**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-K**

**(Mark One)**

 

| **ý**                                                                                                                                  | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |   |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                        |
| **For the fiscal year ended December 31, 2003**                                                                                             |
|                                                                                                                                        |
| **OR**                                                                                                                                      |
|                                                                                                                                        |
| **o**                                                                                                                                       | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |   |
|                                                                                                                                        |
| **For the transition period from**          **to        .** |
|                                                                                                                                        |
| **Commission file No. 1-14371**                                                                                                             |

 

**INFORMATIONHOLDINGS INC.**

(Exact name of registrant as specified in itscharter)

 

| **DELAWARE**                                                    |   | **06-1518007**                    |
|-----------------------------------------------------------------|--------|-----------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (IRS Employer Identification No.) |
|                                                            |   |                              |
| **2777 Summer Street, Suite 602  Stamford, Connecticut**        |   | **06905**                         |
| (Address of principal executive offices)                        |   | (Zip Code)                        |
|                                                            |   |                              |
| **(203) 961-9106**                                              |
| (Registrant’s telephone number, including  area code)      |
|                                                            |   |                              |
| Securities registered pursuant to Section  12(b) of the Act:    |

 

| **Title of each class**                  |   | **Name of exchange on which registered** |
|------------------------------------------|--------|------------------------------------------|
| Common Stock, par value $0.01  per share |   | New York Stock Exchange                  |

 

Securities registered pursuant to Section12(g) of the Act:  **None**

 

Indicate by check mark whether the registrant(1) has filed reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

YES ý   NOo                    

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to the Form 10-K.  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 

YES ý   NO o                    

 

The aggregate market value of the common stock held by non-affiliatesof the registrant as of the last business day of the registrant’s most recentlycompleted second fiscal quarter was approximately $255,159,923 based upon theJune 30, 2003 closing sale price of the common stock of $18.25 as reported bythe New York Stock Exchange.

 

The number of shares of the registrant’s common stock, par value $0.01outstanding as of March 1, 2004 was 20,886,879 shares.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

The information required by Part III of this report, to the extent notset forth herein, is incorporated by reference from the registrant’s definitiveproxy statement relating to the Annual Meeting of Stockholders to be held April20, 2004, which definitive proxy statement will be filed with the Securitiesand Exchange Commission within 120 days of the end of the registrant’s fiscalyear.

 

 

----

 

**Tableof Contents**

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

 

----

 

**PART I**

 

*This Annual Reporton Form 10-K, including the “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” contains forward-looking statementsregarding future events and our future results that are based on currentexpectations, estimates, forecasts, and projections about the industries inwhich we operate and the beliefs and assumptions of our management.  Words such as “expects,” “anticipates,”“targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,”“estimates,” variations of such words, and similar expressions are intended toidentify such forward-looking statements. In addition, any statements that refer to projections of our futurefinancial performance, our anticipated growth and trends in our businesses, andother characterizations of future events or circumstances, are forward-lookingstatements.  Readers are cautioned thatthese forward-looking statements are only predictions and are subject to risks,uncertainties and assumptions that are difficult to predict.  Therefore, actual results may differmaterially and adversely from those expressed in any forward-lookingstatements.  Readers are referred to therisks and uncertainties identified below, under “Risk Factors,” and elsewherein this Annual Report on Form 10-K.  Weundertake no obligation to revise or update any forward-looking statements forany reason.*

 

**Item 1.****                    *Business***

 

**Overview**

 

InformationHoldings Inc. (IHI or the Company), is a leading provider of intellectualproperty (IP) and regulatory information products, software and services toprofessional end-users.  Prior to fiscal2003, the Company operated in three segments – science and technology information (STI), information technologylearning (ITL) and intellectual property (IP). During 2003, the Company divested the entirety of both its STI and ITLsegments, choosing to focus on its IP and regulatory information and servicebusinesses.  For the year ended December31, 2003, the Company had revenues of $81.4 million, operating income of $6.3million, EBITDA (earnings before interest, taxes, depreciation and amortization)of $17.3 million and net income from continuing operations of $5.3 million, or$0.25 per diluted common share.

 

The Company provides a broad array ofdatabases, information products, software and complementary services for IP andregulatory professionals through four primary business units:  MicroPatent, Master Data Center (MDC), IDRACand Liquent.  MicroPatent, acquired in 1997, is a leading provider of patent andtrademark information to IP professionals in corporate and legal markets.  MDC, acquired in 1999, provides specializedservices and software that enable customers to manage IP portfolios.  IDRAC and Liquent, both acquired in 2001,provide content assembly, publishing and information solutions, primarily toregulatory professionals in the life sciences industry.  The Company also has a small IP licensingunit operating as LPS Group.

 

The MicroPatent, MDC and IDRAC units comprisethe Company’s data segment.  Revenuesfrom data products provided approximately 71% of the Company’s consolidated revenues in fiscal 2003.  The Company’s Liquent unit comprises thesoftware segment.  Revenues fromsoftware and related products provided approximately 29% of the Company’sconsolidated revenues in fiscal 2003.

 

See Note 15 of the Notes to ConsolidatedFinancial Statements for additional business segment information.  References to discontinued operations inthis Form 10-K relate to the STI Segment (CRC Press and subsidiaries) and theITL Segment (Transcender LLC).  See Note 4 of the Notes to Consolidated FinancialStatements for additional information related to discontinued operations.

 

1

----

 

**Markets,Products and Services**

 

***Data Segment***

 

The Company provides products and services inseveral areas within IP and regulatory markets, including patent and trademarkinformation, patent and trademark management services and regulatory databasesrelated to the registration of pharmaceuticals.  These markets are difficult to quantify with precision because ofa lack of third party market information, free services from governmental authorities and the level ofservices performed “in-house” by corporations and law firms.  The Company believes that its marketsare large, dynamic and growing, with growth being fueled by increasingawareness of intellectual property as a corporate asset, greater enforcement ofintellectual property rights on a worldwide basis, increasing intellectualproperty and regulatory filings and an increasing pace of innovation.

 

*Patent and Trademark Information –MicroPatent*

 

The Company’s MicroPatent unit provides information products andservices primarily related to the search, retrieval and analysis of IPinformation.  The Company estimates thatcurrent annual revenue in the market for patent and trademark informationexceeds $500 million.  Marketparticipants provide services including search and retrieval of both primaryand secondary patent information, patent search services and trademarkinformation and search services. Historically, the largest part of the market has been represented bysecondary patent information, including a large market for abstracts andindexes of patent information.  TheCompany believes this has been a relatively low growth area of the overallmarket.  In recent years, the primaryinformation market has experienced strong growth based on the development oftechnologies that enable storage, searching and high value-added analyticalreview.

 

The Company believes it offers the most comprehensive primary patentinformation service in the world, including the largest full text searchabledatabase of patents and unique, proprietary, state-of-the-art searching andanalytical software, as well as a database of comprehensive bibliographicpatent information. The Company also provides a trademark search service thatenables users to search United States (U.S.) Federal, U.S. State, domain name,common law and foreign trademarks over the Internet.  The Company’s primary products include the following:

 

*PatentWeb -*Internet-basedsearching and document downloading products, sold on either a subscription orpay-per-use basis.  The patent collection includes all patentsever issued by the United States Patent and Trademark Office (USPTO), theEuropean Patent Office (EPO) and the World Intellectual Property Organization (WIPO),as well as a significant collection of patents from Japan and numerousindividual countries in Europe.  Theprimary subscription product, *TOPS*,provides enterprise-wide access to the primary patent collection and istypically used by corporate end-users in research and development, productdevelopment, research centers, corporate libraries and legal departments forpatent-related research.

 

*Aureka* – a series of high value-added analytical toolsdesigned to make patent data more accessible and more valuable to decisionmakers throughout anenterprise.  *Aureka* provides sophisticated searching capabilities andfunctionality to aid in the organization, grouping and analysis of patentdata.  Features include text analysistools for data mapping, citation trees to trace the geneology of sets ofpatents and enhanced reporting tools.  The product is sold on a subscription basis.

 

*MicroPatent PatentIndex Database*(MPI) - a timely and comprehensive bibliographic database, generally sold as asupplemental subscription to *TOPS*subscribers.  MPI contains bibliographic data from 72countries and patent authorities, with records dating back to 1920 orearlier.  The

 

2

----

 

product is designed to provide acost-effective alternative to traditional abstracting and indexing services.

 

*Trademark.com* - an online trademark search service includingcomprehensive U.S. Federal and State trademarks, extensive common law files,domain name searching andinternational trademarks from Canada, WIPO, European Community and the UnitedKingdom.  The product is sold either asa subscription or on a pay-per-use basis.

 

The Company also provides patent documentsand patent file histories sold in paper and electronic formats.  Selected IP data is also sold to ReedElsevier, a major information and publishing company, with such information being made available to its online customers inthe legal market.  The Company alsooffers professional patent searching services to customers that do not have thein-house expertise to conduct a patent search.

 

Patent and trademark information services provided 39% of consolidated revenues in 2003.

 

*IPManagement Services - MDC*

 

The Company’s MDC unit provides aservice that organizes and assists owners of intellectual property, includingcorporate and legal clients, with the payments of patent annuities andtrademark renewals on a worldwide basis. The Company estimates that current annual revenue in the marketfor outsourced patent and trademark management services exceeds $100million.  The market is primarilycomprised of license revenues generated for IP portfolio management softwareand revenues generated from payment services. This excludes the potential market associated with organizations thatperform these functions “in-house”. Consistent market growth has been fueled by the increasing number ofactive patents and trademarks, increasing complexity associated with managingIP portfolios, greater interest in maintaining and enforcing IP rights andincreasing levels of outsourcing to firms with industry expertise, such asMDC.  The market is currentlyfragmented, and management believes that MDC is the leading provider of patentand trademark management services in the U.S. market.

 

Due to the fact that the rules for filing andmaintaining patents and trademarks are fairly complex and vary among thevarious regulatory authorities around the world, owners of IP in domestic andforeign markets, including many major corporations and law firms, use service providers on an outsourcedbasis.  MDC’s services includethe following:

 

*Annuity Payment Services*- a service to track filing and paymentrequirements on a worldwide basis and to make payments on behalf of corporateand legal customers.  The serviceis priced on a per payment basis, with cash received from customers in advanceof applicable payment dates.  MDCcurrently processes approximately 375,000 annual payments on behalf of itsclients.  The service is supported by aproprietary database that includes the current rules for filing and maintenanceof patents and trademarks in every major patent jurisdiction in the world.

 

*IP Master* -management software that enables customers to manage, track and report on theirIP portfolios.  The software includesthe country rules database for every major IP jurisdiction as well as advancedquery, filtering and reporting features.

 

MDC also provides supplemental services including training, legacy dataconversions and software customizations.

 

IP management services provided 19% of consolidated revenues in 2003.

 

3

----

 

*Regulatory Databases – IDRAC*

 

The Company’s IDRAC unit provides a comprehensive database detailingthe rules and regulations for registering new drugs in 36 differentjurisdictions worldwide.  Because theprocess of registering a new therapeutic drug is highly complex and variesbetween jurisdictions worldwide, life science businesses use IDRAC to constructdrug filings more efficiently, simplify global registrations and optimizein-house resources.

 

The Company believes that the IDRAC database is the most completedatabase of regulatory intelligence available to the worldwide life sciencesindustry.  The database includesofficial regulatory texts and guidelines from supervisory agencies such as theU.S. Food and Drug Administration, legislative and regulatory texts fromofficial journals and proprietary content that provides further information onthe regulatory environment in each jurisdiction.  The database is sold on a subscription basis, most often accessedvia the Internet.

 

Regulatory databases provided 13%of consolidated revenues in 2003.

 

***Software Segment***

 

The Company’s Liquent unit provides softwaresolutions and related services that enable users throughout an enterprise tocollaborate in the authoring, compilation, distribution, publishing and reuseof information. Liquent’s products are used in the life sciences industry and,most predominantly, in pharmaceutical, biotechnology and contract research organizationsfor preparing and filing new drug applications (NDA’s) and  biologics licensing applications.

 

The Company’s historical market has beencontent assembly and publishing solutions in the life science industry.  The Company estimates that this marketapproximates $75 million-$100 million. This excludes the potential market associated with organizations thatperform these functions “in-house”.  TheCompany believes that Liquent is the largest worldwide provider of suchsolutions. This market is a subset of the much larger life science documentmanagement industry.  As discussed laterin this section, the Company is currently developing new products that willexpand its market penetration beyond its core content assembly and publishingniche.

 

Regulatory initiatives currently beingimplemented will result in an increase in the number of electronic submissionsrequired of life science businesses and the harmonization of certain worldwidefiling requirements.  The Companybelieves this will increase the need for document and submission managementsolutions, resulting in a larger overall market for its products and services.

 

In December 2003, the Company acquired CDCSolutions Limited (CDC), a private company based in the United Kingdom thatprovides software solutions and related services for the life sciencesindustry.  The CDC business is beingintegrated with Liquent from both a managerial and operationalperspective.  The primary productsoffered by the combined Liquent-CDC business include the following:

 

*CoreDossier; EZsubsEnterprise* – enterprise-wide software productsdesigned to meet the pre-approval and compliance needs of life scienceorganizations in the process of preparing and filing NDA’s and biologicslicensing applications.  These regulatorydossiers are complex documents, typically running in excess of 200,000 pages,including legacy documents, spreadsheets,charts, photos, graphs, audio and video files and more.  Liquent’ssystems automate the entire regulatory publishing process by assemblingand publishing information from over 100 different native formats.  The products improve publication andsubmission quality with varied output options to regulatory authorities,contract research organizations, vendors and other stakeholders.  These

 

4

----

 

systems integrate with multiple data repositories, can be implementedon one server or multiple servers and publish active and archived documents tostandard formats such as paper, web portals, PDF, XML, TIFF andindustry-specific standards.

 

*Submission Works; EZsubs Compliance*– automated regulatory publishing solutions that produce compliant paper andelectronic regulatory submissions ona turnkey basis. These systems have many of the features of the enterprise-widesolutions above and are most often implemented by smaller pharmaceutical andbiotechnology companies and companies not currently operating a contentmanagement system.

 

*PDFaqua –*a printcontrol and document watermarking system providing an electronic environmentwith rules based security.  This systemis used across life scienceorganizations to create and manage hierarchical document policies;**control who can print and view documents;build audit trails; and perform related functions.

 

*InSight* - a majorproduct development initiative providing a series of products that will moveLiquent beyond content assembly and publishing into regulatory document andsubmission management solutions.  The *InSight* suite will provide the lifesciences market with a single solution for managing the entire submissionprocess and the lifecycle of submission-related content.  The first product in the suite, *InSight Foundation,*was completed in thefourth quarter of 2003 and began generating revenue in the first quarter of2004.  *InSightFoundation* is an electronic regulatory document management system,pre-configured with industry best practices, that enables customers toestablish a controlled document management environment for the creation, reviewand approval of submission-related content. The product fully integrates with other Liquent systems such as *CoreDossier*.  The Company’s *InSight Manager*product is currently in development and is expected to be available for saleearly in the second half of 2004. *InSight Manager* is being developed to enable life science companiesto meet industry and regulatory needs to manage the submission process on aworldwide basis with a centralized solution. *InSight Manager* willenable organizations to efficiently manage their regulatory information andoperations including product information, product registrations and approvals,other submission-related documents and dossiers.

 

Each of the products listed above is sold asa perpetual site license.  The Companyenters into annual maintenance contracts with all software customers to provide technical support and productupdates.  Maintenance is sold as asubscription and renewed annually with software customers.

 

Liquent also offers a full suite ofconsulting and outsourcing resources. Services include implementation consulting and customization of softwaresolutions, education and end-user training, technical support and comprehensiveservices to prepare and publish large compound documents on an outsourcedbasis.  Consulting services aregenerally priced on a time and materials basis, with certain outsourcingservices priced on a fixed fee basis.

 

The software segment provided 29% ofconsolidated revenues in 2003.

 

**Customers**

 

The Company’s products and services are soldprimarily to major corporations. Corporate customers include organizations in all major industries, witha particular concentration in the life sciences, chemical, packaged goods,technology and manufacturing industries. In addition to the corporate customer base, customers include many ofthe major intellectual property law firms in the U.S.

 

5

----

 

The Company does not have any individualcustomer that provided more than 3% of annual revenue for the year endedDecember 31, 2003.  The Company hasapproximately 50 customers currently contributing over $200,000 in revenue perannum.  Major customers in 2003 includedAbbott Laboratories, Astra Zeneca, Dow Chemical, Eastman Kodak, ExxonMobil,GlaxoSmithKline, Kimberly-Clark, Marsh & McLennan, Motorola, Novartis,Pfizer, Philips NV, Procter & Gamble, Schering Plough and 3M.

 

In addition to direct sales to majorcorporations and law firms, selected products are sold to third parties forresale within specific geographic regions and non-core markets.

 

**Seasonalityand Quarterly Results**

 

The Companydoes not believe its businesses have significant seasonality.  However, quarterly results may be affectedby the timing of acquisitions, new product launches and the timing of licensesales.  Accordingly, results for any quarter are not necessarily indicative of the resultsthat may be achieved for the full year.

 

**Sales,Marketing and Distribution**

 

Products and services are sold primarilythrough an in-house sales force with offices in the United States andEurope.  The Company has three primarysales organizations dedicated to patent and trademark information products,patent and trademark management services, and software and information for lifesciences.  Prospects are identifiedthrough referrals from existing customers, referrals from patent and trademarkoffices, leads from trade shows and information requests from sources such asthe Internet.  Additional internationalsales are made through a network of distributors in Japan and elsewhere.  The Company also sells information productsand licenses software products to distributors in the U.S. that resell productsoutside of core markets, on both a private label and branded basis.  At December 31, 2003, the Company had atotal of 71 employees in sales and marketing (45 employees in the U.S. and 26employees in Europe).

 

While the Company has historically relied ondistributors for sales of IP information in Japan and other markets in Asia, itcurrently intends to open a sales office in Japan in 2004, with an initialfocus on sales of IP management services.

 

**Competition**

 

*Patentand Trademark Information*

 

The Company believes it is the largestcommercial provider of primary patent information.  The largest competitor in the patent information market is theThomson Corporation (Thomson), which owns Derwent, historically a leadingprovider of secondary patent information, and Delphion, which provides primarypatent information over the Internet. Competition in this area also comes from patent and trademark offices,particularly the USPTO and the EPO. Both offer useful, low-end patent services, primarily geared towardacademic users.  Patent office productstend to be most useful for those trying to obtain a specific patent, but aregenerally less useful for research and high-end corporate and legalapplications.

 

The major providers of full-search trademarkservices are Thomson & Thomson, a unit of Thomson, and CCH Corsearch, aunit of Wolters Kluwer.

 

6

----

 

*IPManagement Services*

 

The Company believes it is the largestprovider of patent annuity and trademark renewal payment services in theU.S.  Computer Packages, Inc. is theonly significant competitor in the U.S. The Company believes that Computer Patent Annuities (CPA) is the leadingprovider of payment services in Europe and Asia, followed by Dennemeyer.  The Company also believes it is the leadingprovider of IP management software in the U.S. This market is relatively small and fragmented.

 

*RegulatoryData and Software Solutions – Life Sciences*

 

The Company believes it is the leadingprovider of regulatory intelligence and publishing solutions for the lifesciences industry, with competition currently coming primarily from systemsdeveloped in-house by large pharmaceutical companies.  The Company’s software products have direct competition fromLorenz Life Sciences, a small European-based solutions provider. There is alsoindirect competition from third-party systems integrators.  Information solutions in this area facecompetition primarily from government web sites, including the site maintainedby the U.S. Food and Drug Administration.

 

The Company’s new *InSight* products will expand product offerings into theregulatory document management and submission management areas.  While no company currently has productsdirectly competitive with all products in the *InSight*suite, several companies will be competitive with portions of *InSight*, including Qumas, First ConsultingGroup, Aris Global and Open Text.

 

**ForeignOperations and Export Sales**

 

Outside of the U.S., the Company hasoperations based primarily in the United Kingdom and France.  Operations in the United Kingdom include theEuropean headquarters of Liquent, comprised of a combination of Liquent and CDCemployees, and an office supporting European and Asian sales efforts ofMicroPatent.  Operations in Francerelate to the Company’s IDRAC business. The Company’s Liquent unit also has two employees based in Japan.  The Company expects its MDC unit to open asmall office in Japan in 2004, primarily to function as a sales operation.  Export sales, based on customer location,represented approximately 30% of consolidated revenues for the year ended December31, 2003, which includes an estimate of IP information delivered over theInternet to recipients outside the U.S.

 

**IntellectualProperty**

 

The Company regards its patents, trademarks,copyrights, domain names, trade secrets and similar intellectual property asvaluable assets and relies upon trademark and copyright laws, as well asconfidentiality agreements with employees and others, to protect itsrights.  The Company pursues theregistration of material trademarks and copyrights in the U.S. and, dependingupon use, in some other countries.  TheCompany believes it owns or licenses all material intellectual property rightsnecessary to conduct its business.

 

**Environmental Matters**

 

The Company believes its operations are inmaterial compliance with all applicable foreign, federal, state and localenvironmental laws, as well as all laws and regulations relating to workerhealth and safety.

 

7

----

 

**Employees and LaborRelations**

 

As of December 31, 2003, the Company’scontinuing operations had 498 employees, consisting of 384 employees in the United States, 112 employees based in England andFrance and 2 employees based in Japan. Employees by function for continuing operations include: 123 employeesin sales, marketing and customer service; 96 employees in research anddevelopment; 195 employees in production, operations and consulting; and 84employees in finance, administration and information technologies.

 

At December 31, 2003, the Company also had 43employees related to discontinued operations, assisting solely in the transition of the Transcender business to itsacquirer.  The Company expects to haveno remaining employees in discontinued operations by May 31, 2004.

 

No employees are covered by collectivebargaining agreements with labor unions. The Company believes that relations with its employees are good.

 

**Business Acquisitions**

 

On December 1, 2003, the Company’s Liquentunit acquired CDC, a company that provides business solutions to the life sciences industry that facilitate the preparation andsubmission of regulatory filings, primarily new drug applications.  The initial net cash consideration for CDCwas approximately $23 million, which is net of cash acquired and includesguaranteed earnout payments.  Futurecash consideration is currently expected to range from $2 million-$12 million,dependent on future operating results of the combined Liquent-CDC business.

 

**Forward-LookingStatements**

 

The Private Securities Litigation Reform Act of 1995 provides a “safeharbor” for forward-looking statements so long as those statements areidentified as forward-looking and are accompanied by meaningful cautionarystatements identifying important factors that could cause actual results todiffer materially from those projected in such statements.  Statements regarding future events anddevelopments and the Company’s future performance, as well as management’sexpectations, beliefs, plans, estimates or projections relating to the future,are forward-looking statements within the meaning of the federal securitieslaws.  All forward-looking statementsare subject to certain risks and uncertainties that could cause actual eventsto differ materially from those projected. The forward-looking statements contained in this Annual Report on Form10-K were prepared by management and are qualified by, and subject to,significant business, economic, competitive, regulatory and other uncertaintiesand contingencies, all of which are difficult or impossible to predict and manyof which are beyond the control of the Company.

 

The forward-looking statements have not been audited by, examined by,compiled by or subjected to agreed-upon procedures by independent accountants,and no third-party has independently verified or reviewed such statements. Theinclusion of the forward-looking statements contained in this Annual Report onForm 10-K should not be regarded as a representation by the Company or anyother person that the forward-looking statements contained in this report willbe achieved.  Readers are cautioned notto place undue reliance on the forward-looking statements containedherein.  The Company undertakes noobligation to publicly update or revise any forward-looking statement, whetheras a result of future events, new information or otherwise.

 

8

----

 

**Risks Factors**

 

The business and operations of the Company are subject to substantialrisks, which increase the uncertainty inherent in the forward-looking statementcontained in this Annual Report on Form 10-K. Factors that could cause the Company’s actual results to differmaterially from the expected results described in the Company’s forward-lookingstatements include but are not limited to:

 

Difficulties in executing its acquisition strategy.  The Company intends to continue to expandits business through the acquisition of complementary companies.  IHI cannot, however, make any assurancesthat it will be able to identify any potential acquisition candidates orconsummate any additional acquisitions or that any future acquisitions will besuccessfully integrated or will be advantageous to IHI.  Without additional acquisitions, the Companyis unlikely to maintain historical growth rates.

 

Failure to properly manage its operations and growth.  In recent years the Company has expanded itsoperations through acquisitions.  Thisrapid growth places a significant demand on management and operationalresources.  In order to manage growtheffectively, IHI must implement and improve its operational systems,procedures, and controls on a timely basis in order to achieve operatingefficiencies and to control costs.  Ifthe Company fails to implement these systems, procedures and controls on atimely basis, it may not be able to serve its clients’ needs, pursue newbusiness, complete future acquisitions or operate its businesseffectively.  Failure to properlyintegrate acquired operations could result in increased cost.

 

Failure to recruit and retain necessary technical personnel and skilledand experienced management.  The Company’s success depends to a significant extent upon itsability to attract, retain and motivate highly skilled and qualified personnelincluding the Company’s Executive Officers and the senior management teams ofits primary operating units.  Failure toattract, train, and retain sufficient members of these technically-skilledpeople or the loss of any key member(s) of the Company’s management team couldhave an adverse effect on IHI’s business, financial condition, cash flow andresults of operations and prospects.

 

Competition. The Company expects to encounter additional competition based on thecompetitive nature of the markets in which the Company operates as well as theintroduction of new competitors into existing markets, specifically theavailability of raw intellectual property from alternative sources for littleor no cost to the customer.  If theCompany is forced to lower pricing or if demand for services decreases, IHI’sbusiness, financial condition, results of operations, and cash flow may bematerially and adversely affected.  Manyof the Company’s competitors have greater resources, and they may be able touse their resources to adapt more quickly to new or emerging technologies or todevote greater resources to responding to evolving customer requirements.  In addition, the Company may sometimescompete with a client’s own internal business process and informationtechnology capabilities, which may constitute a fixed cost for the client.

 

Technological Changes.  The markets for the Company’s technologyservices are subject to technological changes and changes in clientrequirements.  The Company’s may beunable to timely and successfully customize products and services thatincorporate new technology or to deliver the services and products demanded bythe marketplace.  Late entry into amarket may expose the Company to the risk of being unable to price products andservices to levels that will permit recovery of costs and may therefore,adversely affect IHI’s operating results and cash flow.

 

9

----

 

Change in Internet usage.  The Company’s ability to grow its businessis dependent on the increasing use of the Internet and on the growth ofelectronic commerce.  Many of theCompany’s products depend on the growth, development and increased acceptanceand use of the Internet, the Web and other online services as a medium ofcommerce.  Lack of anticipated growthand development in the acceptance and use of the Internet and electroniccommerce at historical rates of growth would impair the demand for and mayadversely affect the Company’s ability to sell its products.

 

Change in customer relationships.  The loss of customers and/or the reductionin volumes and services provided to customers could materially affect IHI’srevenues, profitability and cash flows. Additionally, if the Company fails to perform services at levelsspecified in customer contracts and/or satisfactory to its customers, theCompany’s reputation in the industry may suffer, which could materially andadversely affect the Company’s business, financial condition, results ofoperations and cash flow.

 

Infrastructure issues and security breaches.  The Company’s business depends upon thereliability of its systems and equipment, including the security of its websiteand access to its databases via e-commerce. From time to time, interruptions may be experienced due to severalfactors including hardware failures, operating system failures and unsolicitedbulk e-mail containing viruses (software programs that disable or impaircomputers).  Although disaster recoveryplans and security measures have been put in place, sustained or repeatedsystem failures and/or compromises to the security measures could reduce trafficon the Company’s website and impair the ability to process orders.  If delays or interruptions occur, theCompany’s reputation could be impaired and customers may become less inclinedto purchase its products and services. Additionally, because activities of the Company include the storage andtransmission of certain proprietary information, a party who is able tocircumvent security measures could misappropriate proprietary informationand/or cause interruptions in services or operations.  The Company may be required to expend significant capital andother resources to protect against security breaches and related possiblelitigation exposure or to address any problems caused by such.  Any failure on the part of the Company toprevent capacity constraints, system interruptions or security breaches couldhave an adverse effect on its business, financial condition and results ofoperations.

 

International risks.  Recently the Company has expanded its internationaloperations.  International operationsare subject to a number of risks including, but not limited to the following —fluctuations in foreign exchange currency rates; licensing and labor counselrequirements; difficulties in complying with regulatory requirements andstandards; longer accounts receivable payment cycles; potentially adverse taxconsequences; limits on repatriation of earnings; financial stability offoreign markets; additional expenses and risks inherent in conductingoperations in geographically distant locations; compliance with laws of thoseforeign countries; political instability; trade restrictions such as tariffsand duties or other controls affecting foreign operations, and other factorsthat may adversely affect the Company’s business, financial condition andoperating results.

 

Other Risks. The Company has attempted to identify material risk factors currentlyaffecting the business and company. However, additional risks that are unknown, or that management currentlythinks are immaterial, may occur or become material.  These risks could impair the Company’s business operations oradversely affect revenues, cash flow or profitability.

 

10

----

 

These risks and others that are detailed in this Annual Report on Form10-K and other documents that the Company files from time to time with theSecurities and Exchange Commission, including Quarterly Reports on Form 10-Qand any Current Reports on Form 8-K, must be considered by any investor orpotential investor in the Company.

 

The Company’s financial information, including the informationcontained in this Annual Report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and any amendments to the above mentioned reportsmay be viewed on the Internet free of charge at *www.informationholdings.com*.  The Company’s Corporate GovernanceGuidelines, Amended and Restated Audit Committee Charter, Nominating andCorporate Governance Committee Charter, Compensation Committee Charter and Codeof Business Conduct and Ethics are also available on the Company’s website.  Copies of the foregoing documents will bemailed to stockholders, free of charge, upon any request made to the CorporateSecretary, Information Holdings Inc., 2777 Summer Street, Suite 602, Stamford,Connecticut 06905.  Reports filed withthe Securities and Exchange Commission (the SEC) may also be viewed or obtainedat the SEC Public Reference Room in Washington, D.C., or at the SEC’s Internetsite at *www.sec.gov*.  Information on the operation of the SECPublic Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

 

The information on the Company’s website is not incorporated byreference in the Annual Report on Form 10-K and the Company’s Internet addressis included as an inactive textual reference only.

 

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

 

The Company leases its corporateheadquarters, which is located in Stamford, Connecticut, and leases additionaloffice and warehouse space for its primary domestic operating units in thefollowing states (in square feet):

 
| Connecticut  (including corporate headquarters) |   | 19,512 |   |
|-------------------------------------------------|--------|--------|--------|
| California                                      |   | 11,450 |   |
| Michigan                                        |   | 15,725 |   |
| New York                                        |   | 4,276  |   |
| Pennsylvania                                    |   | 34,514 |   |
| Tennessee                                       |   | 38,569 |   |
| Washington,  D.C.                               |   | 7,937  |   |
| Other states                                    |   | 962    |   |

 

The Company also leases office space for itsprimary foreign operating units in the following locations (in square feet):

 
| England          |   | 21,103 |   |
|------------------|--------|--------|--------|
| France           |   | 7,855  |   |
| Other  countries |   | 802    |   |

 

Approximately 61,000 square feet of officeand warehouse space located primarily in New York, Pennsylvania, Tennessee andEngland is either unoccupied as of December 31, 2003, not expected to berenewed upon expiration of its lease, or will become vacant in the first halfof 2004.  The Company is also in theprocess of exploring alternative space for its operations in California,Connecticut, Michigan, Pennsylvania and Washington, D.C.  The Company believes it will be able toobtain space at commercially reasonable terms. All other remaining locations are in good operating condition and aresuitable and adequate for current business operations and future expansion.

 

11

----

 

**Item 3.****                    *Legal Proceedings***

 

On December 5, 2002 Venturetek,L.P., Richard Elkin, Antoine Bernheim, Stacy Bernheim and Genstar, Ltd.,derivatively as shareholders of Rand Publishing Co., Inc. (Rand) and individually,on their own behalf (the Plaintiffs) filed a complaint in the Supreme Court ofthe State of New York against IHI (the IHI Action).  The complaint alleges that IHI’s predecessor, InformationVentures LLC, fraudulently acquired assets or businesses, including businessesacquired prior to the Company’s initial public offering in August 1998, thatwere corporate opportunities of Rand. The complaint also alleges that IHI’s taking of the assets or businessesconstitutes a “conversion.” The Plaintiffs request that all of the IHI sharesand options be held in constructive trust for the benefit of thePlaintiffs.  The Plaintiffs also seekdamages in an amount of approximately $750 million.  IHI believes that each of the claims in the complaint is withoutmerit and filed a motion to dismiss the complaint on February 14, 2003.  IHI’s motion to dismiss, which remainspending, states that the complaint fails to state a cause of action against IHIand, even if it does, the claims are barred under the applicable statutes oflimitation or on account of the Plaintiffs’ laches.

 

The Company’s President and Chief Executive Officer, Mason P. Slaine,and Michael E. Danziger, a member of the Company’s board of directors, arenamed as defendants in a related action entitled Venturetek, L.P., et al. v.Rand Publishing Co., Inc., et al., also currently pending in the SupremeCourt of the State of New York (the Rand Action).  As in the IHI Action, the Plaintiffs in the Rand Action,proceeding derivatively on behalf of Rand, allege that certain assets orbusinesses acquired by IHI, including businesses acquired prior to theCompany’s initial public offering in August 1998, were corporate opportunitiesusurped from Rand.  Plaintiffs allegethat Slaine and Danziger breached fiduciary duties allegedly owing to Rand byallowing IHI’s predecessor, Information Ventures LLC, to acquire thosebusinesses.  Plaintiffs seek, amongother remedies, the imposition of a constructive trust over Slaine’s andDanziger’s shares of IHI as well as compensatory damages against Slaine andDanziger in an amount alleged to be in excess of $150 million.

 

In addition, from time to time the Company is a party to other legaland administrative proceedings, claims, and litigation arising in the ordinarycourse of its business. While the outcome of these matters is currently notdeterminable, management does not expect that the ultimate costs to resolvethese matters either singularly or in aggregate will have a material adverseeffect on the Company’s consolidated financial position, results of operationsor cash flows.

 

**Item 4*.******                    Submission of Matters to a Vote of SecurityHolders***

 

No matters were submitted to a vote of security holders during thefourth quarter of 2003.

 

12

----

 

**PARTII**

 

**Item 5.****                                                           *Marketfor the Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities***

 

The Company’s common stock is traded on the New York Stock Exchange(NYSE) under the symbol “IHI”.  As ofMarch 1, 2004, there were approximately 1,818 holders of the Company’s commonstock comprised of 18 record holders and approximately 1,800 beneficialholders.

 

The following table reflects the high and low closing sales prices ofthe Company’s common stock as reported on the NYSE, for the periods indicated.

 
|                               |   | **2003** |   | **2002** |   |
|------------------------------------|--------|----------|--------|----------|--------|
| **Fiscal Year Ended December 31,** |   | **High** |   | **Low**  |   | **High** |   | **Low** |   |
| First Quarter                      |   | $        | 16.78  |     | $      | 14.50 |   | $ | 29.39 |   | $ | 24.23 |   |
| Second Quarter                     |   | 18.39    |   | 15.05    |   | 31.80 |   | 23.34 |   |
| Third Quarter                      |   | 20.05    |   | 15.65    |   | 23.75 |   | 17.53 |   |
| Fourth Quarter                     |   | 22.42    |   | 20.61    |   | 22.56 |   | 12.25 |   |
|                                    |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

**DividendPolicy**

 

The Company has never declared or paid a dividend on its common stockand currently does not anticipate declaring or paying any dividends on itscommon stock in the foreseeable future. The current policy of the Company’s Board of Directors is to retainearnings to finance the operations and expansion of the Company’s business andto repurchase the Company’s common stock.

 

**Purchases of EquitySecurities by the Issuer**

 

On October 28, 2002, the Company announced that its Board of Directorsauthorized the Company to repurchase up to $30,000,000 of its commonstock.  Subsequently, on July 9, 2003,it was announced that the Company’s Board of Directors had approved an increasein the previously authorized share buyback program from $30,000,000 to$50,000,000.

 

The purchases may be made from time to time on the open market or innegotiated transactions in compliance with Rule 10b-18 of the SecuritiesExchange Act of 1934, as amended.  Theauthorization to repurchase the Company’s common stock will remain in effectuntil the Company’s Chief Executive Officer deems it appropriate to terminatethe repurchase program.  The number ofshares to be purchased and the timing of purchases will vary based on the levelof cash balances, general business conditions and alternative investmentopportunities.  The share buybackprogram will be funded from existing cash, cash equivalents andavailable-for-sale securities.  Treasurystock purchases are accounted for under the cost method whereby the entire costof the acquired stock is recorded as treasury stock.  Through December 31, 2003, the Company repurchased a total of1,007,200 shares of common stock at an average price paid per share of $14.62 pursuantto the repurchase authorization at a total cost of $14,723,000.  No shares were repurchased during the threemonths ended December 31, 2003.

 

**Securities Authorizedfor Issuance Under Equity Compensation Plans**

 

See “Equity Compensation Plan Information” in Item 12.

 

13

----

 

**Changes in Securitiesand Use of Proceeds**

 

The following report relates to the Company’s secondary public stockoffering:

 
| Commission file number of registration  statement:       |   | 333-30202      |        |
|----------------------------------------------------------|--------|----------------|-------------|
| Effective Date:                                          |   | March 14, 2000 |        |
|                                                     |   |           |        |
| Expenses incurred through December 31,  2003:            |   |           |        |
| Underwriting discounts                                   |   | $              | 8,595,000   |   |
| Other expenses                                           |   | $              | 522,000     |   |
| Total expenses                                           |   | $              | 9,117,000   |   |
|                                                     |   |           |        |
| Application of proceeds through December  31, 2003:      |   |           |        |
| Acquisitions of businesses, titles and  equity interests |   | $              | 155,000,000 |   |

 

14

----

 

**Item 6.****                    *SelectedFinancial Data***

 

The selected historical financial data of the Company as of and foreach of the five years in the period ended December 31, 2003 have been derivedfrom their respective audited financial statements.  All acquisitions by the Company were accounted for using thepurchase method of accounting. Significant acquisitions of the Company include Master Data Center, Inc.on August 12, 1999, IDRAC on March 29, 2001, Liquent, Inc. on December 20,2001, Aurigin Systems, Inc. on May 9, 2002 and CDC Solutions Limited onDecember 1, 2003.  The results ofoperations of these businesses are included in the Company’s results from theirrespective dates of acquisition.  Theselected historical financial data should be read in conjunction with theCompany’s Consolidated Financial Statements and the Notes to these financialstatements and “Management’s Discussion and Analysis of Financial Condition andResults of Operations” included elsewhere in this Annual Report on Form10-K.  The historical results presentedbelow are not necessarily indicative of the results to be expected for anyfuture fiscal year.

 
|                                                      |   | **Year Ended  December 31,** |       |
|-----------------------------------------------------------|--------|------------------------------|------------|
| **(in thousands, except per share data)**                 |   | **2003**                     |       | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                      |   |                         | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Operating data:**                                       |   |                         |       |   |   |   |   |   |   |   |   |
| Revenues (1)                                              |   | $                            | 81,407     |   | $ | 77,952 |   | $ | 41,565 |   | $ | 30,228 |   | $ | 17,571 |   |
| Gross profit                                              |   | 55,685                       |       | 54,737 |   | 29,845 |   | 21,232 |   | 12,398 |   |
| Percent of sales                                          |   | 68.4                         | %          | 70.2 | % | 71.8 | % | 70.2 | % | 70.6 | % |
| Operating expenses (2) (5)                                |   | $                            | 49,415     |   | $ | 49,015 |   | $ | 27,071 |   | $ | 22,651 |   | $ | 10,671 |   |
| Interest income, net                                      |   | 2,000                        |       | 628 |   | 3,653 |   | 7,149 |   | 1,514 |   |
| Income from continuing operations (4)                     |   | 5,296                        |       | 4,419 |   | 3,619 |   | 3,056 |   | 1,745 |   |
| Income (loss) from discontinued operations,  net of taxes |   | 25,911                       |       | (18,143 | ) | 4,219 |   | 4,036 |   | 4,272 |   |
| Net income (loss)                                         |   | 31,207                       |       | (13,724 | ) | 7,838 |   | 7,092 |   | 6,017 |   |
| Earnings per common share from continuing  operations:    |   |                         |       |   |   |   |   |   |   |   |   |
| Basic                                                     |   | $                            | 0.25       |   | $ | 0.20 |   | $ | 0.17 |   | $ | 0.15 |   | $ | 0.10 |   |
| Diluted                                                   |   | $                            | 0.25       |   | $ | 0.20 |   | $ | 0.17 |   | $ | 0.15 |   | $ | 0.10 |   |
| Earnings (loss) per common share:                         |   |                         |       |   |   |   |   |   |   |   |   |
| Basic                                                     |   | $                            | 1.48       |   | $ | (0.63 | ) | $ | 0.36 |   | $ | 0.34 |   | $ | 0.36 |   |
| Diluted                                                   |   | $                            | 1.48       |   | $ | (0.63 | ) | $ | 0.36 |   | $ | 0.34 |   | $ | 0.35 |   |
| **Balance sheet data  (at period end):**                  |   |                         |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents (3)                             |   | $                            | 39,693     |   | $ | 53,910 |   | $ | 38,612 |   | $ | 96,375 |   | $ | 7,551 |   |
| Investments (3)                                           |   | 95,478                       |       | 13,056 |   | 17,762 |   | 11,731 |   | — |   |
| Total assets                                              |   | 374,670                      |       | 329,001 |   | 346,557 |   | 310,996 |   | 138,658 |   |
| Capital lease obligations, less current  portion          |   | —                       |       | 63 |   | 208 |   | — |   | — |   |
| Stockholders’ equity                                 |   | 282,413                      |       | 249,740 |   | 266,950 |   | 256,274 |   | 90,935 |   |

 

Note:  Prior year results havebeen restated to reflect the discontinued operations of CRC and Transcender,both of which were sold in fiscal 2003 (See Note 4 of the Notes to ConsolidatedFinancial Statements).

 

*(Footnotes on following page)*

 

15

----

 

*(Footnotes from preceding page)*

 

----

(1)                                  In fiscal 2001, inconjunction with the acquisitions of IDRAC and Liquent, the Company wasrequired by purchase accounting to revalue acquired deferred revenues based onthe cost to fulfill.  This revaluationis a non-cash adjustment, which reduced revenue in the year following theacquisitions.  The adjustment reducedrevenues by $1,000,000 and therefore reduced operating income by $1,000,000 forthe year ended December 31, 2001, and reduced revenues by $1,500,000 andtherefore reduced operating income by $1,500,000 for the year ended December31, 2002.

 

(2)                                  During 2000, theCompany formed an alliance with Intellectual Property Technology Exchange, Inc.(Techex) to jointly develop and market products to address the online needs ofthe technology licensing industry.    Operating expenses for the years ended December 31, 2000, 2001 and 2002include impairments in the value of the Company’s investment in Techex of$1,500,000, $400,000 and $95,000, respectively.  During 2001, the Company acquired a minority interest in GSIOffice Management Gmbh, a provider of IP software systems based inGermany.  During 2002, the Companyrecorded an impairment charge of $3,063,000 reflecting the full value of itsinvestment in GSI.

 

(3)                                  For 2003, amountsinclude the net proceeds received from the sale of CRC and Transcender of$90,000,000 and $10,000,000, respectively, less approximately $26,000,000 incash paid to acquire CDC Solutions Limited.

 

(4)                                  Includesapproximately $1,500,000 of costs related to the integration of CDC Solutionsand severance costs at the Company’s Liquent unit during fiscal 2003.

 

(5)                                  Amortization ofgoodwill and indefinite lived intangibles of $5,551,000, $1,869,000 and$519,000 are included in the 2001, 2000 and 1999 operating results,respectively, but not in the 2003 or 2002 operating results pursuant to theCompany’s adoption of SFAS No. 142 (See Note 7 of the Notes to ConsolidatedFinancial Statements).

 

16

----

 

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

 

*The followingdiscussion and analysis should be read in conjunction with the consolidatedfinancial statements and notes thereto and the other financial informationappearing elsewhere in this Annual Report on Form 10-K.  Unless otherwise stated in this Form 10-K,references to the years 2003, 2002 and 2001 relate to the fiscal years endedDecember 31, 2003, 2002 and 2001, respectively.*

 

*The followingdiscussion contains forward-looking statements that involve risks anduncertainties.  Actual results of theCompany could differ materially from those anticipated in these forward-lookingstatements as a result of certain factors, including those discussed below andelsewhere in this Annual Report on Form 10-K, particularly under the heading“Item 1.  Business — Risk Factors.”*

 

**Impactof Acquisitions and Divestitures**

 

A key component of the Company’s historical growth has been to pursueacquisitions where opportunities exist to internally grow the acquired companies’revenues and increase profitability through operating efficiencies.  Since beginning operations in January 1997,the Company has completed 15 substantial acquisitions, including seven in thedata segment, two in the software segment and six in the former scientific andtechnology information and IT learning segments, as well as some minoracquisitions that are not otherwise disclosed herein.

 

As of December 31, 2003, the Company has two reportable segmentscontributing to its results from continuing operations: data and software.  The data segment, which includesMicroPatent, Master Data Center (MDC) and IDRAC, provides a broad array ofdatabases, information products and complementary services for intellectual propertyand regulatory professionals.  Thesoftware segment is comprised solely of Liquent, a leading provider of lifescience regulatory intelligence and publishing solutions.  Other includes unallocated corporateitems.  Corporate assets consistprincipally of cash and cash equivalents, investments and current income taxesreceivable.

 

As of December 31, 2002, the Company had three reportable segments:intellectual property (IP), which included MicroPatent, MDC, Liquent and IDRAC;information technology learning (ITL), which included Transcender LLC; andscientific and technology information (STI), comprised solely of its whollyowned subsidiary CRC Press and its subsidiaries (CRC).

 

On February 27, 2003, the Company entered into a Purchase Agreement tosell substantially all of the assets and certain liabilities of CRC to CRCPress I LLC and Routledge No. 2 Limited, both wholly owned subsidiaries ofTaylor & Francis Group plc.  Thetransaction was completed on April 8, 2003.

 

In September 2003, the Company changed the composition of its remainingsegments from IP and ITL to data and software to more accurately reflect theway management operates the Company and assesses the Company’s performance.

 

On December 1, 2003, the Company acquired the issued share capital ofCDC Solutions Limited (CDC) for cash consideration of approximately $26.3million.  CDC is a leading provider oflife science regulatory intelligence and publishing solutions.  The Company is integrating the CDC business with its Liquentbusiness and, in accordance with Financial Accounting Standards Board(FASB) Statement of Financial and Accounting Standards (SFAS) No. 141, *Business*

* *

17

----

 

*Combinations*, theresults of operations of the acquired business has been included in theConsolidated Statement of Operations from the date of acquisition to December31, 2003.  As a result of the above, theCDC operations are included in the software segment for reporting purposes.

 

On December 22, 2003, the Company announced that it had sold TranscenderLLC n/k/a Dalton I LLC (Transcender) to a subsidiary of Kaplan, Inc.(Kaplan).  Under the terms of the AssetPurchase Agreement, Kaplan acquired substantially all of the assets and assumedcertain operating liabilities.  Thetransaction had an effective date of December 31, 2003.  As a result, the software segment iscurrently comprised solely of Liquent.

 

In accordance with SFASNo. 144, *Accounting for the Impairment orDisposal of Long-Lived Assets*, all assets, liabilities, results ofoperations and cash flows of Transcender and CRC have been segregated fromthose of continuing operations and are presented in the Company’s December 31,2003 financial statements as discontinued operations.  Additionally, the Company’s financial statements have been reclassifiedto reflect Transcender and CRC as discontinued operations for all prior periodspresented herein.

 

See Note 4 of the Notes toConsolidated Financial Statements for additional information regardingthe Company’s discontinued operations and Note 3 to the Notes to Consolidated Financial Statementsfor additional information regarding the Company’s acquisitions.

 

See Note 15 of the Notes to Consolidated Financial Statements forfurther discussion and financial information related to the Company’s segmentspresented in accordance with SFAS No. 131, *Disclosuresabout Segments of an Enterprise and Related Information.*

 

The Company continually seeks opportunities which may result inadditional acquisitions that will further the Company’s growth and operating strategies.  If the Company acquires additionalbusinesses, its sales mix, market focus, cost structure and operating leveragemay change significantly.  Consequently,the Company’s historical and future results of operations reflect and willreflect the impact of acquisitions, and period-to-period comparisons may not bemeaningful in some respects.  Historicalinformation for companies subsequent to their acquisition may includeintegration and other costs that are not expected to continue in the future.

 

**CriticalAccounting Policies**

 

The Company believes the following critical accounting policies affectthe more significant judgments and estimates used in the preparation of theCompany’s consolidated financial statements. The impact and any associated risks on the Company’s results ofoperations related to these policies are discussed throughout Management’sDiscussion and Analysis of Financial Conditions and Results of Operations.  See Note 2 of the Notes to Consolidated Financial Statements for a detaileddiscussion on the application of these and other accounting policies.

 

Thepreparation of the Company’s financial statements in conformity with accountingprinciples generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. These estimates include, but are not limited to, revenue recognition,bad debt allowances, income taxes, and the valuation of goodwill and otheridentified intangible assets.  TheCompany bases its estimates on historical experience and on various otherassumptions that it believes to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that

 

18

----

 

are notreadily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.

 

*Revenue Recognition*

 

The Company derives its revenues primarily from thefollowing sources:

 

*Subscription Revenue -*Revenue from subscriptions to the Company’s information services isrecognized in income as earned over the subscription period.  Costs in connection with the procurement ofsubscriptions are charged to expense as incurred.

 

*IP Management Services* - Revenues from patent annuity and trademarkrenewal payment services are recognized in the period when the related annuity payments are made tovarious regulatory agencies.

 

*IP Transactional Services-*When not governed by a subscription agreement, sales of patentdocuments, patent file histories, patent searches, patent downloads andtrademark searches are recorded as revenue upon delivery of the product to thecustomer.  Delivery generally occurswhen the product is delivered to a common carrier, sent by facsimile, deliveredvia e-mail or downloaded electronically by the customer.

 

*Software and RelatedServices*- The Company recognizes revenue inaccordance with the American Institute of Certified Public Accountants (AICPA)Statement of Position (SOP) 97-2, *SoftwareRevenue Recognition*, as amended. The AICPA and its Software Revenue Recognition Task Force continue toissue interpretations and guidance for applying the relevant standards to awide range of sales contract terms and business arrangements that are prevalentin the software industry.

 

The Company recognizes revenue from thesale of software licenses when persuasive evidence of an arrangement exists,the product has been delivered, the fees are fixed or determinable andcollection of the resulting receivable is probable.  Delivery generally occurs when the product is delivered to acommon carrier or made available to the customer for electronic download.  At the time of the transaction, theCompany assesses whether the fee associated with its revenue transactions isfixed or determinable and whether or not collection is probable.  The Company assesses whether the fee isfixed or determinable based on the payment terms associated with thetransaction.  The Company assessescollection based on a number of factors, including past transaction historywith the customer and the credit-worthiness of the customer.

 

For all sales, either a binding purchaseorder or signed license agreement is used as evidence of an arrangement.  Sales through the Company’s distributors areevidenced by a master agreement governing the relationship together withbinding purchase orders on a transaction-by-transaction basis.  Revenue from software licenses to partiesother than end-users, including reseller, third-party integrator and *OEM* arrangements with after-sale supportrequirements, is recorded only when software has been placed with an end-userand no further obligations exist. Customer acceptance terms, which the Companyconsiders to be perfunctory, lapse after a short period (generally 30 to 90days) if the customer has not formally rejected the software.

 

For agreements with multiple elements, such as license, maintenance,training and consulting services, the Company allocates revenue to eachcomponent of the arrangement based upon its fair value as determined by vendorspecific objective evidence (VSOE). VSOE of fair value for all elements of an arrangement is based upon thenormal pricing and discounting practices for those products and services whensold separately.  For software licenseupdates and product

 

19

----

 

support services, VSOE is additionally measured by the renewal rateoffered to the customer.  Revenue isdeferred for any undelivered elements and recognized when the product isdelivered or over the period in which the service is performed, in accordancewith the revenue recognition policy for such element.  If the Company cannot objectively determine the fair value of anyundelivered element included in bundled software and service arrangements,revenue is deferred until all elements are delivered and all services have beenperformed, or until fair value can objectively be determined for any remainingundelivered elements.  When the fairvalue of a delivered element has not been established, the residual method torecord revenue is used if the fair value of all undelivered elements isdeterminable.  Under the residualmethod, the fair value of the undelivered elements is deferred and theremaining portion of the arrangement fee is allocated to the delivered elementsand is recognized as revenue.

 

*Support Services Revenue*- Revenue is derived from (i) maintenance and post-support contracts, (ii)training services and (iii) consulting services.  Maintenance and post contract customer support includes ongoingcustomer support, bug fixes and rights to upgrades on a when-and-if availablebasis.  Revenue from maintenance andpost-support contracts is recognized ratably over the term of the servicecontract, which is typically 12 months. Generally payments for maintenance fees are received in advance and arenon-refundable.  Revenue from trainingand consulting services is generally recognized when the services areperformed.  Consulting revenue includes implementation services performed primarily on atime-and-materials basis under separate service arrangements related to theinstallation of Liquent software. Management does not consider the installation services essential becausethe services are routine in nature and include implementation planning,training of customer personnel, building simple interfaces and running testdata.  Also, customers have access tothird parties who can provide such services. The remainder of consultingrevenues is derived primarily from project management for publishing new drugapplications and general information technology consulting.  Revenue is recognized for these services ona time-and-materials basis as services are performed.

 

Also, the SEChas issued Staff Accounting Bulletins No. 101 and 104, *Revenue Recognition in Financial Statements*,which provides guidance related to revenue recognition based on interpretationsand practices followed by the SEC. Future interpretations of existing accounting standards or changes inthe Company’s business practices could result in future changes in theCompany’s revenue accounting policies that could have a material adverse effecton its business, financial condition and results of operations.

 

*Deferred Revenue -*Deferred revenue includes (i) payments received for products not yetdelivered, (ii) advance paymentson contract revenues, (iii) payments received from subscriptions and (iv) thatportion of separately sold software support agreements that has not yet beenrecognized as revenue.  In connectionwith the acquisition of companies, the Company records deferred revenue at the cost to fulfill plus an applicable grossprofit margin, rather than based on the subscription and advanced paymentsreceived.

 

*Allowance for DoubtfulAccounts*

 

The Company evaluates the collectibility ofits accounts receivable based on a combination of factors.  Where the Company is aware of a customer’sinability to pay or where collectibility is uncertain the Company specificallyprovides for the potential bad debt to reduce the net recognized receivable tothe amount it reasonably believes will be collected.  For all other customers, reserves for bad debts are establishedbased on the length of time the receivables are past due, with up to 100%reserved for amounts more than 90 days past due, adjusted for accounts managementbelieves are collectible based on historical experience.  If circumstances change (i.e., an unexpectedmaterial adverse change in a customer’s ability to meet its financial

 

20

----

 

obligations), the Company’s estimates ofthe recoverability of amounts due could be revised by a material amount.  Management believes that credit risk foraccounts receivable is limited because of the large number of customers and becausethe Company’s customers are dispersed across different businesses andgeographic areas.

 

*Valuation of Goodwill andIdentified Intangible Assets*

 

Due to the fact that the Company is primarily a services company, itsbusiness acquisitions typically result in significant amounts of goodwill andother intangible assets, which affect the amount of future period amortizationexpense and possible future expense resulting from impairments.  The determination of the value of goodwilland other intangibles requires the use of estimates and assumptions aboutfuture business trends and growth.  TheCompany regularly (at least annually) evaluates whether events andcircumstances have occurred that indicate the balance of goodwill or intangibleassets may not be recoverable.  Inevaluating impairments, the Company generally estimates discounted future cashflows derived from the goodwill or intangible asset.  Such evaluation is significantly impacted by estimates andassumptions of future revenues, costs and expenses and other factors.  If an event occurs which would cause arevision in estimates and assumptions used in analyzing the value of goodwillor other intangibles, such revision could result in an impairment charge thatcould have a material impact on the Company’s financial results.

 

*Accounting for Income Taxes*

 

As part of the process of preparing the consolidated financialstatements, the Company estimates income taxes in each of the jurisdictions inwhich it operates.  The income taxaccounting process involves recording the estimated future tax effects oftemporary differences between the tax bases of assets and liabilities andamounts reported in the accompanying consolidated balance sheets, as well asoperating loss and tax credit carryforwards. These differences result in the recognition of deferred tax assets andliabilities.

 

Deferred tax assets at each balance sheet date are evaluated todetermine realizability, considering, without limitation, currently enacted taxlaws, expected future taxable income and origins of the specific components ofthe deferred tax asset.  If it isdetermined that it is not fully realizable, a valuation allowance is recordedto reduce the asset balance to its realizable value through a charge to incometax expense.  Determining whether theCompany will be able to utilize its net operating loss carryforward requiresthat it estimate future taxable income and make judgments regarding the timingof future tax obligations.  Actualtaxable income could differ from these estimates.

 

As of December 31, 2003, the Company believes it is more likely thannot that it will be able to realize the majority of its deferred tax assetsthrough expected future profits, but believes that it is more probable than notthat it will not be able to recover any benefits from net operating losscarryforwards acquired with the acquisition of Liquent in 2001.

 

Therefore, the Company recorded a valuation allowance related to thiscomponent of the deferred tax asset. The net operating loss carryforwards and the related valuation allowancehave been recorded in conjunction with the acquisition of Liquent in 2001 anddid not affect net income for the period.

 

If other components of the deferred tax asset require a valuationallowance in the future, the effect on income tax expense could be material.

 

21

----

 

**Resultsof Operations**

 

***Fiscal year 2003 vs. 2002***

 

*Summary*

 

Revenues increased $3.5 million, or 4%, to $81.4 million from $78.0million.  Revenues increased by $8.9million, or 18%, in the data segment, partially offset by a decrease of $3.6million, or 13%, in the software segment and a decrease in other revenue of$1.8 million, as further described in the segment analysis below.  No single customer accounted for 3% or morethe Company’s revenues during 2003. Gross profits increased by $0.9 million, or2%, with gross profit margins declining to 68.4% in 2003 from 70.2% in2002.  The decrease in gross margins isdue primarily to lower software license revenues in the Company’s Liquent unit,based on the significant gross profit contribution of incremental licenserevenues.  Selling, general andadministrative expenses (SG&A) increased by $3.2 million, or 9%, dueprimarily to costs related to the acquisitions of Aurigin Systems and CDC,which were acquired in May 2002 and December 2003, respectively. Depreciationand amortization increased by $0.4 million, or 3%, due primarily to the impactof foreign exchange fluctuations on amortization of intangible assets in theCompany’s IDRAC unit during 2003. During 2002, the Company recorded impairment charges related to thecarrying value of certain long-lived assets, including an impairment charge of$3.1 million reflecting the full carrying value of the Company’s minorityownership interest in GSI Office Management GmbH (the GSI Charge).  Based on the factors above, income fromoperations increased $0.5 million, or 10%, to $6.3 million from $5.7 million.

 

During 2003, the Company incurred costs of approximately $0.6 millionassociated with the early termination of a credit agreement (See Note 18 of theNotes to Consolidated FinancialStatements).  The earlytermination costs include approximately $0.5 million for the write-off ofunamortized fees, representing a non-cash charge.

 

Net interest income increased $1.4 million to $2.0 million from $0.6million due primarily to increased interest income earned on invested cashproceeds received from the sale of CRC and a cessation of finance costamortization following the termination of the Company’s creditfacility.

 

Based on the factors above, income from continuing operations beforeincome taxes increased by $1.5 million, or 24%, to $7.9 million from $6.4million.

 

The Company recorded a provision for income taxes of $2.6 million in2003, or 33.0% of income before taxes, compared to a provision for income taxesof $1.9 million in 2002, or 30.5% of income before taxes.  The increase in the effective tax rate isdue to increased foreign income taxes in the Company’s French operation.  The effective tax rate differs from statutoryrates primarily as a result of state, local and foreign income taxes andpermanent items which are not tax deductible.

 

Based on the factors above, income from continuing operations in 2003increased by $0.9 million, or 20%, to $5.3 million, or $0.25 per diluted commonshare, in 2003 from $4.4 million, or $0.20 per diluted common share, in 2002.

 

Income (loss) from discontinued operations in 2003 approximated $25.9million, or $1.23 per diluted common share, compared to $(18.1) million, or$(0.83) per diluted common share, in 2002. Income from discontinued operations increased primarily as the result ofan after-tax gain of $30.8 million associated with the sale of CRC and theimpact of an after-tax impairment charge of $22.5 million associated with thecarrying value of goodwill and intangible assets in

 

22

----

 

the Company’s Transcender unit recorded in 2002.  These increases were partially offset by anafter-tax loss of $(3.8) million resulting from the sale of Transcender.

 

The Company evaluates the performance of its segments based primarilyon revenues and EBITDA (earnings before interest, taxes, depreciation andamortization).  The Company believesthat EBITDA is the most useful measure of business unit earnings because itmore closely approximates the cash generating ability of each business comparedto income (loss) from operations. Income (loss) from operations includes charges for depreciation andamortization, the majority of which relate to amortization of intangibleassets.  The Company generally does notincur capital expenditures to replace intangible assets within existingoperations.  A reconciliation of segmentEBITDA to income from continuing operations before income taxes is presented afterthe discussion of operating results.

 

**SegmentReview**

 

*Data*

 

Revenues increased $8.9 million, or 18%, to $57.9 million from $49.0million.  The strongest areas of revenuegrowth included:  revenues from patentinformation subscriptions at MicroPatent, both as a result of the acquisitionof Aurigin in May 2002 and strong growth in core subscriptions; intellectualproperty management services at MDC; and database subscriptions at IDRAC.  The primary growth driver in each area wasincreased volume, in addition to increased average pricing at MDC.  Revenues derived from export sales, based oncustomer location, accounted for approximately 29% and 26% of data segmentrevenues in 2003 and 2002, respectively.

 

Income from operations increased $6.8 million to $13.9 million from$7.1 million.  Income from operationsincreased at MicroPatent due primarily to the revenue increases noted above,partially offset by a full year of costs associated with Aurigin.  Income from operations increased at MDC dueto strong revenue growth and relatively stable operating expenses, coupled withthe impact of the GSI Charge recorded during 2002.  Income from operations increased at IDRAC due primarily to therevenue increases noted above, partially offset by the impact of foreign exchangefluctuations on amortization of intangible assets.  EBITDA increased $7.4 million, or 48%, to $22.7 million from$15.3 million.  EBITDA marginsapproximated 39% in 2003, compared to 31% in 2002.  The most significant factors in the increase were the growth insegment revenues and the impact of the GSI Charge.

 

*Software*

 

Revenues decreased $3.6 million, or 13%, to $23.5 million from $27.1million.  All revenues in the segmentrelate to Liquent.  The decrease ismainly attributable to a decline in software license sales and services,partially offset by increased revenues resulting from the acquisition of CDC inDecember 2003.  The revenue declineswere volume related due both to weaker sales performance and market conditionsin the life sciences industry.  Revenuesderived from export sales, based on customer location, accounted forapproximately 32% and 24% of software segment revenues in 2003 and 2002,respectively.

 

(Loss) income from operations in this segment decreased $4.0 million to$(1.8) million from $2.2 million. Income from operations decreased at Liquent due primarily to the revenuedecreases noted above and aggregate increases in SG&A of approximately $1.5million related to integration costs associated with the CDC acquisition andseverance costs.  EBITDA in this segmentdecreased $4.1 million, or 86%, to $0.7 million from $4.8 million.  EBITDA margins approximated 3% in 2003,compared to 18% in 2002.  The mostsignificant factor in the

 

23

----

 

decrease was the decline in revenues and the aggregate severance andintegration charges as noted above.

 

*Other*

 

During 2002, other revenues of $1.8 million were generated from patentlicensing activities in the Company’s LPS unit.  LPS generated only nominal revenues in 2003.  LPS revenues, which are not recurring innature, were generated from the settlement of two potential patent infringementcases (Infringement Cases).  Losses fromother operations increased by $2.2 million, to $5.8 million in 2003 from $3.6million in 2002, primarily as the result of the impact of the 2002 InfringementCases and an increase in other expenses resulting from the early termination ofthe Company’s credit facility during 2003 (See Note 18 of the Notes toConsolidated Financial Statements).

 

***Fiscal year 2002 vs. 2001***

 

*Summary*

 

Revenues increased $36.4 million, or 87.5%,to $78.0 million from $41.6 million.  The increase in revenues is due to growth in the data segment andrevenues generated by Liquent, which was acquired in December 2001, as furtherdescribed in the segment analysis below. No single customer accounted for 3% or more the Company’s revenuesduring 2002.  Gross profits increased by$24.9 million, or 83.4%, with gross profit margins declining to 70.2% in 2002 from71.8% in 2001.  The decrease in grossmargins is due primarily to the inclusion of Liquent in 2002, which has lowergross margins than existing units, partially offset by gross profits generatedfrom patent licensing activities in 2002. SG&A increased $17.9 million, or 104.8%, including an increase of$13.2 million related to the Liquent business. As a percentage of revenue, SG&A increased in the data segment, dueprimarily to increased expenses at MicroPatent associated with the integrationof Aurigin and product development initiatives.  Depreciation and amortization increased by $1.3 million, or13.2%, with an increase in depreciation of $2.1 million being partially offsetby a reduction of $0.8 million in amortization of intangible assets.  The increase in depreciation is primarilyassociated with property and equipment of acquired businesses.  The decrease in intangible amortizationincludes a reduction of $2.1 million associated with goodwill no longer beingamortized based on the adoption of SFAS No. 142, *Goodwill and Other Intangible Assets,*partially offset byincreased amortization related to intangible assets of acquired businesses.

 

During 2002, the Company recorded the GSI Charge of $3.1 million,compared to impairment charges of $0.4 million recorded in 2001.  After consideration of these impairmentcharges, income from operations increased to $5.7 million from $2.8million.  The increase of $2.9 millionincludes an increase of $1.5 million from Liquent and $1.0 million from patentlicensing activities.  Data segmentincome from operations was relatively unchanged, with improved earnings fromcore businesses offset by the impairment charges recorded in 2002.

 

Net interest income decreased $3.0 million, or 82.8%, to $0.6 millionfrom $3.7 million based on the use of cash, cash equivalents and investmentsfor acquisitions in 2001 and 2002 and lower interest rates earned on investedfunds.

 

Based on the factors above, income from continuing operations beforeincome taxes remained relatively stable at $6.4 million for 2002 and 2001.

 

24

----

 

The Company recorded a provision for income taxes of $1.9 million in2002, or 30.5% of income before taxes, compared to a provision for income taxesof $2.8 million in 2001, or 43.5% of income before taxes.  The lower effective tax rate in 2002 is dueprimarily to the favorable impact on tax rates resulting from the cessation ofgoodwill amortization, a portion of which was not tax deductible.

 

Based on the factors above, income from continuing operations increasedby $0.8 million, or 22%, to $4.4 million, or $0.20 per diluted common share, in2002 from $3.6 million, or $0.17 per diluted common share, in 2001.

 

(Loss) income from discontinued operations in 2002 approximated $(18.1)million, or $(0.83) per diluted common share, compared to $4.2 million, or$0.19 per diluted common share, in 2001. The loss in 2002 resulted primarily from an after-tax impairment chargeof $22.5 million associated with the carrying value of goodwill and intangibleassets in the Company’s Transcender unit. Excluding this charge earnings from discontinued operations werecomparable in 2002 and 2001.

 

**SegmentReview**

 

*Data*

 

Revenues increased $8.9 million, or 22.1%, to $49.0 million from $40.1million. Revenues increased by $3.9 million at the Company’s IDRAC unit, whichwas acquired in March 2001.  Theremaining increase of $5.0 million relates primarily to MicroPatent, based onstrong growth in revenues from patent information subscriptions, both as aresult of the acquisition of Aurigin in May 2002 and strong growth in coresubscriptions.  In addition, the Companygenerated strong growth in IP management services at MDC.  The subscription growth at MicroPatent andIP management growth at MDC were primarily volume-driven.  These revenue increases were partly offsetby a decline in variable demand patent revenues, such as patent documentdownloads.  Revenues derived from exportsales, based on customer location, accounted for approximately 26% and 18% ofdata segment revenues in 2002 and 2001, respectively.

 

Income from operations decreased $0.1 million, or 0.8%, to $7.1 millionfrom $7.2 million.  During 2002, theCompany recorded the GSI Charge of $3.1 million.  Core business operations in this segment increased by $3.0million, including an increased contribution of $1.9 million at IDRAC based ona full year of operations in 2002. Excluding the impairment charge, income from operations increased at MDCbased on strong revenue growth, relatively stable operating expenses anddecreased amortization of intangible assets (based on the adoption of SFAS No.142).  Income from operations declinedat MicroPatent due primarily to integration costs related to the acquisition ofAurigin and costs incurred on product development initiatives.  EBITDA decreased $1.2 million, or 7%, to$15.3 million from $16.6 million.  Thedecrease includes the $3.1 million GSI Charge in 2002, partially offset by anincrease of $1.4 million at IDRAC. EBITDA margins approximated 31% in 2002, compared to 41% in 2001.  The most significant factors in the decreasewere the impact of the GSI Charge and the acquisition of Aurigin, which servedto reduce EBITDA margins at MicroPatent based on integration costs and lowerprofitability on Aurigin revenues.

 

25

----

 

*Software*

 

Revenues increased $25.7 million to $27.1 million from $1.4 million.All revenues in the segment relate to Liquent, which was acquired in December2001.  During 2002, Liquent had strongrevenues from license sales and consulting services, driven primarily by volumegrowth.  On a pro forma basis, Liquentrevenue growth approximated 22% in 2002 compared to full year 2001.  Revenues derived from export sales, based oncustomer location, accounted for approximately 24% and 9% of software segmentrevenues in 2002 and 2001, respectively.

 

Income from operations increased $1.5 million to $2.2 million from $0.7million, based on a full year of Liquent operations in 2002.  On a full year pro forma basis Liquentgenerated a significant loss from operations in 2001.  Improved earnings at Liquent reflect both strong revenue growthand reduced SG&A expenses following a series of cost reductioninitiatives.  EBITDA increased $4.1million to $4.8 million from $0.7 million, with EBITDA margins approximating18% in 2002.

 

*Other*

 

Other revenues of $1.8 million in 2002 represent revenues from patentlicensing activities in the Company’s LPS unit.  LPS generated only nominal revenues in 2001.  LPS revenues, which are not recurring innature, were generated from the Infringement Cases.  Losses from other operations decreased by $1.5 million, or 29%,to $3.6 million from $5.1 million.  Theimprovement reflects earnings associated with the patent licensing activitiesand an impairment charge of $0.4 million recorded in 2001 related to theCompany’s investment in Techex.

 

26

----

 

A reconciliation of segment EBITDA to income (loss) from continuingoperations before income taxes follows:

 

 
|                                                          |   | **Years Ended December 31,** |   |
|---------------------------------------------------------------|--------|------------------------------|--------|
| **(In thousands)**                                            |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                          |   |                         |   |   |   |   |   |
| *Data segment*                                                |   |                         |   |   |   |   |   |
| EBITDA                                                        |   | $                            | 22,730 |   | $ | 15,314 |   | $ | 16,555 |   |
| Amortization of capitalized software                          |   | (12                          | )      | (17 | ) | — |   |
| Depreciation and amortization                                 |   | (8,832                       | )      | (8,198 | ) | (9,379 | ) |
| Interest income                                               |   | 178                          |   | 262 |   | 267 |   |
| Income from continuing operations before  income taxes        |   | $                            | 14,064 |   | $ | 7,361 |   | $ | 7,443 |   |
|                                                          |   |                         |   |   |   |   |   |
| *Software segment*                                            |   |                         |   |   |   |   |   |
| EBITDA                                                        |   | $                            | 688    |   | $ | 4,808 |   | $ | 748 |   |
| Amortization of capitalized software                          |   | (184                         | )      | (40 | ) | — |   |
| Depreciation and amortization                                 |   | (2,318                       | )      | (2,554 | ) | (82 | ) |
| Interest income (expense)                                     |   | 5                            |   | (2 | ) | 5 |   |
| (Loss) income from continuing operations  before income taxes |   | $                            | (1,809 | ) | $ | 2,212 |   | $ | 671 |   |
|                                                          |   |                         |   |   |   |   |   |
| *Other*                                                       |   |                         |   |   |   |   |   |
| EBITDA                                                        |   | $                            | (6,131 | ) | $ | (3,507 | ) | $ | (4,979 | ) |
| Depreciation and amortization                                 |   | (42                          | )      | (79 | ) | (108 | ) |
| Interest income                                               |   | 1,817                        |   | 368 |   | 3,381 |   |
| Loss from continuing operations before  income taxes          |   | $                            | (4,356 | ) | $ | (3,218 | ) | $ | (1,706 | ) |
|                                                          |   |                         |   |   |   |   |   |
| *Total*                                                       |   |                         |   |   |   |   |   |
| EBITDA                                                        |   | $                            | 17,287 |   | $ | 16,615 |   | $ | 12,324 |   |
| Amortization of capitalized software                          |   | (196                         | )      | (57 | ) | — |   |
| Depreciation and amortization                                 |   | (11,192                      | )      | (10,831 | ) | (9,569 | ) |
| Interest income                                               |   | 2,000                        |   | 628 |   | 3,653 |   |
| Income from continuing operations before  income taxes        |   | $                            | 7,899  |   | $ | 6,355 |   | $ | 6,408 |   |

 

27

----

 

**Liquidityand Capital Resources**

 

*Transcender Sale*

 

On December 31, 2003, the Company completed the sale of its Transcenderbusiness unit for cash consideration of $10 million.  As a result of a post-closing adjustment, the Company expects toreceive an additional $300,000 in cash. The Company recognized a loss of $3.8 million within discontinuedoperations, net of income tax benefits associated with the transaction of $2.4million.  The Company estimates thatapproximately $0.6 million in deal related costs will be paid subsequent toDecember 31, 2003.

 

In connection with the sale of the assets of Transcender, the Companyentered into an Interim Transition Services Agreement (the TSA) with thepurchaser that requires the Company to retain all employees of Transcenderthrough March 31, 2004 and certain employees through May 31, 2004.  The purchaser is reimbursing the Company infull for all employee costs and incidental expenses during the serviceagreement period.  The Company isresponsible to pay severance costs to any employee that is not offeredemployment or does not accept employment with the purchaser.  The Company estimates that it will incurseverance and related costs of approximately $0.5 million in the first half of2004.  The purchaser is reimbursing theCompany in full for all real estate costs through March 31, 2004 and for aportion of real estate costs from April 1, 2004 through May 31, 2004.  Future rental payments under the Transcenderleases of approximately $2.9 million are included in the future operating leasecommitment schedule below.  The Companyis actively seeking to sublet the Transcender real estate and may generatesublease income in the future to offset a portion of the lease commitment.  During the first half of 2004, the Companyexpects to record a charge in discontinued operations related to the remaininglease commitment less estimated sublease income.

 

*CRC Sale*

 

On April 8, 2003, the Company completed the sale of CRC and receivednet proceeds of approximately $90 million, representing the cash considerationfor the assets sold less deal related expenses and an adjustment made based onthe closing balance sheet of CRC in accordance with the underlying purchaseagreement.  The Company estimates thatapproximately $0.5 million in deal related costs will be paid subsequent toDecember 31, 2003.  Approximately $3.0million of the proceeds is being held in escrow related to representations andwarranties contained in the purchase agreement.  These proceeds will become available to the Company in April 2004unless the buyer of CRC asserts claims under the purchase agreement.  All proceeds held in escrow will remainclassified as restricted cash until made available to the Company.

 

In March 2003, the Company, in an effort to facilitate the impendingsale of CRC and in light of the strength of its current financial position,voluntarily terminated its credit facility established on September 24, 1999(the Credit Facility) (See Note 18 of the Notes to Consolidated FinancialStatements).  The Company had nooutstanding borrowings under the Credit Facility at any time since itsinception.

 

The proceeds from the sales of the CRC and Transcender business units,net of income taxes associated with the transactions, will be used to financefuture acquisitions and for general corporate purposes.  The Company currently does not have anyagreements with respect to any prospective material acquisitions.  Pending such uses, the proceeds will beinvested in accordance with the Company’s Investment Program (See Note 5 of theNotes to Consolidated Financial Statements).

 

28

----

 

*CDC Acquisition*

 

On December 1, 2003, the Company acquired the issued share capital (theShares) of CDC for cash consideration of approximately $26.3 million (CashConsideration), including approximately $3.8 million currently held in escrowfor estimated guaranteed earnouts as defined and calculated in accordance with theunderlying Share Purchase Agreement (SPA). The Company expects to pay additional closing costs associated with thetransaction of approximately $0.3 million subsequent to December 31, 2003.

 

Under the terms of the SPA, the sellers are entitled to potentialfuture consideration dependent on future operating results.  In addition to guaranteed futureconsideration of approximately $3.8 million, which has been paid into escrow,the Company has a liability based on revenues of the acquired business for theyear ended December 31, 2003 (the Further Consideration) and a potentialliability based on the combined operating results of Liquent and CDC for thethree year period ending December 31, 2006 (the Earnout Consideration).  The specific provisions of each contingencyare detailed in Note 13 of the Notes to Consolidated Financial Statements.  As of December 31, 2003, the Company hasaccrued for additional estimated Further Consideration costs of approximately$1,500,000, which is expected to be paid during the second quarter of 2004.

 

All payments associated with the transaction are expected to be paidwith cash flow generated by the working capital of the Company.

 

*IHI Stock Sales and Purchases*

 

In March 2000, the Company sold 4.5 million shares of its common stockand received approximately $155 million of net proceeds.  As of December 31, 2003, the entire amountof proceeds has been used from this offering to fund acquisitions including theacquisition of CDC noted above (See Note 3 of the Notes to ConsolidatedFinancial Statements).

 

The Company’s Board of Directors authorized a share repurchase programin October 2002, enabling the Company to repurchase up to $30 million of itscommon stock.  In July 2003, theCompany’s Board of Directors approved an increase in the previously authorizedshare buyback program from $30 million to $50 million.  Through March 15, 2004, the Company hadpurchased 1,007,200 shares, or approximately $14.7 million, of its commonstock.  The Company may use up to anadditional $35.3 million of cash, cash equivalents and available-for-salesecurities in the future to purchase additional shares of its common stock.

 

*2003 Cash Flows*

 

Cash and cash equivalents, including short-term investments, totaled$52.0 million at December 31, 2003 compared to $67.0 million at December 31,2002.  During 2003, the Company receivednet cash proceeds of approximately $99.6 million from the disposition of bothits CRC and Transcender business units (See Note 4 of the Notes to ConsolidatedFinancial Statements).  As a result, theCompany also has long-term investments, comprised of U.S. government notes,collateralized mortgage obligations, and corporate notes and bonds totaling$83.2 million as of December 31, 2003. Maturities of the Company’s long-term investments range from 12 to 35months.  Excluding cash, cashequivalents and short-term investments, the Company’s continuing operations hadworking capital deficits at December 31, 2003 and 2002.  The Company receives patent annuity paymentsand subscription payments in advance and is, therefore, expected to maintainvery low or negative working capital balances, excluding cash, cash equivalentsand short-term investments.  Included incurrent liabilities at December 31, 2003, are obligations related to patentannuity payments of approximately $28.5 million and deferred revenue ofapproximately $25.8 million.

 

29

----

 

Cash generated from operating activities of continuing operations was$6.8 million for the year ended December 31, 2003, derived from income of $5.3million plus non-cash charges of $11.4 million and an increase in net operatingassets of $9.9 million during the period. The increase in net operating assets relates primarily to income taxesreceivable, based on expected tax refunds for both federal and state taxes paidin 2003.  Estimated income tax paymentsmade during 2003 are expected to be refunded to the Company in 2004 as a resultof tax losses realized from the sale of Transcender in December 2003.  During March 2004 the Company received afederal income tax refund of approximately $10.8 million.  The increase in operating assets waspartially offset by an increase in deferred revenue, most notably due to anincrease at Liquent resulting from the acquisition of CDC, a business acquiredin December 2003.

 

Cash used in investing activities from continuing operations was $14.0million for the year ended December 31, 2003 due primarily to an increase ininvestment purchases, net of sales and maturities, of $83.3 million and netacquisition costs of $23.0 million associated with the purchase of CDC (SeeNote 3 of the Notes to Consolidated Financial Statements).  These uses of cash were partially offset bynet proceeds received by the Company of $99.6 million resulting from thedisposition of both the CRC and Transcender business units, less $3.0 milliondeposited in escrow related to the sale of CRC.  Capital expenditures, including capitalized software costs, approximated$4.3 million in 2003.  Excludingacquisitions of businesses, the Company’s existing operations are not capitalintensive.

 

Cash used in financing activities from continuing operations was $8.8million for the year ended December 31, 2003. During 2003, the Company repurchased shares of its common stock at acost of $9.5 million, which was partially offset by net cash proceeds receivedfrom the issuance of common stock from stock option exercises of $0.8 million.

 

Total cash provided by discontinued operations was $1.1 million for theyear ended December 31, 2003.  Totalcash from operating activities was $2.0 million, primarily the result ofnoncash charges related to depreciation and amortization of $3.4 million,offset by capital spending of approximately $0.8 million, including purchasesof equipment and capitalized pre-publication costs, and $0.1 million inprincipal payments on capital leases.

 

The additive effect of exchange rates on cash and cash equivalentstotaled $0.8 million.  Exchange rateswere impacted by foreign currency translation of local currency to the U.S.dollar of balances recorded within the Company’s European subsidiaries IDRACand Liquent.  This increase is due to asignificant weakening of the U.S. dollar during 2003 when compared to the Euroand the British pound.

 

30

----

 

*Future noncancelable minimum lease payments*

 

Future noncancelable minimumlease payments under operating leases including estimated escalation amounts asof December 31, 2003 are as follows (in thousands):

 
|                         |   | **Operating  Leases** |   |
|------------------------------|--------|-----------------------|--------|
| Year ending December 31,     |   |                  |   |
| 2004                         |   | $                     | 3,193  |   |
| 2005                         |   | 2,395                 |   |
| 2006                         |   | 1,350                 |   |
| 2007                         |   | 1,133                 |   |
| 2008                         |   | 455                   |   |
| Thereafter                   |   | 4                     |   |
| Total minimum lease payments |   | $                     | 8,530  |   |

 

Included in the minimum lease payments presented above are theCompany’s operating lease obligations associated with the discontinuedoperations of Transcender and CRC (See Note 4 of the Notes to ConsolidatedFinancial Statements).  The aggregateamount of these lease obligations, which are set to expire in 2008, approximate$3,333,000.  As of December 31, 2003,$388,000 related to CRC operating leases is included in accrued expenses.  During the first half of 2004, the Companyexpects to record a charge in discontinued operations related to the remaininglease commitment less estimated sublease income.

 

Included in accrued expenses at December 31, 2003 is the currentmaturity balance of capital lease obligations in the amount of $63,000.

 

The Company believes that available for cash and cash equivalents,together with funds generated from operations and amounts included in itsinvestments program will be sufficient to fund the cash requirements of itsexisting operations for the foreseeable future including all contractualobligations as they become due.  TheCompany currently has no commitments for material capital expenditures oragreements with respect to any prospective material acquisitions. The Companymay choose to obtain additional capital or financing to consummate futureacquisitions.  Future operating requirementsand capital needs may be subject to economic conditions and other factors, manyof which are beyond the Company’s control. No assurance can be given as to the Company’s future acquisition orexpansion opportunities and how such opportunities will be financed.

 

**Off-BalanceSheet Arrangements**

 

The Company does not have any off-balance sheet arrangements as of andfor the periods presented herein.

 

**LegalProceedings**

 

From time to time the Company is a party to legal and administrativeproceedings, claims, and litigation arising in the ordinary course of itsbusiness (See Item 3.  *Legal Proceedings*). While the outcome ofthese matters is currently not determinable, management does not expect thatthe ultimate costs to resolve these matters either singularly or in aggregatewill have a material adverse effect on the Company’s consolidated financialposition, results of operations or cash flows.

 

31

----

 

**Impactof Recent Accounting Pronouncements**

 

In August 2001, the FASB issued SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets.*  Thisstandard supercedes SFAS No. 121, *Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to BeDisposed Of.*  The standardretains the previously existing accounting requirements related to therecognition and measurement of the impairment of long-lived assets to be heldand used while expanding the measurement requirements of long-lived assets tobe disposed of by sale to include discontinued operations.  It also expands on the previously existingreporting requirements for discontinued operations to include a component of anentity that either has been disposed of or is classified as held for sale. TheCompany adopted SFAS No. 144 effective January 1, 2002.  The adoption of SFAS No. 144 did not have asignificant impact on the Company’s consolidated financial position or resultsof operations.

 

In July 2002, the FASB issued SFAS No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*.  This standard nullifies the guidance ofEmerging Issues Task Force (EITF) Issue No. 94-3, *Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring)*. Under EITF Issue No.94-3, an entity recognized a liability for an exit cost on the date that theentity committed itself to an exit plan. In SFAS No. 146, the FASB acknowledges that an entity’s commitment to aplan does not, by itself, create a present obligation to other parties thatmeets the definition of a liability and requires that a liability for a costthat is associated with an exit or disposal activity be recognized when theliability is incurred.  It alsoestablishes that fair value is the objective for the initial measurement of theliability. The scope of SFAS No. 146 also includes (1) costs related toterminating a contract that is not a capital lease, (2) termination benefitsthat employees who are involuntarily terminated receive under the terms of aone-time benefit arrangement that is not an ongoing benefit arrangement or anindividual deferred compensation contract and (3) costs to consolidatefacilities or relocate employees.  SFASNo. 146 is required to be effective for exit or disposal activities initiatedafter December 31, 2002.  The adoptionof SFAS No. 146 did not have a significant impact on the Company’s consolidatedfinancial position or results of operations.

 

In November 2002, the EITF reached a consensus on Issue No. 00-21(Issue 00-21), *Revenue Arrangements withMultiple Deliverables*. Issue 00-21 provides guidance on how toaccount for arrangements that involve the delivery or performance of multipleproducts, services and/or rights to use assets.  The provisions of Issue 00-21 applies to revenue arrangementsentered into in fiscal periods beginning after June 15, 2003.  The adoption of this new issue did not havea significant impact on the Company’s financial position or results ofoperations.

 

In December 2002, the FASB issued SFAS No. 148, *Accounting for Stock-Based Compensation -Transitionand Disclosure*.  SFAS No. 148amends certain provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation*, to provide alternative methods oftransition for an entity that voluntarily changes to the fair value basedmethod of accounting for stock-based employee compensation.  In addition, SFAS No. 148 amends thedisclosure requirements of SFAS No. 123 to require prominent disclosure in bothannual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  The provisions of SFAS No. 148are effective for financial statements for fiscal years and interim periodsending after December 15, 2002.  TheCompany has adopted the disclosure provisions of SFAS No. 148. (See Note 2 ofthe Notes to Consolidated Financial Statements).  SFAS No. 148 did not require the Company to change to the fairvalue method of accounting for stock-based compensation, and as such theCompany will continue to apply the intrinsic-value based method.

 

32

----

 

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), *Consolidation of Variable Interest Entities*.  FIN 46 requires that if an entity has acontrolling financial interest in a variable interest entity, the assets,liabilities and results of activities of the variable interest entity should beincluded in the consolidated financial statements of the entity.  The Company does not have any variableinterest entities.

 

In April 2003, the FASB issued SFAS No. 149, *Amendment of Statement 133 on Derivative Instruments and HedgingActivities*.  SFAS No. 149 isintended to result in more consistent reporting of contracts as eitherfreestanding derivative instruments subject to SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*, in its entirety, or as hybrid instruments with debt hostcontracts and embedded derivative features. In addition, SFAS No. 149 clarifiesthe definition of a derivative by providing guidance on the meaning of initialnet investments related to derivatives. SFAS No. 149 is effective for contracts entered into or modified after June30, 2003.  The adoption of SFAS No. 149had no impact on the Company’s consolidated financial statements.

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity*. SFAS No. 150 establishes standards for classifying and measuring asliabilities certain financial instruments that embody obligations of the issuerand have characteristics of both liabilities and equity.  SFAS No. 150 represents a significant changein practice in the accounting for a number of financial instruments, includingmandatorily redeemable equity instruments and certain equity derivatives thatfrequently are used in connection with share repurchase programs.  The Company does not use such instruments inits share repurchase program.  SFAS No.150 is effective for all financial instruments created or modified after May31, 2003, and to other instruments as of September 1, 2003. The adoption ofthis standard had no impact on the Company’s consolidated financial statements.

 

In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No.104, *RevenueRecognition in Financial Statements*, which codifies, revises andrescinds certain sections of SAB No. 101, *Revenue Recognition in Financial Statements*,in order to make this interpretive guidance consistent with currentauthoritative accounting and auditing guidance and SEC rules andregulations.  The changes noted in SABNo. 104 did not have a material effect on the Company’s consolidated financialposition or results of operations.

 

**Item 7A.****                 *Quantitativeand Qualitative Disclosures About Market Risk***

 

*Interest Rate Risk* - The primary objective ofthe Company’s investment activities is to preserve the principal while at thesame time maximizing yields without significantly increasing the risk.  To achieve this objective, the Companymaintains its portfolio of cash equivalents and investments in a variety ofsecurities, including U.S. government notes, collateralized mortgageobligations, and corporate notes and bonds. As of December 31, 2003, approximately 13% of the Company’s portfoliomatures in one year or less, with the remainder maturing in less than threeyears.   The Company does not usederivative financial instruments in its investment portfolio.  Investments are placed with high credit qualityissuers and, by policy, the Company limits the amount of credit exposure to anyone issuer.  The Company does not holdsecurities for trading purposes.

 

At any time, a sharp rise ininterest rates could have a material adverse impact on the fair value of theCompany’s investment portfolio.  Conversely, declines in interest rates couldhave a material favorable impact on interest earnings from the Company’sinvestment portfolio.  The Company doesnot currently hedge interest rate exposures.

 

33

----

 

*ForeignCurrency Exchange Rate Risk*-**The financial statements ofthe Company’s foreign subsidiaries are translated from the local currency intoU.S. dollars.  Assets and liabilitiesare translated using exchange rates in effect at the balance sheet date, exceptcertain accounts of subsidiaries whose functional currency is the U.S. dollar,and translation adjustments are accumulated in a separate component ofstockholders’ equity.  Revenue andexpenses are translated at average monthly exchange rates, and translationadjustments are charged and credited to income.  Assuch, the Company’s operating results are affected by fluctuations in the valueof the U.S. dollar compared to the British pound and the Euro.  During the years ended December 31,2003 and 2002, the Company’s operating results include foreign exchange lossesof approximately $962,000 and $740,000, respectively, primarily related to thedecline in the value of the U.S. dollar relative to the Euro.  The impact of foreign exchange on operatingresults for the year ended December 31, 2001 was immaterial.

 

A subsidiary of the Company routinely enters into forward contracts toacquire various international currencies in an effort to hedge foreign currencytransaction exposures of its operations. Such forward contracts have been designated ashedges for future annual patent payments to related international regulatoryagencies.  At December 31, 2003, thesubsidiary of the Company had entered into forward contracts to acquire variousinternational currencies, all having maturities of less than seven months,aggregating approximately $25,951,000. Realized gains and losses relating to the forward contracts wereimmaterial for the years ended December 31, 2003, 2002 and 2001.

 

The Company has only limited involvement with derivative financialinstruments and does not use them for trading purposes.

 

34

----

 

**Item 8.****                    *FinancialStatements and Supplementary Data***

 

Reference is made to the financial statements, the report thereon, thenotes thereto, and supplementary data commencing at page F-1 of this AnnualReport on Form 10-K which financial statements, report, notes, and data areincorporated herein by reference.

 

***QUARTERLY RESULTS OFOPERATIONS (UNAUDITED)***

 

Thefollowing table sets forth certain unaudited consolidated statements ofoperations data, for each of the eight quarters in the period ended December31, 2003.  In management’s opinion, thisinformation has been presented on the same basis as the audited consolidatedfinancial statements commencing at page F-1 of this Annual Report on Form 10-K,and all necessary adjustments, consisting only of normal recurring adjustmentshave been included in the amounts stated below to present fairly the unauditedquarterly results when read in conjunction with the audited consolidatedfinancial statements and related notes thereto.  The operating results for any quarter should not be relied uponas necessarily indicative of results for any future period.  The Company expects its quarterly operatingresults to fluctuate in future periods due to a variety of reasons, includingthose specifically discussed in “Item 1. Business — Risk Factors.”

 

The following is a summary of the quarterly results of operations forthe years ended December 31, 2003 and 2002, respectively (in thousands, exceptper share data):

 
|                                                   |   | **Quarter Ended** |   |        |   |
|--------------------------------------------------------|--------|-------------------|--------|-------------|--------|
|                                                   |   | **March 31**      |   | **June 30** |   | **Sept. 30** |   | **Dec. 31** |   | **Year** |   |
| ***2003***                                             |   |              |   |        |   |   |   |   |   |   |   |
| Revenues                                               |   | $                 | 19,657 |        | $      | 19,755 |   | $ | 18,922 |   | $ | 23,073 |   | $ | 81,407 |   |
| Gross profit                                           |   | 13,289            |   | 13,368      |   | 13,049 |   | 15,979 |   | 55,685 |   |
| Income from continuing operations                      |   | 883               |   | 1,372       |   | 1,023 |   | 2,018 |   | 5,296 |   |
| Earnings per common share from continuing  operations: |   |              |   |        |   |   |   |   |   |   |   |
| Basic and Diluted                                      |   | $                 | 0.04   |        | $      | 0.06 |   | $ | 0.05 |   | $ | 0.10 |   | $ | 0.25 |   |
| Net income (loss) (1)                                  |   | 1,094             |   | 30,772      |   | 1,152 |   | (1,811 | ) | 31,207 |   |
| Earnings (loss) per common share:                      |   |              |   |        |   |   |   |   |   |   |   |
| Basic and Diluted                                      |   | $                 | 0.05   |        | $      | 1.45 |   | $ | 0.06 |   | $ | (0.09 | ) | $ | 1.48 |   |

 
|                                                          |   | **Quarter Ended** |   |        |   |
|---------------------------------------------------------------|--------|-------------------|--------|-------------|--------|
|                                                          |   | **March 31**      |   | **June 30** |   | **Sept. 30** |   | **Dec. 31** |   | **Year** |   |
| ***2002***                                                    |   |              |   |        |   |   |   |   |   |   |   |
| Revenues                                                      |   | $                 | 18,919 |        | $      | 19,455 |   | $ | 18,868 |   | $ | 20,710 |   | $ | 77,952 |   |
| Gross profit                                                  |   | 13,442            |   | 13,577      |   | 13,014 |   | 14,704 |   | 54,737 |   |
| Income (loss) from continuing operations  (2)                 |   | 2,104             |   | 1,666       |   | (876 | ) | 1,525 |   | 4,419 |   |
| Earnings (loss) per common share from  continuing operations: |   |              |   |        |   |   |   |   |   |   |   |
| Basic and Diluted                                             |   | $                 | 0.10   |        | $      | 0.08 |   | $ | (0.04 | ) | $ | 0.07 |   | $ | 0.20 |   |
| Net income (loss) (2) & (3)                               |   | 2,814             |   | 3,068       |   | (67 | ) | (19,539 | ) | (13,724 | ) |
| Earnings (loss) per common share:                             |   |              |   |        |   |   |   |   |   |   |   |
| Basic and Diluted                                             |   | $                 | 0.13   |        | $      | 0.14 |   | $ | 0.00 |   | $ | (0.91 | ) | $ | (0.63 | ) |

 

The sum of the quarterly per share amounts may not equal per shareamounts reported for year ended 2003 and 2002. This is due to changes in the number of weighted-average sharesoutstanding and the effects of rounding for each period.

 

35

----

 

*(Footnotes from preceding page)*

 

----

(1)                                  Includes the resultsof discontinued operations that were income of $0.2 million, $29.4 million and$0.1 million for the first, second and third quarters of 2003, respectively anda loss of $3.8 million for the fourth quarter of 2003.  The second quarter of 2003 income fromdiscontinued operations of $29.4 million includes a $30.3 million gain on thesale of CRC.  The fourth quarter 2003loss of $3.8 million from discontinued operations reflects the loss on the saleof Transcender.

 

(2)                                  The third quarter of2002 includes an asset write-down of approximately $1.9 million, net of taxes.

 

(3)                                  Includes the resultsof discontinued operations that were income of $0.7 million, $1.4 million, $0.8million for the first, second and third quarters of 2002, respectively and aloss of $21.0 million for the fourth quarter of 2002.  The fourth quarter 2002 discontinued loss of $21.0 millionincludes a $22.5 million after-tax charge for asset impairment.

 

**Item 9.****                    *Changesin and Disagreements with Accountants on Accounting and Financial Disclosure***

 

None.

 

**Item 9A.****                 *Controlsand Procedures***

 

The Company carried out an evaluation, under the supervision and withthe participation of the Company’s management, including the chief executiveofficer and the chief financial officer, of the effectiveness of the design andoperation of the disclosure controls and procedures, as defined in Rules 13a-15and 15d-15 under the Securities Exchange Act of 1934, as amended (the ExchangeAct).  Based upon that evaluation, theCompany’s chief executive officer and chief financial officer concluded thatthe Company’s disclosure controls and procedures are effective, as of the endof the period covered by this Report (December 31, 2003), in ensuring thatmaterial information relating to IHI, including its consolidated subsidiaries,required to be disclosed by the Company in reports that it files or submitsunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms, including ensuring that such material information is accumulated andcommunicated to the Company’s management, including the Company’s chiefexecutive officer and chief financial officer, as appropriate to allow timelydecisions regarding required disclosure.

 

There were no changes in the Company’s internal control over financialreporting (as required by the Exchange Act) that occurred during the lastfiscal quarter that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal controls over financial reporting.

 

36

----

 

**PART III**

 

**Item 10.****                 *Directorsand Executive Officers of the Registrant***

 

The information required by Items 401 and 405 of Regulation S-K areincluded under the captions “Proposal Number One—Election of Directors,”“Executive Officers,” “The Board and Its Committees—Committees of theBoard—Audit Committee” and “Section 16(a) Beneficial Ownership ReportingCompliance” of IHI’s definitive Proxy Statement for the 2004 Annual Meeting ofStockholders and is hereby incorporated by reference.

 

The information required by Item 406 of Regulation S-K is set forthbelow:

 

As stated above under “Item 1. Business,” the Company has adopted a Code of Business Conduct and Ethicsthat applies to its directors, the principal executive, financial and accountingofficers, all executive officers, all members of the finance departments aswell as all other employees.  The Codeof Business Conduct and Ethics is available on the Company’s website at *www.informationholdings.com*.  Copies of the Code of Business Conduct andEthics will be mailed to stockholders, free of charge, upon any request made tothe Corporate Secretary, Information Holdings Inc., 2777 Summer Street, Suite602, Stamford, Connecticut 06905.

 

The Company intends to satisfy the disclosure requirement under Item 10of Form 8-K regarding an amendment to, or waiver from, a provision of its Codeof Business Conduct and Ethics by posting such information on its website, atthe address and location specified above.

 

**Item 11.****                 *ExecutiveCompensation***

 

The information required by this item is included under the captions“The Board and Its Committees—Compensation of Directors,” “The Board and ItsCommittees—Compensation Committee Interlocks and Insider Participation,”“Report of the Board of Directors and the Board Compensation Committee onExecutive Compensation,” “Executive Officers—Employment Agreements,” “SummaryCompensation Table,” “Stock Option Grants in 2003,” “Fiscal 2003 Year-EndOption Values,” and “Share Investment Performance” of IHI’s definitive ProxyStatement for the 2004 Annual Meeting of Stockholders and is herebyincorporated by reference.

 

**Item 12.****                 *SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters***

 

The information required by Item 403 of Regulation S-K is includedunder the caption “Security Ownership of Certain Beneficial Owners andManagement” of IHI’s definitive Proxy Statement for the 2004 Annual Meeting ofStockholders and is hereby incorporated by reference.

 

37

----

 

The information required by Item 201(d) of Regulation S-K is set forthbelow:

 

Equity Compensation Plan Information

 

The following chart gives aggregate information regarding grants underall equity compensation plans of IHI through December 31, 2003.

 
| **Plan  Category**                                      |   | **(a) Number of securities to  be issued upon exercise of  outstanding options,  warrants and rights (1)** |   | **(b) Weighted-average  exercise price of  outstanding options,  warrants and rights** |   | **(c) Number of securities  remaining available for  future issuance under equity  compensation plans  (excluding securities  reflected in column (a))** |    |
|---------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| Equity compensation plans approved by  shareholders     |   | 1,229,855                                                                                                  |   | $                                                                                      | 23.24  |                                                                                                                                                     | 797,616 |   |
|                                                    |   |                                                                                                       |   |                                                                                   |   |                                                                                                                                                     |    |
| Equity compensation plans not approved by  shareholders |   | -0-                                                                                                        |   | Not applicable                                                                         |   | -0-                                                                                                                                                      |    |
|                                                    |   |                                                                                                       |   |                                                                                   |   |                                                                                                                                                     |    |
| Total                                                   |   | 1,229,855                                                                                                  |   | $                                                                                      | 23.24  |                                                                                                                                                     | 797,616 |   |

 

----

(1)          Represents options granted under theCompany’s 1998 Stock Option Plan, which was approved by shareholders in 1998,as thereafter amended with shareholder approval.

 

**Item 13.****                 *CertainRelationships and Related Transactions***

 

The information required by Item 404 of Regulation S-K is includedunder the caption “Certain Relationships and Related Transactions” of IHI’sdefinitive Proxy Statement for the 2004 Annual Meeting of Stockholders and ishereby incorporated by reference.

 

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

 

The information required by this item is included under the caption“Proposal Number Two—Ratification of Independent Auditors” and “Pre-ApprovalPolicy and Procedures” of IHI’s definitive Proxy Statement for the 2004 AnnualMeeting of Stockholders and is hereby incorporated by reference.

 

38

----

 

**PART IV**

 

**Item 15.****                 *Exhibits,Financial Statement Schedules, and Reports on Form 8-K***

 
| (a)  Financial Statements                   |                                          |
|-------------------------------------------------------|-----------------------------------------------|
|                                                  |                                          |
|                                                  |                                          |
| Report of Independent Auditors                        |                                          |
|                                                  |                                          |
| Consolidated Balance Sheets,                          |                                          |
|                                                  | December 31, 2003 and 2002                    |   |
|                                                  |                                          |
| Consolidated Statements of Operations,                |                                          |
|                                                  | Years Ended December 31, 2003, 2002 and  2001 |   |
|                                                  |                                          |
| Consolidated Statements of Stockholders’  Equity |                                          |
|                                                  | Years Ended December 31, 2003, 2002 and  2001 |   |
|                                                  |                                          |
| Consolidated Statements of Cash Flows,                |                                          |
|                                                  | Years Ended December 31, 2003, 2002 and  2001 |   |
|                                                  |
| Notes to Consolidated Financial Statements            |                                          |

 

All schedules of the Company for which provision is made in theapplicable accounting regulations of the Securities and Exchange Commission arenot required under the related instructions, are inapplicable, or have beendisclosed in the Notes to Consolidated Financial Statements and, therefore,have been omitted.

 

(b)                     Reports on Form 8-K.

 

On October 24, 2003, the Company furnished aCurrent Report on Form 8-K announcing the preliminary financial results of theCompany for the three and nine month periods ended September 30, 2003.  In accordance with Item 12 of Form 8-K, theForm 8-K and the press release attached as an exhibit thereto were furnishedand not filed with the SEC.

 

On December 12, 2003, the Company filed aCurrent Report on Form 8-K announcing that its wholly owned subsidiary Liquent,Inc., entered into a Share Purchase Agreement, dated December 1, 2003, by andamong 3i Group PLC and others, J.A. Cook and others, Philip Padfield and SunilPurohit, Liquent Holdings Limited, and Information Ventures LLC, pursuant towhich it acquired the shares of CDC Solutions Limited, a private companylimited by shares and existing under the laws of the United Kingdom.

 

On December 22, 2003, the Company filed a CurrentReport on Form 8-K reporting that pursuant to an Asset Purchase Agreement,dated as of December 22, 2003 with effect as of December 31, 2003, by and amongTranscender LLC (n/k/a Dalton I LLC), Information Ventures LLC, InformationHoldings Inc., Kaplan Inc. (Kaplan) and Self Test Software, Inc., it had soldsubstantially all of the assets and certain liabilities of its wholly ownedsubsidiary Transcender to a subsidiary of Kaplan.  On January 6, 2004, the Company filed a Current Report on Form8-K containing the required pro forma condensed consolidated financialstatements of the Company.

 

39

----

 

(c)           Exhibits

 
| **No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                          |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 2.1     |   | Agreement and Plan of Merger, dated as of November 13, 2001, by and among  Liquent, Information Holdings Inc. and Fluid Acquisition Corp. (Incorporated  herein by reference to Exhibit 99.2 to the Schedule 13D relating to the  Shares, filed by the Company and Fluid Acquisition Corp. on November 21,  2001)                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 2.2     |   | Asset Purchase Agreement, dated December 22, 2003 with effect as of  December 31, 2003, by and among Transcender LLC (n/k/a Dalton I LLC),  Information Ventures LLC, Information Holdings Inc., Self Test Software, Inc.  and Kaplan Inc. (Incorporated herein by reference to Exhibit 2.1 to the  Company’s Current Report on Form 8-K, filed on January 6, 2004) |
|    |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 2.3     |   | Share Purchase Agreement, dated December 1, 2003, by and between 3i  Group PLC and others, J.A. Cook and others, Philip Padfield and Sunil  Purohit, Liquent Holdings Limited and Information Ventures LLC (Incorporated  herein by reference to Exhibit 2.1 to the Company’s Current Report on Form  8-K, filed on December 12, 2003)                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 3.1     |   | Certificate of Incorporation (Incorporated herein by reference to the  Company’s Registration Statement on Form S-1, Registration No. 333-56665)                                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 3.2     |   | Amended and Restated Bylaws (Incorporated herein by reference to  Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year  ended December 31, 2000)                                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 4.1     |   | Specimen Common Stock Certificate (Incorporated herein by reference  to the Company’s Registration Statement on Form S-1, Registration No.  333-56665)                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 4.2     | *      | Registration Rights Agreement, dated as of August 12, 1998, among  Information Holdings Inc., Warburg, Pincus Ventures, L.P. and Mason P. Slaine  (Incorporated herein by reference to Exhibit 4.2 to the Company’s Annual  Report on Form 10-K for the fiscal year ended December 31, 1998 SEC File No.  001-14371)                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1    | *      | Employment Agreement, dated as of March 15, 2000, between Information  Holdings Inc. and Mason P. Slaine (Incorporated herein by reference to  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter  ended June 30, 2000, filed on August 11, 2000)                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2    | *      | Employment Agreement, dated as of January 19, 1998, between  Information Ventures LLC and Vincent A. Chippari (Incorporated herein by  reference to Exhibit 10.2 to the Company’s Registration Statement on Form  S-1, Registration No. 333-56665)                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3    | *      | Employment Agreement, dated as of April 10, 2000, between Information  Ventures LLC and Jay Nadler (Incorporated herein by reference to Exhibit 10.4  to the Company’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2000)                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4    | *      | 1998 Stock Option Plan of the Company (Amended and Restated as of  March 26, 2002) (Incorporated herein by reference to Exhibit 10.7 to the  Company’s Annual Report on Form 10-K for the fiscal year ended December 31,  2001)                                                                                                                                     |

 

40

----

 
| 10.5   | *      | Amendment, entered into as of January 17, 2003, to the Employment  Agreement by and between Information Holdings Inc. and Mason P. Slaine, dated  as of April 30, 2002 (Incorporated herein by reference to Exhibit 10.16 to  the Company’s Annual Report on Form 10-K for the fiscal year ended December  31, 2002)                                                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6   |   | Asset Purchase Agreement, dated as of May 3, 2002, by and among  Aurigin Systems, Inc. and MicroPatent LLC (Incorporated herein by reference  to Exhibit 2.1 to the Current Report on Form 8-K, filed on October 8, 2002)                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7   |   | Asset Purchase Agreement, dated as of February 27, 2003, by and among  Information Holdings Inc., CRC Press LLC, CRC Press (U.K.) LLC, Parthenon  Publishing Group, Inc., CRC Press I LLC and Routledge No. 2 Limited  (Incorporated herein by reference to Exhibit 10.20 to the Company’s Annual  Report on Form 10-K for the fiscal year ended December 31, 2002) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.8   | *      | Employment Agreement, dated as of June 23, 2003, between MicroPatent  LLC and Daniel Videtto (Incorporated herein by reference to Exhibit 10.21 to  the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2003, filed on August 14, 2003)                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.9   | *      | Amendment, entered into as of September 2, 2003, to the Employment  Agreement by and between Information Holdings Inc. and Jay Nadler, dated as  of April 10, 2000 (Incorporated herein by reference to Exhibit 10.22 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,  2003, filed on November 12, 2003)                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.10  |   | Non-competition Agreement, dated November 6, 2000, between  Transcender LLC and Aneel M. Pandey (Incorporated herein by reference to  Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year  ended December 31, 2000)                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 21.1   |   | List of subsidiaries of Information Holdings Inc.                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 23.1   |   | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1   |   | Certificate of Principal Executive Officer pursuant to Rule 13a-14 of  the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 31.2   |   | Certification of Principal Financial Officer pursuant to Rule 13a-14  of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 32.1   |   | Certificate of Principal Executive Officer pursuant to Rule 13a-14(b)  and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                     |
| 32.2   |   | Certification of Principal Financial Officer pursuant to Rule  13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                                                                                                                               |

 

----

*                                         Denotes acompensatory, contract or arrangement, in which the Company’s directors orexecutive officers may participate.

 

41

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, as amended, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|   | INFORMATION HOLDINGS INC.                                                   |
|--------|-----------------------------------------------------------------------------|
|   |
| By:    | /s/ Vincent A. Chippari                                                     |   |
|   | Vincent A. Chippari, Executive Vice  President  and Chief Financial Officer |
|   |
| Date:  | March 15, 2004                                                              |   |
|        |                                                                             |  |  |

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, this report has been signed below by the following persons on behalfof the Registrant and in the capacities and on the dates indicated:

 

 
|   | /s/ Mason P. Slaine                    |                         | /s/ Vincent A. Chippari |   |
|--------|----------------------------------------|------------------------------|-------------------------|--------|
|   | Mason P. Slaine                        | Vincent A. Chippari          |
|   | President, Chief Executive Officer and | Executive Vice President and |
|   | Director                               | Chief Financial Officer      |
|   | (Principal Executive Officer)          | (Principal Financial and     |
|   | March 15, 2004                         | Accounting Officer)          |
|   |                                   | March 15, 2004               |
|   |                                   |                         |
|   |                                   |                         |
|   | /s/ Michael E. Danziger                |                         | /s/ David R. Haas       |   |
|   | Michael E. Danziger                    | David R. Haas                |
|   | Director                               | Director                     |
|   | March 15, 2004                         | March 15, 2004               |
|   |                                   |                         |
|   |                                   |                         |
|   | /s/ Keith B. Jarrett                   |                         | /s/ Sidney Lapidus      |   |
|   | Keith B. Jarrett                       | Sidney Lapidus               |
|   | Director                               | Director                     |
|   | March 15, 2004                         | March 15, 2004               |
|   |                                   |                         |
|   |                                   |                         |
|   | /s/ Martin D. Payson                   |                         | /s/ John L. Vogelstein  |   |
|   | Martin D. Payson                       | John L. Vogelstein           |
|   | Director                               | Director                     |
|   | March 15, 2004                         | March 15, 2004               |

 

42

----

 

**Report of Independent Auditors**

 

Stockholders and Board of Directors

Information Holdings Inc.

 

We have audited the accompanying consolidated balance sheets ofInformation Holdings Inc. and subsidiaries as of December 31, 2003 and 2002 andthe related consolidated statements of operations, stockholders’ equity, andcash flows for each of the three years in the period ended December 31,2003.  These financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audits provide a reasonablebasis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Information Holdings Inc. and subsidiaries at December 31, 2003 and 2002,and the consolidated results of their operations and their cash flows for eachof the three years in the period ended December 31, 2003, in conformity withaccounting principles generally accepted in the United States.

 

As discussed in Note 2 of the Notes to Consolidated FinancialStatements, on January 1, 2002 the Company adopted Statement of FinancialAccounting Standards No. 142, *Goodwill andOther Intangible Assets.*

 

 

**ERNST& YOUNG LLP**

 

 

New York, New York

February 21, 2004

 

F-1

----

**INFORMATIONHOLDINGS INC.**

*CONSOLIDATED BALANCE SHEETS*

*(In thousands, except share data)*

 
|                                                                                                                                                                             |   | **December 31,  2003** |    | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|------------------------|--------|
| ***ASSETS***                                                                                                                                                                     |   |                   |    |                   |   |
|                                                                                                                                                                             |   |                   |    |                   |   |
| *CURRENT ASSETS:*                                                                                                                                                                |   |                   |    |                   |   |
| Cash and  cash equivalents                                                                                                                                                       |   | $                      | 39,693  |                   | $      | 53,910 |   |
| Short-term  investments                                                                                                                                                          |   | 12,271                 |    | 13,056                 |   |
| Restricted  cash                                                                                                                                                                 |   | 3,000                  |    | —                 |   |
| Accounts receivable*(net of allowance for doubtful accounts of $693  and $310, respectively)*                                                                                    |   | 37,650                 |    | 28,852                 |   |
| Prepaid  expenses and other current assets                                                                                                                                       |   | 5,669                  |    | 3,674                  |   |
| Income taxes  receivable                                                                                                                                                         |   | 11,899                 |    | —                 |   |
| Deferred  income taxes                                                                                                                                                           |   | 2,001                  |    | 4,589                  |   |
| Total assets  of discontinued operations                                                                                                                                         |   | —                 |    | 77,453                 |   |
| Total  current assets                                                                                                                                                            |   | 112,183                |    | 181,534                |   |
| Investments                                                                                                                                                                      |   | 83,207                 |    | —                 |   |
| Property and  equipment, net                                                                                                                                                     |   | 4,281                  |    | 5,132                  |   |
| Identified  intangible assets, net                                                                                                                                               |   | 70,248                 |    | 69,005                 |   |
| Goodwill                                                                                                                                                                         |   | 100,871                |    | 70,299                 |   |
| Other assets                                                                                                                                                                     |   | 3,880                  |    | 3,031                  |   |
|                                                                                                                                                                             |   |                   |    |                   |   |
| TOTAL                                                                                                                                                                            |   | $                      | 374,670 |                   | $      | 329,001 |   |
|                                                                                                                                                                             |   |                   |    |                   |   |
| ***LIABILITIES AND STOCKHOLDERS’ EQUITY***                                                                                                                                  |   |                   |    |                   |   |
|                                                                                                                                                                             |   |                   |    |                   |   |
| *CURRENT LIABILITIES:*                                                                                                                                                           |   |                   |    |                   |   |
| Accounts  payable                                                                                                                                                                |   | $                      | 32,073  |                   | $      | 26,744 |   |
| Accrued  expenses                                                                                                                                                                |   | 18,124                 |    | 10,060                 |   |
| Accrued  income taxes                                                                                                                                                            |   | —                 |    | 2,794                  |   |
| Deferred  revenue                                                                                                                                                                |   | 25,753                 |    | 21,067                 |   |
| Total  liabilities of discontinued operations                                                                                                                                    |   | —                 |    | 18,533                 |   |
| Total  current liabilities                                                                                                                                                       |   | 75,950                 |    | 79,198                 |   |
|                                                                                                                                                                             |   |                   |    |                   |   |
| Long-term  deferred income taxes                                                                                                                                                 |   | 16,307                 |    | —                 |   |
| Other  long-term liabilities                                                                                                                                                     |   | *—*               |    | 63                     |   |
| Total  liabilities                                                                                                                                                               |   | 92,257                 |    | 79,261                 |   |
|                                                                                                                                                                             |   |                   |    |                   |   |
| *STOCKHOLDERS’ EQUITY:*                                                                                                                                                     |   |                   |    |                   |   |
| Preferred  stock, $.01 par value; 1,000,000 shares  authorized; none issued                                                                                                      |   | $                      | —  |                   | $      | — |   |
| Common  stock, $.01 par value; authorized 50,000,000 shares;  issued 21,882,604 and 21,815,677 shares, respectively;  outstanding 20,875,404 and 21,433,777 shares, respectively |   | 219                    |    | 218                    |   |
| Additional  paid-in capital                                                                                                                                                      |   | 247,964                |    | 247,026                |   |
| Retained  earnings                                                                                                                                                               |   | 38,304                 |    | 7,097                  |   |
| Treasury  stock, at cost, 1,007,200 and 381,900 shares, respectively                                                                                                             |   | (14,723                | )       | (5,227                 | )      |
| Accumulated  other comprehensive income                                                                                                                                          |   | 10,649                 |    | 626                    |   |
| Total  stockholders’ equity                                                                                                                                                 |   | 282,413                |    | 249,740                |   |
|                                                                                                                                                                             |   |                   |    |                   |   |
| TOTAL                                                                                                                                                                            |   | $                      | 374,670 |                   | $      | 329,001 |   |

 

*See notes to consolidated financial statements.*

 

F-2

----

 

**INFORMATION HOLDINGS INC.**

*CONSOLIDATED STATEMENTS OF OPERATIONS*

*YEARS ENDED DECEMBER 31*

*(In thousands, except per share data)*

 
|                                                             |   | **2003**   |   | **2002**   |   | **2001**   |   |
|------------------------------------------------------------------|--------|------------|--------|------------|--------|------------|--------|
|                                                             |   |       |   |       |   |       |   |
| Revenues                                                         |   | $          | 81,407 |       | $      | 77,952     |   | $ | 41,565 |   |
| Cost of sales                                                    |   | 25,722     |   | 23,215     |   | 11,720     |   |
| Gross profit                                                     |   | 55,685     |   | 54,737     |   | 29,845     |   |
|                                                             |   |       |   |       |   |       |   |
| Operating  expenses:                                             |   |       |   |       |   |       |   |
| Selling,  general and administrative                             |   | 38,223     |   | 35,026     |   | 17,102     |   |
| Depreciation  and amortization                                   |   | 11,192     |   | 10,831     |   | 9,569      |   |
| Impairment  of long-lived assets                                 |   | —     |   | 3,158      |   | 400        |   |
| Total  operating expenses                                        |   | 49,415     |   | 49,015     |   | 27,071     |   |
|                                                             |   |       |   |       |   |       |   |
| Income from  operations                                          |   | 6,270      |   | 5,722      |   | 2,774      |   |
|                                                             |   |       |   |       |   |       |   |
| Other income  (expense):                                         |   |       |   |       |   |       |   |
| Interest  income                                                 |   | 2,080      |   | 971        |   | 3,983      |   |
| Interest  expense                                                |   | (80        | )      | (343       | )      | (330       | )      |
| Early  termination of credit agreement                           |   | (575       | )      | —     |   | —     |   |
| Other income  (expense)                                          |   | 204        |   | 5          |   | (19        | )      |
|                                                             |   |       |   |       |   |       |   |
| Income from  continuing operations before income taxes           |   | 7,899      |   | 6,355      |   | 6,408      |   |
| Provision  for income taxes                                      |   | 2,603      |   | 1,936      |   | 2,789      |   |
|                                                             |   |       |   |       |   |       |   |
| Income from  continuing operations                               |   | 5,296      |   | 4,419      |   | 3,619      |   |
|                                                             |   |       |   |       |   |       |   |
| Income  (loss) from discontinued operations, net of income taxes |   | 25,911     |   | (18,143    | )      | 4,219      |   |
|                                                             |   |       |   |       |   |       |   |
| Net income  (loss)                                               |   | $          | 31,207 |       | $      | (13,724    | )      | $ | 7,838 |   |
|                                                             |   |       |   |       |   |       |   |
| Net income  (loss) per basic and diluted common share:           |   |       |   |       |   |       |   |
| Continuing  operations                                           |   | $          | 0.25   |       | $      | 0.20       |   | $ | 0.17 |   |
| Discontinued  operations                                         |   | $          | 1.23   |       | $      | (0.83      | )      | $ | 0.19 |   |
| Net income  (loss)                                               |   | $          | 1.48   |       | $      | (0.63      | )      | $ | 0.36 |   |
|                                                             |   |       |   |       |   |       |   |
| Average  number of basic common shares outstanding               |   | 21,087,622 |   | 21,734,708 |   | 21,686,149 |   |
| Average  number of diluted common shares outstanding             |   | 21,142,895 |   | 21,830,190 |   | 21,826,359 |   |

 

*See notes to consolidated financial statements*.

 

F-3

----

 

**INFORMATION HOLDINGS INC.**

*CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY*

# *YEARS ENDED DECEMBER 31*

*(In thousands, except share data)*

* *
|                                                                  |   | **Common Stock**      |   | **Additional** |   |                   |   |                     |   | **Accumulated  other** |   |                        |   |      |   |
|-----------------------------------------------------------------------|--------|-----------------------|--------|----------------|--------|------------------------|--------|--------------------------|--------|------------------------|--------|-----------------------------|--------|-----------|--------|
|                                                                  |   | **Number of  shares** |   | **Amount**     |   | **paid-in****capital** |   | **Retained****earnings** |   | **Treasury****stock**  |   | **comprehensive****income** |   | **Total** |   | **Comprehensive****income  (loss)** |   |
|                                                                  |   |                  |   |           |   |                   |   |                     |   |                   |   |                        |   |      |   |   |   |
| Balance at December 31,  2000                                         |   | 21,611,970            |   | $              | 216    |                   | $      | 243,075                  |   | $                      | 12,983 |                        | $      | —    |   | $ | — |   | $ | 256,274 |   |   |   |
|                                                                  |   |                  |   |           |   |                   |   |                     |   |                   |   |                        |   |      |   |   |   |
| Common stock issued to  employees from stock option exercises         |   | 146,082               |   | 2              |   | 2,003                  |   |                     |   |                   |   |                        |   | 2,005     |   |   |   |
| Income tax benefit from  stock option exercises                       |   |                  |   |           |   | 833                    |   |                     |   |                   |   |                        |   | 833       |   |   |   |
| Net income                                                            |   |                  |   |           |   |                   |   | 7,838                    |   |                   |   |                        |   | 7,838     |   | $ | 7,838 |   |
|                                                                  |   |                  |   |           |   |                   |   |                     |   |                   |   |                        |   |      |   |   |   |
| Balance at December 31,  2001                                         |   | 21,758,052            |   | 218            |   | 245,911                |   | 20,821                   |   | —                 |   | —                      |   | 266,950   |   |   |   |
|                                                                  |   |                  |   |           |   |                   |   |                     |   |                   |   |                        |   |      |   |   |   |
| Common stock issued to  employees from stock option exercises         |   | 57,625                |   | —         |   | 786                    |   |                     |   |                   |   |                        |   | 786       |   |   |   |
| Income tax benefit from  stock option exercises                       |   |                  |   |           |   | 329                    |   |                     |   |                   |   |                        |   | 329       |   |   |   |
| Net loss                                                              |   |                  |   |           |   |                   |   | (13,724                  | )      |                   |   |                        |   | (13,724   | )      | $ | (13,724 | ) |
| Purchase of common stock  for treasury                                |   | (381,900              | )      |           |   |                   |   |                     |   | (5,227                 | )      |                        |   | (5,227    | )      |   |   |
| Effect of foreign currency  translation adjustments                   |   |                  |   |           |   |                   |   |                     |   |                   |   | 626                         |   | 626       |   | 626 |   |
|                                                                  |   |                  |   |           |   |                   |   |                     |   |                   |   |                        |   |      |   |   |   |
| Comprehensive income                                                  |   |                  |   |           |   |                   |   |                     |   |                   |   |                        |   |      |   | $ | (13,098 | ) |
|                                                                  |   |                  |   |           |   |                   |   |                     |   |                   |   |                        |   |      |   |   |   |
| Balance at December 31,  2002                                         |   | 21,433,777            |   | 218            |   | 247,026                |   | 7,097                    |   | (5,227                 | )      | 626                         |   | 249,740   |   |   |   |
|                                                                  |   |                  |   |           |   |                   |   |                     |   |                   |   |                        |   |      |   |   |   |
| Common stock issued to  employees from stock option exercises         |   | 66,927                |   | 1              |   | 803                    |   |                     |   |                   |   |                        |   | 804       |   |   |   |
| Income tax benefit from  stock option exercises                       |   |                  |   |           |   | 135                    |   |                     |   |                   |   |                        |   | 135       |   |   |   |
| Net income                                                            |   |                  |   |           |   |                   |   | 31,207                   |   |                   |   |                        |   | 31,207    |   | $ | 31,207 |   |
| Purchase of common stock  for treasury                                |   | (625,300              | )      |           |   |                   |   |                     |   | (9,496                 | )      |                        |   | (9,496    | )      |   |   |
| Net unrealized gains on  available-for-sale investments, net of taxes |   |                  |   |           |   |                   |   |                     |   |                   |   | 169                         |   | 169       |   | 169 |   |
| Unrealized gains on hedges,  net of taxes                             |   |                  |   |           |   |                   |   |                     |   |                   |   | 142                         |   | 142       |   | 142 |   |
| Effect of foreign currency  translation adjustments                   |   |                  |   |           |   |                   |   |                     |   |                   |   | 9,712                       |   | 9,712     |   | 9,712 |   |
|                                                                  |   |                  |   |           |   |                   |   |                     |   |                   |   |                        |   |      |   |   |   |
| Comprehensive income                                                  |   |                  |   |           |   |                   |   |                     |   |                   |   |                        |   |      |   | $ | 41,230 |   |
|                                                                  |   |                  |   |           |   |                   |   |                     |   |                   |   |                        |   |      |   |   |   |
| Balance at December 31,  2003                                         |   | 20,875,404            |   | $              | 219    |                   | $      | 247,964                  |   | $                      | 38,304 |                        | $      | (14,723   | )      | $ | 10,649 |   | $ | 282,413 |   |   |   |

 

*See notes to consolidated financial statements.*

 

F-4

----

 

**INFORMATION HOLDINGS INC.**

*CONSOLIDATED STATEMENTS OF CASH FLOWS*

*YEARS ENDED DECEMBER 31*

*(In thousands)*

 
|                                                                                      |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| CASH FLOWS  FROM OPERATING ACTIVITIES:                                                    |   |     |   |     |   |     |   |
| Net income  (loss)                                                                        |   | $        | 31,207 |     | $      | (13,724  | )      | $ | 7,838 |   |
| Gain on sale  of assets of discontinued operations                                        |   | (26,971  | )      | —   |   | —   |   |
| Loss  (income) from discontinued operations                                               |   | 1,060    |   | 18,143   |   | (4,219   | )      |
| Income from  continuing operations                                                        |   | 5,296    |   | 4,419    |   | 3,619    |   |
|                                                                                      |   |     |   |     |   |     |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |   |     |   |     |   |     |   |
| Depreciation                                                                              |   | 3,945    |   | 4,101    |   | 2,026    |   |
| Amortization  of goodwill and other intangible assets                                     |   | 7,247    |   | 6,730    |   | 7,543    |   |
| Change in  deferred income taxes                                                          |   | (1,608   | )      | (16,146  | )      | (1,964   | )      |
| Impairment  of long-lived assets                                                          |   | —   |   | 3,158    |   | 400      |   |
| Termination  of credit facility                                                           |   | 494      |   | —   |   | —   |   |
| Net  amortization of premiums on investments available for sale                           |   | 967      |   | —   |   | —   |   |
| Other                                                                                     |   | 394      |   | 155      |   | 157      |   |
| Changes in  operating assets and liabilities, net of effect of acquisitions:              |   |     |   |     |   |     |   |
| Increase in  accounts receivable, net                                                     |   | (5,950   | )      | (2,238   | )      | (3,550   | )      |
| Decrease  (increase) in prepaid and other current assets                                  |   | 275      |   | 1,281    |   | (653     | )      |
| Increase  (decrease) in accounts payable and accrued expenses                             |   | 5,938    |   | (2,924   | )      | 955      |   |
| Income tax  benefit from stock options exercised                                          |   | 135      |   | 329      |   | 1,166    |   |
| Net change  in income taxes (receivable) payable                                          |   | (11,989  | )      | 17,136   |   | (5,179   | )      |
| Increase in  deferred revenue                                                             |   | 1,894    |   | 5,533    |   | 3,239    |   |
| Net change  in other assets and liabilities                                               |   | (193     | )      | 169      |   | 152      |   |
| Net Cash  Provided by Continuing Operations                                               |   | 6,845    |   | 21,703   |   | 7,911    |   |
| Net Cash  Provided by Discontinued Operations                                             |   | 1,996    |   | 16,151   |   | 15,771   |   |
| Net Cash  Provided by Operating Activities                                                |   | 8,841    |   | 37,854   |   | 23,682   |   |
|                                                                                      |   |     |   |     |   |     |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES:                                                    |   |     |   |     |   |     |   |
| Proceeds  from sale of discontinued operations, net of transaction costs                  |   | 99,627   |   | —   |   | —   |   |
| Acquisitions  of businesses and equity interests, net of cash acquired                    |   | (22,959  | )      | (14,043  | )      | (58,045  | )      |
| Purchases of  property and equipment                                                      |   | (2,105   | )      | (2,062   | )      | (2,301   | )      |
| Proceeds  from maturities of investments held to maturity                                 |   | 13,056   |   | 4,706    |   | (6,031   | )      |
| Purchase of  investments available for sale                                               |   | (165,584 | )      | —   |   | —   |   |
| Proceeds  from sales and maturities of investments available for sale                     |   | 69,139   |   | —   |   | —   |   |
| Amounts  deposited in escrow funds                                                        |   | (3,000   | )      | —   |   | —   |   |
| Capitalized  software development cost                                                    |   | (1,713   | )      | (451     | )      | —   |   |
| Capitalized  internal-use software                                                        |   | (502     | )      | (344     | )      | (427     | )      |
| Proceeds  from disposal of property and equipment                                         |   | —   |   | 40       |   | 1        |   |
| Net Cash  Used in Continuing Operations                                                   |   | (14,041  | )      | (12,154  | )      | (66,803  | )      |
| Net Cash  Used in Discontinued Operations                                                 |   | (835     | )      | (6,198   | )      | (16,339  | )      |
| Net Cash  Used in Investing Activities                                                    |   | (14,876  | )      | (18,352  | )      | (83,142  | )      |
|                                                                                      |   |     |   |     |   |     |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES:                                                    |   |     |   |     |   |     |   |
| Common stock  issued from stock options exercised                                         |   | 804      |   | 786      |   | 2,005    |   |
| Purchase of  common stock for treasury                                                    |   | (9,496   | )      | (5,227   | )      | —   |   |
| Principal  payments on capital leases                                                     |   | (145     | )      | (134     | )      | —   |   |
| Net Cash  (Used in) Provided by Continuing Operations                                     |   | (8,837   | )      | (4,575   | )      | 2,005    |   |
| Net Cash  Used in Discontinued Operations                                                 |   | (106     | )      | (356     | )      | (308     | )      |
| Net Cash  (Used in) Provided by Financing Activities                                      |   | (8,943   | )      | (4,931   | )      | 1,697    |   |
|                                                                                      |   |     |   |     |   |     |   |
| EFFECT OF  EXCHANGE RATES ON CASH                                                         |   | 761      |   | 727      |   | —   |   |
| (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                                         |   | (14,217  | )      | 15,298   |   | (57,763  | )      |
| CASH AND  CASH EQUIVALENTS, BEGINNING OF YEAR                                             |   | 53,910   |   | 38,612   |   | 96,375   |   |
| CASH AND  CASH EQUIVALENTS, END OF YEAR                                                   |   | $        | 39,693 |     | $      | 53,910   |   | $ | 38,612 |   |
|                                                                                      |   |     |   |     |   |     |   |
| SUPPLEMENTAL  DISCLOSURE:                                                                 |   |     |   |     |   |     |   |
| Income taxes  paid                                                                        |   | $        | 15,603 |     | $      | 560      |   | $ | 8,755 |   |
| Interest  paid                                                                            |   | $        | 96     |     | $      | 162      |   | $ | 191 |   |

 

*See notes to consolidated financial statements.*

 

F-5

----

 

**INFORMATION HOLDINGS INC.**

*NOTES TO CONSOLIDATED FINANCIAL STATEMENTS*

*YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001*

 

***1.  DESCRIPTION OF BUSINESS AND BASIS OFPRESENTATION***

 

Information Holdings Inc. (IHI or the Company) is a leading provider ofintellectual property and regulatory information products, software andservices to professional end-users. IHI’s data businesses, which include MicroPatent, Master Data Center(MDC) and IDRAC, provide a broad array of databases, information products andcomplementary services for intellectual property (IP) and regulatoryprofessionals.  IHI’s software segmentincludes Liquent, a leading provider of life science regulatory intelligenceand publishing solutions.

 

MicroPatent is a leading provider of patent and trademark informationto IP professionals in corporate and legal markets.  MDC provides specialized services and software that enablecustomers to manage IP portfolios. IDRAC provides database services that provide related information onregulatory guidelines in major pharmaceutical markets worldwide.  Liquent provides software solutions andrelated services that enable users throughout an enterprise to collaborate inthe authoring, compilation, distribution, publishing and reuse ofinformation.  The Company markets andsells its products and services to major corporations and intellectual propertylaw firms as well as third party resellers through multiple distributionchannels, including direct sales, primarily in the United States and Europe.

 

During 2003, the Company sold substantially all of the assets andcertain liabilities of its wholly owned subsidiaries Transcender and CRC (SeeNote 4 – *DiscontinuedOperations*).  Accordingly,for financial statement purposes, the assets, liabilities, results ofoperations and cash flows of these components have been segregated from those ofcontinuing operations and are presented in the Company’s financial statementsas discontinued operations for all periods presented herein.

 

On December 1, 2003, the Company acquired the issued share capital ofCDC Solutions Limited (CDC) (See Note 3 – *Acquisitions*) for cash consideration ofapproximately $26.3 million.  CDC is aleading provider of life science regulatory intelligence and publishingsolutions.  In accordance with Statementof Financial Accounting Standards (SFAS) No. 141, *Business Combinations*, theresults of operations of the acquired business have been included in theConsolidated Statement of Operations from the date of acquisition to December31, 2003.  The CDC operations are beingintegrated with the Company’s Liquent unit and are included in the softwaresegment for reporting purposes.

 

The consolidated financial statements include the accounts of IHI andits wholly owned subsidiaries.  Allsignificant intercompany balances and transactions have been eliminated inconsolidation.  All acquisitions havebeen accounted for using the purchase method of accounting, and operatingresults have been included from the respective dates of acquisition.

 

Exchange rate fluctuations for translating the financial statements ofsubsidiaries located outside the United States (U.S.) into U.S. dollars arerecorded in accumulated other comprehensive income in stockholders’equity.  All foreign currency gains andlosses are included in income.

 

F-6

----

 

***2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES***

 

***Use of Estimates***– Thepreparation of the consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Managementbases its estimates on historical experience and on various assumptions, whichare believed to be reasonable under the circumstances.  Actual results could differ from thoseestimates.

 

***Cash Equivalents –***TheCompany considers all highly liquid investments with an original or remainingmaturity of three months or less at the time of purchase to be cashequivalents.  The cost of theseinvestments approximates fair market value because of the short-term maturityof those instruments.

 

***Investments –*** The Companyaccounts for its investments in accordance with Financial AccountingStandards Board (FASB) issued SFAS No. 115, *Accountingfor Certain Investments in Debt and Equity Securities*.  The Company has classified its investmentsas available-for-sale securities.  Thesesecurities are primarily comprised of U.S. government notes, collateralizedmortgage obligations, and corporate notes and bonds.  As of the balance sheet date, securities with remainingmaturities of one year or less are classified as short-term investments, andthose with remaining maturities of longer than one year are classified aslong-term if the Company has the ability and the intent to hold the securitiesmore than one year.  Allavailable-for-sale securities are recorded at fair value and unrealized gainsand losses, net of the related tax effect, are excluded from earnings andreported as a separate component of shareholders’ equity until realized.  Unrealized losses are charged against incomewhen a decline in fair value is determined to be other than temporary.  Dividend and interest income, includingamortization of premiums and discounts arising at acquisition, are included inearnings.  The Company uses the specificidentification method to account for realized gains and losses onavailable-for-sale securities. Purchases and sales are recorded on a trade date basis.  The fair value of the Company’s investmentsis based upon the quoted market price on the last business day of the fiscalyear.

 

***Accounts Receivable***– The Company makes estimates of the collectibility of accounts receivablebased upon historical bad debts, customer credit-worthiness, current economictrends, and changes in customer payment terms and collection trends whenevaluating the adequacy of its allowance for doubtful accounts.  Any change in the assumptions used inanalyzing a specific account receivable may result in additional allowance fordoubtful accounts being recognized in the period in which the changeoccurs.  The changes in the allowancefor doubtful accounts receivable consist of the following (in thousands):

 
|                                                                                                       |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                                       |   |     |   |     |   |     |   |
| Allowance,  beginning of year                                                                              |   | $        | 310    |     | $      | 174      |   | $ | 329 |   |
| Provision  for uncollectible accounts                                                                      |   | 523      |   | 233      |   | 27       |   |
| Write-off of  uncollectible accounts, deductions from reserves and effect of foreign  currency translation |   | (140     | )      | (97      | )      | (182     | )      |
|                                                                                                       |   |     |   |     |   |     |   |
| Allowance,  end of year                                                                                    |   | $        | 693    |     | $      | 310      |   | $ | 174 |   |

 

***Advertising Costs –*** The cost ofadvertising is expensed as incurred.  TheCompany incurred approximately $495,000, $650,000, and $390,000 in advertisingcosts from continuing operations during 2003, 2002 and 2001, respectively.

 

F-7

----

 

***Property andEquipment*** – Property and equipment are stated atcost less accumulated depreciation and amortization.  Depreciation and amortization is computed using the straight-linemethod over the following estimated useful lives:

 
| Furniture  and equipment       |   | 3 - 7 years                           |   |
|--------------------------------|--------|---------------------------------------|--------|
| Computer  equipment            |   | 2 - 5 years                           |   |
| Leasehold  improvements        |   | Shorter of  useful life or lease term |   |
| Property  under capital leases |   | Life of  lease                        |   |

 

Gains orlosses arising from dispositions are reported as income or expense.  Maintenance and repair costs are charged toexpense as incurred, and renewals and improvements that extend the useful livesof assets are capitalized.

 

***Goodwill andIdentified Intangible Assets –*** In June 2001, theFASB issued SFAS No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 142 addresses the accounting andreporting of acquired goodwill and other identified intangible assets.  SFAS No. 142 discontinues amortization ofacquired goodwill and intangible assets with indefinite lives and insteadrequires goodwill and intangible assets not subject to amortization be testedfor impairment on an annual basis or more frequently if events or circumstancesindicate that the carrying amount may be impaired.  Intangible assets subject to amortization are tested forimpairment in accordance with SFAS No. 144, *Accounting for the Impairment of Disposal ofLong-Lived Assets*. Identified intangible assets are amortized using the straight-linemethod over the following estimated useful lives:

 
| Trademarks  and tradenames        |   | 6 – 20 years   |   |
|-----------------------------------|--------|---------------------|--------|
| Customer  lists and relationships |   | 10 – 20  years |   |
| Databases  and content            |   | 10 – 20  years |   |
| Other  identified intangibles     |   | 3 – 20 years   |   |

 

Goodwill consists of the excess of costover the value of identifiable net assets of businesses acquired under thepurchase method of accounting. Through December 31, 2001, goodwill acquiredprior to June 30, 2001 had been amortized on a straight-line basis over theestimated useful lives of 10-20 years.

 

Identified intangible assets represent theportion of purchase price paid in a business acquisition which has beenallocated, based on independent appraisals or management’s estimates, to thevalue of subscriber lists, databases, trademarks and acquired customerrelationships, or similar assets.

 

***Impairment ofGoodwill and Long-Lived Assets –*** In accordancewith SFAS No. 142 and SFAS No. 144, goodwill and long-lived assets to be heldand used by an entity are to be reviewed for impairment whenever facts andcircumstances indicate that the carrying value of long-lived assets may beimpaired and, in the case of goodwill and indefinite lived intangible assets,at least annually.  An evaluation ofrecoverability is performed by comparing the carrying value of the assets tothe projected future cash flows in addition to other quantitative andqualitative analyses.  Long-lived assetsinclude property and equipment.  If theCompany determines, based on such measures, that the carrying amount isimpaired, the assets will be written down to fair value. Fair value isdetermined based on discounted cash flows or management’s estimates, dependingon the nature of the assets.  If it isdetermined that the carrying value of such assets may not be recoverable, theCompany recognizes an impairment loss by a charge against current operations.

 

F-8

----

 

***Internal-UseSoftware***– According to the provisions of theAmerican Institute of Certified Public Accountants (AICPA) Statement ofPosition (SOP) 98-1, *Accounting for theCosts of Software Developed or Obtained for Internal Use*, certaincosts incurred in the planning and development stage of internal use computersoftware projects have been expensed, while costs incurred during theapplication development stage, including the purchase of software required todevelop certain projects, have been capitalized.  Capitalized software costs are amortized over estimated usefullives of three to five years.  Total netcapitalized costs as of December 31, 2003 and 2002 were $1,526,000 and$1,538,000, respectively, and are included in Other assets. Accumulateddepreciation related to internal-use software was $1,593,000 and $991,000,respectively, at December 31, 2003 and 2002. These costs were incurred in the development of our proprietary softwareused in connection with our long-term client relationships.

 

***Cost of Computer******Software to Be Sold***–According to the provisions of SFAS No. 86, *Accountingfor the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed*,certain costs incurred to develop computer software to be sold as a separateproduct are capitalized once technological feasibility has been established.  Capitalization of costs ceases when theproduct is available for general release to customers.  Upon release, purchased computer softwarecosts are amortized using the straight-line method over an estimated usefullife of three years.  Total net capitalizedcosts as of December 31, 2003 and 2002 were $1,940,000 and $423,000,respectively, and are included in Other assets.

 

***Treasury Stock –***Treasury stockpurchases are accounted for under the cost method whereby the entire cost ofthe acquired stock is recorded as treasury stock.  Gains and losses on the subsequent reissuance of shares, if any,will be credited or charged to capital in excess of par value using theaverage-cost method.

 

***Comprehensive Income***– Comprehensive income is calculated in accordance with SFAS No.130, *Reporting Comprehensive Income*.  SFAS No. 130 requires that unrealized gains(losses) on the Company’s available-for-sale securities, hedges and foreigncurrency translation adjustments be included in accumulated other comprehensiveincome as a component of stockholders’ equity.

 

***Foreign CurrencyTranslation*****– The financialstatements of the Company’s foreign subsidiaries are translated from the localcurrency into U.S. dollars.  Assets andliabilities are translated using exchange rates in effect at the balance sheetdate, except certain accounts of subsidiaries whose functional currency is theU.S. dollar, and translation adjustments are accumulated in a separatecomponent of stockholders’ equity. Revenue and expenses are translated at average monthly exchange rates,and translation adjustments are charged and credited to income.

 

***Research andDevelopment Costs****–*****Costs related toresearch, design and development of products are charged to operations whenincurred and are included in Selling, general and administrative expenses.  The amounts incurred in 2003, 2002 and 2001related to continuing operations were approximately $4,800,000, $4,200,000 and$1,400,000, respectively.

 

***Revenue Recognition***

 

The Company derives its revenues primarily from thefollowing sources:

 

*Subscription Revenue*– Revenue from subscriptions to the Company’s information services isrecognized in income as earned over the subscription period.  Costs in connection with the procurement ofsubscriptions are charged to expense as incurred.

 

*IP Management Services* – Revenuesfrom patent annuity and trademark renewal payment services are recognized inthe period when the relatedannuity payments are made to various regulatory agencies.

 

F-9

----

 

*IP TransactionalServices –*When not governed by a subscription agreement, sales of patentdocuments, patent file histories, patent searches, patent downloads andtrademark searches are recorded as revenue upon delivery of the product to thecustomer.  Delivery generally occurswhen the product is delivered to a common carrier, sent by facsimile, deliveredvia e-mail or downloaded electronically by the customer.

 

*Software andRelated Services*– The Companyrecognizes revenue in accordance with AICPA Statement of Position 97-2, *Software Revenue Recognition*, asamended.  The AICPA and its SoftwareRevenue Recognition Task Force continue to issue interpretations and guidancefor applying the relevant standards to a wide range of sales contract terms andbusiness arrangements that are prevalent in the software industry.

 

The Company recognizes revenue from thesale of software licenses when persuasive evidence of an arrangement exists,the product has been delivered, the fees are fixed or determinable andcollection of the resulting receivable is probable.  Delivery generally occurs when the product is delivered to acommon carrier or made available to the customer for electronic download.  At the time of the transaction, theCompany assesses whether the fee associated with its revenue transactions isfixed or determinable and whether or not collection is probable.  The Company assesses whether the fee isfixed or determinable based on the payment terms associated with thetransaction.  The Company assessescollection based on a number of factors, including past transaction historywith the customer and the credit-worthiness of the customer.

 

For all sales, either a binding purchaseorder or signed license agreement is used as evidence of an arrangement.  Sales through the Company’s distributors areevidenced by a master agreement governing the relationship together withbinding purchase orders on a transaction-by-transaction basis.  Revenue from software licenses to partiesother than end-users, including reseller, third-party integrator and *OEM* arrangements with after-sale supportrequirements, is recorded only when software has been placed with an end-userand no further obligations exist. Customer acceptance terms, which the Companyconsiders to be perfunctory, lapse after a short period (generally 30 to 90days) if the customer has not formally rejected the software.

 

For agreements with multiple elements, such as license, maintenance,training and consulting services, the Company allocates revenue to eachcomponent of the arrangement based upon its fair value as determined by vendorspecific objective evidence (VSOE). VSOE of fair value for all elements of an arrangement is based upon thenormal pricing and discounting practices for those products and services whensold separately.  For software licenseupdates and product support services, VSOE is additionally measured by therenewal rate offered to the customer. Revenue is deferred for any undelivered elements and recognized when theproduct is delivered or over the period in which the service is performed, inaccordance with the revenue recognition policy for such element.  If the Company cannot objectively determinethe fair value of any undelivered element included in bundled software andservice arrangements, revenue is deferred until all elements are delivered andall services have been performed, or until fair value can objectively bedetermined for any remaining undelivered elements.  When the fair value of a delivered element has not beenestablished, the residual method to record revenue is used if the fair value ofall undelivered elements is determinable. Under the residual method, the fairvalue of the undelivered elements is deferred and the remaining portion of thearrangement fee is allocated to the delivered elements and is recognized asrevenue.

 

F-10

----

 

*Support Services Revenue *– Revenueis derived from (i) maintenance and post-support contracts, (ii) trainingservices and (iii) consulting services. Maintenance and post contract customer support includes ongoing customersupport, bug fixes and rights to upgrades on a when-and-if availablebasis.  Revenue from maintenance andpost-support contracts is recognized ratably over the term of the servicecontract, which is typically 12 months. Generally payments for maintenance fees are received in advance and arenon-refundable.  Revenue from training andconsulting services is generally recognized when the services are performed. Consulting revenue includes implementationservices performedprimarily on a time-and-materials basis under separate service arrangementsrelated to the installation of Liquent software.  Management does not consider the installation services essentialbecause the services are routine in nature and include implementation planning,training of customer personnel, building simple interfaces and running testdata.  Also, customers have access tothird parties who can provide such services. The remainder of consultingrevenues is derived primarily from project management for publishing new drugapplications and general information technology consulting.  Revenue is recognized for these services ona time-and-materials basis as services are performed.

 

Also, theSecurities and Exchange Commission (SEC) has issued Staff Accounting BulletinsNo. 101 and 104, *Revenue Recognition inFinancial Statements*, which provides guidance related to revenuerecognition based on interpretations and practices followed by the SEC.  Future interpretations of existingaccounting standards or changes in the Company’s business practices couldresult in future changes in the Company’s revenue accounting policies thatcould have a material adverse effect on its business, financial condition andresults of operations.

 

***Deferred Revenue***– Deferred revenueincludes (i) payments received for products not yet delivered, (ii) advancepayments on contract revenues, (iii) payments received from subscriptions and(iv) that portion of separately sold software support agreements that has notyet been recognized as revenue.  Inconnection with the acquisition of companies, the Company records deferredrevenue at the cost to fulfill plus an applicable gross profit margin, ratherthan based on the subscription and advanced payments received.

 

***Income Taxes*** – Incometaxes are calculated in accordance with SFAS No. 109, *Accounting for Income Taxes*.  SFAS No. 109 requires the asset andliability method of accounting for income taxes. Deferred tax assets and liabilitiesare determined based upon differences between financial reporting and tax basesof assets and liabilities and are measured using the enacted tax rates and lawsthat are expected to be in effect when the differences are expected to berecovered or settled. Management provides a valuation allowance against the netdeferred tax assets for amounts that are not considered more likely than not tobe realized.

 

***Stock-BasedCompensation***– In December 2002, the FASB issuedSFAS No. 148, *Accounting for Stock-BasedCompensation – Transition and Disclosure*, which amends SFAS No. 123,*Accounting for Stock-Based Compensation*.  SFAS No. 148 provides alternative methods oftransition for voluntary change to the fair value method of accounting forstock-based compensation.  In addition,SFAS No. 148 requires more prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results.  The Company adopted the annual and interimdisclosure requirements of SFAS No. 148 as of December 2002.

 

The Company grants stock options for a fixed number of shares toemployees and directors with an exercise price equal to the fair value of theshares at the date of grant.  TheCompany accounts for its stock option grants under the provisions of AccountingPrinciples Board (APB) Opinion No. 25, *Accountingfor Stock Issued to Employees,*which utilizes the intrinsic valuemethod.  Since stock options are grantedby the Company with exercise prices equal to the market price of the underlyingstock at the date of grant, no compensation expense has been recognized in theCompany’s Consolidated Statements of Operations.

 

F-11

----

 

Had compensation cost for the Company’s stock option plan beenrecognized based upon the fair value of the options at the dates of grantconsistent with the requirements of SFAS No. 123, as amended by SFAS No. 148,the Company’s net income (loss) and earnings (loss) per share would have beenreduced (increased) to the pro forma amounts indicated below (in thousands,except per share data):

 
|                                                                                                                                   |   | **Years Ended December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                                                                   |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                                                                                                   |   |                         |   |   |   |   |   |
| Net income  (loss) as reported                                                                                                         |   | $                            | 31,207 |   | $ | (13,724 | ) | $ | 7,838 |   |
| Deduct:  Total stock-based employee expense  determined under fair value based method for all awards, net of related tax  effects |   | 6,133                        |   | 3,806 |   | 1,725 |   |
| Pro forma  net income (loss)                                                                                                           |   | $                            | 25,074 |   | $ | (17,530 | ) | $ | 6,113 |   |
|                                                                                                                                   |   |                         |   |   |   |   |   |
| Basic and diluted  earnings (loss) per common share:                                                                                   |   |                         |   |   |   |   |   |
| As reported                                                                                                                            |   | $                            | 1.48   |   | $ | (0.63 | ) | $ | 0.36 |   |
| Pro forma                                                                                                                              |   | $                            | 1.19   |   | $ | (0.81 | ) | $ | 0.28 |   |

 

The effects on pro forma net income (loss) and earnings (loss) pershare of expensing the estimated fair value of stock options are notnecessarily representative of the effects on reported net income (loss) forfuture years due to such factors as the vesting period of the stock options andthe potential for issuance of additional stock options in future years.  For purposes of proforma disclosures, theestimated fair value of options granted is amortized to expense over the optionvesting period.

 

The fair value of each option grant was estimated on the date of grantusing the Black-Scholes option pricing model with the followingweighted-average assumptions used:

 
|                                    |   | **Years Ended December 31,** |   |
|-----------------------------------------|--------|------------------------------|--------|
|                                    |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                    |   |                         |   |   |   |   |   |
| Risk free  interest rate                |   | 3.1                          | %      | 2.5 | % | 4.7 | % |
| Expected  life of option grants (years) |   | 5                            |   | 5 |   | 5 |   |
| Expected  volatility                    |   | 64.31                        | %      | 67.02 | % | 66.40 | % |
| Dividend yield                          |   | 0                            |   | 0 |   | 0 |   |
| Weighted  average fair value            |   | $                            | 10.28  |   | $ | 16.14 |   | $ | 13.76 |   |
|                                         |        |                              |        |  |  |  |  |  |  |  |

 

***Forward Contracts***–****SFASNo. 133, *Accountingfor Derivative Instruments and Hedging Activities,* requires that allderivative instruments be recorded on the balance sheet at their fair value**. **A subsidiary of the Companyroutinely enters into forward contracts to acquire various internationalcurrencies in an effort to hedge foreign currency transaction exposures of itsoperations.  Generally, this subsidiary purchasesforward contracts over periods not to exceed six months.  For forward exchange contracts designated asa fair value hedge, the gain or loss is recognized in earnings in the period ofchange together with the offsetting loss or gain on the hedged item attributedto the risk being hedged.  For forwardexchange contracts designated as a cash flow hedge, the effective portion ofthe derivative’s gain or loss is initially reported as a component ofaccumulated other comprehensive income (loss) and subsequently reclassifiedinto earnings when the hedged exposure affects earnings.  The ineffective portion of the gain or lossis reported in earnings immediately.  Asa matter of policy, the Company does not speculate in financial markets and,therefore, the Company does not hold financial instruments for tradingpurposes.  The Company hasestablished strict counterparty credit guidelines and enters into transactionsonly with financial institutions of investment grade or better.  In addition, the Company routinely monitors counterpartyexposures and reviews any downgrade in credit rating immediately.

 

F-12

----

 

***Computation ofEarnings (Loss) Per Common Share*** – Basicearnings (loss) per common share is computed based on the weighted averagenumber of outstanding common shares during the respective period.  Diluted earnings (loss) per common share iscomputed based on the weighted average number of outstanding common shares andthe effect of all dilutive potential common shares, such as stock options.

 

***Reclassification***– Certainprior year amounts have been reclassified for comparability purposes.

 

***Impact of RecentAccounting Pronouncements***– In August 2001, the FASB issued SFASNo. 144, *Accounting for the Impairment orDisposal of Long-Lived Assets.* This standard supercedes SFAS No. 121, *Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to BeDisposed Of.*  The standardretains the previously existing accounting requirements related to therecognition and measurement of the impairment of long-lived assets to be heldand used while expanding the measurement requirements of long-lived assets tobe disposed of by sale to include discontinued operations.  It also expands on the previously existingreporting requirements for discontinued operations to include a component of anentity that either has been disposed of or is classified as held for sale.  The Company adopted SFAS No. 144 effectiveJanuary 1, 2002.  The adoption of SFASNo. 144 did not have a significant impact on the Company’s consolidatedfinancial position or results of operations.

 

In July 2002, the FASB issued SFAS No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*.  This standard nullifies the guidance ofEmerging Issues Task Force (EITF) Issue No. 94-3, *Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring)*. Under EITF Issue No.94-3, an entity recognized a liability for an exit cost on the date that theentity committed itself to an exit plan. In SFAS No. 146, the FASB acknowledges that an entity’s commitment to aplan does not, by itself, create a present obligation to other parties that meetsthe definition of a liability and requires that a liability for a cost that isassociated with an exit or disposal activity be recognized when the liabilityis incurred.  It also establishes thatfair value is the objective for the initial measurement of the liability. Thescope of SFAS No. 146 also includes (1) costs related to terminating a contractthat is not a capital lease, (2) termination benefits that employees who areinvoluntarily terminated receive under the terms of a one-time benefitarrangement that is not an ongoing benefit arrangement or an individualdeferred compensation contract and (3) costs to consolidate facilities orrelocate employees.  SFAS No. 146 isrequired to be effective for exit or disposal activities initiated after December31, 2002.  The adoption of SFAS No. 146did not have a significant impact on the Company’s consolidated financialposition or results of operations.  See Note 13 – *Commitments and Contingencies* forfurther discussion regarding future commitments related to the sale ofTranscender.

 

In November 2002, the EITF reached a consensus on Issue No. 00-21(Issue 00-21), *Revenue Arrangements with**Multiple Deliverables*. Issue 00-21provides guidance on how to account for arrangements that involve the deliveryor performance of multiple products, services and/or rights to use assets.  The provisions of Issue 00-21 applies torevenue arrangements entered into in fiscal periods beginning after June 15,2003.  The adoption of this new issuedid not have a significant impact on the Company’s financial position orresults of operations.

 

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN**46*),Consolidation of Variable Interest Entities*.  FIN 46 requires that if an entity has acontrolling financial interest in a variable interest entity, the assets,liabilities and results of activities of the variable interest entity should beincluded in the consolidated financial statements of the entity.  The Company does not have any variableinterest entities.

 

F-13

----

 

In April 2003, the FASB issued SFAS No. 149, *Amendment of Statement 133 on Derivative Instruments and HedgingActivities*.  SFAS No. 149 isintended to result in more consistent reporting of contracts as eitherfreestanding derivative instruments subject to SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*, in its entirety, or as hybrid instruments with debt hostcontracts and embedded derivative features. In addition, SFAS No. 149 clarifiesthe definition of a derivative by providing guidance on the meaning of initialnet investments related to derivatives. SFAS No. 149 is effective for contracts entered into or modified afterJune 30, 2003.  The adoption of SFAS No.149 had no impact on the Company’s consolidated financial statements.

 

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity*. SFAS No. 150 establishes standards for classifying and measuring asliabilities certain financial instruments that embody obligations of the issuerand have characteristics of both liabilities and equity.  SFAS No. 150 represents a significant changein practice in the accounting for a number of financial instruments, includingmandatorily redeemable equity instruments and certain equity derivatives thatfrequently are used in connection with share repurchase programs.  The Company does not use such instruments inits share repurchase program.  SFAS No.150 is effective for all financial instruments created or modified after May31, 2003, and to other instruments as of September 1, 2003. The adoption ofthis standard had no impact on the Company’s consolidated financial statements.

 

In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No.104, *RevenueRecognition in Financial Statements*, which codifies, revises andrescinds certain sections of SAB No. 101, *Revenue Recognition in Financial Statements*,in order to make this interpretive guidance consistent with currentauthoritative accounting and auditing guidance and SEC rules andregulations.  The changes noted in SABNo. 104 did not have a material effect on the Company’s consolidated financialposition or results of operations.

 

***3.  ACQUISITIONS***

 

On December 1, 2003, the Company acquired the issued share capital (theShares) of CDC Solutions Limited (CDC), a private company based in the UnitedKingdom for cash consideration of approximately $26,287,000 (CashConsideration).  CDC is a leadingprovider of life science regulatory intelligence and publishing solutions.  The Cash Consideration includesapproximately $22,126,000 of initial consideration, approximately $3,836,000currently held in escrow for estimated guaranteed earnouts as defined andcalculated in accordance with the underlying Share Purchase Agreement (SPA),and approximately $325,000 of closing costs associated with thetransaction.  Pursuant to the SPA, thereare also potential additional payments that are dependent on the futureoperating results of Liquent and CDC on a combined basis (See Note 13 – *Commitmentsand Contingencies*).  Based oncalculations outlined in the SPA, the Company has recorded additional estimatedfurther consideration costs of approximately $1,500,000, which are expected tobe paid during the second quarter of 2004.

 

The purchase price of CDC was preliminarily allocated to net tangibleliabilities acquired of $151,000, identified intangible assets of $3,443,000and non-deductible goodwill of $24,028,000. The Company also recorded a deferred income tax liability as a result ofthe gross up of acquired intangible assets in the amount of $1,033,000.  Identified intangible assets are currentlybeing amortized over estimated useful lives of six years.  The Company is currently in the process ofobtaining a valuation regarding the purchase price allocation and determinationof the useful lives of the assets acquired. The Company will make any required adjustments to the fair values anduseful lives of identified intangible assets.

 

F-14

----

 

Concurrentwith the acquisition, the Company documented a plan to integrate the CDCbusiness with its Liquent business.  Theintegration plan includes the elimination of certain duplicate positions withinthe acquired operation and the abandonment of certain property no longerneeded.  All affected employees werenotified at the time of acquisition and terminations are expected to becompleted during the first quarter of 2004. Future commitments associated with the property leases, which extendthrough 2005, are included in noncancelable minimum lease payments as disclosedin Note 13 – *Commitments and Contingencies*.  Approximately $669,000 of costs related toseverance and remaining lease costs have been accrued in purchase accounting asof the acquisition date.  Severance andintegration costs of $749,000 have been charged to expense at Liquent in 2003related to the CDC integration. Approximately $177,000 of transition costs were expended in cash during2003.

 

On May 9, 2002, the Company acquired substantially all of the assets ofAurigin Systems, Inc. (Aurigin) for cash consideration of approximately$14,043,000 including the assumption of certain liabilities.  Aurigin provides intellectual propertymanagement systems used primarily by corporations to search, analyze, annotateand group patent information, as well as proprietary corporate data.  The purchase price was allocated to nettangible liabilities of $1,553,000, identified intangible assets of $1,600,000and tax-deductible goodwill of $13,996,000. The Company has a valuation of the fair value of the identifiedintangible assets and their estimated useful lives (six years).

 

On December 20, 2001, the Company completed a tender offer and acquiredall of the outstanding common shares of Liquent, Inc. (Liquent) for cashconsideration equal to $2.27 per share, or approximately $41,100,000.  Liquent is a leading provider of softwareand service solutions that aid in content assembly and publishing for the lifesciences industry.  The purchase pricewas allocated to net tangible assets of $6,026,000, identified intangibleassets of $6,790,000 and non-deductible goodwill of $25,875,000.  The Company has a valuation of the fairvalue of the identified intangible assets and their estimated useful lives (sixyears).  The Company also recorded adeferred income tax asset as a result of Liquent’s net operating losscarryforwards of $5,010,000, offset by a deferred income tax liability as aresult of the gross up of acquired intangible assets in the amount of$2,565,000.  During 2002, the Companyrecorded certain adjustments to the preliminary purchase accounting estimatesrecorded in 2001.  These adjustments,reflecting an increase in assumed liabilities, resulted in an increase togoodwill of $900,000 in 2002.

 

On March 29, 2001, the Company acquired the IDRAC business of IMSHealth and entered into multiple perpetual agreements with IMS Health andcertain affiliates, for aggregate cash consideration of approximately$20,400,000.  IDRAC, based in France, isa leading provider to pharmaceutical companies worldwide of regulatory andintellectual property information related to pharmaceutical productregistrations.  The purchase price wasallocated to net liabilities assumed of $2,974,000, identified intangibleassets of $15,000,000 and goodwill of $13,609,000. The Company also recorded adeferred income tax liability as a result of the gross up of acquiredintangible assets in the amount of $5,256,000. The Company has a valuation of the fair value of the identifiedintangible assets and their estimated useful lives (10 years).

 

All acquisitions have been accounted for using the purchase method ofaccounting and, accordingly, the results of their operations have been includedin the Company’s results of operations from their respective dates ofacquisition.

 

F-15

----

 

The following unaudited pro forma information presents the results ofoperations of the Company as if the 2003 acquisition of CDC had taken place onJanuary 1, 2002, and as if the 2002 acquisition of Aurigin, and the 2001acquisitions of IDRAC and Liquent had taken place as of January 1, 2001 (inthousands, except per share data):

 
|                                              |   | **Years Ended December 31,** |   |
|---------------------------------------------------|--------|------------------------------|--------|
|                                              |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                              |   |                         |   |   |   |   |   |
| Revenues                                          |   | $                            | 91,430 |   | $ | 91,250 |   | $ | 71,579 |   |
| Net income  (loss)                                |   | $                            | 1,858  |   | $ | 1,198 |   | $ | (9,055 | ) |
| Basic and  diluted income (loss) per common share |   | $                            | 0.09   |   | $ | 0.06 |   | $ | (0.42 | ) |

 

These pro forma results of operations have been prepared forcomparative purposes only and do not purport to be indicative of the operatingresults that would have occurred had the acquisitions been consummated as ofthe above date, nor are they necessarily indicative of future operatingresults.

 

***4.  DISCONTINUED OPERATIONS***

 

On December 22, 2003, the Company entered into an Asset PurchaseAgreement (the APA) to sell substantially all of the assets and certainliabilities of Transcender LLC n/k/a Dalton I LLC (Transcender) to Self TestSoftware, Inc., a subsidiary of Kaplan, Inc. (the Transcender Buyer).  Under the terms of the APA, the transactionbecame effective on December 31, 2003 with the Company receiving cashconsideration of $10 million, subject to a post-closing adjustment, pursuant towhich the Company expects to receive an additional $300,000 in cash.  The Company recognized a loss of $3.8million within discontinued operations, net of income tax benefits associatedwith the transaction of $2.4 million. Prior to sale, Transcender was included as part of the software segment(See Note 15 – *Segment Information*).

 

Pursuant to an Interim Transition Services Agreement (the TSA) betweenthe Company and the Transcender Buyer, the Company has agreed to act as aservice provider to the Transcender Buyer for the period from December 31, 2003to May 31, 2004 (the Transition Period). During the Transition Period the Transcender Buyer will reimburse theCompany for any payments the Company makes with respect to salaries and relatedcosts paid to Transcender employees, and for payments made with respect tocertain leases required to be maintained in order to operate thefacilities.  The purchaser isreimbursing the Company in full for all real estate costs through March 31,2004 and for a portion of real estate costs from April 1, 2004 through May 31,2004 (See Note 13 – *Commitments and Contingencies*regardingfuture obligations related to the Transcender sale).

 

On February 27, 2003, the Company entered into a definitive purchaseagreement (the Purchase Agreement) to sell substantially all of the assets andcertain liabilities of its wholly owned subsidiaries CRC Press LLC (CRC Press),CRC Press (U.K.) LLC and Parthenon Publishing Group, Inc. (together, CRC), toCRC Press I LLC and RoutledgeNo. 2 Limited, both wholly owned subsidiaries of Taylor & Francis Group plc(together, the CRC Buyer).  Thetransaction was completed on April 8, 2003. During 2003, the Company received net proceeds of approximately $90million, representing the cash consideration for the assets sold less dealrelated expenses and an adjustment made based on the closing balance sheet ofCRC in accordance with the Purchase Agreement. Approximately $3 million of the proceeds is being held in escrow relatedto representations and warranties contained in the Purchase Agreement.  These proceeds will become available to theCompany in April 2004 unless the CRC Buyer asserts claims under the PurchaseAgreement.  All proceeds held in escrowwill remain classified as restricted cash on the accompanying ConsolidatedBalance Sheet until made available to the Company.  The Company recognized a gain of $30.8 million, net of incometaxes associated with the transaction of $16.0 million, which was recorded aspart of discontinued operations.

 

F-16

----

 

CRC comprised the entirety of the Company’s former scientific andtechnology information (STI) segment. Subsequent to the date of sale, the Company no longer has operations inthe STI segment (See Note 15 – *SegmentInformation*).

 

In accordance with SFASNo. 144, *Accounting for the Impairment orDisposal of Long-Lived Assets*, all assets, liabilities, results ofoperations and cash flows of Transcender and CRC have been segregated fromthose of continuing operations and are presented in the Company’s December 31,2003 financial statements as discontinued operations.  Additionally, the Company’s financial statements have beenreclassified to reflect Transcender and CRC as discontinued operations for allprior periods presented herein (See Note 15 - *SegmentInformation*).

 

Summary operating results for the discontinued operations follow:

 
|                                                                     |   | **Years Ended December 31,** |   |
|--------------------------------------------------------------------------|--------|------------------------------|--------|
| **(In  thousands)**                                                      |   | *** 2003**                   |   | **2002** |   | **2001** |   |
|                                                                     |   |                         |   |   |   |   |   |
| Revenues                                                                 |   | $                            | 19,562 |   | $ | 63,815 |   | $ | 63,771 |   |
|                                                                     |   |                         |   |   |   |   |   |
| (Loss)  income from discontinued operations before income taxes          |   | (1,627                       | )      | (29,306 | ) | 6,741 |   |
| (Benefit  from) income taxes on discontinued operations                  |   | (567                         | )      | (11,163 | ) | 2,522 |   |
| Gain on sale  of discontinued operations, net of income taxes of $13,676 |   | 26,971                       |   | — |   | — |   |
| Income  (loss) from discontinued operations, net of income taxes         |   | $                            | 25,911 |   | $ | (18,143 | ) | $ | 4,219 |   |

 

----

* Reflects results of CRC through disposal on April 8, 2003 and resultsof Transcender through disposal effective December 31, 2003.

 

During 2002, the Company recorded a pre-tax impairment charge ofapproximately $36.2 million related to the carrying value of goodwill and otherintangible assets in its discontinued Transcender unit.  Operating profits and cash flows ofTranscender had been adversely impacted by difficult market conditions in theoverall IT market.

 

Summarized unaudited balance sheet information for discontinuedoperations as included within the accompanying Consolidated Balance Sheet atDecember 31, 2002 consists of the following (in thousands):

 
| Assets:                                       |   |   |   |
|-----------------------------------------------|--------|--------|--------|
| Current  assets                               |   | $      | 22,137 |   |
| Property and  equipment, net                  |   | 2,814  |   |
| Identified  intangible assets, net            |   | 31,434 |   |
| Goodwill                                      |   | 18,668 |   |
| Other  long-term assets                       |   | 2,400  |   |
| Total assets  of discontinued operations      |   | $      | 77,453 |   |
|                                          |   |   |   |
| Liabilities:                                  |   |   |   |
| Current  liabilities                          |   | $      | 15,109 |   |
| Long-term  liabilities                        |   | 3,424  |   |
| Total  liabilities of discontinued operations |   | $      | 18,533 |   |

 

F-17

----

 

**5**.  ***INVESTMENTS***

 

During August 2003, the Company entered into a taxable fixed incomeportfolio program (the Investment Program) in order to increase investmentreturns on cash not immediately needed in operations.  The portfolio is held in custody by a major financial institutionand, in accordance with guidelines set forth by the Company, consists of U.Sdollar denominated taxable fixed income securities with maximum effectivematurities of three years.  The Companyaccounts for its investments in accordance with SFAS No. 115, *Accounting for Certain Investments in Debt and EquitySecurities*.  As of December 31,2003, the Company classified its investments as available-for-salesecurities.  These securities areprimarily comprised of U.S. government notes, collateralized mortgageobligations, and corporate notes and bonds. Prior to August 2003, the Company invested primarily in short-termcommercial paper classified as investments held to maturity.

 

The following table summarizes the Company’s investments:

 
|                                                      |   | **December 31, 2003** |   |
|-----------------------------------------------------------|--------|-----------------------|--------|
| **(In  thousands)**                                       |   | **Amortized****Cost** |   | **GrossUnrealizedGains** |   | **GrossUnrealizedLosses** |   | **EstimatedFairValue** |   | **Maturities****In Months** |   |
| *Available-for-sale securities**(carried at fair value):* |   |                  |   |   |   |   |   |   |   |   |   |
| U.S.  government notes                                    |   | $                     | 27,134 |   | $ | 64 |   | $ | (2 | ) | $ | 27,196 |   | 10-35 |   |
| Collateralized  mortgage obligations                      |   | 6,086                 |   | 65 |   | — |   | 6,151 |   | 13-23 |   |
| Corporate  notes and bonds                                |   | 61,986                |   | 206 |   | (61 | ) | 62,131 |   | 4-34 |   |
|                                                      |   |                  |   |   |   |   |   |   |   |   |   |
| Total                                                     |   | $                     | 95,206 |   | $ | 335 |   | $ | (63 | ) | $ | 95,478 |   |   |   |
|                                                      |   |                  |   |   |   |   |   |   |   |   |   |
| Reported as:                                              |   |                  |   |   |   |   |   |   |   |   |   |
| Short-term  investments                                   |   |                  |   |   |   |   |   | $ | 12,271 |   |   |   |
| Investments                                               |   |                  |   |   |   |   |   | 83,207 |   |   |   |
|                                                      |   |                  |   |   |   |   |   |   |   |   |   |
| Total                                                     |   |                  |   |   |   |   |   | $ | 95,478 |   |   |   |

 

F-18

----

 
|                                                        |   | **December 31, 2002** |   |
|-------------------------------------------------------------|--------|-----------------------|--------|
| **(In  thousands)**                                         |   | **Amortized****Cost** |   | **GrossUnrealizedGains** | ** ** | **GrossUnrealizedLosses** | ** ** | **EstimatedFairValue** | ** ** | **Maturities****In Months** | ** ** |
| *Held-to-maturity securities**(carried at amortized cost):* |   |                  |   |   |   |   |   |   |   |   |   |
| Commercial  paper                                           |   | $                     | 12,556 |   | $ | — |   | $ | — |   | $ | 12,556 |   | 3-6 |   |
| Corporate  bonds                                            |   | 500                   |   | — |   | — |   | 500 |   | 6 |   |
|                                                        |   |                  |   |   |   |   |   |   |   |   |   |
| Total                                                       |   | $                     | 13,056 |   | $ | — |   | $ | — |   | $ | 13,056 |   |   |   |
|                                                        |   |                  |   |   |   |   |   |   |   |   |   |
| Reported as:                                                |   |                  |   |   |   |   |   |   |   |   |   |
| Short-term  investments                                     |   |                  |   |   |   |   |   | $ | 13,056 |   |   |   |
| Investments                                                 |   |                  |   |   |   |   |   | — |   |   |   |
|                                                        |   |                  |   |   |   |   |   |   |   |   |   |
| Total                                                       |   |                  |   |   |   |   |   | $ | 13,056 |   |   |   |

 

Proceeds from sales of available-for-salesecurities were approximately $64.1 million for the year ended December31, 2003.  Gross realized gains from the sales were $124,000 in 2003, andgross realized losses were not material in 2003.  There were no gross realized gains or losses in 2002 or2001.  The Company uses the specificidentification method to account for gains and losses on available-for-salesecurities.

 

As of December 31, 2003, the aggregate fairvalue of available-for-sale securities yielding unrealized losses amounted toapproximately $23,883,000.  All suchsecurities have been in unrealized loss positions for periods of less thantwelve months.  Due to the short-termnature of unrealized loss positions, no unrealized losses are considered to beother than temporary.

 

During August 2003, securities with a net carrying amount of approximately $12.4 million weretransferred from the held-to-maturity classification to securitiesavailable-for-sale.  The grossunrealized loss related to the transferred securities amounted to approximately$97,000.

 

***6.  PROPERTY AND EQUIPMENT***

 

Property and equipment (at cost) consisted of the following (inthousands):

 
|                                            |   | **December 31,  2003** |   | **December 31,  2002** |   |
|-------------------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                            |   |                   |   |                   |   |
| Furniture and equipment                         |   | $                      | 1,303  |                   | $      | 1,290 |   |
| Computer  equipment                             |   | 12,157                 |   | 10,024                 |   |
| Leasehold  improvements                         |   | 1,024                  |   | 1,147                  |   |
| Property under  capital leases                  |   | 420                    |   | 420                    |   |
|                                            |   | 14,904                 |   | 12,881                 |   |
| Less  accumulated depreciation and amortization |   | 10,623                 |   | 7,749                  |   |
|                                            |   | $                      | 4,281  |                   | $      | 5,132 |   |

 

F-19

----

 

***7.  GOODWILL AND IDENTIFIED INTANGIBLE ASSETS***

 

The Company adopted SFAS No. 142, *Goodwilland Other Intangible Assets*. Under SFAS No. 142, goodwill and intangible assets with indefinite livesare no longer amortized but are reviewed at least annually or more frequentlyif impairment indicators arise. Effective January 1, 2002, in accordance with SFAS No. 142, the Companyceased the amortization of goodwill and intangible assets with indefinite livesand reclassified the December 31, 2001 carrying value of its assembledworkforce acquired intangible assets included in other identified intangiblesto goodwill.

 

Thefollowing unaudited reconciliation presents pro forma income fromcontinuing operations and basic and diluted earnings per share from continuing operations as if SFAS No.142 had been in effect for fiscal 2001 as follows (in thousands, except per share data):

*** ***
|                                                                            |   | **Year Ended December 31,  2001** |         |
|---------------------------------------------------------------------------------|--------|-----------------------------------|--------------|
|                                                                            |   |                              | *** *** |
| Income from  continuing operations, as reported                                 |   | $                                 | 3,619        |   |
| Add back for  goodwill amortization, net of tax                                 |   | 1,460                             |         |
| Add back for  indefinite lived trademark and tradename amortization, net of tax |   | 310                               |         |
| Pro forma  income from continuing operations                                    |   | $                                 | 5,389        |   |
|                                                                            |   |                              |         |
| Basic and  diluted earnings per common share from continuing operations:        |   |                              |         |
| As reported                                                                     |   | $                                 | 0.17         |   |
| Pro forma                                                                       |   | $                                 | 0.25         |   |

 

Identified intangible assets subject to amortization consisted of thefollowing (in thousands):

 
|                              |   | **December  31, 2003**      |   |
|-----------------------------------|--------|-----------------------------|--------|
|                              |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net  Balance** |   | **Amortization  Period  (Years)** |   |
| Trademarks and tradenames         |   | $                           | 2,611  |   | $ | 865 |   | $ | 1,746 |   | 6-20 |   |
| Customer  lists and relationships |   | 50,317                      |   | 15,095 |   | 35,222 |   | 10-20 |   |
| Databases  and content            |   | 19,394                      |   | 4,919 |   | 14,475 |   | 10-20 |   |
| Other  identified intangibles     |   | 13,022                      |   | 3,024 |   | 9,998 |   | 3-20 |   |
|                              |   | $                           | 85,344 |   | $ | 23,903 |   | $ | 61,441 |   |   |   |

 
|                             |   | **December 31, 2002**       |
|----------------------------------|--------|-----------------------------|
|                             |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net  Balance** |   | **Amortization  Period  (Years)** |   |
| Trademarks and tradenames        |   | $                           | 2,440 |   | $ | 555 |   | $ | 1,885 |   | 6-20 |   |
| Customer lists and relationships |   | 46,548                      |   | 10,910 |   | 35,638 |   | 10-20 |   |
| Databases and content            |   | 18,400                      |   | 3,624 |   | 14,776 |   | 10-20 |   |
| Other identified intangibles     |   | 9,665                       |   | 1,766 |   | 7,899 |   | 3-20 |   |
|                             |   | $                           | 77,053 |   | $ | 16,855 |   | $ | 60,198 |   |   |   |

 

As of December 31, 2003, the gross carrying value of identifiedintangible assets was increased by approximately $3,557,000 due to theacquisition of CDC on December 1, 2003 (See Note 3 – *Acquisitions*).

 

F-20

----

 

For the year ended December 31, 2003, the total net carrying value ofidentified intangible assets increased by approximately $5,047,000 due toforeign currency translation of local currency to the U.S. dollar of balancesrecorded within the Company’s European subsidiaries IDRAC and Liquent.  This increase is due to a significantweakening of the U.S. dollar during 2003 when compared to the Euro and theBritish pound.  The effect of foreigncurrency exchange rates on identified intangible assets was immaterial for theyear ended December 31, 2002.

 

During 2003 and 2002, the Company removed from its Balance Sheet fullyamortized other identified intangibles with a cost of approximately $200,000and $7,200,000, respectively, primarily related to identified intangible assetsof the Company’s MicroPatent unit.

 

Total amortization expense of identified intangible assets amounted to$7,247,000 and $6,730,000 for the years ended December 31, 2003 and 2002,respectively.

 

Identified intangible assets and goodwill not subject to amortizationconsisted of the following (in thousands):

 
|                       |   | **December 31, 2003**       |    |
|----------------------------|--------|-----------------------------|---------|
|                       |   | **Gross  Carrying  Amount** |    | **Accumulated  Amortization** |   | **Net Balance** |   |
| Trademarks  and tradenames |   | $                           | 10,000  |   | $ | 1,193 |   | $ | 8,807 |   |
| Goodwill                   |   | 103,994                     |    | 3,123 |   | 100,871 |   |
|                       |   | $                           | 113,994 |   | $ | 4,316 |   | $ | 109,678 |   |

 
|                       |   | **December 31, 2002**       |   |
|----------------------------|--------|-----------------------------|--------|
|                       |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net Balance** |   |
| Trademarks  and tradenames |   | $                           | 10,000 |   | $ | 1,193 |   | $ | 8,807 |   |
| Goodwill                   |   | 73,422                      |   | 3,123 |   | 70,299 |   |
|                       |   | $                           | 83,422 |   | $ | 4,316 |   | $ | 79,106 |   |

 

During 2003, the gross carrying value of goodwill was increased byapproximately $24,775,000, including a foreign translation adjustment ofapproximately $747,000, due to the acquisition of CDC on December 1, 2003 (SeeNote 3 – *Acquisitions*).

 

For the year ended December 31, 2003, the net carrying value ofgoodwill increased by approximately $6,503,000 due to foreign currencytranslation of local currency to the U.S. dollar of balances recorded withinthe Company’s European subsidiaries IDRAC and Liquent.  The effect of foreign currency exchangerates on goodwill was immaterial for the year ended December 31, 2002.

 

Annual pretax amortization for identified intangible assets over thenext five years is estimated to be as follows (in thousands):

 

Year ending December 31,

 
| 2004 |   | $ | 7,723 |   |
|------|--------|---|-------|--------|
| 2005 |   | $ | 7,702 |   |
| 2006 |   | $ | 7,702 |   |
| 2007 |   | $ | 7,668 |   |
| 2008 |   | $ | 6,431 |   |

 

F-21

----

 

Annual pre-tax amortization amounts shown above are based on intangibleasset values at December 31, 2003, which include intangible assets of foreignsubsidiaries translated at December 31, 2003 exchange rates.  Future changes in exchange rates will impactannual amortization amounts.

 

Thefollowing table summarizes the change in the carrying amount of segmentgoodwill for the periods indicated (in thousands):

 
|                                          |   | **Data** |   | **Software** |   | **Total** |   |
|-----------------------------------------------|--------|----------|--------|--------------|--------|-----------|--------|
|                                          |   |     |   |         |   |      |   |
| Balance as  of December 31, 2001              |   | $        | 28,489 |         | $      | 25,259    |   | $ | 53,748 |   |
| Net change  from acquisitions                 |   | 14,073   |   | 1,223        |   | 15,296    |   |
| Reclassification  of assembled workforce, net |   | 1,295    |   | —       |   | 1,295     |   |
| Other                                         |   | —   |   | (40          | )      | (40       | )      |
| Balance as  of December 31, 2002              |   | $        | 43,857 |         | $      | 26,442    |   | $ | 70,299 |   |
| Net change  from acquisitions                 |   | 41       |   | 24,028       |   | 24,069    |   |
| Foreign  exchange translation                 |   | 5,756    |   | 747          |   | 6,503     |   |
| Balance as  of December 31, 2003              |   | $        | 49,654 |         | $      | 51,217    |   | $ | 100,871 |   |

 

***8.  IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL***

 

As of December 31, 2003, 2002 and 2001, the Company performed impairmentreviews of goodwill and intangible assets with indefinite lives.  These reviews required the Company toestimate the fair value of its identified reporting units of continuingoperations.  For each of the reportingunits, the estimated fair value was determined utilizing the expected presentvalue of the future cash flows of the units. In all instances, the estimated fair value of the reporting units ofcontinuing operations exceeded their respective book values, and therefore nowrite-down of goodwill was required for any of the periods presentedherein.  With respect to intangibleassets with indefinite lives, the Company compared the carrying value to thefair value and determined that the fair value exceeded carrying value in allinstances.

 

In the third quarter of 2002, the Company determined that the value ofits 49% interest in GSI Office Management GmbH (GSI) was impaired and recordeda charge to write-down the entire carrying amount of the investment.  Prior to the write-down, the investment inGSI was accounted for by the equity method

 

In the fourth quarters of fiscal 2002 and 2001, impairment charges of$95,000 and $400,000, respectively were recorded to reduce the carrying valueof the Company’s investment in Intellectual Property Technology Exchange, Inc.to reflect fair value.

 

F-22

----

 

***9.  INCOME TAXES***

 

A summary of the source of income from continuing operations beforeincome taxes is as follows (in thousands):

 
|     |   | **Years Ended December 31,** |   |
|----------|--------|------------------------------|--------|
|     |   | **2003**                     |   | **2002** |   | **2001** |   |
|     |   |                         |   |   |   |   |   |
| Domestic |   | $                            | 5,895  |   | $ | 5,675 |   | $ | 6,967 |   |
| Foreign  |   | 2,004                        |   | 680 |   | (559 | ) |
|     |   | $                            | 7,899  |   | $ | 6,355 |   | $ | 6,408 |   |

 

The provision for taxes on income from continuing operations consistedof the following (in thousands):

 
|      |   | **Years Ended December 31,** |   |
|-----------|--------|------------------------------|--------|
|      |   | **2003**                     |   | **2002** |   | **2001** |   |
|      |   |                         |   |   |   |   |   |
| Current:  |   |                         |   |   |   |   |   |
| Federal   |   | $                            | 245    |   | $ | 3,394 |   | $ | 2,574 |   |
| State     |   | 55                           |   | 481 |   | 524 |   |
| Foreign   |   | 1,135                        |   | 495 |   | 764 |   |
|      |   |                         |   |   |   |   |   |
| Deferred: |   |                         |   |   |   |   |   |
| Federal   |   | 1,813                        |   | (1,661 | ) | (275 | ) |
| State     |   | 244                          |   | (247 | ) | (49 | ) |
| Foreign   |   | (889                         | )      | (526 | ) | (749 | ) |
|      |   | $                            | 2,603  |   | $ | 1,936 |   | $ | 2,789 |   |

 

The following represents a reconciliation between the actual provisionfor income taxes on continuing operations and income taxes computed by applyingthe statutory federal income tax rate (35%) to income from continuingoperations before income taxes (in thousands):

 
|                                                   |   | **Years Ended December 31,** |   |
|--------------------------------------------------------|--------|------------------------------|--------|
|                                                   |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                   |   |                         |   |   |   |   |   |
| Federal  statutory rate                                |   | $                            | 2,765  |   | $ | 2,224 |   | $ | 2,243 |   |
| State and  local taxes, net of federal tax benefits    |   | 194                          |   | 207 |   | 242 |   |
| Goodwill  amortization not deductible for tax purposes |   | —                       |   | — |   | 394 |   |
| Permanent  items                                       |   | (192                         | )      | (182 | ) | 76 |   |
| Foreign                                                |   | (64                          | )      | (158 | ) | — |   |
| Change in  valuation allowance                         |   | —                       |   | — |   | (32 | ) |
| Other, net                                             |   | (100                         | )      | (155 | ) | (134 | ) |
|                                                   |   | $                            | 2,603  |   | $ | 1,936 |   | $ | 2,789 |   |

 

F-23

----

 

Deferred income tax assets (liabilities) result from reporting incomeand expenses in different periods for tax and financial reportingpurposes.  Significant components of theCompany’s deferred tax assets and liabilities are as follows (in thousands):

 
|                                                   |   | **December 31,  2003** |    | **December 31,  2002** |   |
|--------------------------------------------------------|--------|------------------------|---------|------------------------|--------|
|                                                   |   |                   |    |                   |   |
| Current  deferred tax assets:                          |   |                   |    |                   |   |
| Allowance  for accounts receivable                     |   | $                      | 220     |                   | $      | 1,553 |   |
| Inventory                                              |   | 70                     |    | 1,676                  |   |
| Other, net                                             |   | 1,711                  |    | 1,360                  |   |
| Net current  deferred tax assets                       |   | $                      | 2,001   |                   | $      | 4,589 |   |
|                                                   |   |                   |    |                   |   |
| Non-current  deferred tax assets:                      |   |                   |    |                   |   |
| Investment  write-down                                 |   | $                      | 974     |                   | $      | 14,928 |   |
| Lease  obligation                                      |   | —                 |    | 666                    |   |
| Net  operating loss carryforwards                      |   | 3,699                  |    | 5,082                  |   |
| Other                                                  |   | 1,634                  |    | 2,663                  |   |
|                                                   |   | 6,307                  |    | 23,339                 |   |
| Less  valuation allowance                              |   | 2,252                  |    | 2,252                  |   |
|                                                   |   | 4,055                  |    | 21,087                 |   |
| Non-current  deferred tax liabilities:                 |   |                   |    |                   |   |
| Intangible  assets                                     |   | (18,426                | )       | (19,074                | )      |
| Capitalized  software                                  |   | (1,080                 | )       | (993                   | )      |
| Other                                                  |   | (856                   | )       | (856                   | )      |
|                                                   |   | (20,362                | )       | (20,923                | )      |
|                                                   |   |                   |    |                   |   |
| Total long-term  net deferred tax (liabilities) assets |   | $                      | (16,307 | )                      | $      | 164 |   |
|                                                   |   |                   |    |                   |   |
| Net deferred  tax (liabilities) assets                 |   | $                      | (14,306 | )                      | $      | 4,753 |   |

 

The decrease in the non-current deferred tax asset for the investmentwrite-down was due primarily to the reversal of an impairment charge of $36.2million in the carrying value of Transcender intangible assets which were soldeffective December 31, 2003.

 

At December 31, 2003, the Company had net operating loss carryforwardsof approximately $5,079,000, which were available to offset future federaltaxable income, if any, through 2020. During 2003 and 2002, the Company utilized approximately $4,000,000 and$2,000,000, respectively of federal net operating loss carryforwards.  The Company also had net operating loss carryforwardsof approximately $6,053,000 available to offset future taxable income inforeign jurisdictions.  At December 31,2003, the Company also has research credit carryforwards of approximately$760,000, which will begin to expire in 2012.

 

A valuation allowance has been provided on certain of the Company’sdeferred tax assets due to the uncertainty regarding their realizability.  The valuation allowance as of December 31,2003 of $2,252,000 is primarily attributable to certain net operating losscarryforwards and the research credit carryforwards, both of which wereacquired with the purchase of Liquent in 2001. There has been no change in the valuation allowance for the year endedDecember 31, 2003.  Annually, managementevaluates the recoverability of the deferred tax assets and the level of thevaluation allowance.  At such time as itis determined that it is more likely than not that deferred tax assets arerealizable the valuation allowance will be reduced.

 

F-24

----

 

The Company’s income taxes payable for federal and state purposes havebeen reduced by the tax benefits associated with the exercise of stockoptions.  These benefits were creditedto stockholders’ equity and amounted to $135,000 in 2003 and $329,000 in 2002.

 

The Internal Revenue Service has completed and closed its audits of theCompany returns through 1999 and Liquent, Inc., a direct wholly ownedsubsidiary of the Company, through March 31, 2000.  Management believes that accruals for tax liabilities areadequate for all open years.

 

***10.  1998 STOCK OPTION PLAN***

 

The Company’s 1998 Stock Option Plan (the Plan), provides for thegranting of nonqualified options to purchase not more than an aggregate of2,466,886 shares of the Company’s common stock.  All directors and full-time employees of the Company are eligibleto participate in the Plan.  Each optiongranted pursuant to the Plan must provide for an exercise price per share thatis at least equal to the fair market value per share of the Company’s commonstock on the date of grant.  Optionsgranted under the Plan are generally exercisable no earlier than one-year andno later than ten years from the grant date and vest in 25% increments over afour-year period from the date of grant. The exercise price of each option, the period during which each optionmay be exercised and the other terms and conditions of each option aredetermined by the Board of Directors. Options that have been granted to theCompany’s independent directors and certain executive officers have acceleratedvesting schedules and extended exercisable periods.

 

A summary of stock option transactions under the Plan for the yearsended December 31, 2001, 2002 and 2003 is as follows:

 
|                                     |   | **Shares** |   | **Weighted Average  Exercise Price** |   |
|------------------------------------------|--------|------------|--------|--------------------------------------|--------|
| Outstanding  at December 31, 2000        |   | 896,169    |   | $                                    | 24.14  |   |
| Granted                                  |   | 596,395    |   | 23.14                                |   |
| Exercised                                |   | (146,082   | )      | 13.72                                |   |
| Canceled or  Lapsed                      |   | (272,473   | )      | 33.74                                |   |
| Outstanding  at December 31, 2001        |   | 1,074,009  |   | 22.57                                |   |
| Granted                                  |   | 380,342    |   | 28.09                                |   |
| Exercised                                |   | (57,625    | )      | 13.65                                |   |
| Canceled or  Lapsed                      |   | (129,735   | )      | 25.63                                |   |
| Outstanding  at December 31, 2002        |   | 1,266,991  |   | 24.32                                |   |
| Granted                                  |   | 289,800    |   | 18.07                                |   |
| Exercised                                |   | (66,927    | )      | 12.00                                |   |
| Canceled or  Lapsed                      |   | (260,009   | )      | 25.63                                |   |
| Outstanding  at December 31, 2003        |   | 1,229,855  |   | $                                    | 23.24  |   |
|                                     |   |       |   |                                 |   |
| Shares  exercisable at December 31, 2001 |   | 276,185    |   | $                                    | 18.41  |   |
| Shares  exercisable at December 31, 2002 |   | 497,712    |   | $                                    | 21.53  |   |
| Shares  exercisable at December 31, 2003 |   | 684,130    |   | $                                    | 23.76  |   |

 

F-25

----

 

The following table summarizes information about stock optionsoutstanding and options exercisable at December 31, 2003:

 
|                           |   | **Options Outstanding** |   | **Options Exercisable**                         |   |
|--------------------------------|--------|-------------------------|--------|-------------------------------------------------|--------|
| **Range of  Exercise  Prices** |   | **Number  Outstanding** |   | **Weighted  Avg. Remaining  Contractual  Life** |   | **Weighted  Average  Exercise Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercisable** |   |
|                           |   |                    |   |                                            |   |   |   |   |   |   |   |
| $12.00-$17.10                  |   | 262,429                 |   | 8.0 years                                       |   | $ | 14.84 |   | 89,504 |   | $ | 12.70 |   |
| $17.94-$22.55                  |   | 439,053                 |   | 8.2 years                                       |   | 20.73 |   | 275,653 |   | 20.78 |   |
| $24.75-$28.02                  |   | 218,025                 |   | 7.0 years                                       |   | 26.50 |   | 141,325 |   | 26.28 |   |
| $29.59-$33.75                  |   | 310,348                 |   | 8.0 years                                       |   | 31.61 |   | 177,648 |   | 31.95 |   |
| $12.00-$33.75                  |   | 1,229,855               |   | 7.9 years                                       |   | $ | 23.24 |   | 684,130 |   | $ | 23.76 |   |

 

In the event of a change of Company control, all outstanding stockoptions under the Plan will vest and become immediately exercisable in full asof the date immediately preceding the date of such change of control.

 

At December 31, 2003, 2002 and 2001, the total number of availableshares eligible to be granted under the Plan was 797,616, 827,407 and 578,014,respectively.

 

***11.  EARNINGS (LOSS) PER SHARE***

 

The following table sets forth the denominators used in computing basicand diluted earnings (loss) per common share for the periods indicated:

 
|                                                                            |   | **Years Ended December 31,** |   |
|---------------------------------------------------------------------------------|--------|------------------------------|--------|
| **(In thousands)**                                                              |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                                            |   |                         |   |   |   |   |   |
| Weighted  average common shares outstanding:                                    |   |                         |   |   |   |   |   |
| Basic                                                                           |   | 21,088                       |   | 21,735 |   | 21,686 |   |
| Net effect  of dilutive stock options – based on the treasury stock method |   | 55                           |   | 95 |   | 140 |   |
| Diluted                                                                         |   | 21,143                       |   | 21,830 |   | 21,826 |   |

 

For the years ended December 31, 2003, 2002 and 2001, 830,426, 752,410and 345,268 stock options, respectively were excluded from the computation ofdiluted earnings per common share due to their antidilutive effect.

 

***12.  TREASURY STOCK***

 

On October 28, 2002, the Company announced that its Board of Directorsauthorized the Company to repurchase up to $30,000,000 of its commonstock.  Subsequently, on July 9, 2003,it was announced that the Company’s Board of Directors had approved an increasein the previously authorized share buyback program from $30,000,000 to$50,000,000.

 

The purchases may be made from time to time on the open market or innegotiated transactions in compliance with Rule 10b-18 of the SecuritiesExchange Act of 1934, as amended.  Theauthorization to repurchase the Company’s common stock will remain in effectuntil the Company’s Chief Executive Officer deems it appropriate to terminatethe repurchase program.

 

F-26

----

 

Pursuant to the Company’s share buyback program, the Company acquired625,300 shares at an average price of $15.19 for a total cost of $9,496,000during 2003, and acquired 381,900 shares at an average price of $13.69 for atotal cost of $5,227,000 in 2002.  As ofDecember 31, 2003, there was approximately $35,000,000 authorized for futurerepurchases.  The share buyback programhas been and will continue to be funded from existing cash, cash equivalentsand available-for-sale securities.

 

***13.  COMMITMENTS AND CONTINGENCIES***

 

#### ***Lease Commitments***-The Company primarily leases office and warehouse space, and office andcomputer equipment.  The leasesgenerally provide for the lessee to pay taxes, maintenance, insurance andcertain other operating costs of the leased property, and certain leasesinclude escalation clauses.

#### *** ***

The future noncancelable minimum lease payments under operating leasesincluding estimated escalation amounts as of December 31, 2003 are as follows(in thousands):

 
|                          |   | **Operating  Leases** |   |
|-------------------------------|--------|-----------------------|--------|
| Year ending  December 31,     |   |                  |   |
| 2004                          |   | $                     | 3,193  |   |
| 2005                          |   | 2,395                 |   |
| 2006                          |   | 1,350                 |   |
| 2007                          |   | 1,133                 |   |
| 2008                          |   | 455                   |   |
| Thereafter                    |   | 4                     |   |
| Total  minimum lease payments |   | $                     | 8,530  |   |

 

Included in the minimum lease payments presented above are theCompany’s operating lease obligations associated with the discontinuedoperations of Transcender and CRC (See Note 4 – *Discontinued Operations*).  The aggregate amount of these leaseobligations, which are set to expire in 2008, approximate $3,333,000.  As of December 31, 2003, $388,000 related toCRC operating leases is included in accrued expenses.  During the first half of 2004, the Company expects to record acharge in discontinued operations related to the remaining lease commitmentless estimated sublease income.

 

Included in accrued expenses at December 31, 2003 is the currentmaturity balance of capital lease obligations in the amount of $63,000.

 

Rental expense for property and equipment under noncancelable operatinglease agreements amounted to approximately $2,495,000, $2,575,000 and$1,194,000 for each of the years ended December 31, 2003, 2002 and 2001,respectively.  The significant increasein rental expense in fiscal 2002 over amounts incurred in the prior yearsreflects the addition of lease obligations as a result of acquisitions.

 

***CDC AcquisitionCommitments* -**Under the terms of the SPA relatedto the Company’s acquisition of CDC, the sellers are entitled to potentialfuture consideration dependent on future operating results.  In addition to guaranteed future considerationof approximately $3.8 million, which has been paid into escrow and accountedfor as described in Note 3 – *Acquisitions*, the Company has a liabilitybased on revenues of the acquired business for the year ended December 31, 2003(the Further Consideration) and a potential liability based on the combinedoperating results of Liquent and CDC Solutions for the three year period endingDecember 31, 2006 (the Earnout Consideration). The specific provisions of each contingency are detailed below.

 

F-27

----

 

Further Consideration is to be calculated by March 31, 2004 based onthe amount of fiscal 2003 revenues of CDC Solutions in excess of £7,000,000,multiplied by a factor of 1.9312.  TheCompany expects to pay Further Consideration approximating $1.5 million duringthe second quarter of 2004 and has recorded a liability for the FurtherConsideration as of December 31, 2003.

 

Earnout Consideration is to be calculated by March 31, 2007 based onformulas related to revenues and EBITDA (earnings before interest, taxes,depreciation and amortization) of the combined Liquent-CDC business for thethree-year period ending December 31, 2006 (the Earnout Period).  Amounts due for the Earnout Consideration, ifany, will be paid during the second quarter of 2007, unless the provisionsrelated to a change in control discussed below come into effect.  Earnout Consideration will become due if thecombined business has greater than 10% annual compound revenue growth duringthe Earnout Period, or if EBITDA exceeds $15,000,000 for either the year endingDecember 31, 2006 or on average for the three years of the Earnout Period.  The Earnout Consideration is subject to amaximum of £10,000,000 and could be as low as zero.  The Company currently believes that Earnout Consideration couldreasonably range from $6 million to $10 million.

 

In the event of a sale of all or substantially all of the share capitalof the Company or the combined Liquent-CDC business during the Earnout Period,the sellers have the right, but not an obligation, to elect a payout of theEarnout Consideration.  The payout ofthe Earnout Consideration in the event of a sale varies depending on the yearof such sale and the operating performance of the combined business through thedate of sale.  The range of payout iszero to £5,000,000 if a sale occurs in 2004, zero to £7,500,000 if a saleoccurs in 2005 and zero to £10,000,000 if a sale occurs in 2006.

 

***Transcender SaleCommitments* -**In connection with the sale of theassets of Transcender, the Company entered into a service agreement with thepurchaser that requires the Company to provide certain services through May 31,2004.  The Company also agreed to retaincertain liabilities related to the Transcender business.

 

The service agreement requires the Company to retain all employees ofTranscender through March 31, 2004 and certain employees through May 31,2004.  The purchaser is reimbursing theCompany in full for all employee costs and incidental expenses during theservice agreement period.  The Companyis responsible for paying severance costs to any employee that is not offeredemployment, or does not accept employment with the purchaser.  The Company estimates that it will incurseverance and related costs of approximately $500,000 in the first half of2004.  The purchaser is reimbursing theCompany in full for all real estate costs through March 31, 2004 and for aportion of real estate costs from April 1, 2004 through May 31, 2004.  Future rental payments under the Transcenderleases of approximately $2.9 million are included in the future operating leasecommitment schedule.  The Company isactively seeking to sublet the Transcender real estate and may generatesublease income in the future to offset a portion of the lease commitment.  During the first half of 2004, the Companyexpects to record a charge in discontinued operations related to the remaininglease commitment less estimated sublease income.

 

***Legal Proceedings***- On December 5, 2002 Venturetek,L.P., Richard Elkin, Antoine Bernheim, Stacy Bernheim and Genstar, Ltd.,derivatively as shareholders of Rand Publishing Co., Inc. (Rand) andindividually, on their own behalf (the Plaintiffs) filed a complaint in theSupreme Court of the State of New York against IHI (the IHI Action).  The complaint alleges that IHI’s predecessor,Information Ventures LLC, fraudulently acquired assets or businesses, includingbusinesses acquired prior to the Company’s initial public offering in August1998, that were corporate opportunities of Rand.  The complaint also alleges that IHI’s taking of the assets orbusinesses constitutes a “conversion.” The Plaintiffs request that all of theIHI shares and options be held in constructive trust for the benefit of thePlaintiffs.  The Plaintiffs also seekdamages in an amount of approximately $750 million.  IHI believes that each of the claims in the complaint is withoutmerit and filed a motion to dismiss the complaint on February 14, 2003.  IHI’s motion to dismiss, which remainspending, states that the complaint fails to state a cause of action against IHIand, even if it does, the claims are barred under the applicable statutes oflimitation or on account of the Plaintiffs’ laches.

 

F-28

----

 

The Company’s President and Chief Executive Officer, Mason P. Slaine,and Michael E. Danziger, a member of the Company’s board of directors, arenamed as defendants in a related action entitled Venturetek, L.P., et al. v.Rand Publishing Co., Inc., et al., also currently pending in the SupremeCourt of the State of New York (the Rand Action).  As in the IHI Action, the Plaintiffs in the Rand Action,proceeding derivatively on behalf of Rand, allege that certain assets orbusinesses acquired by IHI, including businesses acquired prior to theCompany’s initial public offering in August 1998, were corporate opportunitiesusurped from Rand.  Plaintiffs allegethat Slaine and Danziger breached fiduciary duties allegedly owing to Rand byallowing IHI’s predecessor, Information Ventures LLC, to acquire thosebusinesses.  Plaintiffs seek, amongother remedies, the imposition of a constructive trust over Slaine’s andDanziger’s shares of IHI as well as compensatory damages against Slaine andDanziger in an amount alleged to be in excess of $150 million.

 

In addition, from time to time the Company is a party to other legalproceedings, claims, and litigation arising in the ordinary course of itsbusiness. While the outcome of these matters is currently not determinable,management does not expect that the ultimate costs to resolve these matterseither singularly or in aggregate will have a material adverse effect on theCompany’s consolidated financial position, results of operations or cash flows.

 

***14.  EMPLOYEE 401(K) PLAN***

 

The Company sponsors a defined contribution 401(k) savings plan (the401(k) Plan).  Employees are eligible toparticipate in the 401(k) Plan upon the attainment of age 21 and the completionof six months of employment with the Company. Acquired businesses that previously offered a 401(k) plan to theiremployees and qualify as an adopting employer will receive prior service creditin determining eligibility and vesting in the 401(k) Plan.  Participants may make pre-tax contributionssubject to Internal Revenue Service limitations.  The Company, via its subsidiaries, matches 50% of an employee’scontribution up to a maximum of 6% of eligible compensation.  In addition, at its discretion, the Companymay make additional contributions to the 401(k) Plan:  no such contributions were made in fiscal years 2003, 2002, and2001. Participant contributions and earnings thereon vest immediately.  Matching contributions and earnings thereonvest in equal amounts over a three-year period.  Nonvested balances are forfeited and used to offset future Planexpenses.

 

The Company’s contributions from continuing operations under the 401(K)Plan for each of the three years ended December 31, 2003, 2002, and 2001 wereapproximately $520,000, $489,000 and $212,000, respectively.

 

***15.  SEGMENT INFORMATION***

 

Operating segments are defined as components of an enterprise for whichseparate financial information is available and regularly reviewed by theCompany’s senior management.  TheCompany evaluates performance based on EBITDA of the respective businessunits.  The accounting policies of theoperating segments are the same as those described in Note 2 - *Summary ofSignificant Accounting Policies*.

 

As of December 31, 2003, the Company has two reportable segmentscontributing to its results from continuing operations: data and software.  The data segment, which includesMicroPatent, Master Data Center (MDC) and IDRAC, provides a broad array ofdatabases, information products and complementary services for intellectualproperty and regulatory professionals. The software segment is comprised solely of Liquent, a leading providerof life science regulatory intelligence and publishing solutions.  Other includes unallocated corporateitems.  Corporate assets consistprincipally of cash and cash equivalents, investments and current income taxesreceivable.

 

F-29

----

 

As of December 31, 2002, the Company had three reportable segments:intellectual property (IP), which included MicroPatent, MDC, Liquent and IDRAC;information technology learning (ITL), which included Transcender; andscientific and technology information (STI), comprised solely of its whollyowned subsidiary CRC.

 

On February 27, 2003, the Company entered into a Purchase Agreement tosell substantially all of the assets and certain liabilities of CRC to CRCPress I LLC and Routledge No. 2 Limited, both wholly owned subsidiaries ofTaylor & Francis Group plc (See Note 4 - *DiscontinuedOperations*).  The transactionwas completed on April 8, 2003.

 

In September 2003, the Company changed the composition of its remainingsegments from IP and ITL to data and software to more accurately reflect theway management operates the Company and assesses the Company’s performance.

 

On December 22, 2003, the Company announced that it had soldTranscender to a subsidiary of Kaplan, Inc. Under the terms of the Asset Purchase Agreement, the Company soldsubstantially all of the assets and certain operating liabilities of Transcender(See Note 4 – *Discontinued Operations*). The transaction had an effective date of December 31, 2003.  As a result, the software segment iscurrently comprised solely of Liquent.

 

All corresponding items of segment information for earlier presentedperiods have been restated for comparative purposes.

 

F-30

----

 

The following tables set forth the information for the Company’sreportable segments of continuing operations for the periods indicated (inthousands):

 
|                               |   | **Years Ended December 31,** |    |
|------------------------------------|--------|------------------------------|---------|
|                               |   | **2003**                     |    | **2002** |   | **2001** |   |
| REVENUES  FROM EXTERNAL CUSTOMERS: |   |                         |    |   |   |   |   |
| Data                               |   | $                            | 57,866  |   | $ | 49,011 |   | $ | 40,130 |   |
| Software (1)(2)                    |   | 23,519                       |    | 27,119 |   | 1,369 |   |
| Other                              |   | 22                           |    | 1,822 |   | 66 |   |
|                               |   | $                            | 81,407  |   | $ | 77,952 |   | $ | 41,565 |   |
|                               |   |                         |    |   |   |   |   |
| EBITDA:                            |   |                         |    |   |   |   |   |
| Data                               |   | $                            | 22,730  |   | $ | 15,314 |   | $ | 16,555 |   |
| Software (1)(2)                    |   | 688                          |    | 4,808 |   | 748 |   |
| Other                              |   | (6,131                       | )       | (3,507 | ) | (4,979 | ) |
|                               |   | $                            | 17,287  |   | $ | 16,615 |   | $ | 12,324 |   |
|                               |   |                         |    |   |   |   |   |
| INCOME (LOSS) FROM OPERATIONS:     |   |                         |    |   |   |   |   |
| Data                               |   | $                            | 13,925  |   | $ | 7,125 |   | $ | 7,180 |   |
| Software (1)(2)                    |   | (1,846                       | )       | 2,180 |   | 666 |   |
| Other                              |   | (5,809                       | )       | (3,583 | ) | (5,072 | ) |
|                               |   | $                            | 6,270   |   | $ | 5,722 |   | $ | 2,774 |   |
|                               |   |                         |    |   |   |   |   |
| SEGMENT ASSETS:                    |   |                         |    |   |   |   |   |
| Data                               |   | $                            | 174,660 |   | $ | 159,456 |   | $ | 138,111 |   |
| Software                           |   | 76,100                       |    | 41,840 |   | 52,565 |   |
| Other                              |   | 123,910                      |    | 50,252 |   | 42,286 |   |
|                               |   | $                            | 374,670 |   | $ | 251,548 |   | $ | 232,962 |   |
|                               |   |                         |    |   |   |   |   |
| DEPRECIATION AND AMORTIZATION (3): |   |                         |    |   |   |   |   |
| Data                               |   | $                            | 8,844   |   | $ | 8,215 |   | $ | 9,379 |   |
| Software (1)(2)                    |   | 2,502                        |    | 2,594 |   | 82 |   |
| Other                              |   | 42                           |    | 79 |   | 108 |   |
|                               |   | $                            | 11,388  |   | $ | 10,888 |   | $ | 9,569 |   |
|                               |   |                         |    |   |   |   |   |
| CAPITAL  EXPENDITURES:             |   |                         |    |   |   |   |   |
| Data                               |   | $                            | 1,598   |   | $ | 1,686 |   | $ | 2,287 |   |
| Software (1)(2)                    |   | 501                          |    | 360 |   | 3 |   |
| Other                              |   | 6                            |    | 16 |   | 11 |   |
|                               |   | $                            | 2,105   |   | $ | 2,062 |   | $ | 2,301 |   |

 

*(Footnotes on following page)*

 

F-31

----

 

The Company evaluates the performance of its segments based primarilyon revenues and EBITDA. The Company believes that EBITDA is the most usefulmeasure of business unit earnings because it more closely approximates the cashgenerating ability of each business compared to income (loss) from operations.  Income (loss) from operations includescharges for depreciation and amortization, the majority of which relate toamortization of intangible assets.  TheCompany generally does not incur capital expenditures to replace intangibleassets within existing operations.

 

A reconciliation of EBITDA to income from continuing operations is asfollows (in thousands):

 
|                                                   |   | **Years Ended December 31,** |   |
|--------------------------------------------------------|--------|------------------------------|--------|
|                                                   |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                   |   |                         |   |   |   |   |   |
| EBITDA                                                 |   | $                            | 17,287 |   | $ | 16,615 |   | $ | 12,324 |   |
| Depreciation  and amortization (3)                     |   | (11,388                      | )      | (10,888 | ) | (9,569 | ) |
| Interest  income, net                                  |   | 2,000                        |   | 628 |   | 3,653 |   |
| Income from  continuing operations before income taxes |   | 7,899                        |   | 6,355 |   | 6,408 |   |
| Provision  for income taxes                            |   | 2,603                        |   | 1,936 |   | 2,789 |   |
|                                                   |   |                         |   |   |   |   |   |
| Income from  continuing operations                     |   | $                            | 5,296  |   | $ | 4,419 |   | $ | 3,619 |   |

 

*(Footnotes from preceding page)*

 

----

(1)   Results for the year ended December 31, 2003include operations of CDC from the date of the acquisition December 1, 2003 toDecember 31, 2003 only (See Note 3 - *Acquisitions*).

 

(2)          Results for the yearended December 31, 2002, represent a full year of operations for Liquent.  Results for 2001 include operations ofLiquent from the date of the acquisition December 20, 2001 to December 31, 2001only (See Note 3 - *Acquisitions*).

 

(3)          Depreciation andamortization includes $196,000, $57,000, and $0 of amortization of capitalizedsoftware, classified as Cost of sales for the years ended December 31, 2003,2002 and 2001, respectively.

 

The following table presents revenues related to the Company’scontinuing operations by geographic location (in thousands):

 
|           |   | **Years Ended December 31,** |   |
|----------------|--------|------------------------------|--------|
|           |   | **2003**                     |   | **2002** |   | **2001** |   |
|           |   |                         |   |   |   |   |   |
| United  States |   | $                            | 56,859 |   | $ | 58,943 |   | $ | 34,010 |   |
| Europe         |   | 18,496                       |   | 14,147 |   | 4,994 |   |
| Other          |   | 6,052                        |   | 4,862 |   | 2,561 |   |
|           |   | $                            | 81,407 |   | $ | 77,952 |   | $ | 41,565 |   |

 

Net sales are attributed to countries based on the location ofcustomers.  No customer accounts for 10%or more of the Company’s revenue.

 

The following table presents long-lived assets by geographic location(in thousands):

 
|           |   | **December 31,  2003** |    | **December 31,  2002** |   |
|----------------|--------|------------------------|---------|------------------------|--------|
|           |   |                   |    |                   |   |
| United  States |   | $                      | 112,314 |                   | $      | 118,894 |   |
| Europe         |   | 63,086                 |    | 25,542                 |   |
|           |   | $                      | 175,400 |                   | $      | 144,436 |   |

 

Long-lived assets consist of total property and equipment, identifiedintangible assets, and goodwill.

 

F-32

----

 

***16.  COMPREHENSIVE INCOME (LOSS)***

 

Comprehensive income (loss) is comprised of net income (loss) and othercomprehensive income (loss). Accumulated other comprehensive income includes foreign currencytranslation adjustments and unrealized gains and losses, net of the related taxeffect, on available-for-sale securities (See Note 5 – *Investments*) and onderivative instruments designated and qualifying as cash flow hedges.  The following table is a reconciliation ofthe Company’s net income (loss) to comprehensive income (loss) (in thousands):

*** ***
|                                                    |   | **Years Ended December 31,** |   |
|---------------------------------------------------------|--------|------------------------------|--------|
|                                                    |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                    |   |                         |   |   |   |   |   |
| Net income  (loss)                                      |   | $                            | 31,207 |   | $ | (13,724 | ) | $ | 7,838 |   |
| Other  comprehensive income:                            |   |                         |   |   |   |   |   |
| Net  unrealized gains on available-for-sale investments |   | 272                          |   | — |   | — |   |
| Unrealized  gains on cash flow hedges                   |   | 229                          |   | — |   | — |   |
| Foreign  currency translation adjustments               |   | 9,712                        |   | 626 |   | — |   |
| Estimated  tax provision                                |   | (190                         | )      | — |   | — |   |
|                                                    |   |                         |   |   |   |   |   |
| Net change  in other comprehensive income               |   | 10,023                       |   | 626 |   | — |   |
|                                                    |   |                         |   |   |   |   |   |
| Comprehensive  income (loss)                            |   | $                            | 41,230 |   | $ | (13,098 | ) | $ | 7,838 |   |

 

***17. FINANCIALINSTRUMENTS AND OFF BALANCE SHEET RISK***

 

***Concentration ofcredit risk*** - Financial instruments thatpotentially subject the Company to credit risks consists principally of tradeaccounts receivable, short-term and long-term investments.

 

The Company had amounts receivable from five customers representing 11%of accounts receivable and four customers representing 9% of accountsreceivable at December 31, 2003 and 2002, respectively.  No single customer accounted for an amountequal to or greater than 10% of the Company’s trade receivables.  Overall, the Company believes theconcentration of credit risk in its trade accounts receivables is substantiallymitigated by the Company’s ongoing credit evaluation process and due to thelarge number of customers comprising the Company’s customer base.  The Company does not generally requirecollateral from customers.  The Companyevaluates the need for an allowance for doubtful accounts based upon factorssurrounding the credit risk of specific customers, historical trends and otherinformation.

 

During August 2003, the Company entered into a taxable fixed incomeportfolio program in order to increase investment returns on cash not immediatelyneeded in operations.  The Companyclassifies its investments as available-for-sale securities.  Available-for-sale securities are ofinvestment grade and are primarily comprised of U.S. government notes,collateralized mortgage obligations, and corporate notes and bonds, all withvarying maturities.  Investments arerecorded at fair value and unrealized holding gains and losses, net of therelated tax effect, are excluded from earnings and reported as a separatecomponent of stockholders’ equity until realized.  At any time, a sharp rise in interest rates could have a materialadverse impact on the fair value of the Company’s investment portfolio.  Conversely, declines in interest rates couldhave a material favorable impact on interest earnings from the Company’sinvestment portfolio.  The Company doesnot currently hedge interest rate exposures.

 

F-33

----

 

Prior to the termination of the Credit Facility in March 2003, theCompany was subject to market risks arising from changes in interestrates.  Interest rate exposure resultedfrom changes in the Eurodollar or the prime rate, which were used to determinethe interest rate applicable to borrowings under the Credit Facility.  The Company had no outstanding borrowingsunder the Credit Facility at any time since its inception.

 

The Company maintains its cash in demand deposit accounts, which attimes may exceed the Federal Deposit Insurance Corporation (FDIC) insurancelimits. As of December 31, 2003, the Company had approximately $29,799,000 ofcash in excess of FDIC insurance limits. The Company believes that the risk of any loss is minimal based on thefinancial condition of the institutions in which the funds are deposited.

 

***Fair value offinancial instruments*** - The carrying amounts ofcash and equivalents, accounts receivable and accounts payable reported in theaccompanying Consolidated Balance Sheets approximates fair value because of theshort-term maturity of these instruments.

 

The carrying value of the Company’s borrowings under its capitalizedlease obligations approximates fair value based on quoted market prices for thesame or similar instruments and was not material as of December 31, 2003.

 

The fair value of the Company’s forward contracts is estimated based onquoted market prices of comparable contracts.

 

***Foreign currency exchange rate risk*****-**Thefinancial statements of the Company’s foreign subsidiaries are translated fromthe local currency into U.S. dollars. Assets and liabilities are translated using exchange rates in effect atthe balance sheet date, except certain accounts of subsidiaries whosefunctional currency is the U.S. dollar, and translation adjustments areaccumulated in a separate component of stockholders’ equity.  Revenue and expenses are translated ataverage monthly exchange rates, and translation adjustments are charged andcredited to income.  As such, theCompany’s operating results are affected by fluctuations in the value of theU.S. dollar compared to the British pound and the Euro.  During the years ended December 31,2003 and 2002, the Company’s operating results include foreign exchange lossesof approximately $962,000 and $646,000, respectively, primarily related to thedecline in the value of the U.S. dollar relative to the Euro.  The impact of foreign exchange on operatingresults for the year ended December 31, 2001 was immaterial.

 

A subsidiary of the Company routinely enters into forward contracts toacquire various international currencies in an effort to hedge foreign currencytransaction exposures of its operations. Such forward contracts have been designated as hedges for future annualpatent payments to related international regulatory agencies.  At December 31, 2003, the subsidiary of theCompany had entered into forward contracts to acquire various internationalcurrencies, all having maturities of less than seven months, aggregatingapproximately $25,951,000.  Realizedgains and losses relating to the forward contracts were immaterial for theyears ended December 31, 2003, 2002 and 2001.

 

The Company has only limited involvement with derivative financialinstruments and does not use them for trading purposes.

 

F-34

----

 

***18.  REVOLVING CREDIT FACILITY***

 

In March 2003, in an effort to facilitate the impending sale of CRC andin light of the strength of its current financial position, the Companyvoluntarily terminated its credit facility established on September 24, 1999(the Credit Facility).  The terminatedCredit Facility was not to exceed $50,000,000 initially, including a$10,000,000 sub-limit for the issuance of standby letters of credit.  The Company had no outstanding borrowingsunder the Credit Facility at any time since its inception.  The Credit Facility was secured by a firstpriority perfected pledge of all notes and capital stock owned by the Company’ssubsidiaries and a first priority perfected security interest in all otherassets of the Company and its subsidiaries, subject to certain exceptions.  Obligations under the Credit Facility wereguaranteed by the Company and its subsidiaries.  Additionally, the Credit Facility restricted substantial assetsales.  The Company incurred costs ofapproximately $0.6 million associated with the early termination of the CreditFacility, including approximately $0.5 million for the write-off of unamortizedfees, representing a non-cash charge.

 

F-35

----