, personnel and operations;                           |
|--------|-----------------------------------------------------------------------------------------------------------|
|   |                                                                                                      |
| • | Disruption of our ongoing business and  diversion of management's attention from other business concerns; |
|   |                                                                                                      |
| • | Risks of entering markets in which we have no  or limited prior experience;                               |
|   |                                                                                                      |
| • | Issuances of equity securities that may dilute  your ownership interest in our common stock;              |
|   |                                                                                                      |
| • | Cash payments to, or the assumption of debt or  other liabilities of, the companies we acquire; and       |
|   |                                                                                                      |
| • | Large write-offs related to goodwill and other  intangible assets.                                        |

             Our inability to address theserisks could negatively impact our operating results. In addition, in connectionwith our acquisition of Ford's global customs operations, we acquired, or arereceiving full-time services from, a number of Ford employees. Any failure tosuccessfully integrate these employees into our operations will increase ouroperating expenses and may adversely impact our revenues. Moreover, any futureacquisitions or investments, even if successfully completed, may not generateany additional revenue or provide any benefit to our business.

**Your ability to influence corporate matters may be limited because ourofficers, directors and affiliates will be able to control, and Ford will beable to influence, matters requiring stockholder approval and may haveinterests that differ from yours.**

             As of November 6, 2001, ourofficers, directors and affiliated entities, including Ford, togetherbeneficially own approximately 34%of the outstanding shares of ourcommon stock.  In addition, Fordbeneficially owns approximately 21% of the outstanding shares of our commonstock.  As the single largest stockholderof Vastera, Ford may have significant influence over corporate acts requiringstockholder approval, including a merger or sale of the Company. As long asFord holds at least 5% of our common stock, it has the right to appoint anon-voting observer to our board of directors. Accordingly, these stockholders collectively will be able to control allmatters requiring stockholder approval and, thereby, our management andaffairs. In addition, this concentration of ownership may delay, deter orprevent acts that would result in a change of control, which in turn couldreduce the market price of our common stock. Our officers, directors andaffiliated entities, including Ford, may have interests that differ from yourinterests and their decisions may negatively impact our future success.

**Our management has broad discretion over how to use the proceeds of ourinitial public offering; we may not use the proceeds in ways with which ourstockholders agree or that help achieve our growth strategy and our revenuesmay decline.**

             The net proceeds from our initialpublic offering were $86.1 million, at an offering price of $14.00 per shareand after deducting the underwriting discount and offering expenses.  Our management has broad discretion as tohow to apply the net proceeds of this offering.   We have used the net proceeds from the initial public offeringfor general corporate purposes, principally working capital for increaseddomestic and international sales and marketing expenditures, productdevelopment expenditures, expenditures related to the expansion of ourconsulting services organization and capital expenditures made in the ordinarycourse of business. The remaining portions of the net proceeds have beeninvested in cash equivalents and short-term investments.  If we fail to use these proceedseffectively, we may not achieve our growth strategy and our revenues maydecline.

**Other companies may have difficulty acquiring us, even if doing so wouldbenefit our stockholders, due to provisions of our corporate charter andbylaws, Delaware law and Ford's significant ownership position.**

             Provisions in our certificate ofincorporation, in our bylaws and under Delaware law could make it moredifficult for other companies to acquire us, even if doing so would benefit ourstockholders. Our certificate of incorporation and bylaws contain the followingprovisions, among others, which may inhibit an acquisition of our company by athird party:
| • | a staggered board of directors, where  stockholders elect only a minority of the board each year; |
|--------|---------------------------------------------------------------------------------------------------|
|   |                                                                                              |
| • | advance notification procedures for matters to  be brought before stockholder meetings;           |
|   |                                                                                              |
| • | a limitation on who may call stockholder  meetings; and                                           |
|   |                                                                                              |
| • | a prohibition on stockholder action by written  consent.                                          |

             We are subject to provisions ofDelaware law that prohibit us from engaging in any business combination withany "interested stockholder," meaning generally a stockholder whobeneficially owns more than 15% of our stock, for a period of three years fromthe date this person became an interested stockholder, unless variousconditions are met, such as approval of the transaction by our board. Thiscould have the effect of delaying or preventing a change in control.Additionally, in connection with establishing our strategic relationship withFord, Ford acquired approximately 8,000,000 shares of common stock in us. As ofNovember 6, 2001, Ford beneficially owns 21% of us.  Because of Ford's significant holdings, other companies may be deterredfrom acquiring us, even if being acquired would be in the best interest of ourother stockholders.  

**The recent terroristacts have negatively impacted the U.S. economy and may make it more difficultto implement our growth strategy and to forecast future results of operations.**

**            **The terrorist acts of September 11, 2001 havenegatively impacted an already decelerating U.S. economy and caused many U.S.businesses to stop spending on new products and services and to cut costs.  Accordingly, it may be more difficult tomarket our solutions to new clients and to derive additional revenues from ourexisting clients.  The unpredictabilityof future military action and other responses associated with a global war onterrorism has resulted in economic uncertainty that will negatively impactconsumer as well as business confidence in the near term.  This economic uncertainty may make it moredifficult to implement our growth strategy and negatively impact our revenuesin the future.  We also may have moredifficulty forecasting our future results of operations.

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

             We develop products in the UnitedStates and market our products in North America, and to a lesser extent,Europe, Canada, Mexico and the Asia-Pacific region. As a result, our financialresults could be affected by factors such as changes in foreign currencyexchange rates or weak economic conditions in foreign markets. As a majority ofsales are currently made in U.S. dollars, a strengthening of the dollar couldmake our products less competitive in foreign markets. We do not expect anymaterial adverse effect on our consolidated financial position, results ofoperations or cash flows due to movements in any specific foreign currency.

             We currently do not use financialinstruments to hedge operating expenses of our European, Mexican or Canadiansubsidiaries. We intend to assess the need to utilize financial instruments tohedge currency exposures on an ongoing basis. Our interest income is sensitiveto changes in the general level of U.S. interest rates, particularly since themajority of our investments are in short-term instruments. Due to theshort-term nature of our investments, we believe that there is no material riskexposure. We do not hold or issue derivative securities, derivative commodityinstruments or other financial instruments for trading purposes. Therefore, noquantitative tabular disclosures are required.

             We have a substantial amount of intangibleassets.  Although as of September 30,2001, we believe our intangible assets are recoverable, changes in the economy,the business in which we operate and our own relative performance could changethe assumptions used to evaluate intangible asset recoverability.  We continue to monitor these assumptions andtheir effect on the estimated recoverability of our intangible assets.

**Part II – Other Information**

**Item 1:              Legal Proceedings**

             We are not a party to any materiallegal proceedings.

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

             We received net offering proceedsfrom our initial public offering of approximately $86.1 million. We have usedapproximately $19.5 million of the net proceeds from the initial publicoffering for general corporate purposes, principally working capital forincreased domestic and international sales and marketing expenditures, productdevelopment expenditures, expenditures related to the expansion of ourconsulting services organization and capital expenditures made in the ordinarycourse of business. The remaining portions of the net proceeds have beeninvested in cash, cash equivalents and short-term investments. We may also usea portion of the remaining net proceeds to expand internationally and toacquire or invest in additional businesses, products and technologies that webelieve will complement our current or future business. We issued 944,485shares of common stock in the quarter ending March 31, 2001 in connection withour acquisition of Speedchain.  Inissuing these shares to the Speedchain shareholders, we relied on Section 4(2)of the Securities Act and Rule 506 of Regulation D promulgated thereunder forexemptions from the registration requirements of the Securities Act.  All of the Speedchain shareholders whoreceived shares of our common stock were accredited investors.

**Item 6:              Exhibits and Reports on Form 8-K**

The followingexhibits are included herein:

             (a)         Exhibits.

             None.

             (b)        Reportson Form 8-K.

             TheCompany did not file any reports on Form 8-K during the three months endedSeptember 30, 2001.

 

**SIGNATURES**

 

             Pursuantto the requirements of the Securities and Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized in Dulles, Virginia on November 14, 2001.

 
|   | VASTERA, INC. |
|--------|---------------|
|   |          |   |
|   | By:           | /s/ Philip J. Balsamo |
|   |          | Philip J. Balsamo |
|   |          | Chief Financial Officer |
|   |          | (Principal Financial and Accounting Officer) |